Operator: Good afternoon. My name is Chantel, and I'll be your conference operator. I would like to welcome everyone to the Xilinx First Quarter 2021 Earnings Release Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session.

[Operator Instructions] I would now like to turn the call over to Matt Poirier. Thank you. Mr. Poirier, you may begin your conference.

Matt Poirier: Thank you, and good afternoon.

With me are Victor Peng, CEO; and Bryce Hill, our CFO. Let me remind everyone that during our conference call today, we may make projections or other forward statements regarding future events or the future financial performance of the company. We wish to caution you that such statements are predictions based on information that is currently available and that actual results may differ materially. We refer you to the documents the company files with the SEC, including our 10-Ks, 10-Qs and 8-Ks. These documents contain and identify important risk factors that could cause the actual results to differ materially from those contained in our projections or forward-looking statements.

In addition to GAAP financial measures, we will be disclosing certain supplemental non-GAAP financial measures used by management to evaluate the company's financial results. We provide these measures to facilitate period-to-period comparability for purposes of evaluating continuing business operations by excluding the effects of non-recurring and unusual items, such as amortization of intangibles and certain one-time items related to acquisitions. We believe that sharing these non-GAAP measures will be helpful for analysts and investors in analyzing the company's ongoing core business. A reconciliation of non-GAAP financial information to the closest GAAP measure is included in our earnings release and has been posted on our Investor Relations website. This conference call is open to all and is being webcast live.

It can be accessed from our Xilinx Investor Relations website. Let me now turn the call over to Victor.

Victor Peng: Thanks, Matt, and thanks to everyone for joining today's call. I hope you and your families are healthy and well. Let me start with an update of the COVID-19 situation, before I discuss the business highlights and results.

Our supply chain has been operating without any significant disruption, and the business performed well overall despite the COVID-19 challenges. Most of our employees are working from home, except in China where employees have been allowed to return to work. For employees and contractors, who must be at our sites, we have adopted daily health screening. We require masks and are practicing social distance. Travel restrictions continue to be in force worldwide.

We're not experiencing any significant operational challenges and continue to execute well on our strategy. When we provided guidance for fiscal Q1 on our April earnings call, a significant uncertainty about how much impact COVID-19 would have on supply chains and overall demand. As we progress through the quarter, the business is performing better-than-expected in multiple markets, offsetting weakness in others. This demonstrates the strength of our business model in addressing a diverse set of end markets and our progress in executing our strategy in a challenging environment. We also saw some benefit in Q1 from customers accelerating orders due to the U.S.

Department of Commerce, removal of License Exception Civil End Users, also known as CIV licenses. Given the better-than-expected performance, and recent actions impacting our tax rate we provided an appropriately revised guidance in late June. Fiscal Q1 revenues were $727 million, which is at the midpoint of our revised guidance. Compared to the original first quarter guidance in April, PCG and WWG revenues were stronger-than-expected and more than offset weaker revenues in ABC and to a lesser extent, in AIT. AIT was lower-than-expected due to a meaningful customer program time issue that moved revenue into Q2.

As I mentioned, a portion of our revenue rate was attributed to the removal of CIV licenses and that primarily affected our AIT and WWG businesses. The advanced products category constituted approximately 68% of total revenues. Zynq based revenues declined 7% compared to last quarter, primarily due to lower Zynq sales in the automotive businesses. Zynq sales were 18% of total revenues. Zynq revenue and design win momentum continued to be strong across our target markets.

And we're confident our SoC revenue will grow to be a larger portion of our total revenue over time. So now, I'll move on to specific business highlights, starting with DCG. We made significant progress in our DCG business during the first quarter. We had growth in the adoption of our smart NIC solutions, cloud service provider deployment of Alveo based compute AI clusters and strong revenue from Solarflare NIC adapters. We secured multiple new design wins with hyperscalers and OEM customers.

In the compute space, we saw a great interest in our recently announced RT Video Server and Alveo adoption by fintech customers. In networking, we have seen 100-gig smart NIC engagement momentum with hyperscale customers and are conducting proof of concepts for 200-gig SmartNIC solutions. Finally, in storage, we saw next-generation storage platform commitments from one of the top three OEMS, smart SSD evaluations initiated by fintech customers and qualification by a leading video customer. We continue to make great progress transforming Xilinx to a platform company and growing our ecosystem. We had over 34,000 downloads of Vitis since we announced it late last year.

To date, we've trained nearly 14,000 developers and we have approximately 1,000 software partners who are releasing a growing list of production applications. We announced the establishment of Xilinx adaptive compute clusters at four of the world's most prestigious universities to train the next-generation of software developers on our powerful adaptable platforms. These clusters provide critical infrastructure and funding to support research and innovation and adaptive compute acceleration and HPC applications. In the communications market, one of our Tier 1 OEM customers is expected to ramp RFSoC production this quarter for sub-6 gigahertz massive MIMO radio applications for North America deployment. And our design win pipeline for RFSoC continues to build.

Our strategic engagement with Samsung continues to deepen as we collaborate on their second-generation 5G radio that includes beam forming using our 7-nanometer versal ACAP. We believe we are in our strongest competitive position ever with breakthrough products like RFSoC and Versal, the ability we give our customers to differentiate with all our adaptable products and lastly, our commitment to deliver customized solutions to meet our customers' needs. Our strong position comes at an excellent time because, as you know, O-RAN ran is an emerging opportunity for us. And the O-RAN momentum has been building over the last several months. We recently joined the Open Ram Policy Coalition to support the development and deployment of open RAM 5G technology.

We've been an active member of the O-RAN Alliance, and it contributed to the 3GPP specifications 5G mobile network. We're actively working with many key stakeholders to ensure 5G and future networks will be openly developed in or operate and adaptable. Moving on to our diversified core businesses. We continue to benefit from the solid foundation these markets provide in terms of diversification and consistent cash generation, which enables us to reinvest in these markets as well as our high-growth markets. During the quarter, within the Industrial business, we saw a surge in products related to health care applications as a result of COVID-19.

And we expedited approximately 350 orders worldwide to support global efforts to control the pandemic. Aerospace & Defense continues to be a secular driver within our core business. We further strengthened our position. We recently announced the industry's first 20-nanometer space grade FPGA, delivering full radiation tolerance and ultra-high throughput and bandwidth performance for satellite and space applications. The launch of the first 20-nanometer product for these applications advances the space industry by three process node generations.

This breakthrough product is the first to enable machine learning inference, together with unlimited on orbit reconfiguration for real-time onboard processing and space. In the auto business, we have secured a strong position in ADAS, including driver, monitoring systems. In the last six months, we've won five major Tier 1s with our Zynq product family. We believe the auto business bond out during our fiscal first quarter, and we have started seeing signs of improvement in recent bookings. We are cautiously optimistic about the auto business beginning to recover in the second half of the year.

As vehicle sales recover, we expect to see our design wins translate to revenues and resume robust long-term growth. Now before I turn it over to Brice, let me share what I believe our solid Q1 results demonstrate in these extraordinary times. We can, and are, operating safely and effectively to deliver for our customers and execute on our strategy, even with most of our employees working from home. Our diversified core markets continue to provide a solid and resilient foundation, consistently generating cash flow even during a global downturn. Our DCG and WWG businesses grew despite significant headwinds which validates our long-term growth strategy.

The auto business appears to have bottomed out, and we're confident over time, it too will resume robust growth for us in the long world. We continue to make progress moving to adaptive platforms, growing our ecosystem and software base and delivering optimized solutions for our strategic customers. We're in a better competitive position than ever to increase our market share, expand our San, and emerged from this COVID pandemic as a stronger company. Thank you and now over to Brice.

Brice Hill: Thank you, Victor.

As Victor mentioned, visibility and confidence improved throughout the quarter, resulting in total revenue of $727 million, in line with the revised guidance we provided on June 29, and significantly above the guidance range we provided on our April earnings call. The company executed well and delivered GAAP gross margins of 68%, non-GAAP gross margins of 69%. We reduced expenses quarter-over-quarter after the Q4 restructuring, helping to achieve GAAP operating margin of 24% and non-GAAP operating margin of 26%, despite the lower overall level of business due to the pandemic. Free cash flow was $230 million or 32% of revenues, reflecting our efficient fabless business model. Our continued profitability allowed us to return $146 million or 63% of free cash flow to our shareholders through dividends and share buybacks.

During the quarter, we also lowered our cost of capital and increased liquidity with a new debt offering. Our balance sheet is strong and gives us options to pursue business opportunities. Our business has been stable during recent crises, benefiting from servicing a broad set of customers and end markets, some impacted by COVID and other headwinds and others gaining by the move to digital and online services. Specifically, data center group revenue grew 10% quarter-over-quarter and 104% year-over-year, driven by accelerating adoption of our SmartNIC solutions, cloud service provider deployment of compute AI solutions, and continued strong revenue contribution from the Solarflare acquisition. Wired and wireless group revenue increased 27% quarter-over-quarter, but declined 33% year-over-year.

Please note the year-over-year decline was largely due to the effects of trade restrictions on Huawei as well as ASIC related product transitions, which have largely run their course. In the quarter, we saw better-than-expected performance in both wired and wireless businesses. Wired outperformance was driven by access network and 5G-related core network build-outs as well as accelerated orders related to CIV rule changes. Wireless outperformance was driven mainly by 5G rollout in China. Wireless also experienced some CIV related order acceleration.

AIT, or aerospace and defense, industrial, test and measurement end markets, revenue declined 13% quarter-over-quarter and 2% year-over-year as these end markets came off the second quarter, a record quarter in Q4. Test measurement and emulation, the TME end markets declined more than expected due to a meaningful customer program rescheduled to Q2, but was offset by outperformance in the industrials end market in part due to CIV accelerations. ABC or automotive, broadcast and consumer revenue decreased 24% quarter-over-quarter and 29% year-over-year reflecting the impact of COVID-19 on our more consumer-oriented markets. The automotive end market was significantly impacted by factory shutdowns and a steep drop-off in global auto sales. The lack of live sports and shutdown in TV and movie productions negatively affected the broadcast end market.

Company level gross margin was at the top end of guidance with GAAP gross margin of 68% and non-GAAP gross margin of 69%. The difference between GAAP and non-GAAP is due to M&A-related amortization. GAAP operating expenses of $318 million or 44% of revenue and non-GAAP operating expenses of $314 million or 43% of revenue were in line with our revised guidance. Operating expenses were higher than initial guidance due to increased variable compensation related to the revenue outperformance in the quarter. GAAP operating income was $176 million or 24% operating margin.

Non-GAAP operating income was $187 million or 26% operating margin. Our GAAP tax rate was approximately 43% and non-GAAP tax rate was approximately 8% below our revised guidance. Non-GAAP taxes were lower-than-expected due to more of our income coming from lower tax jurisdictions. As a reminder, our GAAP tax rate was impacted by a onetime charge related to effects of a third-party legal proceeding related to cost-sharing arrangements. Please refer to our 10-Q and 10-K for more disclosures on this item.

GAAP net income was $94 million and diluted earnings per share were $0.38, a 42% quarter-over-quarter decrease and 60% year-over-year decrease. Again, please refer to the cost-sharing arrangement tax reserve in our disclosures. Non-GAAP net income was $160 million. Non-GAAP diluted EPS was $0.65 per share, a 17% decline from last quarter and 33% decrease year-over-year. Diluted share count decreased to $245.5 million.

Now on to some balance sheet and cash flow items. Gross cash was $3 billion with $2 billion in total debt, reflecting our issuance in May, of $750 million in 2030 notes. This debt issuance, positioned us to repay the $500 million 2021 notes due next March, as well as to increase our liquidity position. Accounts receivable, increased to $305 million and is at 38 days, compared to 33 days last quarter. The DSO increase is driven primarily by linearity of distribution billings within the quarter.

Net inventory decreased to $292 million and days of inventory stands at 114 days, down from 122 in the prior quarter. Inventory depletion was largely driven by higher-than-expected revenue, relative to the original forecast. The lower inventory and slightly higher cost of sales resulted in the, days of inventory reduction. Overall, we generated $245 million in operating cash flow or 34% of revenue, and $230 million in free cash flow or 32% of revenue, reflecting the strong cash-generating ability of our fabless business model. During the quarter, we repurchased approximately 700,000 shares at an average price of approximately $78 per share and paid dividends of $92 million.

Turning now to the outlook for fiscal second quarter 2021. Note that our guidance for this quarter reflects the narrower range than what we provided on our April earnings call, which was wider than normal due to the uncertainty around COVID impacts. The range we provide today is more in line with, what we think are reasonable guidance ranges for our business going forward. We expect second quarter revenue to be between $730 million and $780 million, which at the midpoint, is up approximately 4% quarter-over-quarter and down approximately 9% year-over-year. This reflects overall business strength, with strong recovery in our core markets, led by TME and A&D as well as in auto and broadcast markets.

Our data center group is expected to be flat to slightly down, off a record Q1 and WWG is expected to decline due to digestion of CIV accelerated orders. Overall, we are pleased with the strength of our business over the first half. We see signs of strengthening in multiple markets through the rest of calendar 2020, but the economic conditions are still quite fluid, with the pandemic and U.S.-China trade relations. Some additional color into our end markets, within AIT, TME sales are expected to increase meaningfully, due to strong emulation prototyping program revenues. Aerospace and Defense sales are also expected to increase, due to certain Defense-related programs.

ISM is expected to decline after a record quarter, but still in line with historical levels. We have started to see some pickup in manufacturing activity, as Europe and Asia have started to recover from COVID-19 impacts. We remain vigilant, as the pandemic continues to play out in the U.S., with potential follow-on effects to the economy. ABC markets are expected to recover, from lows in Q1. The auto market is expected to strengthen.

Broadcast is also expected to increase with innovative new applications related to higher-quality Internet-based videos, as well as pro AV customers, building inventory ahead of potential demand in this December quarter. Data center group sales are expected to be flat to slightly down, from a record quarter in Q1 as customers digest SmartNIC deployments. As we have stated in the past, we expect our DCG business to continue to have quarterly revenue fluctuations, driven by large customer order cycles. We have a solid pipeline of design opportunities with hyperscale customers and see strength in our networking efforts, both in smart NIC solutions and traditional NIC adapters from Solarflare. WWG is expected to be down sequentially with wireless moderately down as CIV related digestion is partially offset by a significant 5G-related RFSoC ramp for a Tier 1 OEM.

Wired business is expected to be down more than wireless due to CIV related digestion. In general, broad work from home shifts have changed demands on network capacity, and we expect increased investment in broadband communications and security over time. Note also that, our outlook captures orders from all customers as we believe we now have a better handle on what we are able to ship to countries and customers impacted by trade restrictions. Fiscal Q2 GAAP gross margin is expected to be between 68.5% and 71.5%. Non-GAAP gross margin is expected to be between 69.5% and 72.5%.

GAAP operating expense is expected to be between $326 million and $340 million. Non-GAAP operating expense is expected to be between $322 million and $336 million. As a reminder, our fiscal Q2 contains annual employee compensation increases related to our focal process. GAAP as well as non-GAAP other expense is expected to be approximately $15 million. GAAP tax rate is expected to be between 0% and 3%.

Non-GAAP tax rate is expected to be between 1% and 4%. In closing, I want to emphasize the stability and profitability of Xilinx's diverse core business as well as the tremendous opportunity Xilinx has across all of its businesses. Our strategy remains on track as we continue to progress on our transformation to a platform company. We will continue to invest in our product road map, highlighted by our 7-nanometer reversal platform in derivatives as well as our Vitis software platform and ecosystem. We also continue to execute on our Zynq road map including our RFSoC and the new MPSoC offerings.

We believe that we will emerge from the global pandemic with a stronger market position. We remain well positioned to expand our market leadership and capitalize on opportunities across all our end markets as the global economy continues to recover from COVID-19. Let me now turn the call back to the operator for Q&A. Thank you.

Operator: [Operator Instructions] Our first question comes from John Pitzer with Credit Suisse.

Your line is open.

John Pitzer: Thanks for letting me ask question. Congratulations on the strong results and appreciate all the detail. Victor, I'm wondering if you could help us just understand on the CIV rule changes. How much of an impact did you think that had on the June quarter? How much do you think it will impact from a digestion period on the September quarter? And I guess it's a backdoor way to try to get an answer around the RFSoC ramp that Brice kind of commented on in his prepared comments.

How big is that opportunity and is this the beginning of something even bigger?

Victor Peng: Yes, great question, John. And look, I think the CIV has puts and takes in it, frankly. And what I would say is that it's hard to really quantify with precision, order of magnitude, think of it as low tens of millions. So our strength is due to what we said. In the data center, we had a very strong quarter.

We had strength in WWG, but there was some CIV so in the Q1. Now in terms of Q2, we really see very little further on effect. We did say that in certain areas, there will be a little bit of digestion of that. But for the most part, I don't think it's really that meaningful. With regard to the RFSoC that is a very significant win, and we're really excited about the fact that it's the North American deployment.

And it's just the start. So we do think that, that is something that we'll continue to deliver good revenue. Now as we said many times and in general, deployments, by definition, are somewhat bursty. So it's not like what we see going forward now in every single quarter, we'll see that kind of thing. But overall, it's the beginning of what we've said for quite some time.

The RFSoC is a really unique product out there, and we're really excited to see another deployment. And so yes, I do think it's – it is the start of something bigger, and I think it is just the beginning of this one particular significant deployment.

Operator: Our next question comes from Joseph Moore with Morgan Stanley. Your line is open.

Joseph Moore: I wonder if you could talk a little bit more about the uptick in the data center business that you saw.

It sounds like it was more kind of driven by the networking side is that the right interpretation? And then I have a follow-up on the SmartNIC piece?

Victor Peng: Yes, it was good uptick in terms of SmartNIC as well as compute. And also we're seeing fintech adoption, some good interest in fintech. Good amount of that is Solarflare, but we also have other engagements going on. So it's really nice to see. It was a record quarter for us, and we're really excited about that.

And of course, we're still in a stage where you might see some burstiness from quarter-to-quarter. But obviously, the trend is in the right direction. And certainly, what we're doing with the ecosystem is encouraging so.

Joseph Moore: And then how are you thinking about that SmartNIC business? Are you – look, it seems like there's a part of that business that's going to be large deployments at hyperscale, where people standardize around certain solutions. And then there's lots of smaller pieces of it.

How are you thinking about which segments you're attacking? And how is that business pursued differently through Solarflare versus through other customers?

Victor Peng: Yes, what I would say is, first of all, we definitely see opportunity with the hyperscalers as well as, I think, enterprise over time and other players. I think everybody knows the hyperscales tends to move more aggressively and it takes a little bit longer to move into the enterprise. And so yes, and by the way, I think there's a combination of things going on. I mean, people just need to go to the higher bandwidth, but also people are doing different levels of offload and processing. So it is just the beginning, and it's a really exciting area for us.

In terms of fintech, Solarflare already had a position, obviously, in financial technology. A lot of it was around their very low latency techniques. And we're still seeing that expanding. But now we're seeing it going beyond some of the traditional applications that they were in as well. And that bodes in terms of both those products, but also taking a look at Alveo for the route.

Operator: Our next question comes from Toshiya Hari with Goldman Sachs. Your line is open.

Toshiya Hari: Thanks for taking the question. I had one for Brice, not so much related to this quarter. But I guess it's been a couple of months or maybe several months since you joined the company, I'm guessing.

You've had some time to learn more about the company, the outlook and the opportunity you set. How are you thinking about sort of the medium to long-term financial model? I know you guys had an Analyst Day coming up in a couple of months, and I don't expect you to preview anything. But in terms of driving efficiencies from an OpEx perspective and how you're thinking about the balance sheet and cash flow going forward, any insight would be helpful? Thank you.

Brice Hill: Okay thanks, Toshiya. So, first as you mentioned, we're only giving guidance for Q2, and we are planning an Investor Day for the second half in the October, November timeframe.

We'll get back with the date where we'll be specific. On the balance sheet, just really quick, we'll start there. The business has been strong. Victor pointed out in his commentary. We're profitable in this crisis.

We've been profitable in prior crisis. So we feel fortunate that we're adding cash, adding earnings to the balance sheet and we're in a good position to be able to consider additional opportunities, both organic and inorganic. So the company is in a strong position financially, and that's great. When we think about the long-term business model, what the company has described before, significant growth opportunities in data center and WWG and then also higher growth rates in our core markets. And we'll detail this in – when we have that Investor Day meeting, but we're excited about the opportunities in automotive.

We think we'll be able to extend opportunities in test measurement and emulation. And also the aerospace, defense, industrial, medical businesses, all of those have products that are improving our position in those markets, and we're pretty bright on the prospects for growth in those markets. So, that's what we'll discuss when we get to that point.

Operator: Our next question comes from Ambrish Srivastava with BMO. Your line is open.

Ambrish Srivastava: Brice, you mentioned that the ASIC transition is behind the company. And I was just wondering, what kind of time frame are you referring to because it's always been the case, Xilinx has ASIC transition. So, what gives you the confidence, unless it's for a couple of quarters that you're talking about, that we will not see further ASIC transitions? And I have a really quick follow-up on the advanced product side, the down year-over-year versus core. Is that largely related to Zynq and Huawei is that the right interpretation of that underperformance versus core? Thank you.

Brice Hill: So on the first piece, I think the ASIC transition, we're talking about are for designs that were specific to 5G infrastructure.

We knew some of the designs that we would lose. And so, we think we're past that. I don't think we're saying that we'll never have an ASIC transition again, but the effect on our business from a quarter-over-quarter perspective that we saw from last year to this year is largely complete, and we're competing for new business. And then the – Victor you want to add?

Victor Peng: Well I guess, I just would like to say again, I think he was really trying to clarify the big year-over-year drop, right. And we had talked about that on the previous earnings calls, and that's all these referring to.

And again, I feel that we have a stronger position than ever against ASICs and competing as ASICs is not new, as you said. But I think people have over rotated into the notion that we always get designed out, but that’s really not been the case. And I think, again, Brice was just trying to clarify the big year-over-year change, but once you complete the second half of the question.

Brice Hill: Look I'm sorry. Could you repeat the second half please.

Ambrish Srivastava: Yeah, sorry it was Adam and thanks for jumping in Victor for the clarification. Yes, my question was on the advanced products being down more than the core and – am I correct in assuming that that's largely, because it's usually counterintuitive to see the advanced products down more, but I'm assuming that's because it probably likely due to Huawei as well as to Zynq and automotive is that the correct assumption?

Victor Peng: Well, the way the way to think about it is, since we had a lower quarter on Aerospace, Defense test and measurement emulation. And we had a number of accelerations related to CIV, the CIV accelerations were in a lot of cases older products. And so that was a slight mix change just based on the end market mix for the quarter, and we'll expect that to, you know, flip as we go into the second quarter where you have. Where we'll have increased business in Aerospace and Defense, test measurement, emulation et cetera.

So it's really just a reflection of – the end market mix for the quarter.

Brice Hill: Well, there's that part and then, as you said, on Zynq specifically, yes automotive certainly was down quite a bit. So on the SoC portion of that and that is definitely Zynq auto.

Operator: Our next question comes from Tristan Gerra from Baird. Your line is open.

Tristan Gerra: How should we look at the RFSoC when ramped in North America versus opportunities that you have in China in base station. Over the medium term, which one is the bigger opportunity. And also, when do you benefit in China from the non-Huawei ramps as they diversify base station suppliers?

Victor Peng: So with regard to RFSoC, we see deployments in multiple geographies. In fact, at this point, we have deployments in all the major geographies. So – and we think that will continue.

Again, it's been out in the market now for a while, and there's still no product like it in terms of fully integrated, monolithically integrated, high performance ADCs and DACs together with the digital processing. So that's been unique, and I really think that's kind of a long life and to be deployed in all the regions. With respect to share shift, I guess, that's what you're referring to in China. Look, we've seen some of that, but I would say that it's not super meaningful from what we can see. I think in some of the other geographies, I think everybody is aware that, of course, there is some more shifts to non-Chinese vendors in general, not just Huawei in Europe, and India certainly is moving in a different direction, although India, it's really delayed in terms of 5G, but just in terms of wireless infrastructure as a whole.

So I'd say, yes, we do see some shifts. I mean nothing as of yet very material. But obviously, it's still a dynamic situation. And implicit in your comment, I guess, is around some of the recent restrictions around that impacts Hisilicon and Huawei. And again, I think it's probably still a very dynamic situation.

Operator: Our next question comes from C.J. Muse with Evercore ISI. Your line is open. C.J. Muse: I guess I wanted to clarify John's earlier question.

On the CIV pull-ins, was there any impact to DCG and then for the main question, for gross margins, very nice range, particularly at the higher end of that range. I'm curious, what would have to happen for you to hit that 72.5? And I guess as part of that, anything mix wise that stands out to certain products? Or is this really just a function of WWG following up pretty severely in the quarter? Thank you.

Brice Hill: Thanks, C.J., its Brice. I'll start on that one. Some of the CIV acceleration volume did go to data center, a small portion of it.

So that's fair. Basically, three groups, data center, WWG and industrial, all had some of the orders that were accelerated in the quarter. On the gross margin changes, as you highlighted, the really not changes in price or cost much during the quarter. It's really end market mix that drives the gross margin, as you sort of alluded to. And so in the second quarter, we're expecting a stronger mix of aerospace and Defense and test measurement and emulation.

And that typically drives our margin higher. And we think we put that range out there. It's all going to depend on the end market mix, as we get through the quarter where we'll end up in that range.

Operator: Our next question comes from Blayne Curtis with Barclays. Your line is open.

Blayne Curtis: Another question, I just want to understand that there being pieces on the CIV pull-in. Maybe you can just talk about - I mean, if you look at the strongest group in WWG, it's up 27%, and it's not down that much in the guide. So I'm just trying to understand, one, are you just saying that you have products that are backfilling it? And when you look at tens of millions of dollars, is it incorrect to think that WWG got the biggest contribution?

Victor Peng: It was mixed across the three groups I mentioned. When we think about it, we look at Q1 and Q2, and both quarters are stronger than we originally anticipated, the major driver being strength in data center, WWG and industrial businesses for the two quarters. Low tens of millions like we described in Q1, and the reason we say it's difficult to see is when we accelerated some of that product in Q1.

We essentially had to displace product that we were shipping to other customers, and so some of that moves to Q2. So we just suggest, look at both quarters we're ahead of expectation in both quarters. We do think the net effect in Q1 was in the low 10s, and it was across those three end markets.

Brice Hill: Yes. I'd like to actually jump in again and sort of say, the business is strong independent of CIV.

And I think, the CIV causes some movement across the quarter, I would also be clear that in some cases, the CIV wasn't - it didn't have a positive effect because of concerns around the continuing escalation between U.S. and China. So I don't think people should walk away from this saying that our strength was based on that. It's a portion of what we saw in that order of magnitude. No, not that meaningful.

And really, if you look at going ahead, virtually, we have strength in multiple markets. So I think, that's - I understand people trying to tease that out. But I wouldn't over rotate any of the emphasis on CIV.

Blayne Curtis: And then, just maybe a quick follow-up. Since they are trailing products, could you still ship to it if the customer wanted to it or is there part of this restriction that you no longer can ship to them?

Victor Peng: We’re asking for licenses from the government, so those products had an exception.

That exception was removed. We applied for licenses. We've gotten a number of licenses, so you know our hope would be that we'll be able to continue shipping the products to customers.

Brice Hill: Yes, well, it's a mixed bag, right I mean some won't. Some have.

By the way, you know, people should understand is that this is not affecting just Chinese companies. These are multinationals that have operations in China as well, so we have licensed that definitely covered those. U.K. word Chinese companies but you know this is why, you know, there are really put some takes, right. And some of it we feel like we work with the customers or figure out another way and some of it is - not going to be there, so…

Operator: Our next question comes from William Stein with SunTrust.

Your line is open.

William Stein: Great, thanks for taking my question. It's really about the data center and market. And I apologize if I missed this, but I think you said this was going to be flagged down in September. There's been quite a lot of discussion about digestion period, wondering if you'd be willing to comment on how you expect that to extend over the next couple of quarters have customers, perhaps overbuilt in a meaningful way where we should expect some period of digestion beyond the quarter.

And the other question relates to this and that's about the split, if you can remind us between let's say vertical applications like networking versus FPGA as a service, if you can just remind us what that split is approximately? Thank you.

Victor Peng: So on the first part - back to the - when you say digestion, I don't know whether referring to CIV or just general digestion. I mean, in terms of the markets that had some impact with regard to CIV, the data center was probably the least. So that's one thing just to sort of put that in, in terms of a qualitative sense. But I think in general right like when we have deployments in the data center, You know usually is they do a buy and then they use that for a while they don't continuously buy that's just the nature of most of the purchases.

And then as we said in the past as we're scaling this quarter the quarter things vary a bit. So, you know, this you know flat class just slightly down off of a record quarter I don't think you should read too much into this, you know, a tremendous amount of digestion going on right, that's one part of the question I guess. In terms of FAA versus sort of networking opportunities, you know we don't break out FAS specifically we just kind of put that as one sub category within compute. And I would say is that you know we saw winds and some, some good momentum in both areas, but I you know in terms of SmartNIC as well as in compute, I would say that, you know, for the near term, you know, there's good strength in both probably right now. A lot of really good activity on the SmartNIC side, I think the you know the real time video system that we had just this place was in great interest there first time that we have a much more of a turnkey solution.

So, we'll see how that plays out into revenue, but I think there's strength in both areas compute as well as SmartNIC.

Operator: Our next question comes from Christopher Rolland with Susquehanna. Your line is open.

Christopher Rolland: If you, Victor, could update us on the timing and migration path to 7-nanometer? And are there some applications or end markets or customers where process technology leadership is particularly sensitive and that we can get some, sort of, accelerated growth for that end market or applications? How are you thinking about that? Thank you.

Victor Peng: So Versal is progressing really well.

We're on track as exactly as planned to go into their for production at the end of this year. And that's – and of course, we had the big announcement in terms of Samsung and their 5G equipment. We have multiple customer engagements in many, many different industries. So that's one that's most notable that we made public. But that's really going to be a broad market thing.

And this production is just the first device in the product family, which there are like multiple subfamilies. So 7-nanometer transition is just beginning. And that's why, indeed, we're actually still doing 16-nanometer tape-outs because of the strength of the 16-nanometer generation. So I think this transition is starting to happen. We're in the early phases of that.

And again, we are still getting very strong design wins and activity on the 16 nanometer. And I think you might be wondering like, gee, certain parts of the industry is already talking about 5 or whatever. And I think the really important thing to keep in mind is at 7-nanometers, and for that matter, 16-nanometer as well, we significantly increase the capability of the products that we put out there, right. You, kind of, mentioned the RFSoC see multiple times. Nobody has that integrated RF capability, and all capability together with digital logic even after us being in the marketplace for a couple of years.

Versal, again, there's no other products like that or more direct competitor in that area did a much more evolutionary move in terms of their architecture. So we're providing capability and value to our customers through a lot of innovation architecturally, we're not as reliant like in the old days and just moving to process those because if you follow this industry back when it was just pure FPGAs, right, not Energen's acceleration with SOCs and other architectures. Then it - they mattered a lot more getting to the next node because that's the only way you really deliver more capability, right. So I think we've really - we continue to move to advance, but we're really innovating at the architectural level and other forms of integration. So I think that's why you may see, like, okay, why wouldn't you be moving to the next architecture, but that's the reason.

Hopefully, that helps.

Operator: Our next question comes from Ross Seymore with Deutsche Bank. Your line is open.

Ross Seymore: Okay. I’ll certainly ask a question.

I just wanted to talk about the AIT segment for a bit. I think everybody understands why that was weak recently. But going forward, can you just help us size first how big is the TME side of things? And then as you think about growth in September and maybe even to the calendar fourth quarter of this year, how are you looking about the company specific growth versus the macro side getting better? Especially in that TME side, which tends to be so lumpy?

Victor Peng: So on the TME, it can be a sizable business for us. You saw we had a record Q4 in that business. And in Q1, it was a little bit lower, but we do expect it to strengthen in Q2 again.

And that particular business, we do a good job of optimizing our products for the customers, and we have a strong product line that will improve their ability to get short development times, faster validation, etcetera. So there's lots of opportunity for the company in that particular business. When we think about AIT in general and we think about the macro, there's probably – we do expect to grow faster than the macro. We're all looking at and hoping for a V recovery. We do think that the market will benefit from the recovery, and we'll track that.

But we have tailwinds in terms of being able to gain share with the products that we're developing in the space. So TME market looks good. Industrial will recover along with the macro economy. On the medical side, we expect that, that will continue to benefit from trend toward automation. And then in Aerospace & Defense, we also think there's many programs there that will continue to grow that end market over time.

So if you're thinking about the long-term growth rate there, we do think it will be – it will exceed the macro.

Brice Hill: Yes. And maybe just kind of point out that in this quarter, our expectations is, in the core markets, every submarket is going to grow, except for perhaps ISM, because it was a record, right. So, really there’s broad growth across all those core markets. Auto, obviously, had a severe downturn.

It's still going to have an uptick from that, but it's still got a ways to go to get back to it. But the breadth is across every market, except for ISM, which had a record, and the – our expectation still be solid. So, yes, it's pretty broad.

Operator: Our next question comes from Matt Ramsey with Cowen. Your line is open.

Matt Ramsay: Yes, good afternoon. I wanted to follow-up a bit on the process technology angle. There were, obviously, some pretty big news out of Intel in the last week or so. And Victor, I'm completely – I think I agree with you, the architecture and a lot of the things you're doing on software, et cetera, are increasingly important in your end markets. So I get the commentary that you gave with respect to that question.

I wanted to explore the other side of it, which is sort of certainty of road map and certainty of supply, given some of the commentary out of Intel that owns your chief competitor. How have you seen your customers react in the last week since some of the news? And is certainty of road map and certainty of silicon supply critical to the long-term design wins that you're getting? Or maybe am I overemphasizing that in my own thinking? Thank you.

Victor Peng: No, I think it's a good question. I mean, I think, that we've done – I'm very proud of our team in terms of the execution that we've been doing for a number of generations, actually. I mean, if you followed us, we used to talk about how we had a 3P in getting leadership, and we sort of stopped talking about that, not because we're no longer doing, but actually because we expect that our customers have come to be very accustomed and expect that we just – we say what we do and we do what we say.

And they can count on that. Right? So I think we continue to execute really well, and that is important. I think our delivery and execution in terms of providing supply and on-time delivery and all those metrics are - we get really high marks. We do customer set studies constantly. That's always part of the KPIs of my operations team.

So, we're very proud of our record there, and that's certainly - I guess what I would say is some of the recent things maybe underscore that more, but I would say that that's always been a strength, and I think our customers all acknowledge that. We've been in a strong position in automotive. And you may have heard me say in the past, people want to talk about certain sexy kinds of topics, but one thing that's super critical if you're on safety is you're low PPM, right? So, how few failures that you have, and it's really, really hard. It's really not very sexy, but we do a really good job at that, and we get very good price from our automotive customers. So, I think it's a very important thing, but I think it's something that we've always been doing.

And I think what you're alluding to is the other side is, obviously, more recently challenged, but we just stay focused on making sure that we continue to execute with excellence and deliver high quality.

Operator: Our next question comes from Vivek Arya with Bank of America. Your line is open.

Vivek Arya: Thank you for taking my question. Actually, a quick clarification and a question, if I may.

Clarification, how large was Solarflare in the quarter? Was it like low tens of millions? Any rough amount would be useful? And then the question, Victor, I just wanted to slightly challenge this notion that the ASIC conversion is complete because if it can happen at one customer, why can't it happen at other customers, right? The original ASIC transition was at Samsung, but then after that Nokia also announced multiple ASIC suppliers for 5G and said FPGA solutions are expensive. So, I'm just asking, technically, if it can happen at one customer, why can't it happen at other customers? Or is there just a difference that maybe it's happening on the baseband side and maybe not as much on the radio side? And if that is the case, how sustainable is that? So it's more a technology question.

Victor Peng: Yes. Okay. Well, so look, on Solarflare, we don't break out and fine granularity.

But I would say is that since we've acquired, the revenue is up essentially multiple tens of percent. So, that is doing well. And so just on that part now, switching to the ASIC thing is that, I think Brice said, and I've always said that we're not saying we don't think it'll ever happen. Again, his comment really was around just explaining the year-on-year change. And yes, as you know, part of that was based on, and absolutely, we're much stronger in radio, and that's traditionally the case.

I think the important thing you need to maybe pick up on is that with currently our products in [indiscernible] and in addition, I talked about how we are delivering customized solutions for our customers, right? And we've done that in the past, and we've actually up leveled that a lot more, where based on critical needs, we would do derivative products. We work with them. In some cases, we're doing effectively join engineering together. So, we're delivering a lot more value than we ever have. So, it's not that I'm saying inherently, of course, it's possible that there'll be ASIC replacement.

I guess what we're really saying is that we know we're delivering tremendously more value than in the past. And we have these really innovative products. And I think it's going to be a tough value statement to be. And we're always happy to compete that's always been the case. As I said, we've done this in the past.

And yes, sometimes there is ASIC replacements, but we have a pretty big business in communications for a reason, right. And all those Tier 1s, as you know have ASIC team. So, that's why I keep getting back to it. It's not really new, but we've really upped our game to, that's the bottom line.

Operator: Our next question comes from Vijay Rakesh with Mizuho.

Your line is open.

Vijay Rakesh: Victor I just had a question on the millimeter wave side. Just wondering how - what your share is there? And the U.S. looks like Verizon and U.S. sellers seem to be being fine, but AT&T and T-Mobile accessing is slowing down, but just wondering what you're seeing in the U.S.

and globally in the millimeter wave side, and then I’ve a follow-up?

Victor Peng: We do have deployment in millimeter wave. I think - but I do still think that the 6-gig and below bands, that's going to be very important. I think millimeter has its applications, but it's also has some technical challenges. We can play in both do play in both. I think it's pretty early to talk about share.

But again, we see opportunity, and we are working with people in both, and we still really feel like our bandwidth capability is really important and quite leadership in lot of ways. So, I think we feel confident that we can win both of those spectrums.

Vijay Rakesh: And I think in China, you mentioned outside [ph] of some of the restrictions, you're seeing some of the other guys pick up. Just wondering, when you look at ZTE or Ericsson, how you're seeing those opportunities? And obviously, first half was pretty strong in China. Do you see a slowdown into the back half, like the dilution from the post of 5G expansion there or? Thanks.

Victor Peng: Yes well, I mean first half was a bit of a mixed bag. Obviously, that China got impacted by COVID a lot earlier, and they had a hard shutdown, then they came back strong out of it. They're obviously still trying to hit their original goals for deployment in this calendar year would probably end up being more on the low side. And I think our team estimates in the 400,000-ish sort of range in terms of base stations. So I would say that, obviously, there's - it's very dynamic.

I think we've seen, as I mentioned earlier, some degree of share shifts. But if you're talking about Chinese versus non-Chinese suppliers in the China market, at least what we've seen, we haven't seen anything materially change there. There might be some changes, but nothing really material. Obviously, I think it's been in the press quite a bit about what's recently been going on in terms of European, people saying that moving away from some of the Chinese suppliers in India as well. So, I guess we'll have to see, but I wouldn't say right now, we see any drastic share shifts.

Operator: Our next question comes from Quinn Bolton with Needham. Your line is open.

Quinn Bolton: Just wanted to come back to the CIV issue just, you've given us some sense of how much was accelerated into the June quarter. I'm just kind of thinking if you look longer-term, is there any way to quantify how much of the business you used to do under the CIV exemption that's going to be permanently lost? And then, I've got a quick follow-up.

Brice Hill: Yes Quinn, this is Brice.

As I mentioned earlier, we're pursuing licenses for the business. So at this point, we wouldn't really be able to quantify if any, we’ll be permanently lost. The customers will look to shift as they can also to change the mix of the products. So we'll pursue licenses and see if this can be equaled out and there will be no permanent loss that's obviously the goal. And go ahead with a follow-up.

Quinn Bolton: And just on the follow-up the North American RFSoC deployment that you mentioned earlier. Is that - can you just discuss the timing, is that taking place now or does that need to wait for the CBRS and the C-band options later this year before that deployment begins? Thanks.

Brice Hill: No, that is starting now. So it's just beginning. But so I think we obviously think that's going to be a long-lived win.

And we expect to have more expanded opportunities than especially digital front end on radio with RFSoC.

Quinn Bolton: Thank you.

Brice Hill: Yes, thanks.

Victor Peng: So I think - are we going to do any more questions? Okay.

Matt Poirier: Go ahead, operator.

Operator: Our next question comes from Srini Pajjuri with SMBC Nikko. Your line is open.

Srini Pajjuri: Thank you for squeezing me in. First, a clarification and then a question Brice, on the tax rate, you're guiding for, I think, 3% or 4%. I'm just curious as to how we should model going forward.

And then the question Victor, you seem pretty excited about the O-RAN opportunity. I'm just curious as to when you expect O-RAN rollouts to start? And is it because you see more opportunity for FPGAs and O-RAN that gives you that excitement or is there anything else? I mean, if - as opposed to selling components to Ericsson and Nokia, if you sell these components to O-RAN vendor. How is that different for you, if you could kind of talk about that that will be helpful?

Brice Hill: Okay. I'll go quickly. So on the tax rate yes, don't use the Q2 tax rate for your model going forward.

Our equity grants vest in Q2, we typically have low tax rate in Q2, and that's what's happening. A lot of those have appreciated, and so we have a tax benefit in Q2. I would look back to Q1 and Q4 and use a blend of those for your looking forward. Victor?

Victor Peng: Yes. On the O-RAN side, I think the thing is - if you think about it, people are looking at how they can fundamentally reduce some of their hardware costs, but also then they'll differentiate and do that through other means from a software perspective.

And if you think about it, that is something that we have always brought to the table for our customers is the ability to differentiate with hardware that is so adaptable, right. That the same hardware can be used and deliver different architectures, support different standards, be optimized in different ways. And in fact, you can change it right, even after you deployed it. So I think really what it is, is the reason why we're excited is because we feel that what people are trying to accomplish fundamentally with O-RAN is something that we really help enable and have always helped enable in a tremendous way. So and plus with the RFSoC again, I think we're creating more value.

We're solving more of the whole radio problem. And so we just see that as another big opportunity, right? Not only the Tier 1s, but also with Tier 2s. And we'll see. I do think it's still new technology, so it's going to be hard to call the exact inflection. But I'm sure you've heard that the momentum and the interest behind this has really picked up over the last several months so.

Victor Peng: Okay. Thanks, everyone, for joining the call. I just want to do one closing because I know - and understandably so, there has been a lot of questions around the CIV thing. I just don't want to lose sight of the fact that we had a record quarter in DCG, displaying strength and multiple areas within that, both in compute and on the network side and as well as storage activity. We've really made tremendous progress in growing our ecosystem in the software story.

34,000 downloads just from a fairly - sorry 40,000 downloads over a short period of time and continue to grow ecosystem. So, I don't want to lose sight of the fact that we had really great strength there. And of course, there's some puts and takes in WWG. But we're really excited about the RFSoC opportunity as well as universal continues to be getting really good design activity. So just want to leave you with the strength.

Then in the current quarter, as we said, the core markets, which had some puts and takes in the last quarter is going to come back really strong. So we're excited about it to go forward, and I hope this is helpful for you.

Operator: I'll now turn the call back over to Mr. Poirier for closing remarks.

Matt Poirier: Thank you.

I appreciate everyone for joining us today. We will have a playback of this call beginning

at 7:00 p.m. Pacific Time, 10:00 p.m. Eastern Time today. For a copy of our earnings release, please visit our Investor Relations website.

Our next earnings release date for the second quarter of fiscal year 2021 will be Wednesday, October 21, after the market close. This completes our call, and thank you very much for your participation.

Operator: This concludes today's conference call. You may now disconnect.