Categories Earnings Call Transcripts, Technology

Broadcom Inc. (AVGO) Q2 2021 Earnings Call Transcript

AVGO Earnings - Final Transcript

Broadcom Inc. (NASDAQ: AVGO) Q2 2021 earnings call dated June 03, 2021

Corporate Participants:

Ji Yoo — Director of Investor Relations

Hock E. Tan — President and Chief Executive Officer

Kirsten Spears — Chief Financial Officer and Chief Accounting Officer

Analysts:

John Pitzer — Credit Suisse — Analyst

Harlan Sur — J.P. Morgan — Analyst

Ross Seymore — Deutsche Bank — Analyst

Vivek Arya — Bank of America Securities — Analyst

Timothy Arcuri — UBS — Analyst

Craig Hettenbach — Morgan Stanley — Analyst

Blayne Curtis — Barclays — Analyst

Toshiya Hari — Goldman Sachs — Analyst

C.J. Muse — Evercore ISI — Analyst

Christopher Danely — Citigroup — Analyst

Presentation:

Operator

Welcome to Broadcom Inc.’s Second Quarter Fiscal Year 2021 Financial Results Conference Call.

At this time, for opening remarks and introductions, I would like to turn the call over to Ji Yoo, Director of Investor Relations of Broadcom Inc. Please go ahead.

Ji Yoo — Director of Investor Relations

Thank you, operator, and good afternoon, everyone.

Joining me on today’s call are Hock Tan, President and CEO; Kirsten Spears, Chief Financial Officer; Tom Krause, President, Infrastructure Software Group; and Charlie Kawwas, Chief Operating Officer.

Broadcom also distributed a press release and financial tables after the market close, describing our financial performance for the second quarter of fiscal year 2021. If you did not receive a copy, you may obtain the information from the Investors section of Broadcom’s website at broadcom.com.

This conference call is being webcast live and a recording will be available via telephone playback for one week. It will also be archived in the Investors section of our website at broadcom.com.

During the prepared comments, Hock and Kirsten will be providing details of our second quarter fiscal year 2021 results, guidance for our third quarter, as well as commentary regarding the business environment. We’ll take questions after the end of our prepared comments.

Please refer to our press release today and our recent filings with the SEC for information on the specific risk factors that could cause our actual results to differ materially from the forward-looking statements made on this call. In addition to US GAAP reporting, Broadcom reports certain financial measures on a non-GAAP basis. A reconciliation between GAAP and non-GAAP measures is included in the tables attached to today’s press release. Comments made during today’s call will primarily refer to our non-GAAP financial results.

I’ll now turn the call over to Hock.

Hock E. Tan — President and Chief Executive Officer

Thank you, Ji, and thank you everyone for joining us today.

In Q2, Semiconductor Solutions revenue grew a strong 20% year-on-year to $4.8 billion, with Infrastructure Software revenue growing an expected 4% year-on-year to $1.8 billion. Consolidated net revenue was $6.6 billion, up 15% year-on-year.

Now, on the last earnings call we had, we talked about how strong broadband and networking bookings were from hypercloud and service providers, even as wireless was declining seasonally. In Q2, just passed, not only do we see broadband and networking sustaining, we now see a recovery of bookings from enterprise. And on the supply side, our lead times have now stabilized, but the book — but the volume of bookings we are experiencing today continues to grow. Now, we intend to meet such demand, and in doing so, we maintain our discipline process of carefully reviewing our backlog, identifying real end user demand, and delivering products accordingly.

With that as context, let me provide you more color. Starting with broadband, which interestingly now is going through somewhat of a renaissance. Revenue grew 28% year-on-year, and represented 18% of our Semiconductor revenue. As discussed during our Broadband Teach-In, the work, learn and play from home environment is driving global service providers to expand connectivity to the home. In our Broadband Carrier Access business, PON fiber, or otherwise known as PON, grew over 40% year-on-year, mostly with existing generation 2.5G. But with next generation 10G PON representing only 30% today, there is significant room for content growth as 10G PON deploys over the next few years.

Not to be outdone by fiber, cable operators in the U.S. are driving deployment of DOCSIS 3.1 cable modems, we see — we saw an 80% year-on-year growth, and planning to accelerate the upgrades to next generation DOCSIS 4.0. Our broadband technologies, in fact, are enabling service providers to complement the 5G they deliver — to deliver best experience for consumers.

Now, overlaying all this last mile broadband upgrades, we see a demand surge for the latest Wi-Fi 6 and 6E technology to enable the last 100 feet of connectivity in homes. Broadcom has emerged as the clear market and technology leader in Wi-Fi for exercise gateways to the home and to enterprises with over 50 million ports shipped in Q2 alone, or a year-on-year revenue growth of some 30%.

On the other hand, as we might expect with the push into higher performance fiber, copper DSL, digital subscriber line, deployments for wireline broadband declined 30% year-on-year, and with a lack of live events during the pandemic, video declined 20%. But with the onset of 5G, service providers are competing for subscribers, leading to technology upgrades globally in fiber, cable and Wi-Fi connectivity. We are seeing this investment cycle in broadband extending into 2022, and so, for Q3, we expect to sustain double-digit year-on-year revenue growth in this segment.

Moving on to networking. Networking grew 10% year-on-year and represented 32% of our Semiconductor revenue. We experienced tailwinds from hypercloud and telcos, partially offset by headwinds from enterprise. Revenue for switching was up 30% year-on-year, primarily driven by the strong ramp of our Trident and Tomahawk 3 for over 400G platforms at hypercloud datacenters.

In the networks, service providers have been investing in 5G infrastructure worldwide, where the demand for Jericho 2 at the Metro/Core and Qumran at the Edge have been robust, with revenue up 35% year-on-year. On the other hand, enterprise demand in networking has not yet recovered, still down double-digits from a year ago. And then — but as we go into the back half of the year, we expect to see hypercloud upgrading to a next-generation Trident/Tomahawk 4 over 800G switching platforms and sustain strength by service providers in network routing. And accordingly in Q3, we expect networking revenue to maintain the trend of low double-digit growth year-on-year without the complete recovery of enterprise demand.

Speaking of enterprise, let’s talk about server storage connectivity, which represented approximately 12% of Semiconductor revenue. This end market is largely driven by enterprise, and in line with our guidance, revenue was down 16% year-on-year. You may recall, however, in Q1, this was down 22%. And as the economy starts to recover, we have seen an improving demand trajectory. And so, in Q3, we expect server storage connectivity revenue to be down high single-digits percentage year-on-year. With the launch of Intel’s Ice Lake, AMD’s Milan, as well as future ARM-based servers, this space is turning quite exciting and innovative for us, both in hardware and software. And we will provide, obviously, more color during our next Teach-In July on our server storage business.

Moving on to wireless, Q2 revenue was down 16% sequentially, reflecting seasonality with wireless representing 34% of Semiconductor revenue mix. Nonetheless, on a year-over-year basis, wireless revenue was up 48%, reflecting a very favorable compare year-on-year, as well as content increases in RFFE [Phonetic] and Wi-Fi. In Q2, we were able to ship more than we had originally planned. And accordingly in Q3, we expect the growth trend in wireless revenue to sustain, but at over 30% year-on-year.

Finally, industrial and other represented approximately 4% of Q2 Semiconductor Solutions revenue. Resales grew 34% year-over-year in Q2, driven by recovery in automotive and China. Inventory in the channel continues to deplete as what we shipped in the distributors grew only 23%. Turning to Q3, we expect resales to continue to grow double-digit percentage on a year-on-year basis.

Summary, Q2 Semiconductor Solutions segment was up 20% year-on-year. And in Q3, we expect revenue growth year-over-year to be of a similar amount.

Turning to Software. In Q2, Infrastructure Software produced another quarter of steady and predictable results, as revenue grew 4% year-on-year and represented 27% of total revenue. Now, if we exclude professional services, our enterprise software revenue grew 7% actually year-over-year. And as further indicator of the quality and sustainability of our products, over 90% of our software bookings represented recurring subscription and maintenance with an average contract life span from core customers pretty much close to three years. We continue to believe our infrastructure software business is on track to grow at or better than mid single-digit percentage year-over-year, which is again what we expect to see in Q3.

Summarizing this, demand continues to be robust, so our Q2 consolidated net revenue grew 15% year-over-year. We expect the momentum to sustain in Q3, and total revenue to be at $6.75 billion, or up 16% year-on-year.

With that, let me now turn the call over to Kirsten.

Kirsten Spears — Chief Financial Officer and Chief Accounting Officer

Thank you, Hock.

Let me now provide additional detail on our financial performance.

Revenue was $6.6 billion for the quarter, up 15% from a year ago. Gross margins were a record 75% of revenue in the quarter and up approximately 180 basis points year-on-year. Operating expenses were $1.2 billion, down 1% year-on-year, driven by lower SG&A, offset in part by increased investment in R&D. Operating income for the quarter was $3.8 billion and was up 25% from a year ago. Operating margin was 58% of revenue, up approximately 470 basis points year-on-year. Adjusted EBITDA was $4 billion, or 60% of revenue. This figure excludes $133 million of depreciation.

Now, I’ll review of the P&L for our two segments.

Revenue for our Semiconductor Solutions segment was $4.8 billion, and represented 73% of total revenue in the quarter. This was up 20% year-on-year. Gross margins for our Semiconductor Solutions segment were approximately 69%, up 290 basis points year-on-year, driven primarily by higher product margins. This margin improvement comes from content growth as we deploy more next-generation products in broadband and networking end markets. Operating expenses were $795 million in Q2, up approximately 2% year-on-year, as we invested in R&D and streamlined SG&A. R&D was $702 million in Q2, up approximately 6% year-on-year. Q2 operating margins increased to 53%, up 580 basis points year-on-year. So, while Semiconductor revenue was up 20%, operating profit grew 35%.

Moving to the P&L for our Infrastructure Software segment. Revenue for Infrastructure Software was $1.8 billion, and represented 27% of revenue. This was up 4% year-on-year. Gross margins for Infrastructure Software were 90% in the quarter, up 100 basis points year-over-year. Operating expenses were $355 million in the quarter, down 8% year-on-year, as we’ve completed the integration of Symantec. R&D spending at $228 million is up 1% year-over-year. Operating profit was up 10% year-on-year on top-line growth of 4%. Operating margin was 70% in Q2, up 360 basis points year-over-year.

Moving to cash flow. Free cash flow in the second quarter was $3.4 billion, representing 52% of revenue. Days sales outstanding were 33 days in the second quarter compared to 51 days a year ago. We ended the second quarter with inventory of $1 billion, an increase of $52 million, or 5%, from the end of the prior quarter. We should also note in Q2, we spent $126 million on capital expenditures.

On the financing front, we extended our weighted average debt maturity to approximately 10 years from nine by exchanging notes. Our weighted average coupon decreased about 5 basis points to 3.7%. During the quarter, we made $1.5 billion in payments on debt obligations, ending the quarter with $9.5 billion of cash and $40.4 billion of total debt, of which $278 million is short-term.

Turning to capital allocation, in the quarter, we paid stockholders $1.6 billion of cash dividends. We also paid $461 million in withholding taxes due on vesting of employee equity, resulting in the elimination of approximately 1 million AVGO shares. We ended the quarter with 410 million outstanding common shares and 450 million diluted shares. Note that we expect the diluted share count to be 449 million in Q3. The Board of Directors has approved a quarterly cash dividend on our common stock of $3.60 per share in Q3.

Based on current trends and conditions, our guidance for the third quarter of fiscal 2021 is for consolidated revenues to be $6.75 billion, and adjusted EBITDA of approximately 60% of projected revenue.

That concludes my prepared remarks. Operator, please open up the call for questions.

Questions and Answers:

 

Operator

Thank you. [Operator Instructions] Our first question comes from the line of John Pitzer of Credit Suisse. Your line is open.

John Pitzer — Credit Suisse — Analyst

Yeah. Good afternoon, guys. Thanks for letting me ask the question. Hock, I’ve got two quick ones. First, within your wireless business, you’ve been able to sign long-term contracts with your key customer. And I’d argue that’s benefited both you and them. It’s given you the confidence to invest in the business properly, and them the confidence that you’ll have supply for them when they needed. I’m just kind of curious, given how tight things are elsewhere in the semi business, have you been able to parlay this into any longer-term customer contracts? And what implication might that have as we all start to worry about the “end of cycle”?

And then secondly, just on your comments about enterprise recovery, can you elaborate on that? Was that specifically a storage comment, or is that also a networking comment?

Hock E. Tan — President and Chief Executive Officer

Okay. Let’s — let me take the question one at a time. On arrangements with long-term agreements, John, this is something we have been thoughtfully, carefully putting in place with, I’ll call, strategic customers. We just don’t go do it as if its commoditized. We’re very thoughtful about doing it. And we do it in very specific areas where technology — where we know for sure that the technology is fairly, fairly difficult, complex to manage, and which requires of substantial amount of R&D spending. And we have been doing for a while now with strategic customers in core businesses. So we just don’t do it across the board. And what you pointed out is very, very correct. It’s a mutual — it’s a structure, it’s an agreement with mutual benefit. We have the confidence to invest in R&D to make capex capacity investment, and in return, we offer the best leading-edge technology in specific areas in a timely manner to our critical customers. So yes, we have been doing it, and we will continue to thoughtfully do it in a very appropriate manner.

On the second part — okay, which is — if you could repeat the question, John? Let me be sure…

John Pitzer — Credit Suisse — Analyst

[Speech Overlap] elaborate a little bit on your comments about an enterprise recovering brewing, was that mostly within storage or was it networking? So I’m a little bit surprised given some of Cisco’s comments that you’re not a little bit more positive on the enterprise network space.

Hock E. Tan — President and Chief Executive Officer

It is across, it is for enterprise spending. It is — I won’t say, across the board necessarily, and trying to define enterprise very appropriately. As you know — as you noticed in my comments, we classified service providers telcos as a separate an emo [Phonetic], different from traditional enterprise. And so — and as I pointed out, based on broadband, telcos have been investing, big time. Service providers telcos have been investing in a huge manner over the past 12 months. But traditional enterprise, the companies, whether it’s the banks, the manufacturing sector, various retail customers, airlines, examples, no, these guys are in a recovery mode, and not surprising. We are seeing pandemic easing, let’s say, in North America, and as it eases, we see a step-up in spending, but we do not see spending spiking up.

Now, obviously, if you look at some businesses that — like warehouses that require Wi-Fi networks, campus networking environment, you do see that improving. But to say across the board all enterprises are just spending money, not — we are still seeing — and as I showed in servers storage connectivity, we still see a year-on-year, things are not up to what it was a year ago. And that applies not just on data centers, namely compute, it also applies to data centers and enterprise, campus environment, we see less of that, and — but across the board.

John Pitzer — Credit Suisse — Analyst

Helpful. Thank you very much.

Operator

Thank you. Our next question comes from the line of Harlan Sur of J.P. Morgan. Your line is open.

Harlan Sur — J.P. Morgan — Analyst

Good afternoon. Great job on the quarterly execution, strong margins and free cash flow generations. Hock, I think you do mentioned, we’re still in the early phases of the 400 gig networking upgrade cycle with your hyperscale and telco customers. I know two of your big cloud taking customers have already started the upgrade. Looks like there are another two more that are going to start the upgrade cycle here in the second half of this year, and quite a bit more next year. And then as you mentioned, you still have Tomahawk 4 ahead of you. So, given the extended visibility that the team has with the strong backlog, do you see the cloud and telco upgrade cycle an inevitable recovery in enterprise driving continued year-over-year growth in networking into next year?

Hock E. Tan — President and Chief Executive Officer

I don’t — we don’t really try to guide more than one quarter at a time first of all, because we’re not that smart to be able to do that. But on a broader trajectory, it does appear fairly much the trend as we see it, which is — the hypercloud guys won’t push out in the second half, as I indicated, on the data center side on Tomahawk 4, the 800G platform. They have substantial backlog for delivery in the back half of the year for Tomahawk 4. So we see that going on. But, — and we — you’re right, we see the recovery step-by-step big enterprise, though I do not see that really taking off in terms of reaching the level it was a year ago probably until 2022.

But what we do not know for sure is, would that give pause to hypercloud in their spending. And that part — I’m just putting everything on the table, we’re not sure whether hypercloud spending will necessarily continue into 2022. We sense it would. We see some of the backlog. But as enterprise steps up, one never knows if the economy starts to rebalance in that side. But what we do see in broadband is service providers, the telcos in particular are for sure upgrading and here this is a longer cycle of upgrade and we see them upgrade and we see the backlog associated with it through 2022.

Harlan Sur — J.P. Morgan — Analyst

Great. Thank you.

Operator

Thank you. Our next question comes from Ross Seymore of Deutsche Bank. Your question please.

Ross Seymore — Deutsche Bank — Analyst

Hi, guys. Thanks for letting me ask the question, and congrats on the strong results. Hock, I wanted to dive a little bit into the lead time commentary that you had, with that stabilizing. Two quarters ago, you talked about the size of the book, the backlog you had. Last quarter you talked about the year-over-year and even in some instances, the sequential growth being so large in bookings. And now we’re hearing that the lead times are stabilizing. People could interpret that a bunch of different ways as far as the implication on the demand side of the equation or that supply is catching up to it or frankly people are just ordering so far out that they’re not willing to extend that any further. So I was hoping to double-click on that lead time commentary and get your feelings as to why it’s stabilizing, and do you take that as a positive or negative?

Hock E. Tan — President and Chief Executive Officer

I just made a comment to say we have stretched our lead time so far, Ross. Good point you bring up, and I’m glad you bringing up to give me a chance to clarify. I said a quick comments, I made in my opening remarks, that we are comfortable at the lead times we are on. And so what it is is customer — ask customers are comfortable seeing our lead time now. But what we have found rather remarkable over the last quarter is that even as our lead times remain stable, consistent, the volume of bookings we receive every week continues to grow. I made that comment, and thanks for the opportunity to make that — reiterate that point. Same lead time, stable for last three months, but the booking rate we are seeing every week continues to step up.

Ross Seymore — Deutsche Bank — Analyst

All right. Thank you.

Operator

Thank you. Our next question comes from Vivek Arya of Bank of America Securities. Your line is open.

Vivek Arya — Bank of America Securities — Analyst

Thanks for taking my question. Hock, I had another one on the supply situation. If there were no supply constraints, how fast would your Semiconductor business be growing? And kind of Part B of that is, what is driving the shortages for you right now? And what are you doing to resolve it? And do you have any kind of gut feel on when the supply situation will become normal? Thank you.

Hock E. Tan — President and Chief Executive Officer

On the first — I’ll answer the first and the last, in between, I’m not sure. But on the first, it’s — we would not put ourselves in the situation nor should anyone do it, because there is also a certain amount — you do — we do not want our customers, and I don’t think any of our peers want to do that either, to buy too hot, to create buffers, to buy ahead of what they need. So we tried to manage — identifying as I said and go through a process of rigorously understanding true end demand. In other words, we look for drop date quantities, as of term is used in the industry. And we ship to those drop date quantities maybe a little more. And what you see today is the true growth rate we are representing. We are not hiding what could have been, there is no what could have been. We are shipping to what we believe we — customers consider is the true real demand. Now having said that, we may be delivering — doing JIT, just in time, but nonetheless, we do try to fulfill what customer truly want just on the — in the timely basis. And that still continues today regardless of the size of the backlog we have. We’re discipline in that regard.

And from our perspective, the challenges we have in the supply chain is a constant — challenges is to ensure that we get components, whether it’s wafers, substrates, getting our products assembled, tested and any other small components on a timely basis to make sure that we can keep this thing running. And if we look at the size of our inventory versus the size of our cost of goods sold or revenue quarterly, you can see that we run pretty close to just in time through our entire supply chain. And we’ve been able to do it and sustain that. And so what we’re reporting to you, like 20% year-on-year growth on semiconductor component is in our view a pretty decent reflection what is truly end demand needs out there. All right? Next question?

Operator

Our next question comes from Timothy Arcuri of UBS. Your line is open.

Timothy Arcuri — UBS — Analyst

Thanks a lot. Hock, I guess I wanted to ask you what you think the long-term growth rate is of your Semiconductor business. You’re sort of trending to the high teens this year, but that’s kind of due to easy comps and you have the compressed iPhone launch and the pull forward of some of these technologies due to the pandemic. So, once this all sort of normalizes, what do you think is the right long-term growth rate for the business? Are you still thinking 5%? Or do you think maybe just given the strength of the bookings recently that it could be better than that? Thanks.

Hock E. Tan — President and Chief Executive Officer

That’s a hell of a question. And I’ll tell you this, right now, we are in the midst of a very strong demand, and that has also created perhaps, as we all know about, a severe imbalance between demand and supply. Demand and supply wants to catch up. But if you look at it long enough, I think the dynamics underlying the — fundamental dynamics underlying the semiconductor industry hasn’t yet changed. At least I haven’t seen it to change. So, Tim, that’s my — that’s the own best answer I can give you, which is I haven’t changed my thinking if we look over the next 10 years how this industry will behave, because it is a relatively mature industry. It’s evolutionary. Technology is still evolving, which is great for us, and it keeps getting better and better, but it’s evolving. Disruption, as people like to say, in this industry is less of an event. It’s evolutionary, and I have not seen anything that tells me there is a fundamental change.

Timothy Arcuri — UBS — Analyst

Thanks, Hock.

Operator

Thank you. Our next question comes from Craig Hettenbach of Morgan Stanley. Your line is open.

Craig Hettenbach — Morgan Stanley — Analyst

Thanks. Hock, just given the ongoing strength in free cash flow and improved balance sheet, can you just talk about your thoughts on the M&A environment? And also — and to your buybacks, how you’re thinking about cash deployment as you go forward?

Kirsten Spears — Chief Financial Officer and Chief Accounting Officer

Yeah. I’ll take that one. This is Kirsten. Relative to capital allocation, first and foremost, we’re dedicated to paying 50% of our free cash flows to our shareholders. And so that would be first. Secondly, M&A, if we can — accretive M&A, it would be the second objective. Then thirdly, stock buybacks, and at the end, there would be debt repayments. So, I think that’s how we’re looking at capital allocation in that order. There isn’t anything yet on the M&A front that I can talk about, but if anything does come up, we’ll let you know.

Operator

Thank you. Our next question comes from Blayne Curtis of Barclays. Please go ahead.

Blayne Curtis — Barclays — Analyst

Hey, good afternoon. Thanks for taking my question. Just curious, a little more detail on the gross margin. It’s a record gross margin. Any color on product or segment? And then I guess as you look forward here, if you could describe what you’re still dealing with in terms of excess cost due to COVID? And then how to think about it as enterprise comes back, should that be additive to the gross margin?

Kirsten Spears — Chief Financial Officer and Chief Accounting Officer

I expect gross margin next quarter to be about the same as it was this quarter. And then as you know, at the end of the year, we’re expecting wireless to come back in for the normal ramp that we have, so the margins will come down a bit towards the end of the year. But at this point, I see us being able to sustain the margins that we experienced this quarter, mostly coming from networking and broadband.

Hock E. Tan — President and Chief Executive Officer

Blayne, at the resale — perhaps repeating ourselves — myself too much from past conversations that I had with you — all you guys, our gross margin has this natural trend of continuing to keep expanding year-on-year, not necessary quarter-on-quarter, sequentially, as much as year-on-year, simply because we tend to have a chance to go to a new product lifecycle — product new — next-generation product in across some of our franchise products. And it’s a combination of all this. So the natural growth of our expansion of gross margin for our business, especially in the semi side, particularly in the semi side, which I assume your question is related to, Blayne is, as I’ve always say, we have a gross margin expansion range of 50 basis points to 150 basis points year-on-year.

And if an average across our 24, 25 different — well I should take out software, just hardware, about 20 or so different product lines, each with the different product lifecycle and each going towards new generation product each time, because as you know each time we come to a new generation product, we get a lift in margins, in product margins, which translates to gross margin. So, it’s not unusual to see us go to the high end of the range. And in this particular case, year-on-year is a bit more than high end of the range, and that’s probably related to perhaps separate mix of products in this environment, because there’s still puts and takes across our product range. Not everything is on fire. And based on that, we end up with higher than the normal 50 basis point to 150 basis point range. But I don’t think this is something that will go on forever. But you should expect that year after year, you will see that 50 basis points to 150 basis point improvement in gross margin on the Semiconductor side.

Blayne Curtis — Barclays — Analyst

Thanks so much.

Operator

Thank you. Our next question comes from Toshiya Hari of Goldman Sachs. Your line is open.

Toshiya Hari — Goldman Sachs — Analyst

Hi, guys. Thank you so much for taking my questions. I had two actually. One on wireless, and one on the cost side. Hock, in terms of wireless, I guess, in Q2, revenue came in better than expected. I just wanted to understand was that primarily supply being better or were there dynamics on the demand side that came in better than expected?

And then sticking to wireless, as you think about the next-generation product cycle or your largest customer, how are you thinking about the content opportunity at this point? You pretty much know what’s locked in. If you can comment on RF and Wi-Fi and touch — and maybe compare and contrast this uplift in this cycle vis-a-vis past cycles, that would be super helpful.

And then on the cost side, based on the comments you just made about gross margin expansion in some of Kirsten’s comments, I doubt cost inflation is having impact on your business. But if you can speak to wafer pricing and substrates, and what you’re seeing from a cost perspective over the next year or so, that would be super helpful. Thank you.

Hock E. Tan — President and Chief Executive Officer

All right. Let’s start with the first one. And if I lost track of the last two, you better remind me. On wireless, you’re right, what I indicated was Q2 wireless was kind of high-end than we had originally planned. And it’s all related to demand. Of course, it’s demand. We will never ship just because we have the products, it’s based on demand [Technical Issues] and so we are happy to fulfill it. And part of the demand may actually come a bit from Q3. Not sure, 100% yet, because this is — demand comes in short cycles, and in May — and perhaps that’s why we are a bit careful about telling you Q3 year-on-year improvement is still 30% plus year-on-year growth. I’m not saying 40% plus, but we don’t know for sure, except we know that we do pull in some from Q3 to Q2, not much, and that allows Q2 to perform in that 48% year-on-year growth, which is great. But Q3 will still be pretty good year-on-year as we fully expect.

And related to content and all that, I prefer at this point, in this sensitive arena, we’re in highly sensitive situation to not answer that question at all. No offense, please, but I can’t answer that question.

But I’ll be happy to take the third question, which is, yeah, we have cost inflation in this environment where as we all know the semiconductor supply chain is on the severe constrain on its ability to provide. Now whether we are very large — we are very large customer and a very loyal customer to many of our suppliers, all of our key components, and so we believe we are treated very well. Having said that, were prices are concerned? Of course, not. We see cost inflation. And in this environment, we’re very, very open to talking to our customers who are in turn very open to being able to address cost — inflationary cost pressure in a higher purchase price on their side. So we’re good, which is why our margins has been stable.

Toshiya Hari — Goldman Sachs — Analyst

Thank you.

Operator

Thank you. Our next question comes from C.J. Muse of Evercore. Your line is open.

C.J. Muse — Evercore ISI — Analyst

Yeah. Good afternoon, and thank you for taking the question. I guess another question on the supply chain, and I guess a bigger picture question, Hock. If you think about your increased lead times, you talked earlier to John’s question about selective strategic agreements with key customers. At the same time, we’re taking multi-year kind of take-or-pay contracts with foundries. Curious if you see any structural changes to the semi industry as we kind of emerge post pandemic?

Hock E. Tan — President and Chief Executive Officer

Okay. My frank opinion, I don’t know. They shouldn’t be. Same question that was asked is, do I think the semiconductor industry over the next 10, 20 years will grow any faster or slower, and my view is, no, I don’t think — I don’t see any fundamental things that have changed. See, while we are in the flick of this storm, so to speak, of course all hell breaks loose, as the expression goes. But these are cycles we all have seen many times in the semiconductor industry. And maybe this is a bit extreme with the — in the context of the pandemic over the course of 2020, now extending partly into 2021.

But supply will step up at some point and demand is always there, because people need technology, people need — performance need technology that we all offer in the products we provide and we will be completing the same way we have been competing. And it’s not necessarily related to creating long-term agreements or any such thing, it’s about being able to provide the best technology, the best product in a timely manner for your customers. And it doesn’t matter that you do any agreements if at the end of the day, you lack the technology or you lack the products that customers need to make themselves successful or to be able to deploy in a very well — in a good manner, and that’s always been the semiconductor industry. And that has — that will — I don’t see anything that changes that. Now, putting long-term agreements might make life easier. But I think it’s just a mix. We still have to establish ourselves that we can outperform our engineers, the competition.

C.J. Muse — Evercore ISI — Analyst

Thank you.

Operator

Thank you. Our next question comes from Chris Danely of Citi. Your line is open.

Christopher Danely — Citigroup — Analyst

Hey, thanks, gang [Phonetic]. There is a lot of talk, worries, speculation, I don’t know, old wives tales whatever about this big inventory build of handsets in China. Any thoughts there, Hock and team, and what would be the potential impact for Broadcom?

Hock E. Tan — President and Chief Executive Officer

Well, not directly. If there is such as a big overhang sitting out there, not directly, because our wireless business — our wireless products, as we have fully articulated, pretty much sells to two large customers, largely, and we’re talking my handset. We do not sell much if any to the handset product — handset guys, OEMs there is in China. And we sell to two big customers, one in North America, one in Korea, and these are very high-end flagship status phones. And that’s it. And now, there could be indirect blow back, and that I do recognize in certain markets if there is an excess of inventory that needs to be just thrown out there. But on the other side, on a direct basis, we do not see any — we do not expect to see any impact.

Christopher Danely — Citigroup — Analyst

Okay. Thanks, Hock.

Operator

Thank you. At this time, I’d like to turn the call over to Ji Yoo for closing remarks.

Ji Yoo — Director of Investor Relations

Thank you, operator.

In closing, please note that Hock will be presenting at the BofA Securities Technology Conference on Tuesday, June 8th. Following our Networking and Broadband Teach-Ins earlier this year, Broadcom and Bernstein will be hosting a Teach-In on our storage businesses on Wednesday, July 21st at 12:00 PM Eastern, 9:00 AM Pacific. Hock will be joined by Jas Tremblay, General Manager of our Server Storage Connectivity Business; Jack Rondoni, General Manager of our SND Business; and Dan Dolan, Marketing Head of our Hard Disk Drive Business.

That will conclude our earnings call today. Thank you all for joining. Operator, you may end the call.

Operator

[Operator Closing Remarks]

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