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Broadcom (NASDAQ:BRCM)

Q4 2012 Results Earnings Call

January 29, 2013 4:45 p.m. ET

Executives

Chris Zegarelli - Director of Investor Relations

Scott A. McGregor - Chief Executive Officer, President and Director

Eric K. Brandt - Chief Financial Officer and Executive Vice President

Analysts

James Schneider - Goldman Sachs

Harlan Sur – JPMorgan

(Ember Schervistava) – BMO Financial

Ross Seymore - Deutsche Bank

Craig Berger - FBR Capital Markets

Craig A. Ellis - B. Riley Caris

John Pitzer – Credit Suisse

Glen Yeung – Citi

Stacy A. Rasgon - Sanford C. Bernstein

Daniel Berenbaum - MKM Partners

Vivek Arya - BofA Merrill Lynch

CJ Muse – Barclays

Shawn Webster – Macquarie

Srini Pajjuri – CLSA Securities

Steven Chin – UBS

Romit J. Shah - Nomura

Steven Smigie - Raymond James

Ruben Roy - Mizuho Securities

Alex Gauna - JMP Securities

Kevin Cassidy – Stifel Nicolaus

Tristan Gerra – Baird

(David) – Wells Fargo

Doug Freedman – RBC Capital Markets

Chris Caso – Susquehanna Financial

Edward Snyder - Charter Equity Research

Dale Pfau - Cantor Fitzgerald

Patrick Wang - Evercore Partners

Operator

Welcome to the Broadcom 2012 fourth quarter earnings call. [Operator instructions.] I will now turn the call over to Chris Zegarelli. Mr. Zegarelli, you may begin.

Chris Zegarelli

Thank you, and good afternoon, everyone. Today's call will include prepared remarks by Scott McGregor, our President and Chief Executive Officer; and Eric Brandt, our Executive Vice President and Chief Financial Officer.

This call will include forward-looking statements which involve risks and uncertainties that could cause Broadcom's results to differ materially from management's current expectations. We encourage you to review the cautionary statements and risk factors contained in the earnings release, which were furnished to the SEC today and is available on our website, and in our 2011 10-K.

We undertake no obligation to revise or update publicly any forward-looking statement to reflect future events or circumstances. Additionally, throughout this call, we will be discussing certain non-GAAP financial measures. Today's earnings release and the related current report on Form 8-K describe the differences between our non-GAAP and GAAP reporting and present a reconciliation between the two for the periods reported in the release.

Please also see the Investors section of our website at www.broadcom.com/investors for a slide deck that includes additional information disclosed in accordance with SEC Regulation G.

Now it is my pleasure to introduce Broadcom's President and Chief Executive Officer, Scott McGregor.

Scott McGregor

Good afternoon, and thanks for joining us today. In 2012, Broadcom gained market share across all three of our business groups, while delivering profitability within our target operating model. Broadcom’s annual product revenue increased almost 9% year over year, significantly ahead of the semiconductor industry, which contracted slightly year over year.

Our non-GAAP product operating margin for the year came in at 20.2%, enabling Broadcom to deliver record cash flow from operations of nearly $2 billion. Our track record of profitable growth is driven by innovation and execution.

Our broadband business gained market share and expanded operating margins by more than 400 basis points to a near-record high. In mobile, we gained share and connectivity combos in 3G basebands, led the industry into 5G wifi, and introduced the world’s first NFC combo chip. In infrastructure, we gained share and meaningfully expanded our addressable market.

We also remained focused on delivering meaningful share [unintelligible] value. Broadcom is one of a few select names in the communications semiconductor space that delivered EPS growth year on year on a non-GAAP basis in 2012. Today we announced a 10% increase in our dividend, to $0.11 per share per quarter. We also resumed repurchasing shares in the second half of 2012.

I’ll now turn the call over to Eric for details on fourth quarter results and first quarter guidance, and then I’ll go into details on our business units.

Eric Brandt

Thanks, Scott. As Chris mentioned, please refer to the data breakout in the investor section of our website for additional financial information that will supplement my financial commentary. Moving to the financial overview, to summarize, Q4 total revenue of $2.08 billion, including product revenue of $2.03 billion. Q4 total net revenue was down 2.3% sequentially and up 14.3% year over year.

Full year revenue was $8.01 billion dollars, up 8.4% over 2011. Q4 non-GAAP product gross margin was up 10 basis points from Q3 to 52.2%. Q4 GAAP product gross margin was 49.5%. Non-GAAP and GAAP R&D plus SG&A expenses were down $10 million and $12 million respectively, from Q3 levels.

Q4 non-GAAP EPS was $0.76, or $0.03 above first call consensus of $0.73 per share. Q4 GAAP EPS was $0.43 per share, including $0.14 of acquisition-related and nonrecurring adjustments outlined in our earnings release.

Cash flow from operations in Q4 was $593 million. Full year cash flow from operations was a record $1.93 billion. Our cash and marketable securities balance at the end of the quarter was $0.7 billion.

Moving to revenue and gross margin, in December, prior to analyst day, we said that we expected Q4 total net revenue to be $2 billion to $2.1 billion.  We delivered revenue at the upper end of the range of $2.08 billion.

Our broadband communications segment was up 1% from Q3 principally driven by growth in sales of said top box platforms.  Revenue from our infrastructure and networking segment decreased 8.5% sequentially driven by broad based softness across all of our product categories.

Our mobile and wireless segment was down 1% from Q3 to $1.01 billion, slightly above our original expectations.  Our Q4 non-GAAP product gross margin was up 10 basis points from Q3 to 52.2%.  This is consistent with our expectations of up slightly.

Our Q4 GAAP product gross margin was up 70 basis points from Q3 to 49.5% principally driven by a decrease in inventory step up resulting from the sell through of inventory assumed in our acquisition of NetLogic.

Moving to operating expenses, total non-GAAP R&D and SG&A expenses for Q4 were down $10 million from Q3 levels, which is at the midpoint of our guidance provided in December of down $5 million to $15 million.  On a GAAP basis, R&D expenses for Q4 were down $12 million from Q3 levels.

Moving to the balance sheet, cash and marketable securities ended Q4 at $3.7 billion.  This reflects our cash flow from operations of $593 million for Q4, our quarterly dividend payment of $57 million and stock repurchases of $32 million.

Our accounts receivable day sales outstanding were strong at 32 days in Q4.  In addition, net inventory turns were 7.8 turns in Q4.

Moving to expectations, we currently expect net revenue in Q1 to be roughly $1.9 billion plus or minus 4%.  Sequential revenue is expected to be down from Q4 across all segments.

We expect Q1 GAAP and non-GAAP product gross margin to be flat to down roughly 50 basis points, driven principally by absorption.  In addition, consistent with prior years, we expect non-GAAP R&D and SG&A expenses to be $25 million to $40 million, driven principally by fringe and merit step-ups of roughly $35 million.

GAAP, R&D and SG&A should increase $35 million to $50 million.  Finally, I’m pleased to announce the company has increased its dividend by 10% to $0.11 per quarter.  This reflects our ongoing commitment to return capital to our shareholders and the strength of our cash flow.

And now I’d like to turn the call back over to Scott to talk more about the state of the business.

Scott McGregor

Thanks, Eric.  Starting with the home platform, our broad based communications revenue was stronger than expected in Q4, up roughly 1% sequentially, driven by growth in set top box.

Our broadband business performed particularly well in 2012 as we gained meaningful share and delivered solid growth and profitability.  Last year, we shipped over 150 million less (inaudible) and grew set top box SOC shipments by over 15%.

At the same time, we expanded operating margins from 18% in 2011 to 23% in 2012.  In the set top box market, we see the industry beginning the transition to high efficiency video coding or HEVC.

This standard is the successor to MPEG4 and reduces the bandwidth that service providers use to transmit existing digital content by 50%.

The HEVC transition creates capacity for service providers to add additional channels and to migrate to ultra HD, which was a big draw at the consumer electronics show earlier this month.

Ultra HD gives consumers four times the resolution of 1080P HD TVs and it’s supported in our latest generation of set top box SOCs.

For emerging markets, we have a portfolio of optimized platforms that enable operators to cost effectively transition to digital content.  These advances will drive a multiyear product cycle as developed markets migrate to ultra HD and HEVC while emerging markets continue their digital transition.

In broadband access, we continue to see design win momentum in new market opportunities.  During Q4, Huawei chose Broadcom’s small cell platform for upcoming (wipe A CDMA) access point deployments.

Broadcom is also working with China cable operators (Constar) to accelerate the next generation broadband initiative.  During Q4, the Chinese government agency overseeing broadcasting certified (Doxis)-based technology.  This sets the stage for our Ethernet over (Coax) architecture to be deployed by China service providers as they move increasingly to interactive triple play services.

Looking into Q1, we expect our broadband communications revenue to be down seasonally.

Moving to infrastructure, our infrastructure and networking business was down roughly 9% sequentially, driven by softness across all end markets. Our multicore processor business has grown each quarter since we closed the NetLogic transaction, and that trend continued in Q4.

The 28 nanometer XLP 200 multicore processor is seeing strong design momentum with tier one OEMs across a broad range of platforms, including routers, switches, service gateways, security appliances, and mobile infrastructure.

During the quarter, we introduced the NLA12000 knowledge-based processors, the industry’s first 28 nanometer heterogeneous KBP that natively supports up to 2 million IPv6 routes. This KBP delivers up to 24 times greater performance and can reduce power consumption by fourfold, compared to previous generations. The NLA12000 is sampling globally, and is expected to be in production by the middle of this year.

We also introduced the latest generation of Ethernet switches for the enterprise and SMD markets. Our new SMD solutions deliver enterprise-class features by combining layer two and layer three switching. They also include 16 GB Ethernet 5 and a high-performance CPU into a single chip.

Our new enterprise solutions are optimized to address workforce mobility by simplifying the provisioning and monitoring of mobile user traffic, and providing secure and seamless connectivity to the cloud. As we look into Q1, we expect our infrastructure revenue to be down sequentially due to ongoing softness across the market segments.

Moving to our [Hand] platform, our mobile and wireless revenue was down 1% to $1.01 billion, which was stronger than typical seasonality. We continue to see our customers launching new smartphones that integrate more Broadcom content. Samsung launched the Galaxy Grand, Grand Duos, and Galaxy S2 Plus, leveraging our complete Android platform, which includes our 3G cellular SOC and wireless connectivity.

We also have more than 40 designs in process in China on our turnkey reference platforms. Our technology mix is trending to HSPA+ dual core application processors and additional connectivity, features which command a meaningful ASP premium.

The Galaxy Grand, for example, includes Broadcom’s dual core SOC NFC controller, connectivity combo with built-in wifi, Bluetooth and FM, RF transceiver, power management, and GPS.

We continue to see a richer mix of connectivity features integrated into our customers’ end products. We shipped a record of roughly 200 million connectivity combos in Q4, and gained share in combos in 2012. We have been shipping our 5G wifi combo to lead customers and expect the [first G wifi] smartphones to launch in the coming weeks.

Our quad combo, which includes NFC, wifi, Bluetooth, and FM, will be in handsets this summer. We’re gaining share in access points, which improves our wifi mix, as they tend to integrate higher-end wireless connectivity features.

Our touch business also grew meaningfully in the quarter. We have over 20 NFC customers, and expect to gain meaningful double digit market share in NFC this year.

We continue to demonstrate progress on our cellular modem and application processor roadmap. Broadcom introduced new 3G SoCs with dual core and HSPA+ modems, all optimized for the latest Android Jellybean release.

We also demonstrated voice over LTE at the consumer electronics show, showcasing our commitment to support advanced modem features.

Looking into Q1, we see mobile and wireless revenues down sequentially.

In summary, we continue to drive innovation and engineering excellence across a broad range of communication end markets to help our customers enhance device performance, drive down costs, and improve power efficiency. We have leading scale in our industry, as evidenced by shipping in excess of 2 billion products in 2012, and we have an unparalleled IP portfolio.

These strengths, when combined with our relentless focus on execution, position us for long term success in the semiconductor market. This concludes our prepared comments, and we’re now ready for your questions. Operator, may we have the first question please?

Question-and-Answer Session

Operator

[Operator instructions.] Our first question is from James Schneider from Goldman Sachs. Please go ahead.

James Schneider - Goldman Sachs

I was wondering, in terms of the mobile wireless guidance, how should we think about your guidance for that segment relative to what you expect the overall market to do. In other words, do you think you’re doing better or worse than the market in terms of gaining or losing share in Q1?

Eric Brandt

Jim, I would say in the connectivity space, there is – it’s a soft quarter from a seasonality point of view, so that amounts to most of the decline.  In 3G (base pans), we actually expect to grow, though, so I expect we’re taking share in (base pans) and probably holding share in connectivity or maybe gaining a little bit.

James Schneider – Goldman Sachs

And then as a follow-up, Eric, maybe if you look at the mix effect on gross margin as we head through the year, what do you expect the 40 nanometer mix to do in terms of improving gross margin?  Is that going to be a tailwind to margins and what do you expect that 40 nanometer mix to be by the end of this year?

Eric Brandt

So we ended Q4 at just over 20% 40 nanometer and we benefitted from that.  I think 40 nanometer will benefit us over the course of the year.  I think the real challenge will be what is the strength of the infrastructure business, which obviously gives us a fairly rich mix.

And so I think the 40 nanometer is made positive and assuming the infrastructure market rebounds in the middle and back half of the year, that’ll be a positive as well.

To the extent that it doesn’t and we continue to grow in the mobile and wireless space, we could have a little bit of headwind offsetting that 40 nanometer tailwind.

Operator

Your next question comes from the line of Harlan Sur – JPMorgan.

Harlan Sur – JPMorgan

So if I recall, I think seasonality for wireless is typically down about 5% sequentially in Q1.  Is this segment going to be in line or down more than the seasonal trend this quarter?

Eric Brandt

I think that everything will be down roughly about the same as the midpoint of our guidance.  Mobile and wireless might be a touch lower than that.

Harlan Sur - JPMorgan

Then in Q4 obviously networking was weak due to softness in virtually all of your subsegments, datacenter, enterprise, service provider.  Are all three subsegments again contributing to the decline this quarter?  And what are you hearing from your service provider customers as it relates to the positive capex spending trends that we are hearing about?  When does that start to show up you think in your backlog and shipments?

Eric Brandt

So the first part of your question, yes, I think it is across all the segments approximately equally.  There’s no one that really jumps out.  In terms of positive capex trends, well, to be honest, I haven’t heard that many positive capex trends.

We see a mixed market out there with some of the US carriers even revising downward in the last month.  So we’ll have to wait to see the capex come back.  Europe is still very soft.

I think the one potential bright spot is we’re hearing anecdotally that there’s some new tenders that are coming out in China and that might be the first thing we see in terms of driving some new waves of capex there.  But it’s been soft for a while.

Scott McGregor

And I just add to it just a point.  I think it’s important to look year-over-year at this, Harlan.  If you look year-over-year, the midpoint of our guidance is 4% year-on-year.  If you look at the companies that have reported today – and there are still some large ones, obviously, to report.

In the semiconductor space, year-on-year they’re reporting a number that’s down about 2.5%.  That’s about a 6.5 point swing.  Interestingly, it’s very similar to the full-year result that we saw on our weighted average mix basis for our pure set.

Our pure set was down on a weighted average basis about 30 basis points and the company, when you adjust for the acquisition, was up about five.  So you talk about 520 to 530 basis points.

So it looks year-over-year, as we go into Q1, to have a similar effect in terms of the relative share gain between the companies plus or minus what other companies report after us.

Operator

Your next question comes from the line of (Ember Schervistava) – BMO Financial.

(Ember Schervistava) – BMO Financial

Just a quick follow up on the infrastructure, so, again, is this, just in your opinion, exit inventory being wiped out or is it still demand pretty week?  And then follow-up on the opex side, despite everything, Eric, we always manage to surprise ourselves, so could you please just help us walk through the opex profile for the remainder of the year?

Scott McGregor

On the inventory question, there is a lot of inventory remaining out there.  I think after a number of quarters of softness that’s slowed down pretty well.  So I think it’s pretty lean out there right now, which has the positive effect that if the market does pick up it should flow through fairly rapidly to the semiconductor supply chain.  So I would say quite lean on inventories on that side right now.

Eric Brandt

(Ember), on the opex, for Q1, we have our normal fringe merit step up.  It’s about $35 million on a non-GAAP basis.  And so if you look at the midpoint of the guidance or just even in the guidance range, you can see that virtually everything else is flat to down slightly. Now, there’s some puts and takes, and design and prototyping that will probably be up a little bit, and some other things that will be down, but that’s sort of how Q1 is. So we’re managing things pretty tight coming out of Q4 and into Q1.

As we look at the rest of the year, it will be similar to what you’ve seen in other years. A much more muted expense growth. It will be probably a little bit more in Q2, because the merit increase goes in in March, so you’ll have three months instead of one month, but other than that, I would expect, until we see some major macro pickup, we’re going to manage things as tightly as we said on analysts day.

Operator

The next question is from Ross Ross Seymore from Deutsche Bank. Please go ahead.

Ross Seymore - Deutsche Bank

Quick question on the infrastructure side of things. If I recall right, back at your analyst day in December you expressed some confidence that the revenue growth rate could expand up to the double digit rate. Has something changed in that? Or is it just macro remaining weak? And can you remind us what the drivers are that led you to that confidence, and if they still apply?

Scott McGregor

Certainly. I think the macro situation remaining weak is the major factor here, in that we see ourselves gaining share and growing a number of our segments, the smaller ones that we did. For example, the processor business, the strategic reason we acquired NetLogic, has been growing steadily for us there.

I think the double digit growth [unintelligible] over the next few years is definitely intact. It does require that the market recover to more normal levels, but I think between processors, a lot of the new switch architectures, expanding high-end, low-end, getting into automotive. I mean, there’s just many different areas here, and I think as [Rajeet] portrayed in his analyst day presentation, there are a lot of drivers for that growth broadly across his business and where we have fairly low share, have great share expansion opportunities.

Operator

Your next question is from Craig Berger from FBR Capital Markets. Please go ahead.

Craig Berger - FBR Capital Markets

As you look out at your baseband efforts, it looks like you’ve been making progress in recent years, but are there any goals or targets, market share, metrics, design win metrics, that you can share with us for 2013, either in terms of what you’d like to achieve or backward looking at 2012, in terms of of progress actually achieved?

Scott McGregor

We have internal metrics, but we don’t have metrics that we quote outside. Our hope is to continue to gain share in 3G, and we believe we will grow our 3G business in Q1, which we think we’ll be gaining share in that space. And we have said that we will sample an LTE product over the course of this year. And so as that rolls out, it will certainly help.

We did launch, fairly recently, our dual core product, HSPA+ dual core product, and that’s rolling out now in terms of a number of products. You’ll see us move from single core to multicore products, which will help on the ASP a little bit in that space.

So those are all metrics to look for over the course of this year.

Craig Berger - FBR Capital Markets

And then just as a follow up, networking is weak, obviously the whole macro is weak. Is any of that sort of an ongoing reaction, the fiscal cliff, that hasn’t been worked through the system yet? Or is it something bigger than that? When do you see that particular business inflecting higher?

Scott McGregor

Well, I think it’s really based on capex spending from the carriers, and that will be driven over time by their availability of capital. We’re not economists, so it’s hard for us to forecast the macro. We’ll leave that to you guys. But we do believe that the market is more than normally depressed at this point, and we believe it will revert to the mean, and we’ll get back to growth at some point. Predicting exactly when that happens, that’s hard to do.

Operator

The next question is from Craig A. Ellis from B. Riley Caris. Please go ahead.

Craig A. Ellis - B. Riley Caris

Can you just frame up for us the growth drivers that you see in mobile and wireless this year, in terms of their magnitude? You’ve talked about NFC, you’ve talked about 5G wifi, baseband you’re obviously starting the year well there. But as we take a step back and look at what the largest growth drivers will be, what are they and in what order?

Scott McGregor

I’d like to tell you, but sometimes we don’t even know the answer to that. We can get surprised on that. I’ll tell you some of the ones that I think are quite large though. I think the 5G wifi will continue to grow significantly. That’s a new technology that has penetrated access points in 2012, and will roll out In the mobile handsets over the course of this year.  That is likely to be the largest magnitude of the set.

NFC will be new for us, so from a percentage basis, I think NFC is probably the likely winner there because we’re coming from a fairly small base and we think we’ll take very meaningful share in that space.

Other businesses, I think 3G base band should do nicely as all these products roll out and especially as we go to the multicore products.  So I’d say that those are three that I’d certainly pick there.

But we’ve also see other opportunities that come up.  The touch business as I mentioned in my earlier text, the touch business has performed well for us, so there are a variety of opportunities.  But those are probably the highlights.

Craig A Ellis – B. Riley Caris

And then the follow-up either for you or Eric, you guys have done a very nice job with broadband communications on the operating margin side and we’re up I think at or very near historic highs but we’re far from that for networking infrastructure and for mobile and wireless.  What are the keys in those other two segments to return back towards prior peak margin levels on the operating side?

Eric Brandt

Yes, so broadband has had a very good year in managing their business.  They delivered the kind of margins that we had hoped that they were capable of doing.  The infrastructure business should run in the low 30s.

It finished the year at about 26, so I think there’s probably five, six, seven points of leverage potentially in that business when that market turns around and even despite that, we still delivered product operating margin on a non-GAAP basis north of 20.

In the case of mobile and wireless, they finished the year right around 15% on a non-GAAP basis, which is close to what they should be doing particularly given the significant investment that’s being made in LTE.

My guess is that margin can begin to expand as we ramp LTE, which will be obviously a higher price than higher margin products.  And that’s what would lift that margin but they’re both pretty much revenue lifts bases.  In the case of NWG, it’s really a coverage of that R&D investment.

Operator

Your next question comes from the line of John Pitzer – Credit Suisse.

John Pitzer – Credit Suisse

Scott, Eric mentioned that all three divisions will be down roughly the same in the March quarter with maybe mobile and wireless being down a little bit more than the midpoint.  I’m just curious to what extent that might be driven by a single large customer and how would you characterize the market outside of that customer?  Is it more typical to seasonal trends?  And then I have a follow-up.

Scott McGregor

I would say it’s largely driven by seasonality and we don’t see any particular drivers there.  There is always lumpiness across customers.  Some do a little better some quarters.  Some do a little worse.

So don’t try to read too much into the data points there.  Yes, I’d say that’s the sum of it.  Eric?

Eric Brandt

It’s pretty much – as I said, it’s pretty much down across all three.  Mobile and wireless is typically down and there’s been some discussion about potentially there being some inventory across a couple of customers.  Hard to tell if that’s the case.  There may be some of that in the market.

John Pitzer – Credit Suisse

And then, guys, for either Scott or Eric, just curious.  Can you help us now size how much tablets represented mobile and wireless and maybe how much base pan is, some ballpark figures there?

Scott McGregor

You mean how much base band and connectivity is in tablets?

John Pitzer – Credit Suisse

Well, no, basically what tablet represents as a percent of mobile and wireless today and what does base band overall represent as a percent of mobile and wireless as well.

Scott McGregor

I would say tablets is fairly small in terms of our overall.  It’s just the unit quantities are so much higher.  Unfortunately, we don’t get more for our connectivity chip and a tablet than we do in a phone, so we don’t participate in that higher ASP.

But in general, the phones greatly outweigh the tablets.  In terms of base band versus the (total) market, it’s still dominated by our connectivity chips and so there’s a big opportunity for share growth in the base band side.

Operator

Your next question comes from the line of Glen Yeung – Citi.

Glen Yeung – Citi

Just thinking about your first quarter mobile and wireless guidance, is there any bias towards smartphone versus feature phone being better or worse relatively speaking?

Scott McGregor

We’re definitely seeing a transition to more of our business in smartphone and that’s because we have upscaled our products to focus more on smartphones, particularly in the base band space.  And so as we go more upscale on base bands, we see a richer mix.

Glen Yeung - Citi

And Scott, you expressed a lot of confidence in your NFC market share gain for this. I wondered if you could just shed some light as to where that confidence is coming from.

Scott McGregor

The confidence is coming from a fairly large number of customers that we’re working with, who have designed their products into their products, and we expect to ramp over the course of the year. We’ve also partnered with Google, and working with them closely on NFC for the Google Wallet and other products. So we’ve been working pretty closely with those customers, and do expect the products to ramp.

Operator

Our next question is from Stacy A. Rasgon from Sanford C. Bernstein. Please go ahead.

Stacy A. Rasgon - Sanford C. Bernstein

I want to probe a little bit on the wireless guide. You said the business down a little more than seasonal, but you have baseband up, which still implies connectivity down even more than that, even more than the rest of the company. You’re saying it’s purely a seasonal thing. I think last quarter you said that seasonal for this business was down 5% or so. But it would seem like you’re guiding it down 10% or even more for connectivity. Can you give us any feeling, do you think this is more cyclical or secular? Are you seeing smartphone growth slowing? Is this, again, a mix shift from high end smartphones to low-end smartphone? I know you touched on the customer aspects already. But I guess any more color that you can give us on what might be driving the weakness there? Because it does seem, given what you’ve talked about, that the weakness you are seeing is broader than what you typically have as a seasonal decline there.

Scott McGregor

I think we’re seeing a bit of lumpiness. If you look at Q3 and Q4, we saw stronger than seasonal growth in those quarters. And now we see somewhat a little less than seasonal growth. So I wouldn’t read into one data point too much there. I’d wait until we get another quarter, and smooth it, probably. But we don’t feel like we’re losing any share. In fact, if anything, we feel like we’re gaining share a bit. So I feel we’ve got good strength in our products and our penetration with customers.

Stacy A. Rasgon - Sanford C. Bernstein

I guess as a follow up, and to touch on that a little more, you had, I guess, about seasonal growth this quarter. Does that represent inventory builds or pull-forwards, or something else, based on just products that potentially were going to be shipping that maybe are shipping less now. And I guess products in the channel that are maybe a little bit misaligned to what actually is shipping at this point? And if that’s true, would we expect that to be correcting over the next few quarters?

Scott McGregor

It’s possible. We have a fairly long supply chain in terms of connectivity. We deliver to module makers, and the module makers deliver to handset customers, and so there’s an extra element in the food chain that can cause a little confusion in lining up quarters and so forth. But generally, there’s a longer supply chain for connectivity products than for many of the other products you may be following.

Operator

The next question is from Daniel Berenbaum from MKM Partners. Please go ahead.

Daniel Berenbaum - MKM Partners

Just wanted to ask a question on the capital structure and dividend in terms of a dividend payout target. It looks like you paid out a little bit under 15% of free cash flow in a dividend, so nice dividend increase here. But how should we think about that long term? And then kind of related to that, with the debt that you have coming due this year, are you thinking to refinance, take advantage of low existing rates, or would you sort of clean up the balance sheet a little bit? What are your thoughts there?

Eric Brandt

It looks like 15% of cash flow, or cash flow from operations, or you could use free cash flow as well, because we don’t have that high a capital expenditure, but the truth of the matter is a large amount of our cash accrues overseas, and so as a result, as a percentage, the U.S. cash, which dividends need to be paid out of, it’s actually a fairly high percentage that we are paying out again. Below 50%. But staying at a reasonably high percentage of U.S. cash.

In terms of the cash we have, we have about $2.1 billion onshore. And we did do a financing about a quarter ago, where we took advantage of some very attractive rates. The rates are actually probably 40-ish basis points, maybe 50 basis points, higher for a similar piece of paper today. And so I don’t think we intend, at this point - that could change - to do an additional financing, and we’ll probably head down the path of, as you say, cleaning up the balance sheet.

Operator

[Operator instructions.] Our next question comes from Vivek Arya from BofA Merrill Lynch. Please go ahead.

Vivek Arya - BofA Merrill Lynch

Scott, if I look back at 2012, you did quite well in the mobile and wireless segment. But when I compare the growth rate, about 9% or so, it compares to about 30% fast growth in smartphones and tablets.  It’s clearly not a competitive issue because you mentioned you gained share in a number of areas.  So what was it that caused the segment to grow less than just the simplistic unit growth in these smart mobile devices?  Was it mix?  Was it more pricing?

And if it is pricing, can you give us a sense for where you are seeing that pricing pressure and what you are doing to offset it?

Scott McGregor

Recently an ASP declined.  That’s natural in our business.  That happens year-over-year.  So you should expect that the growth in revenue dollars would be less than the growth in units unless you’re getting a richer mix or you’re moving up in the market.

One of our goals with a lot of the new 3G base bands, the multicore base bands and then moving into LTE is to go for richer mix.  But today our share is still relatively small in those businesses and so it’s not as big a driver for us.

In the connectivity space, the smartphone growth, we’ve pretty much been in all the smartphones.  We were also in the high-end feature phones with a lot of those products and so the cannibalization of the high-end feature phones didn’t result in a net unit growth for us in some of those spaces.  So those are two factors that explain that.

Eric Brandt

I have just one other thing to that which is recall that this year we saw the roll off of our 2G business at Nokia and our multimedia business at Nokia and that actually depressed the aggregate segment growth rate quite meaningfully, actually, to the tune of hundreds of millions of dollars.

Operator

Your next question come from the line of CJ Muse – Barclays.

CJ Muse – Barclays

I guess pretty similar to the last question – curious, when you think about mobile and wireless, your outlook for 2013, how much of it do you see being driven by an uptick in units versus the richer mix that you talked about and continue trace?

Scott McGregor

Well, for mobile and wireless, we do see the segment down, so it’s not an uptick in units or richer mix.  But we do see more of 3G base band shifting offsetting some of the decline in connectivity.

Operator

Your next question comes from the line of Shawn Webster – Macquarie.

Shawn Webster – Macquarie

I was wondering as you’ve talked a bit about Q1 seasonality if you could share what you think Q2 new seasonality is for a broad comment.  I was wondering also if you could share with us your order linearity as it progressed from December and maybe into January.

Eric Brandt

Shawn, we don’t provide order linearity.  I think what we gave you is a pretty good picture of what we think Q1 is.  And as we said repeatedly, we are mostly, if not fully booked by the time we get to this point in the quarter and give guidance.  Things move around but we’re pretty well booked.

In terms of Q2, we’ll give you the best picture we can when we get there.  Typical seasonality for Q2 is up mid to high-single digits, similar for Q3 as well.

Scott McGregor

Just another comment on that, looking at order linearity is always difficult in Q1 because of Chinese New Year.  A lot of the orders shut down for several weeks in our business.

Operator

Your next question comes from the line of Srini Pajjuri – CLSA Securities.

Srini Pajjuri – CLSA Securities

Scott, a question on the 4G wifi and the – I’m just wondering what sort of ASP increase do you expect to see in smartphones as these richer mix products ramp and also any guesses as to exiting the (sea) or what you expect 5G to be at as a percent of your overall shipments.

Scott McGregor

So I don’t have good data for you in terms of the percentage of overall shipments for 5G wifi, but we do expect it to have a fairly steep slope of the course of this year as it starts out pretty much just in the high-end phones and flagship phones as many of our customers and then deployment much more into the midrange.

It’s a little harder to predict that curve but we could see a fairly rapid shift towards the end of the year on that.  In terms of ASP increase, it could be anywhere from 25% to 50% or more based on how much content we get in there, NFC and so forth.

Operator

Your next question comes from the line of Steven Chin – UBS.

Steven Chin – UBS

My question is on your process note technology strategy for (sailor fishnet) products.  I know that you guys are probably focusing more on 40 nanometer based chips for this coming year.  So I was wondering, relative to your competitors that have dual and quad core chips based on 20 nanometers, do you see any real or perceived disadvantages that you guys have from a performance or impression standpoint out there in the market?

Scott McGregor

Your dual core and single core products shipping in the first half of this year will be predominantly 40 nanometer chips. Most of our [tape outs] going forward are all 28 nanometer, though, in that space. And so we do see a migration in the cellular space, especially with basebands and processors. You do get an advantage in 28 nanometer, and we will move there.

Operator

The next question is from Romit J. Shah from Nomura. Please go ahead.

Romit J. Shah - Nomura

I know you guys don’t put much stock in order linearity, but some of your peers who are also below seasonal are talking about better bookings. Eric, I know you study this closely. Curious what your take is. Are you seeing elements today that support a durable recovery going forward? Or is the jury kind of still out until after Chinese New Year?

Eric Brandt

My opinion is that the jury’s out until after Chinese New Year. You know, look, you can’t see a bottom looking forward. You can only see a bottom looking backwards. And you know, one week or two weeks of orders, particularly coming into Chinese New Year, where people typically order heavy before they shut down, it’s hard to draw a conclusion.

So what I would say is the best piece of data is, again, if you look at the semiconductor companies that have reported, and the midpoint of guidance they’ve given for Q1, the average looks like it’s down about - or the mean of it, because you have to take the two numbers together in aggregate - looks like it’s down about 2-2.5%.

So it’s hard to say that when you have a year over year decline in the industry of 2.5%, that people sort of can conclude that things are turning around, at least for guidance for Q1. Having said that, I do agree with Scott’s comment that I do think we have been running in a lull for a while, and at some point, it will turn around. And I don’t know where that is. It’s hard for me to say whether that’s Q2, Q3, Q4. I just don’t know.

We do believe it will turn around. I think in our case, we actually feel pretty good, secularly, because of the design wins we’ve had, and the performance we have in terms of the market share, and outgrowing the market.

Operator

The next question is from Steve Smigie from Raymond James. Please go ahead.

Steven Smigie - Raymond James

I was hoping you guys could talk a little bit about the landscape in the [TK] market and just curious from a competitive position if you’re seeing any new entrants into that market gaining relative to new technology, or if you continue to see your position as pretty dominant and a lever into other areas of the network.

Eric Brandt

In the [TK] market, our knowledge based processor market, we see very strong products [unintelligible]. I mentioned in my earlier text that we’ve announced some new products that really are a giant step forward. They’re in 28 nanometers, very powerful products, really reduce the power consumption, while at the same time provide much more capability. And so when we look at the competition, there’s one competitor in Asia, but we see them actually weakening, and potentially exiting that market. There’s a potential competitor in the United States, but so far we haven’t seen them in any customers, and we don’t expect any meaningful share loss that we can see right now.

Operator

The next question is from Ruben Roy from Mizuho Securities. Please go ahead.

Ruben Roy - Mizuho Securities

Scott, were there any Blu-Ray and DTV revenues left over in broadband for this year? If so, what are the prospects there? I would imagine they’ll continue to roll off. And if so, would you expect some headwinds on your operating margins in that business?

Scott McGregor

It’s pretty de minimis at this point. We had about $5 million worth of revenue in Q4, which we expect to roll off in Q1, although we will get some revenue in Q1, so it won’t be zero. But it’s getting to be counted on one hand, and soon kind of on one finger, in terms of revenue there. So it’s not meaningful in terms of either margins or revenue.

Eric Brandt

And I’d just add to that point. If you look at broadband’s growth rate for the year, on the annual numbers, you’ll see a number that looks like about 5.5%. If you take out the consumer electronics business from broadband’s performance, it actually grew in its core business about 11%, and the margin went up. And so one of the reasons we exited that business is because the margin was terrible. And one of the reasons you’re seeing broadband’s margins pick up is the exit of that business, and a focus on a higher set of profitable businesses.

Operator

The next question is from Alex Gauna from JMP Securities. Please go ahead.

Alex Gauna - JMP Securities

I was wondering if you could make some initial comments on how your 5G 802.11ac design win profile is shaping up for smartphones. Do you think you’re going to be holding share? And maybe if you could briefly comment on how your solution stacks up against what Qualcomm and their two-chip solution that was announced at CES.

Eric Brandt

So in the access point side, I think we’ve got pretty much a clean sweep across there.  We don’t see much competition in that space.  On the mobile phone side, there are competitors.  We believe we’ve won the majority of the large design wins and we expect we’ll see the majority of unit share over the course of its year certainly in the 5G space and in the overall connectivity space as well.

So we see pretty good share gains there.  In terms of how do we compare versus competitors, one of the things that’s really strong about our wifi product is just the throughput and data rate that it’s capable of.

A lot of people like to quote the theoretical rate you get using the 2011 AC standard but it’s totally different when you actually go measure it.  And we’ve been able to get substantially better throughput than competitors in that as much as 30%, 40% better throughput and that’s a big feature there.

In terms of other features, there are just a lot of features and I think Bob went through a number of them at analyst day.  You might want to go back to that deck there but there’s just a whole bunch of connectivity features where our competitors just don’t have them.

Operator

Your next question comes from the line of Kevin Cassidy – Stifel Nicolaus.

Kevin Cassidy – Stifel Nicolaus

You had mentioned a small cell design win with Huawei. I wondered if you could tell us how you think that small cell market develops and where the deployments happen.

Scott McGregor

The small cell market’s a little bit of a puzzle to us because there are a lot of analyst reports out there that say that the thing is going to grow spectacularly and we’d love that to be true.

I think we’re a little more cautious than many of the analyst reports, although we do believe that it will be an interesting market.  So I think we’re going to have a wait and see a little bit as the carriers begin to deploy.

I think we will take meaningful share in that market and there’s no reason we can’t be a number one player in that space.  But I’d be a little skeptical from a higher growth market forecast out there.  I think we’ll want to see as the carriers deploy.

I think they’re going to be cautious at first just as they learn about frequency usage and as they learn about the deployment models and establish the business models for how they make money deploying the small cells.

Operator

Your next question is from the line of Tristan Gerra – Baird.

Tristan Gerra – Baird

You provide us with a sense of putting margin in target in your wireless business once you want to (inaudible) sometime next year and I thought you had a higher working base with a richer mix and lower key investments.

Eric Brandt

Well, Tristan, I think we’d like to see our wireless business north of 15%.  How much north of 15% really does depend on the mix of the business.  But to see it go up from 15% to 17%, once we see that product ramp and higher ASP, would be some kind of thing we’re looking for in terms of trying to drive the business.

Operator

Your next question is from the line of (David) – Wells Fargo.

(David) – Wells Fargo

(inaudible) exit from the connectivity business has created an opportunity for the rest in that segment.  Do you recon that that’s mostly slowed to (inaudible) by the time we get to the end of the first quarter or do you get ongoing benefits through the rest of the year in terms of business you can pick up?

Scott McGregor

I believe there’s still more opportunity to pick up business there.  They’re still in a number of shipping products and as they get phased out there’s an opportunity to replace them.

Operator

Your next question comes from the line of Doug Freedman – RBC Capital Markets.

Doug Freedman – RBC Capital Markets

When you look at the base band opportunity, there’s a lot of concern in the marketplace that you guys are late with the LTE solution.  Can you talk about how you think your LTE solution is going to fit into the market and where you see the opportunity?

Scott McGregor

So yes, we’re late.  We’ve talked about that on analyst day and so because we’re late, we need to do a really great product.  And so I’m going to not say much more because, as we said, we’ll announce sampling product over the course of this year.

But we’ve tried to do what we think is a really competitive product and we will target the full range of the LTE handsets all the way up to the high end.

Operator

Your next question comes from the line of Chris Caso – Susquehanna Financial.

Chris Caso – Susquehanna Financial

I have a question with regard to opex and maybe returning to some of the earlier questions.  And you talk about keeping the opex tight in the near term until you see some improvement.

I guess the question is what should our expectations be once we see some improvement?  You talked about some of the operating margin targets.  I assume they’re to be longer term.  But perhaps you can talk a little bit more on the intermediate term, to get our expectations right.

And I guess part of that answer probably has to do with some of the incentive pay as well. So maybe you can touch on that as well.

Scott McGregor

It actually doesn’t have very much to do with the incentive pay, other than the fact that we’re trying to manage the business with a set of operating margin targets, to earn incentive pay. But what I would say is that we just came out of analysts day. We have a very focused set of investments that we’re going to make, and I don’t think that that changes…

Sitting here today, and I keep referring to this guidance number that other companies have put out, and it’s minus 2.5%, and the number that’s seems to be the industry, that people are projecting, is somewhere between 7% and 11%. And when it looks like it’s closer to 7% and 11%, I think we may start spending a little bit more money than what we’ve committed in terms of those fairly tight things.

But just to give you a sense, we did exactly that in 2012, and seemed to manage a year which was down with some market share gain and holding our profitability in the targeted ranges. So I think we’ll do the same thing. You’ll see a more muted growth in operating expenses over the course of the year, and maybe even flatten out toward the end of the year, if the industry doesn’t show growth.

Operator

The next question comes from Edward Snyder from Charter Equity Research. Please go ahead.

Edward Snyder - Charter Equity Research

In terms of your LTE, can you give any idea or update on when you’re sampling the part, not necessarily the production? And then what is your take on the competitive environment coming out of MediaTek and Spreadtrum? They’re starting to offer multicore HSPA with connectivity, I know, on Spreadtrum’s case. They’re looking at LTE the second half of the year. And they’re certainly targeting the lower end, kind of, on the smartphone business, where you’ve probably played more strongly than the high end. Does that change your feeling about the dynamic of baseband in general and LTE in particular as we go through the rest of this year?

Eric Brandt

In terms of LTE timing, all we’ve said is that we’ll talk about sampling a product sometime in the course of this year. So stay tuned for further information on that.

In terms of some of the Asian competitors you mentioned, you’re right, they do target the low end generally, and they’ve come up with some pretty competitive products, and very compelling in the developing markets, and especially in China. And one of the challenges they have is that from a spec point of view, they don’t quite meet spec for products that would be sold across most of Europe or the United States. And so it’s hard for them to penetrate there.

The challenge for us is to develop products that are very cost-effective that penetrate into China. So you’ll see us increase our focus on China over the course of the next year. We’ve already started doing reference designs, and turnkey designs, that we think appeal to a broad range of companies. So I believe our competitive position will actually increase in China, albeit from a small base.

Operator

The next question is from Dale Pfau from Cantor Fitzgerald. Please go ahead.

Dale Pfau - Cantor Fitzgerald

Back on mobile and wireless again, if we ex out the baseband chips, do you think your growth rate in that segment can equal the growth rate of the overall smartphone market by ASP expansion on NFC or 5G wifi? Or should we expect that the growth of that segment ex-baseband will be less than the growth of the smartphone market?

Eric Brandt

It will be structurally less than the growth of the smartphone market, because of both ASP erosion and also the fact that the smartphone market is cannibalizing some of the feature phone market, where we do have some penetration. So I think those are two headwinds against that.

Certainly offsetting that positively is the fact that we are increasing the features and increasing our capabilities, which gives some ASP enhancements for those set of products. To the extent that we also gain share, that’s also a headwind there. But I wouldn’t model that we would grow that business necessarily as fast as overall.

Operator

The next question is from Patrick Wang from Evercore Partners. Please go ahead.

Patrick Wang - Evercore Partners

If you could talk again about your traction with handsets in China. You mentioned over 40 turnkey wins. What type of trajectory are you looking at this year? And then what type of dollar content do you get per phone, I guess, on average, with those wins? And is that in line with your overall mobile operating margins?

Eric Brandt

In terms of China, we do have design wins with a number of small players. It’s a little difficult to forecast exactly how many they’re going to sell. One of the challenges in that business is if you add up the expected market share of all the players, you get a number well over 100%. And so a priori, it’s hard to figure that out. But we’re certainly starting to play.

I wouldn’t say that we’re going to become a major player in China this year, but I think you’ll see us make some meaningful steps shipping. I think our products are getting incrementally more competitive with some of the dual core products that we’ve announced, and some of the dual dual core products, which we think are very competitive.

Our dual dual core products, the double dual core products, are, from a performance point of view, for many apps, much faster than the quad core products that are out there today. And so some of those benchmarks, I think, are going to help, and people will realize that just having a lot of cores doesn’t mean your phone runs faster. It’s really an architectural design and how you apportion that. So I think you’re going to see some meaningful steps there, now that we have turnkey designs, and working with customers to do that. That’s really increased the interest level.

Operator

We have no further questions at this time. I’d like to turn the call back over to Scott McGregor for closing remarks.

Scott McGregor

Thanks everyone for joining us today. Broadcom’s completed another very strong year, and we’ve designed world-class communications products. We’ve gained market share, and I think we’ve delivered solid profitability, despite a broad industry weakness.

As a reminder, we’re going to be hosting an open house at Mobile World Congress in Barcelona on February 25 at 3 p.m. local time. And if any of you need any additional details on that event, please give Chris a call.

With that, thanks again for joining us, and have a good day.

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