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Broadcom Corporation (NASDAQ:BRCM)

Q2 2006 Earnings Conference Call

July 20, 2006 4:45 pm ET

Executives

Peter Andrew - VP IR

Scott McGregor - President, CEO

Bill Ruehle - CFO

Henry Samueli - Chairman, CTO

Analysts

Michael Masdea - Credit Suisse First Boston

Alex Gauna - UBS Warburg

Ross Seymore - Deutsche Bank

Ambrish Srivastava - BMO Capital Markets

Mark Edelstone - Morgan Stanley

Roy Ruben - Pacific Crest Securities

Arnab Chanda - Lehman Brothers

Charlie Glavin - Needham & Company

Seogju Lee - Goldman Sachs

Srini Pajjuri - Merrill Lynch

David Wu - Global Crown Capital

Adam Benjamin - Jefferies & Company

Jeff Palmer - Friedman, Billings, Ramsey

Bill Lewis – JP Morgan

Shelby Seyrafi - Kaufman Brothers

Presentation

Operator

Welcome to the Broadcom second quarter 2006 conference call. (Operator Instructions) Your speakers for today are Scott McGregor, Broadcom's President and Chief Executive Officer; Henry Samueli, Broadcom's Chief Technical Officer and Co-Founder; Bill Ruehle, Broadcom's Chief Financial Officer; and Peter Andrew, Vice President of Investor Relations.

I would now like to turn the conference over to Mr. Andrew. Please go ahead.

Peter Andrew

Thank you very much, Martin, and good morning, or good afternoon. I would like to thank everyone for joining us.

Before I turn the call over to Scott, I've got to make a brief comment. During this call, we will discuss some factors that are likely to influence our business going forward. These forward-looking statements include guidance we will provide on anticipated revenue for the third and fourth quarters of 2006, financial information for any future periods, and statements about prospects for our various businesses and the development status and planned availability of new products.

It should be clearly understood that our actual results may differ substantially from the forward-looking statements we make today. Specific factors that may affect our business and future results are discussed in the Risk Factors sections of our 2005 Form 10-K and subsequent 10-Qs and 8-Ks and in our other SEC filings.

A partial list of these important risk factors is set forth at the end of today's release. As always, we undertake no obligation to revise or update publicly any forward-looking statement for any reason.

On July 14, we provided a preliminary report on the voluntary review of our equity award practices. As we announced then, as a result of that review, we had to limit the scope of our financial information that we release today.

In addition, on this call, we will not be able to provide any specifics about our gross margin or operating expenses for the second quarter or year-to-date because we cannot determine those amounts in accordance with GAAP until we have completed our ongoing review and the expected restatements of our historical financial statements.

In today's call, we will provide you some information and guidance about general trends for these metrics, but cannot provide any greater detail than what we state on the call. We will of course make every effort to provide you with more detailed information as soon as we can, which will be when we have completed all of our required SEC filings and amendments.

You should note, however, that this will likely take a number of weeks to accomplish. Because of the pending restatement of our financial statements, all financial numbers for the second quarter discussed on this call are not final and should be considered estimates.

In addition, any guidance we provide for the third and fourth quarters of 2006 do not take into account the effects of the pending restatement, which we believe will result in significant adjustments to our results of operations on a GAAP basis but will not have any material effects on our non-GAAP results. To the extent we discuss any non-GAAP measures, please refer to our 8-K we filed with the SEC on April 28, 2006. That contains additional information regarding why Broadcom believes that these non-GAAP measures provide useful information to investors, the specific manner in which management uses these measures, and some limitations associated with the use of these measures.

With that, let me turn the call over to Scott.

Scott McGregor

Good afternoon and thanks for joining us today. I'm sure everyone has seen the press release by now, and as we noted, we are a bit limited in terms of financial metrics that we are able to report. What we are able to disclose at this time is our revenue and some limited balance sheet items.

Revenues came in at $940 million, which is at the upper end of our guidance of $930 million to $945 million, and represented growth of 4.5% quarter-to-quarter and 56% year-over-year. This is another record revenue level for Broadcom.

Echoing what we noted in our Q1 conference call, the growth in Q2 was led by continued broad-based growth within our broadband communications and mobile and wireless end markets. Enterprise networking was essentially flat on a quarter-to-quarter basis.

We had another strong quarter of cash generation, as total cash, cash equivalents and marketable securities came in at just under $2.4 billion, which represented net growth of about $60 million quarter-to-quarter after spending about $150 million buying back shares in the open market.

With respect to our equity award review, we have nothing new to report in our analysis today, but we continue to make excellent progress. We're making every effort to complete our analysis and file our restated financial statements as soon as possible, after the completion of our review. However, as we noted in our previous press release, we're not likely to file our 10-Q for the period ending June 30, 2006 by the due date of August 9.

With that, let me turn the call over to Bill to talk about Q2 and give guidance for Q3.

Bill Ruehle

Thank you, Scott. Q2 '06 was near the high end of our guidance. Our record quarterly revenue of $941.1 million was up more than $40 million or 4.5% from Q1. Revenue is up more than $336 million or 56% from Q2 of '05.

Our non-GAAP gross margin was down from last quarter a little more than our guidance. Our total non-GAAP OpEx was up more than the rate of our revenue increase, as per our guidance. Our cash and marketable securities on-hand increased by $64 million for the quarter, leaving us with a balance of $2.4 billion.

In our January conference call, we said we expected Q2 revenue to be in the range of $930 million to $945 million, a 3% to 5% increase over Q1. Our actual revenue of $941.1 million was an increase of 4.5%, so we did come in at the high end of the range.

In April, we noted that we expected our strongest growth to come from broadband, and it did. Our broadband revenue increased by 8% over Q1. The increase was primarily driven by strong increases in DSL and solid sequential growth in cable set-top boxes and cable modems, which more than offset a decrease in our DVS business.

Our two new emerging categories within this sector, digital TV and HD DVD, also experienced strong growth off a relatively low base. In total, our broadband business was up 58% over Q2 of '05.

Our mobile and wireless business was up more than 5% from Q1 with most of the significant increase coming from Wireless LAN as the 802.11n shipments ramped significantly, more than offsetting decreases in Bluetooth and mobile multimedia, both of which were impacted by short-term and customer inventory rebalancing.

We also achieved shipment of our first 3G baseband chips to a Tier 1 customer. Scott will talk more about this in his remarks. Our mobile and wireless revenue was up 121% over Q2 of '05.

Our enterprise networking business was flat for quarter-over-quarter and up 20% year-over-year. For the quarter, strong performance in controller and Fi offset weakness is switching.

In terms of revenue distribution for Q2, Broadband Communications accounted for approximately 38% of total revenues, mobile and wireless for 30%, and enterprise networking for 32%. In Q2, we had two customers, each of whom accounted for 10% or more of our revenue, and that was Motorola and Cisco.

In terms of operating expenses, we are limited as to what we can say. As I mentioned earlier, our total non-GAAP operating expenses were up from last quarter. This was driven primarily by the impact of our annual focal salary reviews, by additional headcount, and by increased spending on [inaudible] sets.

We increased our total company headcount from Q1 by 249 people to a worldwide total of 4,854. This includes over 3,450 people in engineering to represent 71% of our total headcount. Our annualized revenue per employee was $776,000, down slightly from the $782,000 we reported the previous quarter and up substantially from the $647,000 we reported in Q2 of '05.

Turning to the balance sheet, we continued our ability to generate positive cash flow. Our total cash and marketable securities balance was up by $64 million, from an all-time high of $2.4 billion.

During the quarter, we disbursed $152 million in pursuit of our stock buyback program, and we collected approximately $93 million from employee stock option exercises and employee stock plan purchases. In the second quarter, we repurchased 4.2 million shares, bringing our year-to-date purchases to 6.3 million shares.

Our inventory balance has increased by just over $51 million to $278 million, which was higher than our expectation. We had a small number of parts where we had expected higher shipment volumes to materialize.

Our accounts receivable DSOs increased slightly from 36 days to 39. Our linearity of shipments was still quite good as we still shipped 33% in the quarter within the third month.

Turning now to our expectations, we see some near-term issues regarding our revenue outlook for Q3. We expect these to be substantially resolved by Q4. Specifically, for Q3, we expect revenue to be below what we just reported for Q2. In Q3, we believe that our revenue could be approximately $900 million, which would equal the revenue we reported in Q1.

Normally, we only give guidance for one quarter in advance. Because we believe there are short-term factors affecting Q3 that do not accurately reflect our longer-term revenue trends, we want to also give some indication of our expectations for Q4.

We anticipate our Q4 revenue will be higher than the $941 million we just reported for Q2. There are three principal lines of business contributing to the expected temporary decline in Q3.

In DSL, we have experienced a very rapid increase in our sales, up to a level where we believe we are now in a leadership position in that market. For the last several quarters, we have been struggling to keep up with our customers' increasing demand. In Q2, we were able to catch up to their demand and experienced a significant increase in revenue over Q1. For Q3, we expect to be above the Q1 level but below Q2, as we reach an equilibrium point with respect our supply and our customers' demand and desired inventory levels. For Q4, we expect that business to be about flat with Q3.

In Ethernet switching, we believe we have seen some inventory build across a broad set of customers. That business was down in Q2 and is expected to be down again in Q3. We expect to see a relatively strong Q4.

The third area of expected decrease in Q3 is mobile communications; in other words, cellular baseband. In Q2, some of our GSM and GPRS models within our largest customer in that market reached the peak of their volume life cycle. We expect a reasonable upturn in that business in Q4, both in existing 2G models and some new 3G models.

In addition to the lines of business described above, other lines of business with expected revenue increases in Q4 include digital TV, where we expect to see a strong Q3 and an even stronger Q4, as some of our major accounts in that area are beginning to ramp. We also anticipate a good ramp in Bluetooth as additional large customers are expected to kick in, and possibly in Wireless LAN, depending on retailers' sell-through of the 802.11n product.

For gross margin trends, we have consistently stated our long-term model as being in the range of 50% to 52% on a non-GAAP basis. We expect to see some margin pressure in Q3 that could bring our non-GAAP gross margin to a point below the top end of that range.

This is driven by a combination of product mix, product transition issues, and the fact that virtually all of our Q3 production has already been committed at existing foundry prices. We're starting to see some indications that foundry pricing may be a little more favorable beginning in Q4.

For Q3, we do expect to see OpEx continue to increase, though at a reduced rate from Q2. We remain very conscious of our long-term profitability models and will take whatever steps we reasonably can to assure we operate within that model, consistent with continuing to fund our growth opportunities.

Cash flow in both Q3 and Q4 is expected to remain strong. We also expect our inventory in Q3 to decrease by at least as much as the $51 million by which it increased in Q2.

Now, I'd like to turn the call back over to Scott to talk about the state of the business.

Scott McGregor

Thanks, Bill. Before I jump into my discussion, there are four things that I would like everybody to take away from today's discussion:

  1. The first is the large, diverse and growing opportunities we see at Broadcom.
  2. The second is that customer rebalancing activities will have a short-term negative impact in Q3.
  3. The third is that our strong design win momentum plus favorable product cycles give us confidence to believe that Q4 revenues will be up versus Q3 and Q2.
  4. As our end markets and end products continue to converge, our competitive position improves.

So, at a high level, I'd like to start off by observing that Broadcom is well positioned to lead this communication and convergence wave due to our broad and diverse product offering that covers a large number of large and growing end markets.

We have over 20 different lines of business focused on three separate target markets that we classify as broadband, mobile and wireless, and enterprise networking. Another way to look at it is that Broadcom solutions touch an individual at home, at work, and while mobile. These lines of business change from time to time, but none represented over 11% of revenues in Q2, which is a testament to the diversity of our revenue stream.

In Q2, all but four of these lines of business grew revenue on a sequential basis, proving that we're not being driven by any single end market, product, technology or customer. To put this communications and convergence opportunity into perspective, we've recently updated the total available market analysis for each of our 20-plus lines of business, and see an opportunity of approximately $60 billion in 2005. Looking out to 2008, we see this growing to $83 billion.

Our served addressable market, or SAM, is a more accurate view of our opportunity and grows from $24 billion in 2005 with a 33% compound annual growth rate to $56 billion by 2008. The key take-away here is that there are large and fast-growing opportunities ahead of us.

As Bill mentioned in his discussion, we believe there's some unusual short-term circumstances that will affect our Q3 results. However, due to the diversity of our product line, favorable product cycles occurring within our various sectors, and strong design win momentum, we believe that we will return to our growth track in Q4.

Moving onto our product lines, Broadband Communications experienced another solid quarter of revenue growth that was driven by numerous lines of business. Broadband modem revenue momentum continued in Q2, driven by market share gains in DSL, combined with strong unit demand in cable modems. We have been under extreme pressure to keep up with supply in the DSL space over the last few quarters, as we have been successful in capturing a number of design wins that have driven us to the number one position in this market; clearly a positive. We believe that now we have more than fulfilled these shortages, leading to a temporary decline in our Q3 DSL revenue.

We see excellent opportunities to grow our broadband modem business longer-term, driven by additional units, ASP increases as we add voice switching and Wireless LAN to these platforms, and our expansion into the VDSL2 space. We believe we can achieve a share position in VDSL similar to what we have today in ADSL2+.

In set-top boxes, Broadcom continued to experience a high level demand for our HD and PVR solutions across both the cable and satellite markets. The news in the satellite space is that we've successfully expanded our customer engagements for ABC and MPEG-4-based set-top boxes beyond EchoStar and DirecTV.

Not only are we expanding our customer base, but also look forward to expanding our strong DVB-S2 back-end product offerings into the front end. We will announce these new customers and product wins at the appropriate time.

As Bill mentioned earlier, we are taking significant steps into the digital TV space, and we've secured Tier 1 design wins in Korea, Japan and China. We expect good revenue growth in Q3 and Q4 as our Tier 1 customers begin their shipments in Q4 of DTV's incorporating Broadcom solutions.

Customers are choosing our solutions for the digital TV because of our experience in the set-top box market, as well as our ability to integrate many of the discrete scaler and video-enhancement capabilities into a highly integrated solution.

Strength in our mobile and wireless business was also broad-based. Growth in our Wireless LAN, cellular baseband and VoIP businesses offset customer rebalancing actions in our Bluetooth and mobile multimedia businesses. Wireless LAN had a very exciting quarter, driven by continued growth in our existing 802.11g solutions with the additional kicker of the initial ramp of our next generation draft end solutions and offers two distinct advantages over g: bandwidth and reach, which we believe will enlarge the total available market opportunity for n beyond that for g.

We expect the transition to n to be similar to that of g. In g, the first shipments into the retail channel cede to the market. The first buyers of these products were high-end power users. After an initial channel fill, there was a pause in the demand until the notebook vendors began adopting the technology, causing a reacceleration in the demand.

The third wave was a price drop to the psychological $99 level, causing the next surge in demand. What's different this time around is that we are seeing the notebook vendors announce end products much earlier than they did for g. This not only shows their confidence in the stability, interoperability and performance of the current n solutions, but also potentially accelerate the life cycle curve for n-based products.

With respect to hitting the $99 price point, we believe that you'll see those price points reached before the end of this calendar year. Just as in g, several silicon vendors are announcing n-based design wins, but the key metric to focus on is who is in the volume platforms. So far, we're very pleased with our position within the retail channel, enabling products with Linksys, Netgear, Buffalo and U.S. Robotics. Sales into the retail channel accounted for almost all of the 1 million units shipped milestone for draft-end chipsets that we announced earlier this week.

On the PC side, we're pleased to see that both Dell and Acer will be shipping notebooks incorporating Broadcom's 802.11n solutions, and we expect to add to this customer list shortly.

In the Bluetooth market, we were impacted by customer rebalancing, mainly on the handset side, which we expect to continue into Q3. This is being driven not by any market share losses but by adjustments in our customers' needs. We expect growth again in Q4.

Our leadership position in the handset market has been driven not only by our success in capturing the right design wins but also our software and roadmap of integration with other functions such as FM radio, Wireless LAN, and other technologies that we haven't yet highlighted. We remain on track to ship our Bluetooth plus FM radio part late this calendar year, and we have high expectations for this product.

Our VoIP business had a good quarter, driven by continued strength in the enterprise phone sector, as we're shipping solutions to each of the top three vendors. Consumer adoption of VoIP is still in its early stages but growing probably off a low base. We're pleased that Broadcom was chosen by Vonage to drive more rapid development of high-quality, feature-rich products incorporating VoIP, Wireless LAN, and Ethernet switching. The Vonage relationship highlights our communication and convergence competitive differentiator.

Two other announcements which highlight these same themes include Nintendo's Next Generation Wii platform will include Broadcom's Wireless LAN and Bluetooth solutions integrated within the box and Bluetooth in the controllers. And Lenovo will be integrating Broadcom's WiFi Bluetooth and Fast Ethernet controllers within various notebook models.

Cellular baseband experienced a strong quarter of growth that is somewhat of a mixed blessing. Part of the growth in Q2 was driven by end-of-life sales of a few GSM/GPRS models to our largest customer in this market. The absence of repeat sales there will negatively impact our Q3 results.

On the positive side, our Q1 conference call, we stated that we expected a Tier 1 3G handset customer to start shipping phones in Q2, utilizing Broadcom's 3G baseband solution. We're pleased to report that Telecom Italia did indeed offer Samsung's SGH-Z220 Wedge solution. Wedge is both wideband CDMA and EDGE utilizing Broadcom's wideband CDMA and full EDGE chipsets, along with our Bluetooth chip. This is a true Wedge solution.

It's been a number of years since a cellular handset manufacturer has adopted a new baseband supplier, and this was a key accomplishment for Broadcom, especially given Samsung's high product quality and system test requirements. This model is what we would classify as a starter model, and therefore, we expect it to be relatively low volume.

Contrary to some recent speculation, though, we are now engaged in the development of follow-on models with multiple handset customers, utilizing 3G baseband solutions that we expect to begin shipping by year-end.

With respect to our true single-chip HSDPA solution, we've seen a high degree of interest in this product, and we have begun the development of HSDPA phone designs with customers.

Enterprise networking was relatively flat in the quarter. Most of the lines of business experienced growth in the quarter, led by controllers and Fi’s as Bill mentioned. However, small amounts of rebalancing at most of our customers offset these strengths. We have no doubt, though, that the Gigabit Ethernet market will grow and that we are still relatively early in its adoption. When you combine that with our leading market share position and new product momentum, we see continued growth out of this line of business going forward.

New developments in the quarter include a ramp of our converged NIC or C-NIC family of Gigabit Ethernet controllers. These controllers are designed to drastically change the way servers are built and deployed by running TCP acceleration storage our EMA for CPU clustering, and remote systems management all over an Ethernet backplane. We also won significant numbers of sockets for our server I/O product that takes advantage of AMD's new CPU, Rev F.

Moving to security, we've extended our security processor offering from high-end switches, servers and routers in stand-alone devices to include our first products that incorporate RF ID along with TPM and crypto technology. These new devices are designed to secure personal authentication transactions associated with physical access, logical access, such as into a PC or network, and contactless payment.

We also announced a series of industry first products such as our 48-port Fast Ethernet switch with 24 5s and 4 integrated 10 gigabit Ethernet uplinks, 24 10 gigabit Ethernet switch, and a 90 nanometer [Opo] Fi. We expect revenue from each of these products as part of our growth in Q4.

So in closing, while we are a bit disappointed to see an expected short-term blip in revenue in Q3, we are encouraged by our continued design win momentum and favorable product cycles across a diverse set of businesses, a combination that we believe will enable us to rebound in the fourth quarter.

With that, let me turn the call over to questions from you.

Question-and-Answer Session

Operator

Thank you. We will now begin the question-and-answer session. (Operator Instructions) Our first question comes from Michael Masdea, Credit Suisse First Boston.

Michael Masdea - Credit Suisse First Boston

Thanks a lot. I guess just hitting it head-on with the channel fill inventory situation we're in, we've had this happen before. It looks like it has happened again a little bit. Is this something we just have to face when you ramp new product lines, is that you have a bit of a channel fill dynamic that's going to hit you every time, or is there anything that can be done to mitigate that?

In the same sort of vein, on the Bluetooth and the Ethernet side, is this something that we expect to hear more about you think from other companies or is this something that is specific to, you think, a couple of customers that you happen to be serving?

Scott McGregor

Michael, I think it's a couple of things. In the latter half of 2005, we had some product shortages in some of these areas. We weren't able to quite keep up with customer demand. We saw, for example, for substrates in our back-end, we saw 20-week lead-times, and that was longer than some of our customers could accommodate.

I think their experience there led them to probably over-order a little bit, and so I expect, in Q1 and to some extent in Q2, we overshot a bit. So I think that's the phenomenon going on in some of the spaces, such as in networking and what not.

In the case of 802.11n, I think that's more of a channel-fill situation, and I would expect that to be the same for anyone else who is in that space. That's just typical of the initial retail launch. So I think you need to peel it back a little bit and look at it by the different product categories.

Michael Masdea - Credit Suisse First Boston

Part of what I'm asking is, given that you're doing so much innovation with new products, is this type of dynamic where if we do get in shortages and companies start over-ordering like this, is there anything you can do to prevent that in the future? Or is it something we just have to try to watch for and it's just part of the business?

Scott McGregor

I think, in the retail case, channel fill is sort of inherent in that business. There's a mad scramble to see who can get out there first, and they order quite a lot of products as they want to get shelf coverage. From there on, it depends on the sell-through. In the case of 802.11n, I think it's very significant that the PC vendors will start incorporating that because then you'll get access points and PCs that talk to each other, and that will give people the comfort to buy.

In the case of shortages, I think that's a little bit inherent in the semiconductor industry. You have ebbs and flows in demand and supply, and I think, just in my experience in the industry, is whenever you get into shortage situations, the customers do tend to order more than they need and then they overshoot a little bit.

So we will manage that the best we can. We've put some slightly different policies in place in our own company to try to manage that better. That's an area where we aspire to improve and get even better. But I don't think we have an inventory problem, I don't expect inventory write-offs. These products are going to get consumed and I believe all the inventory issues will be sorted out within Q3.

Michael Masdea - Credit Suisse First Boston

Then on the wireless side, obviously in the past we had asked this, if the litigation would cause any overhang and prevent some of your customers from rolling out. Obviously with the success of Samsung, that answers that question.

Is there any sort of wait-and-see from any other customers, or are you on equal footing and compete aggressively for all other baseband business?

Scott McGregor

We are seeing support from the different customers. There is no impediment for us there.

Michael Masdea - Credit Suisse First Boston

Okay. Final question, just LCD side, some inventory problems and then it does push a little bit into the TV side. Any sort of overhang on the TV roll-out that you could potentially see out there from any sort of inventory problems at all?

Scott McGregor

Actually, it's a positive for us because what happens is they are all dumping the panels right now, which is driving the price of LCD TVs down, which will actually increase demand for digital TVs. So we see that as a positive for us over the next couple of quarters.

Michael Masdea - Credit Suisse First Boston

Thanks, guys.

Operator

Our next question comes from Alex Gauna - UBS.

Alex Gauna - UBS Warburg

Yes, thank you. Bill, you mentioned that gross margin came in slightly below what you had guided, but is it still above for this past quarter, that 50% to 52% target?

I was wondering also if you could repeat that number on the cash you spent on share buyback, and if there were any other significant uses of cash in the quarter.

Bill Ruehle

First of all, Alex, unfortunately I am quite limited as to what I can say in terms of any guidance on numbers since we've announced that we will most likely the issuing restated financials. I can't give you any more guidance than what I have.

What I said in the call was that it was slightly more than what we had anticipated. What we had anticipated was between 10 and 20 basis points.

Cash for share buyback was $152 million. We purchased 4.2 million shares in this quarter, which gives us 6.3 million shares repurchased on a year-to-date basis.

Other than that, the primary uses of cash in the quarter were the larger than expected build-up in receivables and inventories. We commented specifically on the inventories that we expect that will all come back into us this next quarter.

Alex Gauna - UBS Warburg

Okay. In terms of visibility into that Q4 recovery that you anticipate, if we go back to you looking out in the back half of '05 you looked into early '06, you thought there would be some seasonality; it didn't manifest.

What kept you from seeing this downturn here in the September quarter? What was it that changed over the course of the quarter? You mentioned the areas, but maybe how it progressed. What kind of visibility do you have in that snapback that you're anticipating in Q4?

Scott McGregor

I think the growth in Q4 is made up of a number of factors. One is the expectation that we will consume the excess inventory across the channel within Q3. We have reasonable expectation based on that by the order rates, and we certainly see that in the decline in the revenue in Q3. It comes back in Q4.

We also see things like 802.11n where you had a sudden channel fill, and then a softening and then a pickup again as the PC thing comes in. Some those are pretty specific to what's happened just recently. I think it would have been hard to see those back that long ago.

Alex Gauna - UBS Warburg

Okay. Speaking on n specifically, what kind of average selling prices are you seeing in that market as it hits these new volume levels?

Scott McGregor

We are seeing $15 to $20, in that range, on current prices.

Alex Gauna - UBS Warburg

How long do you think you can sustain that? Does that look good through year-end right now, best you're able to discern?

Scott McGregor

Alex, probably not. Right now, we have the best product out there and that's what has really propelled our design wins and given us the predominate share of the high volume wins. I think, as other vendors come out and get their solutions working, there will be some price pressure on that, but we've been able to hold that so far.

Alex Gauna - UBS Warburg

On the digital television you were mentioning the uptake here. How many OEMs or how many design wins are we talking about moving into the second half of the year?

Scott McGregor

Well, I can't give you a specific number there, but I said Korea, China and Japan, so that's three top-tier ones right there, and we do have additional ones beside that.

Alex Gauna - UBS Warburg

Okay, thank you.

Operator

Our next question comes from Ross Seymore - Deutsche Bank.

Ross Seymore - Deutsche Bank

Hi guys. You went to great lengths and it was very helpful to get all the inventory adjustments product line by product line. But if you look through that to the end markets themselves, it sounds like most of your description is about an inventory adjustment with your part specifically. Is there anything you are seeing on end demand that gives you any pause right now?

Scott McGregor

Well you know, it's a struggle. There's a lot of stuff going on in the world right now between oil prices, interest rates, conflict. Those are things that usually could threaten end demand. So far, we don't see anything. We saw a number of our customers report so far and had reasonably good quarters and reasonable guidance, so we don't see anything specific to point out yet, but I think there's room for paranoia.

Ross Seymore - Deutsche Bank

On the Bluetooth side of things, to get back to some specific product lines, you talked about some rebalancing with existing customers. Was that a situation where you were having a hard time keeping up with the demand they had and now you have overshot it? Or is there something going on where they are either multi-sourcing or something along those lines?

Scott McGregor

Those are different phenomena. I think there were some model transitions and some difficulty keeping up, as you said before.

In terms of other people coming on, we have one large customer where we have a 100% market share today, and we don't expect to keep that going forward; that would be unrealistic to expect. However, we do believe that our growth with new customers will more than offset any market share loss we have in a single customer.

Ross Seymore - Deutsche Bank

Then that new customer, is the Bluetooth FM radio going to be what enables you to target that new customer, or are they going to take product before that specific combo device rolls out?

Scott McGregor

I believe the Bluetooth FM part is an exciting part; it has given us access to new customers that we didn't have before, and we do have high expectations for that part.

Ross Seymore - Deutsche Bank

Okay. One final question on the OpEx side of things for Bill -- I know you really can't talk about the expenses per sae, but given the shortfall in the third quarter and the expected rebound, what generally are you going to be trying to do with OpEx during that timeframe?

Bill Ruehle

Clearly, we will be moderating a rate of increase of the OpEx. I did indicate we would still be increasing as Scott cited, some TAM and SAM numbers earlier and there's a tremendous growth opportunity. So, as always, we will do the best job we can to balance, continuing to invest in the future and preserving our business model in the short term.

I think our track record on that has been pretty good; any time we've fallen off the model at all, we've recovered from it pretty quickly. So we keep that balance in mind, Ross, and will continue to.

Ross Seymore - Deutsche Bank

Great, thank you.

Operator

Our next question comes from Ambrish Srivastava, BMO Capital Markets.

Ambrish Srivastava - BMO Capital Markets

Thanks. What gives you the confidence, Bill? You've had these issues before and yes, you do have the track record that you come back sooner than most guys. But sitting here with the kind of adjustments you are seeing, why should we believe that this thing should recover in one quarter, given it seems to be pretty widespread in several segments as opposed to one or two? I recall last time, they was very specific stuff going on with Server Works and so on and so forth.

Bill Ruehle

There are more items this time, Ambrish, and each of them is of much smaller volume. We do have reasonable visibility into what's happening through the balance of the year. Scott made reference earlier to strong design win momentum and that's important, as we expect new designs to be coming in.

In particular, I highlighted the digital TV as an area that we expect in fact in Q3 that will be strong as well as in Q4. Some other product cycles that we see happening are things such as the Bluetooth/FM combination and the converged NIC now coming out now that the Intel platform is out that that fits in with.

So we have a number of things going on and within our 20 lines of business, almost all of them were up in the most recent quarter. In the next quarter, probably about half of them are going to be flat to down and about half will be up. Then by the fourth quarter, we think we will be back to where we are now right in Q2.

Ambrish Srivastava - BMO Capital Markets

Okay. Well, I don't doubt the design wins. What I'm trying to understand is it just seems to be a little bit more widespread.

The second question on DBS, you mentioned that it was down. Do you expect DBS to recover in the third and the fourth quarter as well?

Bill Ruehle

Yes, we do.

Ambrish Srivastava - BMO Capital Markets

Then one final question on the inventory issue. If we look through the balance of the year, where do you see the inventory normalizing to as we exit Q3?

Bill Ruehle

I would just say that, by the end of the year, we are probably back in the turns rate that we've been accustomed to, which is in the 7 to 8 times.

Ambrish Srivastava - BMO Capital Markets

Great, thanks.

Operator

Our next question comes from Mark Edelstone - Morgan Stanley.

Mark Edelstone - Morgan Stanley

Good afternoon, guys. A couple of questions. You guys started out giving some guidance on what the TAM and the SAM looks like. Obviously the SAM is growing at a much more rapid pace. Is there a knee of a curve there or is that basically a linear type of increase as you go through the next three years?

Scott McGregor

It's basically a linear type of increase, Mark.

Mark Edelstone - Morgan Stanley

Then Bill, in your prepared comments, you talked about your large handset customer at the 2.5G level basically end of life. What is your content like going forward with that particular customer? Are there other follow-on products into their 2.5G platforms?

Bill Ruehle

Yes, there are some other products going on with that customer, and I didn't mean to imply they were end of life. I think what I said it's the end of the high-volume portion of their life, so there still is ongoing business. I think that was another case where they got a little bit ahead of themselves with some inventory, so that's going to cause a little bit of a pause for Q3 but we expect some of that comes back in Q4, along with some other accounts and some 3G business.

Mark Edelstone - Morgan Stanley

Then just lastly, looking at your gross margin guidance here for Q3, basically it sounds like it will be in the middle of what your long-term target or range has been. So if we make the assumption that that's like a 150 basis point decline quarter-to-quarter, how much of that is being explained the mix and how much of that is being explained by the fact that you've already got forward pricing in at customers and you are now going to have to basically satisfy that demand with inventory that you've built on the balance sheet at a higher cost than what you might otherwise would have had if sales met your expectations?

Bill Ruehle

Yes, that's always more difficult to sort out than you might expect and I am particularly constrained right now because I really can't say much about margins. I would say that both those factors that you mentioned are important. They are both important.

Mark Edelstone - Morgan Stanley

Should we think about the mix with the biggest factor there being that the switching business is expected to still be weak in the third quarter?

Bill Ruehle

Well, what I said was product mix/product transition. We have some actually early product cycles ramping right now, where as we discussed in the past, usually in the early stages of product ramp, we don't have the best margins. We have product optimized for time-to-market and not for cost, and so the sweet spot will be when we get into the high-volume portion of that market and have our second gen of product that is more cost-reduced.

So, that's at least as important a factor as which particular product lines may be shipping more or less.

Mark Edelstone - Morgan Stanley

Okay, thanks a lot, guys.

Operator

Our next question comes from Roy Ruben - Pacific Crest Securities.

Roy Ruben - Pacific Crest Securities

Thanks for taking my question. Scott, on Bluetooth, have you seen any significant changes in the pricing environment as we enter the second half?

Scott McGregor

Actually, Bluetooth has firmed up a little bit. There was a pretty significant ASP decline over the last year or so; I think it has firmed up a little bit. You know, over time it will continue to decline as we move to different process geometries and integrate more different functions.

I think, if you look out a couple of years, you're not going to find very many Bluetooth-only chips; you're going to find integrated Bluetooth/Wireless LAN, FM radio and other things.

Roy Ruben - Pacific Crest Securities

Great. Can you give us an idea of what type of ASP premium you may be able to charge on the Bluetooth plus FM tuner that's coming out?

Scott McGregor

Well, the FM tuners generally are selling in the market for about $1. So if you have to split some of that with the vendor, you can sort of get a sense of that.

Roy Ruben - Pacific Crest Securities

On the TV products that you talked about, Tier 1 customers, can you give us an idea or detail on the types of TVs that you're gaining traction in, i.e. screen sizes, et cetera?

Scott McGregor

It's amazingly broad-based. It's CRT, plasma and LCD and model ranges from, gosh, I don't know, sub-20 inches to more than 40 inches, actually more than 50 inches. So it's quite a range.

Roy Ruben - Pacific Crest Securities

Thank you.

Operator

Our next question comes from Arnab Chanda - Lehman Brothers.

Arnab Chanda - Lehman Brothers

A couple questions, one for Bill. Bill, in 2005, you saw some gross margin benefit because of wafer pricing as you saw an '04 downturn. Did the guidance you are giving, especially going forward should we assume margins to be basically where they are in Q3, or do you think you can gain some benefit from that?

Bill Ruehle

As always, Arnab, there were the offsetting factors. It's too far out to predict just yet now as to whether that's going to cause us to actually have a nice increase in margins as we experienced in 2005, or whether that will just stabilize the margins at where they are.

The important thing here is it's been at least four quarters since we've seen any pricing flexibility at all out of the foundries. The good news is we didn't have to take price increases although we had some back-end price increases imposed on us.

Our customers always expect to get their quarterly ASP reductions, and so service has acted against us. So the fact that by Q4 we're starting to see some capability for maybe some reduced foundry pricing, that's the first good news we've had in there for about a year.

Arnab Chanda - Lehman Brothers

Thanks, Bill. I just have a follow-up, maybe for Scott. Two questions, one on handsets, it seems like there are certain customers that you had a few years ago, the Chinese players plus Sony Ericsson. You are starting to talk about some the Tier 1 guys. Has there been a change in focus there? Therefore, are we going to go through a lull and then an increase?

Scott McGregor

I would say that's a good characterization. We focused on 3G, and we stopped focusing on some of the smaller customers. We went after the top-tier customers with 3G, and so by moving away from the focus on 2G and the smaller customers, we are now sort of in that lull where some of our 2G business is winding down and our 3G business has not yet ramped up. So, that's exactly the challenge in that business.

The good news is I feel pretty good about our traction in 3G and with the top-tier customers. We've had a very good reception from them as a set, and so I feel pretty optimistic about that business going forward.

Arnab Chanda - Lehman Brothers

One more qualitative question, maybe for both of you, Scott and Bill. It seems like that the semiconductor industry obviously goes through the downturn better than others, perhaps. But it seems like this, from your discussion at least on your revenue side, will be one quarter downturn or one quarter correction.

Is there anything qualitatively different now than in the past that you see, that you could share with us? Maybe part of the second quarter, by month, or just so that we can feel better about your clarity on the fact that it will be over in Q3?

Scott McGregor

A couple of things here, Arnab. The first big downturn of course was in 2001, and this is nothing like that. That was industry-wide and it took a long time for the entire industry to recover. In fact, we were one of the first semi companies to get back above our 2000 revenue level when that came up; that took forever.

The next time we had a significant downturn was in the fourth quarter of 2004, and a big piece of that was the Server Works business that fell away, as we had predicted a year-and-a-half earlier and never came back, nor do we expect it to. Although we're getting slight benefits each quarter now from that business. Also, much of that particular time period was characterized by one very large customer having a big fall-off.

We seem much less intense reductions in anybody's inventory at this point, from what we've seen before, and a lot of places where there's no inventory issue at all and some very positive product cycles coming on. So I think those are the principal things that are different.

Arnab Chanda - Lehman Brothers

Thanks, guys.

Operator

Our next question comes from Charlie Glavin - Needham & Co.

Charlie Glavin - Needham & Co.

Thanks. Scott, you indicated certainly the Wireless LAN you've got a bit of a shift going on right now. Recently you announced that you had shipped 1 million of the Intensi-fis. Can you give some sort of indication of what you may get with the actual consumption of that 1 million shipments as it represents in the industry, not just Broadcom specifically?

Scott McGregor

In other words, what was the total number of units shipped in the industry?

Charlie Glavin - Needham & Co.

Well, what was your feel that, say, even using your own 1 million units shipments, what would you gauge was the actual end consumption through the retail market, as opposed to shipments into it?

Scott McGregor

You know, I don't have perfect data on that, but I would say just the numbers sold through to date is a fraction of the million, and a lot of that was indeed channel fill so that people could have product on the shelf.

Again, I think it's this next wave when you start getting companies like Dell and Acer and others launching product that have the same end technology in it. That's when people will get the comfort, because then it makes sense to buy an access point to go with the laptop you just got that has an end solution in it. Those are the kind of things I think that are going to drive serious volume.

Charlie Glavin - Needham & Co.

In terms of shipments, maybe you know specifically between Dell, Acer, Lenovo, all announcing and building products on it, in the back-to-school period you're not seeing some of the pick-up; are you just saying that it's not enough to offset that slight pause between the initial retail channel fill?

Scott McGregor

The Dell and Acer shipments are very recent, so I think it will take a little while until those come out. That's just like in the last week. So I think it will take a couple of months before that really hits stride.

I think the other thing that's going to happen is a lot of the thud and a lot of the concern about is this solid technology will go away once people see that you can take a vendor Dell, which is extremely reputable, and tie that together with somebody like Linksys for an access point, and put those together and get great performance. I think that kind of stuff is going to drive volume once people see that and it's real.

Charlie Glavin - Needham & Co.

I agree, particularly given Dell used your product on the same day that Neutrino was launched. But moving onto the DSL market, Scott you indicated a particular strength there. Can you give a little more clarity in terms of how much of this came from some of the newer VDSL2 versus ADSL, maybe by geography?

You've also seen a pickup more of the multimode where people are looking at maybe not just the ADSL2 and VDSL2 but also looking to bundle your NPUs. Is that some of the shipments you see now or is that more within the design win phase?

Scott McGregor

Yes, today, the business is really driven on ADSL2+, and that's the bulk of that. It's fairly well distributed worldwide, certainly Europe and Asia being very strong in that space, Europe especially.

Going forward, VDSL will be more important there, and again, we are seeing great follow-on opportunities with some of our ADSL2+ customers to move in the road map to VDSL.

Then as you point out, there's an obvious follow-on where you can add things such as Wireless LAN and some of our other products, switches and what not, that make sense because that really becomes much more of an integrated market, where you want to provide a full access point, maybe a triple-play or a quadruple-play access point. Broadcom is unique in that we have all of the those technologies and can integrate that and create a composite solution for people.

Charlie Glavin - Needham & Co.

Then lastly, you talked about some of the rebalancing but was any of the shortfall looking to the second half due to some end customers having problems with their own designs getting out? There's been a lot of chatter that a couple of your main customers have had fits and starts in terms of launching of new products ahead of the holiday period. Was any of that disruption to original guidance in some of your prebuilds?

Scott McGregor

Yes, I can't really comment on specific customers there but yes, it's a mix of things.

Charlie Glavin - Needham & Co.

Got it. Thanks, Scott.

Operator

Our next question comes from Seogju Lee, Goldman Sachs.

Seogju Lee - Goldman Sachs

Thanks. Bill, I think at one point you mentioned that mobile multimedia had some inventory correction in Q3, but I might have missed how you thought that would progress in Q3 and Q4.

Bill Ruehle

Yes, we did say that there was some inventory correction there.

Scott McGregor

But we expect that in Q3 and Q4 to grow.

Bill Ruehle

Yes.

Seogju Lee - Goldman Sachs

Okay, great. Then, in terms of the DTV ramp for you, should I expect that as you progress through Q3 and Q4, that you will be at a full run rate as you exit Q4? And then it will fluctuate with normal sort of seasonality, or how do you expect that to ramp?

Scott McGregor

Oh, not at all. I would say we are in an early ramp in Q3 and Q4. I think we have a lot more to go in 2007. I would expect, between this year and next year, I would expect triple-digit sequential.

Seogju Lee - Goldman Sachs

Okay, great. In terms of the stock repurchase plans, how is that impacted, if at all, by the delays in the filings of the 10-Qs and the ongoing options investigation?

Bill Ruehle

That's not impacted at all.

Seogju Lee - Goldman Sachs

Okay, great. Good luck.

Operator

Our next question comes from Srini Pajjuri - Merrill Lynch.

Srini Pajjuri - Merrill Lynch

Thank you. Just a clarification first. Bill, did you say that Q4 revenues will be higher than Q2 and Q3 or is it just Q3?

Bill Ruehle

No, I said we expect them to be higher than Q2. They [inaudible] higher than Q3, obviously.

Srini Pajjuri - Merrill Lynch

Yes. Okay, thanks for the clarification. On the networking front, you said the controller business of a strong, despite what seems like a weaker PC market, but the switching side, could you give us a little bit more color as to what's going on? Is it just an inventory or Cisco's lean manufacturing is having any impact on that?

Scott McGregor

No, it has nothing to do with Cisco's lean program. What we see there is things like C-NIC and some of the other products beginning to roll out and driving higher end products for us, increasing ASPs.

Srini Pajjuri - Merrill Lynch

Okay. Then on the 3G front, the 3G front, Scott, any color as to how many more models do you expect your customers to launch this year and next year?

Scott McGregor

No, I'm sorry. I can't give you that kind of information. The best I'm going to be able to do is say I feel good about the traction we are getting with customers.

Srini Pajjuri - Merrill Lynch

Okay. Then one final one on Bluetooth. It seems like the handset demand is fairly healthy. I'm just wondering if the penetration of Bluetooth is somewhat slowing down. Is that what's causing the inventory build or is there something else going on?

Scott McGregor

No, I don't see that. We see the uptake of Bluetooth, the attach rate of Bluetooth in handsets continuing to grow. I think some of the handset customers made some of their numbers with lower-end models, which would not have as likely a Bluetooth attach on them, but the general trend is up on that and will continue to go up as Bluetooth continues to come down in price and customers demand it as a feature they want.

So, we see the Bluetooth business going forward as quite healthy. As we get additional customers, as the attach rate goes up and as we have the opportunity to create bundles of Bluetooth and additional technologies together to great higher end chips.

Operator

Our next question comes from David Wu - Global Crown Capital.

David Wu - Global Crown Capital

Yes, can you talk a little bit more about this television business that you're in? Do you supply the whole chain, the front end, back-end, in an SoC chip or is it just one part of a television solution? I guess there are a couple of incumbents in the LCD screen. What do you attribute your ability to beat out a Trident or ATI Technologies?

Henry Samueli

This is Henry. I can answer that. The solution we have is a complete front-end and back-end solution. On the front end, demodulator as well as all the back-end video, decoder and signal processing, image signal processing functions, all integrated on a single chip.

What gives us the ability to beat out some of the incumbents there is our strong legacy in set-top box technology. We have been the leader in cable and set-top box front-end and back-end solutions, and the DTV solutions are very similar to what you need in a set-top box, so we were able to leverage all of that R&D investment over the last ten years in set-top boxes to develop our single-chip DTV solutions to come out with the most integrated solutions in the world.

Scott McGregor

A good example, one of our customers has an existing solution that uses three boards and by going to Broadcom, they got one relatively small board and saved $20 in bill of materials, which in a TV set is huge.

David Wu - Global Crown Capital

Thank you.

Operator

Our next question comes from Adam Benjamin - Jefferies & Co.

Adam Benjamin - Jefferies & Co.

Thanks. You guys talked a lot about 802.11n and that initial ramp. Can you talk a little bit about what you are seeing in the 802.11g space?

Scott McGregor

Well, thanks for asking that, because in Q2, we saw strength trend in our g business as well, so I would say that the double-digit growth we saw in Q2 was about half attributed to strength in g and the rest was the launch of n, so that business is alive and healthy.

We see that business having a lot of legs going forward, because not only do we have n but Broadcom will also roll out a family of embedded products over the course of the year that will start becoming available as well.

Adam Benjamin - Jefferies & Co.

Was that strength generally due to share shifts or largely just end-market strength?

Scott McGregor

I would say probably a combination of both.

Adam Benjamin - Jefferies & Co.

Okay. Just a follow-up on the TV questions. I don't want to beat a dead horse here, but with respect to TVs, when do you expect that to be say 5% of the broadband division?

Scott McGregor

That's not a dead horse, that's a galloping horse. No, we don't break it out, so I will decline to speculate on when it's 5%, but we see that as a growth driver definitely for us going forward, 2006-2007.

Adam Benjamin - Jefferies & Co.

You can't give any kind timeframe as to when you would likely see that kind of growth?

Henry Samueli

No, at most what we are going to be able to do is talk about the platforms as our customers bring them to market.

Adam Benjamin - Jefferies & Co.

Okay, thanks a lot.

Operator

Our next question comes from Jeff Palmer - Friedman, Billings, Ramsey.

Jeff Palmer - Friedman, Billings, Ramsey

Most of my questions have been asked and answered, but I will try to dig in on two here. Scott, can you give a little more color on the Bluetooth situation? I guess I might be slow and I'm just not quite understanding your comment on the situation this quarter.

Scott McGregor

Say more. What don't you understand or what would you like to know more about?

Jeff Palmer - Friedman, Billings, Ramsey

Well, it sounds like the Bluetooth business has a temporary lull, as you described it, but is there share shifts or what is actually going on in that business, given that the handset volumes for most of the vendors were pretty robust this quarter?

Scott McGregor

Yes. In Q2, we don't expect any share shifts. We think it's just an inventory overshoot. Some of the very rapid growth we saw contributed to that. But we see ongoing growth for Bluetooth going forward. We see this as a relatively temporary lull, a little bit in Q2, a little bit in Q3 but then we see solid growth from there. It is not a share shift. We didn't see any share shift in Q2.

Jeff Palmer - Friedman, Billings, Ramsey

Okay, so your large customer that you noted that you do have 100% share on, that was not loss of share there? That was just temporary ordering patterns?

Scott McGregor

We don't believe that was a factor in Q2. That could become a factor in Q3 and Q4 but as I said before, that's more than offset by additional gains we will have in other customers.

Jeff Palmer - Friedman, Billings, Ramsey

Okay. Can you give us some color on HSDPA? Are you actually shipping products now to customers for revenue, or are you just at a design win stage at this point? And maybe an outlook for how that's going to play out over the next several quarters?

Scott McGregor

We are sampling a chip at this point. We don't actually have revenue shipments on HSDPA, but we do have what we believe is the best technology out there. We are the only ones with a single monolithic HSDPA chip. There's some other guys out there with a dual-package system, two chips in a SIP, but we've got a single monolithic chip that does that and that's pretty good technology. We think it can be both price effective and it is significantly smaller than some of the other solutions, which is a factor in these phones. So again, we have design wins at this point but not revenue yet.

Jeff Palmer - Friedman, Billings, Ramsey

Okay. Then moving over to the Wireless LAN segment, you commented earlier about the strength in g. Do you expect, at some point in the next few quarters, that you might get an actual slowdown or kind of a pause as consumers say why buy g if I can wait for n, which is just about here?

Scott McGregor

So far, there's a significant price difference between n and g, so I think they both have their market niches. You know, in the long run, I expect most of the PC market to convert over to n. It's just a better technology; it has longer reach and significantly better performance.

I think, as the n solutions get tuned up and as the price starts coming down, it will be the logical successor to g. I think the g technology will persist longer in the embedded space or the portable space, where power consumption is the primary factor. They don't necessarily need the high-performance that you get with n.

Jeff Palmer - Friedman, Billings, Ramsey

Okay. I think that will do it for me for right now. Thank you very much.

Operator

Our next question comes from Bill Lewis – JP Morgan.

Bill Lewis - JP Morgan

Thank you. I'd like to ask a bit about the set-top box business. Bill, could you talk about what drove the decline in DBS, how the outlook is there? Then on the cable set-top box side, that has remained strong and has been very strong. How have your shipments into that compared to end consumption? Essentially, do you run the risk that there might be an inventory build coming in that end market?

Bill Ruehle

So first of all, Bill, in terms of the DBS business, I think there was a little bit of an overshoot on inventories there at actually a couple of customers. We expect that that's going to turn around fairly quickly. It was a minor shift, as I said.

In terms of cable set-top box, yes, that business has been robust and periodically there have been inventory issues on that. It's difficult see whether there might be something.

Scott McGregor

Well, remember that the growth is not entirely driven by units; it's being driven also by ASP increase with more voice penetration, so that doesn't lead you to inventory issues if your growth is coming from ASP increase. So that helps us in that space.

Bill Lewis - JP Morgan

So essentially you have kind of done the analysis on sell in versus consumption and feel comfortable where the inventory is there?

Bill Ruehle

Yes.

Bill Lewis - JP Morgan

Then one last question if I could. Just back on gross margins, has there been a change in any pricing trends? For example, you're guiding gross margins lower next quarter, you know, but the cost side I don't imagine is changing a lot. Is there a change in some of the pricing trends?

Then I guess related to that, at what point are you going to be able to layer in lower wafer cost pricing, assuming that it takes time to work its way through your inventory and financials? Is that something that can start to contribute positively in the fourth quarter or is that really next year?

Bill Ruehle

First of all, in terms of pricing trends, I would say it's pretty much as it normally is. If anything, maybe there's a little less pricing pressure right at the moment. But we have so many product lines on average across the board, it really isn't particularly meaningful.

In terms of when we could get new pricing incorporated, it would be obviously with new wafer starts and typically it's about a 12-weeks cycle time, so we could start to see some of those benefits in the fourth quarter, probably more than in the first quarter.

Bill Lewis - JP Morgan

Okay. All right, thank you very much.

Operator

Our next question comes from Shelby Seyrafi - Kaufman Brothers.

Shelby Seyrafi - Kaufman Brothers

Yes, thank you very much. So, you're guiding for 900 million. That's down around 4% sequentially in the September quarter. Can you help us with the three major buckets, what kind of sequential growth rates we should be thinking about for those three buckets?

Bill Ruehle

No, we typically don't give that kind of granularity on our guidance.

Shelby Seyrafi - Kaufman Brothers

But I mean, you've talked about the fastest-growing segment. For example, you said mobile and wireless last quarter. Any kind of comment like that?

Scott McGregor

I think, at a very high level, each one of them will be flat to down slightly on a Q-to-Q basis.

Shelby Seyrafi - Kaufman Brothers

Okay. On the inventory build, it looks like you had builds at Bluetooth, mobile multimedia, DBS, Ethernet switching. Two questions here. What else am I missing in the inventory build? Secondly, why do you think so many segments had the inventory build? Was there a quick slowdown in demand? How can you be so confident it's going to turn around?

Bill Ruehle

There are different situations in the different areas. First of all, if you take a look at the DSL area, that one was actually as a result of a very rapid ramp we had to get from nowhere in that market to arguably the number one position in a fairly short period of time, and a lot of pressure from our customers as they kept increasing their demand forecasts.

This always happens. Whenever there is a shortage, people tend to over-order a little bit because they don't want to get caught short again, and they overreact and then there's some working off period. So that was definitely the case in the DSL business.

In the Ethernet switching business, I think it was probably a little more broadly based. That's something that Wall Street has been talking about now for quite some time, and that's one of the cycles that happens in that business. That is a more generalized trend. In our case, in the baseband handset business, we have currently a very small base of customers in that space, so for one customer to be doing a model transition is painful for us in that space.

It would be unusual. You know, in any given quarter, there's something like this going on someplace. It's unusual to have it hit in three places all at once, just as we've had some other unusual situations earlier in the year where everything was just going very strongly all at once.

Typically, most of the businesses are up and a couple of them are down. We've had cases this year where they have all been up, and now we have a case coming up in this next quarter where maybe about half of them are going to be down on this pause.

My experience in the networking business, the third quarter is always a slow quarter.

Shelby Seyrafi - Kaufman Brothers

Thank you.

Operator

That was our final question. We will now close the Q&A session and I will turn the call over to Scott McGregor for closing comments.

Scott McGregor

Before we end the call, I wanted to reiterate the takeaways from the discussion we had today. I hope you got an appreciation for the large, diverse and growing opportunities we have at Broadcom. We spent a considerable amount of time talking about the rebalancing activities that do have a negative impact in Q3, but I hope you also got an appreciation for the design win momentum and favorable product cycles that are driving us in Q4 to see those revenues ahead of what we reported in Q2.

Also, as our end markets and end products are converging, we believe that Broadcom's competitive situation does continue to improve, which gives us a good story for the future.

So with that, thank you very much. I will end the call. Thank you for joining us today.

Operator

Ladies and gentlemen, this concludes today's conference. Thank you for participating. You may now disconnect.

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Source: Broadcom Corporation Q2 2006 Earnings Conference Call Transcript (BRCM)
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