Broadcom's Management Presents at 2013 Credit Suisse US Technology Conference (Transcript)

Dec. 3.13 | About: Broadcom Limited (AVGO)

Broadcom Corporation (BRCM) 2013 Credit Suisse US Technology Conference December 3, 2013 3:30 PM ET

Executives

Eric Brandt - EVP and CFO

Analysts

Unidentified Analyst

Good afternoon. When we get started with this afternoon session, it’s my pleasure to introduce Eric Brandt, the Chief Financial Officer of Broadcom Corporation. We are going to go through a fireside chat. We will open-up to the room for questions. So please don’t be shy, but Eric I will kick things off. I doubt there is very few people in the room that aren’t acclimated to the Broadcom story, but maybe you can spend just two minutes to kind of positioning the Company, the key end markets, sort of the strategy within each end market, whether it’s a growth strategy or return strategy or both?

Eric Brandt

Sure. So we operate in three business segments. We operate in a Broadband business segment, which we’re the market leader in set-top boxes, whether that’s satellite or cable or even IP set-top boxes. We also in that segment do broadband access, which includes cable modems, DSL modems, PON etcetera and again the leader in that market as well.

We -- our second segment is Infrastructure, that is principally sort of switching processors, data center, enterprise, service providers, sort of all of the backhaul, if you will, of a lot of the traffic and communication technology. And then the third segment which makes up about half of the company is the Mobile & Wireless segment that is made up of connectivity piece which is Wi-Fi, Bluetooth, NFC, GPS, combo-chips and a baseband segment which -- in which we participate in 3G and now with the acquisition of Renesas on the LTE side.

I’d say that historically the company’s strategy really has been one drum, which is integration of technology and I think that as a company we have focused on rather than competing for sockets more along the lines of integrating people’s technology or removing the socket from the board and building some of the most sophisticated and integrated SoCs and you can see that certainly in some of the business as we’ve been in the longest -- broadband and in the infrastructure side of our business.

What I would also say is that in terms of the strategy of the businesses, I think the company has always been sort of designed around growth and our metrics as a company about a third of our bonus pool was tied to outgrowing the market and we’re very sensitive to outgrowing the market.

Having said that, I think that we’re trying to optimize profitability, in the second third of our bonus pool metrics is around profitability. If you look at the performance we’ve seen in our segment, certainly in the broadband infrastructure segments, they’re quite strong from a -- from an economic standpoint. I think even in Mobile & Wireless you could sort of adjust for the baseband investment you would see that segment is quite strong as well.

So the industry has been relatively flat over the last couple of years. We have outperformed the industry over that time period. And I’d say that in that period we’ve focused both on growth and on profitability.

Unidentified Analyst

Eric may be starting from least controversial and moving to a little bit more controversial, and the least controversial side is the broadband business. As you mentioned, you guys are the market share leader, how do we think about the growth drivers in that business and you’ve done a great job on the cost side. Is there more to come around strength, integration from a cost perspective to drive better profitability there?

Eric Brandt

The broadband team works all the time to try to drive cost out of the product and I think that they’ve been probably over the last of couple of years one of the best at doing so and their gross margins improved as a result and whether that’s optical shrinks or better design or more efficient designs. Certainly they have been very, very focused on and I think there is more to come and that will continue to focus on it.

From a growth perspective, really two things that drive the growth for broadband. The first being additional content standards, which typically has an up charge in the chip, so whether that things like HEVC or vectoring or G.fast or DOCSIS 3.1, all of those things are ultra HD, all of those things add content and some value to the chip. And in fact if you look at set-top box, price performance is actually for chip, the ASPs are actually relatively flat, up slightly over the last couple of years as a result of the content.

I’d say the other vector for growth for broadband is in developing markets, expanding last couple of years really China and India, more now I would say in Latin America, in Russia, starting to do Africa as well, certainly in Latin America, seeing particularly strong uptick in Brazil with some of the high-end highest functionality set-top boxes as they get ready for the World Cup and Olympics.

Unidentified Analyst

How should we think about the longer term growth in that business?

Eric Brandt

Historically that business has sort of been a low to mid single digit grow or it tends to be lumpy. It has certain years where it can grow as much as 10 and some years which is flat and sort of tends to match certain cycles both in terms of deployment of new standards and new functionality as well as opening up with new markets. I think that that continues certainly over the top actually, people talk a lot about over the top. Its actually somewhat additive, its not one-for-one, because you’ve more sort of media servers and most servers in the house and most people actually have both kinds of servers coming into the home. And there are in some cases smaller boxes as the cable guys are putting things out. So I think sort of low to mid single digits is probably a reasonable assumption for broadband and ongoing business.

Unidentified Analyst

Moving on to networking, you guys have put up a couple of really strong sequential growth quarters in that business and you had a large customer come out report Cisco and kind of – put water on the flames a bit relative to the overall market. Kind of curious how should we think about Cisco guidance versus your drivers in that business? Is there a perfect overlap or are you benefiting in areas that perhaps Cisco is not or help us understand that a little bit?

Eric Brandt

I’d say that the Venn diagram does not completely overlap certainly in the one of the places that they showed some weakness, which was on the set-top box side, which is principally an ASIC business. We don’t participate in that and I think our set-top box business has done reasonably well.

On the infrastructure side, there really isn’t a one-to-one match. We are certainly doing well on a number of switches where we’re being included in the merchant products and there have been discussion about that. Our data center business, which is about 30% of our mix has been strong, really cloud based data center. And to the extent that there has been international expansion, our position with people like Huawei and ZTE is quite strong and I think we benefited from that. So I don’t think there is a complete one-to-one match and certainly the results that they reported in the quarter and guided into the next quarter would have shown up in our Q3 results, because typically we ship about a quarter in advance.

Unidentified Analyst

Lot of buzz that I hear about you guys related to SDN, when I go into the Valley and talk to a lot of SDN companies, they love your switches; they love what you’re doing. How should we think about your leverage to the whole software defined network scene?

Eric Brandt

Yes, we think of it as very much as the foundation to a software defined networks and what software defined networking allows people to do is disaggregation of the entire solution into things that are either customized or tailored to the specific need. But at the core of that is the switching chip that we provide and I think the quality of that chip is -- has actually enabled people to do more and particularly as you look at sort of the cloud based providers who are actually optimizing networks for specific things and have the sophistication and buying power to build the kind of boxes they want to build and so its actually been -- it’s probably been a couple of years coming, but I would say its actually beginning to really take off and I think we’re seeing it not just in sort of Web 2.0 kind of companies, but you’re seeing companies that operate very large data centers and we were talking last night about investment banks and other people whose CIOs are now beginning to do that themselves.

Unidentified Analyst

Is there way to quantify the size of SDN within the network and business and/or as you move from proprietary network to more of a software defined network, what your SAM might do?

Eric Brandt

It’s hard, I mean, I’d say that it’s certainly the fastest growing component. It’s probably gone from 20% of our mix to 30% of our mix. It’s hard to say how big it will be, but I think what it winds up doing is it winds up moving a bunch of the ASIC part of the market into the merchant part of the market and so just think of it as a sort of a movement across the one to the other.

Unidentified Analyst

Update on NetLogic, acquisition that was probably conceived properly, you get argue may be you bought at the wrong time or at the wrong price as relative to the cycle. Where are we now relative to the integration NetLogic and kind of your happiness with the acquisition?

Eric Brandt

I’d say from a price standpoint, we did buy it at the high point in the market. The market sort of got soft right after we bought it and I think that you could see that, that we probably paid more I think at the time than today we’d have like to be paid. Having said that, I’d say that having a processor business is an important part of our strategy and our mix, it enables us to go into other parts of the market, broaden our stand, move more into the base station side of the house. And I think if we hadn’t done at the time we did, we would still be sitting here today thinking about doing it and people would be asking us about it.

In terms of the technology and the performance of the parts, I would say the business that we bought last quarter was the strongest it’s ever been. The technology and the key points are in terms of technology and performance and tape-outs and new products are pretty much hitting things spot on. So I would say that if I were to assess where are we, I would say that we did a good job in assessing the products, we did a good job on picking the right technology. I would say that our ability to figure out where the top part of the market is and where it was going to roll off was not very good. Having said that, I would say that in amassing technology, I think we bought the right asset.

Unidentified Analyst

Similar question to the broadband. How do we think about the longer term growth there and historically growth of the segment has been fairly lumpy, fits and starts. Do we have any hope of having a smoother growth pattern in this business or that’s just the dynamic of the business we’ve to learn to live with?

Eric Brandt

It’s hard for me to come up with a reason why it would smooth out. But by the same token it’s hard for me to understand why it’s lumpy. Historically it is what it is and those who don’t understand history are doomed to repeat it and its been a fairly lumpy business tied to I think rollouts and whether their rollouts have new standards in different countries or opportunities to pick up meaningful market share on technology transitions. Those was typically been the growth cycles and then sort of digestion and then followed by the next growth cycle.

Unidentified Analyst

When you think about mobile and wireless, as I’m sure it’s your favorite topic off late, break that down between connectivity and baseband. Let’s start on the connectivity side. Big success story, dominant market share, especially with the high-end of the market, I think one of the concerns that I hear from investors is given your market share, given some of the concern that may be high-end smartphone unit growth because is either decelerating or is saturated. How do we think about you growing the business from here given your footprint already?

Eric Brandt

Well, look I think that there is still a growth cycle as there is a transition from end to AC. AC has penetrated probably in the 30s to 40s on the router side, but on the handset side probably in the low double-digits and these things are typically sort of three year cycles. In addition there are more technologies coming and whether it’s 2x2 MIMO migrating its way through tablets down to smaller screens or additional features will provide, I think that will provide growth. I think if you look at the internet of things, you’re going to see things every thing connected. And some of those things where power won’t will matter like your washing machine and your refrigerator, which will communicate with the smart grid or your car perhaps less so, but in places where there is a lot of sensitivity on wearable technology, sensing medical and those sorts of things, having the most efficient technology, the smallest [ph] die size, the most power efficient products going to become very, very important, because many of these things will run on coin cell -- coin size -- coin cell size batteries or smaller.

Unidentified Analyst

As you think about exploiting the mid range to the low end of the handset market, how should we think about your desire and capability to get into that part of the market?

Eric Brandt

Well, a lot of the mid range and lower end of the market is platform sell and so a lot of what we’re trying to do in expanding our position on the baseband side is what drags along the connectivity benefit as well. And I think where we win the baseband in the vast, vast majority not to take an overuse term; we actually carry the connectivity with us. Because I think in a lot of those cases it's a good enough market and also quite frankly in a number of those cases there aren’t sufficient R&D resources at the OEM to actually do that integration. They’re relying on us to do the integration across the chipset for our connectivity, our baseband and our applications processor. In the high-end of the market a little different, where you’re actually looking for the best functionality of the part and it's driven off of the fact that the connectivity often provides a large part of the user experience probably more so than the cellular side.

Unidentified Analyst

Getting into the baseband; heavy investment in LTE over the last several year’s; hard to think doubling down with the Renesas Acquisition, but clearly kind of accelerating the investments with the Renesas Acquisition. The key question is; what kind of timeline do you have to bring real product down to the market. You guys have been pretty vocal about being pragmatic about this business. What kind of milestones are you looking at to measure success or lack thereof?

Eric Brandt

So, we talked about products in the first part of next year. We haven't changed our view. We’ll provide an update on that next week at our Analyst Day in New York. But we have a whole series of milestones and whether that’s launch of products into the market like the dual-core SoC that we acquired or the sampling and ultimately the commercialization of a quad-core version of that part in the middle of next year and bringing an integrated thin modem with leading edge technology Cat 6, VoLTE, Envelop Tracking, Carrier Aggregation et cetera sort of mid third quarter of next year and sampling that product next year. Those are sort of real sort of milestones I think that you’ll probably get to see as an investor. Some of the internal milestones will be things like design win momentum. I’m tracking both revenue, gross margin; operating expense’s associated with the business. We’ve been reasonably successful, I would say quite successful in Q4 in taking some of the costs out that we expect that we would take out in the first quarter, taking them out in the fourth quarter. So now I think we’re sort of down to the real revenue traction, the product traction and whether that yields the kind of margins in business we’re excited about.

Unidentified Analyst

Do you think you’ll have a complete enough product portfolio in front of customers by the end of next year to be able to assess the viability of the business longer term?

Eric Brandt

Yes, I think we do. I think I loathe to put a timeline on anything, but I would say that, that we’ll have enough data points I think on the revenue side which will include design win estimates, pricing and margin estimates and what we intent to spend from an R&D perspective to begin to figure out whether those lines match the economic cases we built to do the acquisition and make the investment we’re making. And to the extent that they are, I think that that’s great. It drives meaningful leverage and drives real value and as a result we’re a 100% committed. To the extent that it does not, we would naturally reassess where we are.

Unidentified Analyst

How important is the baseband success to the connectivity business longer term?

Eric Brandt

There is some connection certainly in the good enough part of the market and certainly where we sell our parts. Now we have relatively low market share so that connection is not that high. I would say for a number of other customers who don’t have connectivity we are the connectivity partner of choice. I think on the high end, we continue to bring out features and functionality which define our products, if not the best, some of the best in the market and we would continue to do so.

Certainly if we weren’t in the baseband market we might actually have additional money to spend on the R&D on connectivity to continue to drive that roadmap forward, faster and continue to drive the integration forward and faster. But it's possible that someone could eat into that. I think there is some reset if you’re not in the baseband business, but then you sort of have a connectivity business that serves the high-end of the market, that serves the embedded market, that serves the access point market and maybe doesn’t serve that midrange of the smartphone market.

Unidentified Analyst

Free the acquisition of Renesas, you historically talked about 300 to 600 basis point operating margin that’s kind of the magnitude of investment in the baseband business. That’s probably gone up a little bit after Renesas; we’ll see where that sits at the end of 2014. I hope its better. But if you think about kind of the scenario where you’re pragmatic and you get out of the baseband business; how do we as investors think about recouping some of those costs back?

Eric Brandt

Well, I mean look, with exiting any business and we’ve done it before. We exited our Digital TV business and Blu-ray business. You don’t get a 100% of the amount of money you’re spending on. There’s certainly some shared overhead that’s embedded in the numbers and whether that’s IT or real estate et cetera. There’s also central engineering and some operational cost. I think that, when we did Digital TV it was around 40% of what the spent was that actually dropped out of the P&L. My guess is; it will be in that range, but I don’t know. I can’t use a specific number, because I haven't done the math. Because there’s a fair amount of people that we have spending time and resource’s on modems, on processors, on a variety of things that are just baseband specific. And I guess that we would take some although nowhere nearer the level, some amount of that money certainly and reinvest it in places like infrastructure where the ROIs are very, very high. Time line is a little longer, but the ROIs are very, very high. Well we’ve sort of chosen to be very tight in this period of time where we are in the investment window.

Unidentified Analyst

One of the things I hear is that even successful in the LTE market given what the pricing dynamic in 3G has done, there’s sort of concern of what the terminal margins might be for the industry. One, what's your view on that and kind of what's the acceptable margins you need to see for that to be a viable business within your portfolio of businesses?

Eric Brandt

Yes, it's hard to predict the kinds of inflections that competitive dynamics change in a market, and I'll give you a couple of examples. We were in the -- we are in the DSL business, TI was in the DSL business with us and told people that nobody made any money in this business and exited the business. DSL turns out to be one of our more attractive businesses. It may not be a fast growing business, but the margins aren’t bad in the business. Same thing was true in Bluetooth, right? Bluetooth was a tough business. There were many calls to get out of Bluetooth. We hung-in in Bluetooth. We drove a better product. We drove integration, and today Bluetooth is one of our best businesses. And almost the exact same thing is true on Wi-Fi. And Wi-Fi probably in the early days there might have been a half of dozen competitors or more.

Today there is probably four competitors that are meaningful in terms of technology. Three of them which actually have the majority of the market and over that period of time over the last five years, gross margins have probably expanded 500 basis points and operating margins have expanded even more than that. Now that is the model we are hoping we get out of Cellular and LTE. What is hard to predict is whether it actually plays that way and the competitive dynamic behaves that way in the market? I think if the market settles down in terms of sort of two key technology players Qualcomm and -- whoever and is and I believe it will be us. And probably a player in the Asian and developing markets like MediaTech, the market could conceivably settle down that way.

Principally because much of the technology based choices would sort of reside between the two competitors. If it doesn’t and it behaves in a way you describe from a margin perspective it won't be attractive, because again the economic model is built on a total revenue number, a gross margin number and an expense number. So any one of those things getting way out of whack and just drove the whole model off and as a result you have to reassess the position. We discussed earlier today sort of some brought up the content of, over the next year you got 10 envelops that you’re probably going to open. And maybe all 10 will come in the next 12 months. Maybe seven or eight of them will come in the next 12 months. You’ll have to wait for two of them and therefore you’ll have to wait and I think the answer is maybe yes, maybe no. If you open seven of the envelopes and five of them are good and two of them are really bad, you could conclude that it's the wrong answer.

If all seven of them are good or six of the seven are good and the one that’s bad is not that bad, you could see if you want to open the other envelops. I think it will play itself out, and again you have to plot the data points against what your expectations are to determine what trend line you’re really aren’t to determine whether you’re going to create the value you think you’re going to create.

Unidentified Analyst

Any question in the audience. You have time for probably one or two quick questions if there are any. Eric, my last question then; you’ve done a great job since joining Broadcom on the stock based compensation side. Historically this has been a company where engineers, employee’s, wealth is tied to the stock performance. This is not been a great stock performance year unfortunately. How should we think about SPC stock grants and future dilution relative to kind of comp this year and going forward?

Eric Brandt

I don’t think our philosophy changes. I mean certainly we’re cognizant than ever but at the end of the day we're running a business and we’re trying to deliver a set of economics and just because you don’t deliver the set of economics in a particular year you don’t change your comp systems to do so. What you hope is, is that what you compensate now at a relatively low price you grow out and deliver meaningful results and people get better economics than they would have gotten had it not done what it did. And I think there are many of our employees that are patient to see how this plays out. I think patient’s obviously has a limit for everyone. But we are very cognizant of it. I don’t think we’re going to change. In fact I know we’re not going to change our philosophy in terms of granting. I think we tried very hard to move stock based compensation down. It's come down quite a bit, and I suspect it will continue to come down.

Unidentified Analyst

Great. With that we’ve ended our time in this session. But I would like to thank everyone especially Eric for joining this afternoon.

Eric Brandt

Thank you.

Unidentified Analyst

Thank you.

Question-and-Answer Session

[No formal Q&A for this event]

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