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Broadcom (NASDAQ:BRCM)

Q4 2013 Results Earnings Call

January 30, 2014, 4:45 p.m. ET

Executives

Chris Zegarelli - Director of Investor Relations

Scott McGregor - Chief Executive Officer, President and Director

Eric Brandt - Chief Financial Officer and Executive Vice President

Analysts

Harlan Sur - JPMorgan

Vivek Arya - Bank of America Merrill Lynch

Joseph Moore - Morgan Stanley

Ross Seymore - Deutsche Bank

Srini Pajjuri - CLSA Securities

Romit Shah - Nomura

Mark Lipacis - Jefferies

Stephen Chin - UBS

Timothy Arcuri - Cowen & Company

Craig Ellis - B. Riley

Christopher Rolland - FBR Capital Markets

Glen Yeung - Citigroup

John Pitzer - Credit Suisse

Jim Schneider - Goldman Sachs

Edward Snyder - Charter Equity

Doug Freedman - RBC Capital Markets

David Wong - Wells Fargo

Alex Guana - JMP Securities

Ruben Roy - Mizuho Securities

Ambrish Srivastava - BMO Capital Markets

Hans Mosesmann - Raymond James

Operator

Welcome to the Broadcom Q4 2013 earnings call. [Operator instructions.] I will now turn the call over to Chris Zegarelli. Mr. Zegarelli, you may begin.

Chris Zegarelli

Thank you, operator, and good afternoon, everyone. Today's call will include prepared remarks by Scott McGregor, our president and chief executive officer; and Eric Brandt, our executive vice president and chief financial officer.

This call will include forward-looking statements which are subject to risks and uncertainties that could cause Broadcom's results to differ materially and adversely from management's current expectations.

We encourage you to review the cautionary statements and risk factors contained in the earnings release, which was furnished to the SEC today and is available on our website and in our most recent annual reports on form 10-K. We undertake no obligation to revise or update publicly any forward-looking statements to reflect future events or circumstances.

Additionally, throughout this call, we will be discussing certain non-GAAP financial measures. Today's earnings release and the related current report on Form 8-K describe the differences between our non-GAAP and GAAP reporting and present a reconciliation between the two for the periods reported in the release.

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

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

Scott McGregor

Good afternoon, and thanks for joining us. Broadcom performed well in the December quarter, delivering revenue above the high end of the guided range. As a result, EPS for the quarter also come in ahead of First Call consensus on both a GAAP and non-GAAP basis.

Looking forward, we’re excited about progress we’re making on a number of fronts. In the home, we’re setting the stage for ultra HD and leading the industry with best-in-class HEVC-enabled products across our set top box franchise.

We see continued momentum in new areas, including share gains in PON and small cell. In infrastructure, we see continued momentum in our data center business, driven by the continued ramp of our industry-leading Trident II Ethernet switch. In the hand, we are building momentum in LTE. We see the industry continuing to migrate towards richer connectivity content, including 5G wifi and MIMO technologies as well as low power integrated connectivity for wearables and the Internet of Things.

I’ll go into these items in more detail later in the call, but I’d like to first turn the call over to Eric for details on our fourth quarter results and our first quarter guidance. Eric?

Eric Brandt

Thanks, Scott. As Chris mentioned, please refer to the data breakout in the investor section of our website for additional information that will supplement my financial commentary.

Moving to the financial overview, to summarize, total revenue came in at $2.06 billion, down 3.8% sequentially and down 0.8% year over year. Full year revenue was $8.31 billion. Full year product revenue was $8.22 billion, up over 5% year over year.

Q4 non-GAAP product gross margin was down 100 basis points from Q3 to 52.6%. Q4 GAAP product gross margin was 50.3%. Non-GAAP R&D plus SG&A expenses were up $32 million sequentially, while GAAP R&D plus SG&A expenses were up $25 million.

Q4 non-GAAP EPS was $0.60 per share, or $0.03 above the First Call consensus of $0.57 per share. Q4 GAAP EPS was $0.29 per share, which includes $0.14 of acquisition related and restructuring charges.

Cash flow from operations for Q4 was $391 million. Our cash and marketable securities balance at the end of the quarter was $4.4 billion.

Moving to revenue and gross margin, in December we updated our guided range for Q4 product revenue to be between $2 billion and $2.05 billion. We delivered revenue slightly above that range at $2.06 billion. Our broadband communications segment decreased roughly 3% sequentially to $548 million, consistent with our expectations.

Revenue from our infrastructure and networking segment came in ahead of expectations, and increased roughly 2% sequentially to $576 million. This stronger than expected result was driven by Ethernet switch and PHY, primarily in the enterprise and service provider markets. Our mobile and wireless segment decreased roughly 7% sequentially to $940 million, consistent with our expectations.

Our Q4 non-GAAP product gross margin came in below our revised expectations, and was down 100 basis points from Q3 to 52.6%. Gross margin was negatively impacted by higher than expected excess and obsolete inventory of around 50 basis points. Our Q4 GAAP product gross margin was down from Q3 to 50.3%.

Moving to operating expenses, total non-GAAP R&D and SG&A expenses for Q4 were up $32 million from Q3 levels, which is at the low end of the updated guided range provided in December, principally driven by lower than expected costs from the Renaissance acquisition. On a GAAP basis, R&D and SG&A expenses for Q4 were up $25 million from Q3 levels.

Moving to restructuring costs, as discussed on last quarter’s call, in Q3 we initiated a global restructuring plan that resulted in recording additional restructuring costs of $17 million in Q4. We anticipate that we will record approximately $5 million in restructuring costs in Q1. For further discussion, please see our 10-K that we anticipate filing today.

Moving to the balance sheet, cash and marketable securities ended Q4 at $4.4 billion. This reflects cash flow from operations of $391 million, and our dividend payment of $64 million. We ended the quarter with roughly $2 billion in U.S. cash. Our accounts receivable days sales outstanding were 35 days in Q4. In addition, net inventory turns were 7.8 in Q4.

In 2013, we repurchased 20.2 million shares, well ahead of our target for the year. In addition, the board of directors approved a 9% increase in our quarterly dividend.

Moving to expectations, we currently expect net revenue in Q1 to be $1.9 billion to $2.0 billion. From a segment perspective, we expect broadband and infrastructure to be down slightly, and mobile and wireless to be down.

We expect Q1 non-GAAP product gross margin to be down roughly 50 to 100 basis points and GAAP product gross margin to be down roughly 100 to 150 basis points, driven principally by mix within mobile and wireless and for GAAP product gross margin an increase in acquisition related purchased intangibles.

We expect non-GAAP R&D and SG&A expenses in Q1 to be up $15 million to $35 million, driven principally by the annual fringe and merit step ups of roughly $35 million. GAAP R&D and SG&A should increase $20 million to $40 million.

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

Scott McGregor

Thanks, Eric. Starting with the home platform, our broadband communications revenue came in at $548 million, down roughly 3% sequentially. We saw solid growth in sales of our set top box products in 2013, driven by share gains and subscriber growth in developing markets and the ramp of higher end solutions in developed countries.

We see these trends continuing into 2014. In developing markets, we continue to broaden our footprint with new operators in new regions. In developed markets, we see the ecosystem firmly committed to deploying ultra HD. Operators are showing strong interest in HEVC, which doubles the capacity of existing networks, setting the stage for ultra HD broadcast.

Content providers are moving towards ultra HD with the World Cup and Olympics. Falling prices for ultra HD TVs are making it more affordable for consumers to adopt this new technology, with 50-inch ultra HD TV prices now below $1,000.

Broadcom innovations are a key contributor to the ultra HD ecosystem. We announced the industry’s first set top box SOC for ultra HD and HEVC early last year and are currently sampling multiple HEVC solutions for satellite, cable, and IP set top box deployments.

This upgrade cycle of both HEVC and ultra HD will be coupled with continued growth in the number of tuners and the number of transcoding streams enabled in the next generation set top box platforms, all of which set the stage for continued content growth for Broadcom in this market.

In broadband access, we continue to focus on innovation and execution. This quarter, we announced a new entry level DSL SOC for residential gateways that delivers higher data rates while reducing CPE costs. The SOC supports ADSL, VDSL2, and vectoring, while powering a platform that includes Broadcom Ethernet and wifi technology.

In PON, we continue to see share gains and solid design activity. In small cells, we see strong customer traction with our multimode 8 LTE and 3G small cell devices. Looking into Q1, as Eric said, we expect our broadband business to be down slightly sequentially.

Moving to infrastructure, we saw roughly 2% sequential growth in the quarter to a new record quarterly high of $576 million, ahead of our initial expectations. Upside in the quarter was driven by stronger than expected sales in the service provider and enterprise markets. Our infrastructure business grew roughly24% year over year in Q4, and a solid 12% overall in 2013.

Our data center business grew over 50% year over year in the December quarter, and more than 25% in 2013. Our data center business is at record levels and now generates roughly a third of our infrastructure sales. Look forward, we expect to see continued strength in the data center market as we’re in the early stages of the Trident II switch ramp, and we see very strong customer momentum.

Our multicore processor business grew sequentially in the December quarter, and we expect that growth will continue in Q1. Momentum in this business has been driven primarily by LTE base station deployments, particularly in China.

We see our multicore processor business continuing to grow in 2014, based on momentum in LTE deployments as well as the continued ramp of our 40 nanometer XLP products. As we look into Q1, we expect our infrastructure and networking business to be down slightly sequentially.

Moving to our hand platform, our mobile and wireless revenue came in consistent with our expectations at $940 million, down roughly 7% sequentially. We saw expected seasonal softness in the December quarter, coupled with anticipated inventory adjustments with some of our customers.

In cellular SOCs, we’re building momentum in LTE and compared to make good progress on our LTE milestones. We have begun shipping our CAT4 dual core LTE SOC for volume production. We’re on track to sample our quad core LTE SOC in the first half of this year and to sample our CAT6 LTE advanced thin modem by the middle of the year. We have engagements with multiple customers on LTE designs.

In connectivity, we remain focused on driving leading edge technology into tablets and smartphones. We see the cadence of new connectivity features continuing into 2014, with broadening adoption of 2x2 MIMO technology across multiple classes of devices.

We also see continued penetration of 5G wifi as well as other differentiating connectivity features that will come to market over the next 12 to 18 months. As we outlined at analyst day, Broadcom connectivity is smaller, lower power, and higher performance than competing solutions. This level of differentiation enables us to maintain our strong footprint in connectivity, especially for leadership devices.

We also continue to build momentum around the Internet of Things and wearables, with our WICED and WICED Smart connectivity platforms. We’re engaged with multiple customers across multiple end markets. For example, we have the vast majority of major appliance brands, multiple health monitoring devices, 14 different fitness companies, 7 thermostat companies, and multiple smart watch suppliers.

We continue to see good growth potential in the Internet of Things, and firmly believe that the connectivity portion is the ideal low power technology to enable this nascent market. Looking into Q1, we see our mobile and wireless business trending down sequentially due both to seasonality and some continued modest channel inventory.

In summary, we saw strength exiting 2013, particularly in our infrastructure business. Looking into 2014, we’re building momentum in LTE, setting the stage for ultra HD, and continuing to power the world’s service provider and data center networks with our highly differentiated switch and processor offerings, positioning Broadcom for competitive differentiation and long term growth.

This concludes our prepared comments, and now we’re ready for your questions. Operator, may we have the first question please?

Question-and-Answer Session

Operator

[Operator instructions.] Your first question is from Harlan Sur with JPMorgan.

Harlan Sur - JPMorgan

Great to see the production ramp of your 4G solution into your lead customer this quarter. I think the natural follow on question would be with carrier qualifications under your belt, you’ve got a tier one customer shipping in production into a number of different markets globally. Question is, are you starting to expand your 4G wins into more platforms with your lead customer? And have you managed to secure wins with other customers with your LTE platform?

Scott McGregor

I can’t comment on specific customers, but I can say that we have multiple designs in each of multiple customers at this point. So I believe we’re seeing pretty good customer traction. It’s a good product. I think the customers recognize it competitive in the space, and so I expect we’ll see multiple customers delivering products in the market over the next number of quarters, towards the end of this year and into next year, expanding.

Harlan Sur - JPMorgan

And on the opex front, it’s good to see the continued focus on optimization and discipline. If you can just kind of help us understand what’s driving the lower step up in opex in Q1, and I think you mentioned at your analyst day that you expect opex to trend flattish to slightly down from the Q1 levels for the remainder of the year? Is that how we should continue to think about it?

Eric Brandt

In Q1, the fringe and merit was pretty much what we thought. It’s roughly $35-36 million in Q1. The guide, what’s going on underneath it, is as we’ve sort of gone through the restructuring, we have lower employee costs as a result of having somewhat lower employees on a run rate basis going into Q1, offset by some increased [mask] spending in Q1. So that’s sort of the moving pieces underneath it.

As I said on analysts day, I can’t really guide across the year. We’re trying to manage things extraordinarily tightly. We will have some wraparound of merit in Q2, but other than that, nothing new to report.

Operator

The next question is from Vivek Arya of Bank of America.

Vivek Arya - Bank of America Merrill Lynch

I wanted to talk about the gross margins, first on Q4 and then on Q1. On Q4, I’m sort of surprised why margins were a little below, I think despite the favorable mix. And I think you had mentioned an inventory charge. What’s special about those inventory charges that they’re not factored into the original outlook? I just wanted to understand the puts and takes there. And then I had a similar question on Q1 gross margins.

Eric Brandt

On analyst day, we had anticipated roughly 25 basis points of impact from E&O. And at the end of the quarter, we had, principally driven by a quality issue coming out of the fab, which has been rectified, which as a result, we reserved those parts. So it was a late reserve, and it was roughly 50 basis points. And so it was kind of a surprise to us as a one-time event in the quarter. Absent that, we would have been on the better end of the guided range.

Vivek Arya - Bank of America Merrill Lynch

So maybe as a follow up, even if I add back the 50 basis points, you would have still seen a sequential decline on gross margins, even though you had the favorable mix. And sort of to follow on to that, on the Q1 gross margin, I think you had mentioned the mix within mobile and wireless as the reason for the margin decline. If you could give us some more color on what about the mix in mobile and wireless is driving those margins lower?

Eric Brandt

You are correct. From a business unit perspective, there is a margin tailwind with the strength in the infrastructure business vis-à-vis the mobile business.

Within the mobile business, there is a pretty significant price competition within the cellular component on 3G, and I think most people know that. And unfortunately for us, without the ramp yet, or meaningful ramp, of 4G into our numbers, we feel that. And both the strength in cellular in Q1 vis-à-vis connectivity and the pricing pressure in 3G, that’s what’s affecting the gross margin, and affecting the gross margin sufficiently to give the aggregated gross margin that we gave for the guidance.

Operator

The next question is from Joe Moore of Morgan Stanley.

Joseph Moore - Morgan Stanley

Your competitor, Qualcomm, last night talked about 200 AC sockets. I guess that’s a lot. I wanted to give you a chance to respond to that, if you want to.

Scott McGregor

I don’t know whether that’s the correct number or not, so I’ll decline to challenge that. We certainly have focused on the high end phones, and high volume phones, and I think Broadcom has done a great job of winning the key phones in the market. And I expect to see continued strength over the course of this year.

Joseph Moore - Morgan Stanley

And anything you can tell us in terms of thinking about the size of the LTE business in the first quarter? Is it a meaningful impact on the sequential, or is it still kind of relatively small?

Scott McGregor

It’s small in the first quarter, and as I said at analyst day, we’re looking for something like nine digits over the course of this year. So we do expect it to ramp significantly, especially towards the second half.

Operator

Our next question is from Ross Seymore of Deutsche Bank.

Ross Seymore - Deutsche Bank

Could you tell me a bit on the trajectory we should expect in general for Trident II? I know you’re not going to guide specifically for one product, but where are we in the rollout of that? Early days? Middle of the game? Any sort of color on that would be helpful.

Scott McGregor

It’s definitely early days in the rollout of Trident. I think there was a little bit of pent-up demand, because everybody had designed that chip into their products, so it got off to a fairly quick launch. But what typically happens in a lot of these sites is they’ll deploy a relatively small number as a test, and then they’ll deploy more as they get comfortable with the product, and they see what it can really do. So I’d say it’s early days in the Trident II ramp.

Ross Seymore - Deutsche Bank

And I guess as my follow up, one for Eric. I know you said about $65 million of impact from Renaissance was your goal in the fourth quarter. It looks like you might have been lower than that. How should we think about that restructuring driven opex decline as we go through 2014? Is there a different shape to it now that the starting point appears to be a little bit lower?

Eric Brandt

Good question. Recall that we originally expected $75 million in Q4 when we did the deal, about $0.12 of EPS. And actually we were closer to $0.09, so right around $50 million to $55 million in terms of expenditures. So we were able to remove the costs quicker in terms of integrating the two organizations, and now that the integration is sort of done between the two organizations, I expect that that cost drop will be relatively flat in the first half of the year, so not as much, because we took a lot of it out of Q4, and probably more, again, towards the back half of the year.

Ross Seymore - Deutsche Bank

With the same ending point?

Eric Brandt

Yes, we are unchanged in our ending point.

Operator

The next question is from Srini Pajjuri with CLSA Research.

Srini Pajjuri - CLSA Securities

Eric, if I look at the margins for the mobile business, I think they went from double digits a couple of quarters ago to low single digits this quarter. Just wondering, I think you told us that Renaissance will be neutral by end of this year. And first of all, is it still on track? And then if that happens, where can we expect the overall margin for the mobile business to go by the end of this year?

Eric Brandt

There’s no material change to our view in terms of the accretion dilution associated with Renaissance in 2014. Naturally, it will depend on the rate and pace of the ramp of the design wins that Scott mentioned earlier.

In terms of the OI number for mobile and wireless as we end the year, I can’t even begin to guide that number at this point. We’re probably very early in that stage, and the slope of that line will have a very significant impact of what the OI will look like towards the end of the year.

Srini Pajjuri - CLSA Securities

And then Scott, you talked about ultra HD and HEVC. I’m just curious, do we need ultra HD to take off for HEVC to ramp for you?

Scott McGregor

That’s an insightful question, because a lot of people assume that there’s a one to one relationship between those. What HEVC does is it really gives you a factor of two better compression, so you can transmit twice as many channels in the same bandwidth.

So we have a lot of customers interested in it, just so that they can pack in more HD channels or they can get better efficiency. If you’re an over the top set top box maker, you get a factor of two fewer bits transmitted across the Ethernet. So much better download speeds and reliability for people at home with fixed bandwidths.

So I think we’re going to see a very broad adoption of HEVC regardless of whether ultra HD takes off. Now, that being said, we believe that ultra HD is really going to catch fire here. Unlike some of the 3D technologies and other things of the past, it doesn’t require special glasses, and it’s not super high price. The prices are coming down very fast on that. And if you see it, it’s visually quite dramatic.

So I think the next step in that is really a combination of getting the infrastructure in place where we play a role, and we’ve seen very good traction with customers, and then for the content to start showing up. And I think you’re going to see it with some of these premium sports events, some of the soccer events and Olympics and other things.

But it’s interesting also because there’s other technology coming to play that really takes existing Blu-Ray media and other media and takes advantage of that higher resolution and better chroma capabilities and other things. So I think from a visual point of view, these TV sets are going to be pretty compelling, and with the price not too high, I think people will jump on them. But Broadcom is definitely going to benefit no matter what, because the HEVC, in its own right, is compelling to get that factor of two better compression.

Srini Pajjuri - CLSA Securities

Any guesses on the timing of the ramp for HEVC for you?

Scott McGregor

It will start towards the end of this year. We’ve got some customers with some initial deployments, but it really starts ramping towards the end of this year, and next year I think it’s substantially larger for us. It’s a multiyear beneficial trend for us, because it will mean a replacement of existing set top boxes, existing [unintelligible] equipment, and so it allows us to really get a replacement cycle on the capital there.

Most of the carriers are going to phase it in, so probably initially offer premium based services, and then you’ll get a new box, and then over time they’ll deploy that, probably close to 100% of their base, replacing the older boxes, just because they want that factor of two better transmission.

Operator

The next question is from Romit Shah with Nomura.

Romit Shah - Nomura

Baseband was a drag on revenue last year. I’m kind of curious how you see the split between 3G and 4G here in the first quarter. And should we assume that the 3G business stabilizes from here?

Scott McGregor

Actually, our 3G business grew last year, so it was not a drag on revenue, it was actually a growing element for us. We saw significant growth in our 3G business. In terms of what it does this year, I think we’re doing well on a unit basis. We’ve seen some pricing pressure in the market, so I think you’ll see higher than normal ASP declines in the 3G business. And so that’s important for us as we ramp up the LTE business, and why it’s important to get those LTE products out quickly over the course of this year.

Operator

The next question is from Mark Lipacis with Jefferies.

Mark Lipacis - Jefferies

The networking business is better than you expected. Is this due primarily to, you mentioned Trident. But is there something broader going on? Do you think the industry is just spending more in this area? Or is this just due to a great product cycle in Trident?

Scott McGregor

In the fourth quarter, the reason we saw higher than expected growth was due to service provider and the enterprise space. But actually, the fastest grower overall, although not faster than we thought, was the data center space. And we’re just seeing really good pickup in a lot of things. I think Broadcom has some excellent technical cycles on our products there. We’re seeing increased spending for cloud data centers. The enterprise market is beginning to show some life. I think people are beginning to start upgrading and replacing equipment.

And then the service provider business is definitely strong. The rollout of LTE base stations in China is very much underway, and Broadcom has secured wins not just for switches, but also for back haul, for processors, and a variety of other technologies, in these base stations that are being deployed across China. And we expect multiple additional waves to come after that. So this is not a just this year thing. This is a multiyear phenomenon. So we see very good strength in the infrastructure business overall, and we expect to see strong business in that this year as well.

Operator

Our next question is from Stephen Chin with UBS.

Stephen Chin - UBS

The question I had mainly was on the connectivity business, and some of the opportunities for growth in 2014. Scott, you mentioned the Internet of Things. I know that’s still a very new area. But I was kind of wondering if you see a certain pattern shaping up in terms of design win cycles and when revenue ramps would be for certain types of products that you’re currently being designed into and maybe in discussions with.

Scott McGregor

The Internet of Things is definitely an interesting market for us, and I mentioned that we’re in almost every major appliance and all kinds of things. I mean, 7 different thermostats, that’s good. And it’s kind of hard to forecast how fast that market is going to grow.

I think we’ll definitely see some benefit of that over the course of this year, and definitely over the next few years. But the real driver on our connectivity business this year is going to be from the 5G wifi, the 2x2 MIMO technologies. That’s probably the biggest driver. And I think, unlike last year, where our connectivity business was relatively flat across the year, this year we see it much more as a second half much larger than first half phenomenon.

So I think you’ll see relatively muted growth in the first half, but we see very strong growth in the second half based on expected deployments of customers ramping in those devices, which have higher ASPs for us. So as you model our connectivity business, definitely much stronger second half, driven by those two technologies in particular.

Operator

The next question is from Timothy Arcuri of Cowen & Company.

Timothy Arcuri - Cowen & Company

I had a question on the buyback. You generated about $500 million in free cash flow, but virtually nothing from a buyback point of view this quarter, when your stock was at pretty low levels during the quarter. Was there a particular reason for that? And what can we expect on that front going forward?

Eric Brandt

As I mentioned, we bought back $600 million worth of stock this year, and with the dividends, we returned over 100% of the capital. We’ve bought back a small amount of shares in the quarter. What I didn’t mention in my prepared remarks was, we actually had a debt repayment in the quarter. Remember, we had the $300 million bond, which is U.S. cash? And with Q1 being sort of the low revenue quarter and the high opex quarter, we were just being a little prudent on U.S. cash flow. So as I mentioned, we returned literally over 100% of our U.S. cash flow this year.

Operator

The next question comes from Craig Ellis of B. Riley.

Craig Ellis - B. Riley

Scott, I believe it was Bob Rango at analyst day that said he thought connectivity would grow year on year in calendar ’14. Is the company still expecting year on year growth? And if so, what are the specific drivers to that growth?

Scott McGregor

We believe that the 5G wifi and 2x2 MIMO are going to contribute substantially, and again, as I answered a previous question, we see that as a second half predominantly phenomenon for that to really kick into full gear.

You know, we have to caveat that we can’t judge the exact ramp and rate and introductions of all these different products from our customers. But we still are forecasting that our connectivity business is going to grow this year.

Operator

Our next question is from Christopher Rolland with FBR Capital Markets.

Christopher Rolland - FBR Capital Markets

Can you guys talk about mix in the infrastructure segment. Trident II and NetLogic are certainly probably higher value parts for you guys. So is it fair to say we could see a mix up there? And I know you don’t guide by gross margins, you guys break out top margins in your 10-Q, but do you think it’s fair to say that that could be going up from here in ’14 and ’15?

Scott McGregor

The margins in infrastructure have been relatively stable. There are various puts and takes on that. Some things on the low end. So to the extent that we are selling more on high end, and particularly some of the high end processor things, there is certainly a tailwind benefit to that, and some of the optical products as well. But it’s been pretty consistent, actually, almost rock solid, across ’13, and I suspect similarly in ’14 as well.

Operator

The next question is from Glen Yeung with Citigroup.

Glen Yeung - Citigroup

You guys talked a bit about China wireless infrastructure helping you out in the quarter, and a lot of other companies have. What’s your sense as to the shape of what that business will look like for you over the course of the year?

Scott McGregor

The China infrastructure business is in waves of offerings to a broad set of their suppliers, many of which byproducts from us. And it looks like multiple tranches each of hundreds of thousands of base stations that are going to be deployed across China. And so the initial tranche is out there and is being procured, and we expect there’ll be multiple follow-ons to that.

And that’s China Mobile. And then we expect a number of the other Chinese infrastructure players to get involved as well. So I think it’s a multiyear phenomenon. Certainly we’ve seen the first tranche, and it’s been rolling out as we expected. And I believe there will be follow-on, both within China Mobile and others.

Operator

The next question is from John Pitzer of Credit Suisse.

John Pitzer - Credit Suisse

Quick clarification and a question. On the clarification side, just given some of the prepared comments around the mix headwinds intramobile in Q1, is it fair to say connectivity down more than cellular sequentially in the March quarter?

And then secondly, this is the second or third consecutive quarter where pricing pressure in 3G has been kind of an issue on gross margins. Kind of curious, what cost down plans do you have in that business? How should we think about 3G gross margins throughout the year, and at what point do you just get to a level where it starts to make sense to walk away from business?

Scott McGregor

In terms of 3G gross margins, I think they’ll continue to be under pressure for the rest of this year. I don’t see that suddenly letting up. I mean, obviously we won’t sell things below where we make money on them, but how much money we make on them is definitely challenged. I think this really underscores, and our strategy is to ramp into 4G in LTE products, and we think that’s a better place to be and where we can really show our competitiveness, and we put our energies into that market.

We expect to continue to sell 3G products for the course of this year. Whether we continue to sell them in future years will depend on whether we think we can make money and get a good return on incremental investment in that space.

Eric Brandt

And to answer your question on relative mix within NWG, yes, the cellular business is relatively stronger within NWG than WCC, or connectivity is, in the first quarter.

Operator

The next question is from Jim Schneider with Goldman Sachs.

Jim Schneider - Goldman Sachs

On the baseband business for a moment, understanding you don’t want to talk about the pipeline of design wins, but do you feel you have full visibility on at least the dual core LTE design wins for the rest of calendar 2014 in terms of new SKUs? And then can you tell us whether you expect to see any quad core LTE revenue contributing in 2014?

Scott McGregor

We have visibility on the designs we’ve won already. We expect to win additional designs this year, though. I think as we get later into the year, whether they can still actually ship them in this year, or whether it’s an early next year event starts to get more challenged. We do believe that we’re going to be winning new designs with that product over the course of this year. We’ve got a number of customers who are, we think, close to making design commits on that.

Quad core, we’ll have to see. It’s certainly possible for people to ship that before the end of the year, but I think if they do, it’s not going to be a meaningful revenue contributor this year. I think you’d see next year for quad core.

Operator

The next question is from Edward Snyder with Charter Equity.

Edward Snyder - Charter Equity

On the connectivity, it seems to be the case, or our checks suggest, that there may be more pricing pressure than there has been historically. I know you’ve spoken to that on 3G. Could you update us on how the pricing is going in connectivity with Qualcomm out there trying to give it away on their solution?

And then secondly, on [dot AC] solution, which will obviously be in some iconic phones this year, how confident are you of a second half ramp in that product? We’re hearing there’s a couple of different people in the running for one of the big phones released in the second half of the year, although Broadcom leads. You indicated that you expect a big ramp. Is that something you think is definitely going to happen, might happen, or you’re still in the design process and not sure yet?

Scott McGregor

I think the connectivity pricing is reflecting that people have not rolled out the AC and the 2x2 MIMO particularly quickly at this point, and that that’s more of a second half of this year phenomenon. So I would expect our ASP to go up in the second half of the year as opposed to the pricing pressure as you describe it now. So our competitive strength, I think, will show substantially better in the second half.

In terms of visibility and where are we on design wins, generally at this point in the year, customers are pretty committed on what they’re going to ship this year. So I would say our confidence on where we’ve won and where we’ve not won is pretty good.

Operator

Our next question is from Doug Freedman of RBC Capital Markets.

Doug Freedman - RBC Capital Markets

When I look at your results versus the guidance or the upside at the midpoint, you beat by a little bit more than $40 million, yet the upside you cited in infrastructure is about 12. Where was the other strength that surprised you intraquarter?

Eric Brandt

I would say that there was a little bit more strength in mobile, in cellular in particular, than we had anticipated. But the majority was in the infrastructure space.

Doug Freedman - RBC Capital Markets

And then if I could focus in on the mobile and wireless, Scott, you gave a nice answer just there on what was taking place within the ASPs on combo side. What’s it going to take for us to see sort of ASPs start to lift with the launch of LTE and sort of higher content platforms on the cellular side?

Scott McGregor

LTE is a big factor for us there. Our lowest price LTE product is significantly above our highest price 3G product, and so it’s definitely an ASP mix pickup as we launch LTE, and that’s really key, I think, to getting this business in good shape, is getting a good, strong launch with LTE this year. And we believe we’ve won a number of high volume designs, and our expectation is that we should be able to deliver our goals this year, based on the designs we’ve already won.

And of course we’re always looking for some more upside on that, but we need to carry that forward into next year. And we’ve got a lot of new products coming out this year. We’ve told you about some of them, which include not only the quad core, the CAT4, but moving to CAT6 and moving to full SOCs. And we’ve got some interesting products over the course of this year, and some we haven’t talked about yet.

So our team’s working hard, and I think you’re going to be pleased with some products that we have this year. And some of the ones we’ve shared with customers so far, they tell us that we have great competitive products, and to the extent we can get those out there and launch them with customers, I think that’s the real key to getting decent ASPs in the cellular business, and turning baseband business into something we’re proud of.

Operator

The next question is from David Wong of Wells Fargo.

David Wong - Wells Fargo

With your expected ramp up of 4G, what percent of total baseband sales do you think will be from 4G products by, say, the last quarter of this year?

Scott McGregor

That would be hard to guess. I’m going to not guess on that. But clearly we see LTE ramping steadily over the course of the year, and it will be an increasing percentage. Not sure I can call what the fourth quarter mix is going to be, but certainly we’ll go up.

Operator

The next question is from Alex Guana with JMP Securities.

Alex Guana - JMP Securities

Scott, can you talk about linearity as it progressed through the quarter and into this year? And then also, how you feel about visibility building into the second quarter? And would that indicate a down/flat type of outlook at this juncture? I know you’re not guiding formally, but to the extent you can give some color it would be helpful.

Eric Brandt

The linearity in Q4 was what we typically see, which is stronger in the first two months, and then lighter in the third month. And that’s about the same across virtually every quarter of the year. It’s rare that we have a third month of the quarter which is above a third of the quarter. And that’s one of the reasons why you see the DSOs as strongly as you do.

In terms of the year, in terms of linearity, as Scott mentioned, I think we’ll see stronger back half of the year in connectivity as there is adoption and ramp of new features in connectivity. Beyond that, I think the other two businesses, broadband and infrastructure, will follow roughly what the seasonal patterns are over the course of the year. But hard to say, because I don’t know what normal is anymore in the industry.

Operator

Our next question is from Ruben Roy with Mizuho Securities.

Ruben Roy - Mizuho Securities

Scott, I just wanted to follow up on the HEVC comments and your commentary that it’s more than just selling into the ultra HD TVs. It sounds like there’s an opportunity for compression, I imagine, in higher end set top boxes, etc. Is this a content expansion opportunity in the higher end products in developed markets for 2014?

Scott McGregor

It absolutely is an expansion opportunity for us. And it’s not just the developed markets. It’s also in a number of developing markets. You look at a country like Brazil, for example, which is deploying very sophisticated infrastructure in there as they prepare for simultaneously World Cup and Olympics. And we have a number of other countries that you would classify as either developing countries or in between that are deploying very high end infrastructure.

Let me just underscore the real value of HEVC. If you’re an over the top or an IP content provider, this technology gives you a factor of two compression. So in other words, instead of transmitting bits at 5 Mbps, you transmit them at 2.5 Mbps. And that just really works, as people try and squeeze it in. And if a movie only uses half as many bits, for those who are capacity limited or have quotas per month and things like that, getting a movie in there for half the number of bits is a big deal.

So that’s definitely an exciting market for those guys, completely independent of ultra HD. If you’re a satellite provider, just using fewer bits up and down to the birds is important. If you’re a cable operator, it’s a big deal, because you can either get more channels in or you can get ultra HD channels squeezed into the space you already own, and you don’t have to figure out how to cut channels. You can keep your existing channels, compress them in a smaller space, and add a significant number of ultra HD channels going forward.

So all of this is pretty compelling, and we don’t really see any class of content provider who’s not interested in HEVC and doesn’t have plans to roll it out over the next couple of years.

Operator

Our next question is from Ambrish Srivastava of BMO.

Ambrish Srivastava - BMO Capital Markets

A follow up on the mobile and wireless business. After making the acquisition and your expectation on what the revenue contribution will be, where are you right now versus what you thought when you acquired the business? Is it higher, lower, or the same? Or is there a difference in what is causing it?

Scott McGregor

We’re definitely on track with the businesses we acquired. It’s always a significant risk when you acquire a business in terms of getting the folks productive and integrated into the company. We had a number of products that we’re going to tape out shortly after the acquisition.

Basically, everything’s on track. I think the team we acquired looks great. Really strong team, very capable team. I think together the Broadcom and the Renaissance team did a great job of just making things work smoothly. The products have taped out on time. All the engineering stuff is on schedule. Some of it’s ahead of schedule. I am just really pleased with this acquisition, and I think it’s about as theoretically perfect as it could have been on an acquisition. So very pleased with that.

And so consequently, in terms of all of the costs, we’re ahead of the game on that, as Eric has said. In terms of the engineering schedules, we’re on track or ahead in some cases. In terms of customer traction, looks very strong. And so I think all systems go, and the milestones I told you about at analyst day, all are on track, and we might do a little better on some. So again, very pleased with how that’s going.

Operator

The next question is from Hans Mosesmann of Raymond James.

Hans Mosesmann - Raymond James

Scott, if you can give us an update on your ARMv8 multi core processor that you guys talked about in October, in terms of timing for sampling and production, that kind of stuff.

Scott McGregor

We took an architecture license to the ARM 64-bit v8 processor, and I know a number of our competitors have already announced products and when they’re going to roll out, and stuff like that. We generally are more conservative on when we announce products. We generally announce products when they sample. And so I don’t have particularly an update for you today, but you can assume that v8 is on our roadmap, 64-bit, across our product families, and you’ll hear more about it as those products become available for sampling and go to customers. But you can assume that that is something we’re working on, we have on our roadmap, and we believe will be very competitive in that space.

Operator

At this time, I’d like to turn the conference back to Scott for closing remarks.

Scott McGregor

Thank you everyone for joining today. I think it’s been good to talk with you. We’ve made progress on multiple strategic fronts in 2013. We gained market share in a number of key areas. We’ve delivered model profitability in 2013, despite broader industry weakness.

I want to thank our employees also for the hard work they’ve put in, and their continuing dedication to designing and delivering the world-class communications products that make us strong.

Finally, as a reminder, we’ll be hosting an analyst open house at Mobile World Congress in Barcelona, and that will be on February 24 at 3 p.m. local time. For any of those analysts in the area, if you need additional details on this event, please give Chris or [Sameer] a call.

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

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Source: Broadcom CEO Discusses Q4 2013 Results - Earnings Call Transcript

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