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Executives

Peter Andrew – VP, Corporate Communications

Scott McGregor – President & CEO

Eric Brandt – EVP & CFO

Analysts

Tim Luke – Barclays Capital

Craig Ellis – Caris & Company

James Schneider – Goldman Sachs

John Pitzer – Credit Suisse

Glen Yeung – Citi

Mahesh Sanganeria – RBC Capital Markets

Adam Benjamin – Jefferies & Company

Harlan Sur – JP Morgan

Sumit Dhanda – Banc of America

Stephen Eliscu – UBS

Craig Berger – FBR Capital Markets

Mark Lipacis – Morgan Stanley

Stacy Rasgon – Sanford Bernstein

Daniel Amir – Lazard Capital Markets

Alex Gauna – JMP Securities

Mark McChesney [ph] – BrownPoint Securities [ph]

Allan Mishan – Brigantine Advisors

Shawn Webster – Macquarie Capital

Raj Seth – Cowen & Company

Arnab Chanda – ROTH Capital Partners

Ross Seymore – Deutsche Bank

Steve Smigie – Raymond James

Emily Gessner – BMO Capital Markets

Broadcom Corporation (BRCM) Q1 2010 Earnings Call Transcript April 27, 2010 4:45 PM ET

Operator

Welcome to Broadcom’s first quarter 2010 financial results conference call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session.

As a reminder, this conference call is being recorded, Tuesday, April 27th, 2010. Your speakers for today are Scott McGregor, Broadcom's President and Chief Executive Officer; Eric Brandt, Broadcom's Chief Financial Officer; and Peter Andrew, Vice President of Corporate Communications.

I will now turn the call over to Mr. Peter Andrew. Mr. Andrew, you may begin.

Peter Andrew

Thank you, Christine. During this call, we will discuss some factors that are likely to influence our business going forward. These forward-looking statements include guidance we provide on future revenue, gross margins, and operating expense targets for the second quarter of 2010 and any other future periods as well as statements about the prospects for our various businesses, potential market share, and the development status and planned availability of new products.

You should note that the guidance we provide today is based upon forecasts that require us to make certain estimates, judgments, and assumptions using the information that is available to us at this time. It should be clearly understood that our actual performance and financial results may differ substantially from our forecasts and the other forward-looking statements we made today.

Specific factors that may affect our business and future results, including among other things general economic conditions, are discussed in the risk factors section of our 2009 Annual Report on Form 10-K and subsequent SEC filings. A partial list of these important risk factors is set forth at the end of today's earnings press release.

As always, we undertake no obligation to revise or update publicly any forward-looking statements except as required by law. Please refer to the Investors section of our Website for additional historical, financial and statistical information, including the information required by SEC Regulation-G.

In addition, we've placed a slide deck, which is available now in the Investors Relations section of our Website that incorporate additional tables and information regarding our future guidance, historical performance and segment operating income.

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

Scott McGregor

Good afternoon and thanks for joining us today. Broadcom continues to execute and performed particularly well in the March quarter with substantially better results that we originally anticipated, driven by upside demand in several of our businesses. For the first quarter, we reported net revenue of $1.46 billion, which was up approximately 9% from our fourth quarter.

Broadcom’s quarterly revenue reached a record level for a second consecutive quarter and is up 71% from the trough quarter one year ago in Q1 2009. Sequential revenue growth in the quarter was broad-based, with particular strength in our enterprise and our mobile and wireless businesses, which were up 15% and 10% respectively. The solid upside in revenue was driven by new product ramps in each of our segments and continued strong demand from customers in Asia during the quarter.

As a result of our strong cash flow from operations, Broadcom’s cash position remained roughly flat despite the acquisition of Teknovus, issuing our first dividend and repurchasing over $150 million in stock. This result demonstrates our ability to pursue our strategic opportunities while at the same time returning capital to shareholders.

In anticipation of some likely questions, orders remain strong, capacity is tight, but deliveries of our products continue to be within lead times. We believe we are shipping to underlying demand and are comfortable with our inventory levels and best-in-class inventory turns. We are clearly seeing the benefit from both improved global demand as well as the secular trend of increasing need for data, video and multimedia. Broadcom’s focus remains to create outstanding communications and connectivity products that enable us to grow our market share. We have also been successful in generating profitable growth, as we committed on analyst day last December. Both our Q1 results and guidance for Q2 indicate substantially improved operating margins.

I will now turn the call over to Eric for details on the first quarter results and our second quarter guidance.

Eric Brandt

Thanks, Scott. Starting with our financial overview, to summarize for Q1, total revenue of $1.46 billion including $1.4 billion in product revenue. Q1 total net revenue was up 71% from prior year and 9% from Q4 levels. Total gross margin decreased 60 basis points from Q4 to 52.5%.

Product gross margin in Q1 decreased 40 basis points to 50.5% versus 50.9% in Q4. Q1 2010 GAAP R&D plus SG&A expense was $554 million compared to $481 million in Q4 of ’09. Please recall that Q4 of ’09 included a net recovery of legal expenses of $63 million. On a comparable basis, excluding this recovery, these expenses increased only $10 million over Q4. GAAP earnings per share for Q1 were $0.40 per share compared to a First Call estimate of $0.28 per share.

Stock-based compensation dropped to 8.7% of net revenue to approximately $127 million, and represented approximately $0.24 per diluted share. Cash flow from operations for Q1 was a strong $268 million. Our cash and marketable securities balance was flat sequentially at $2.4 billion at the end of the quarter despite $154 million in share repurchases, our initial dividend payout of $40 million, and a $117 million used primarily for the acquisition of Teknovus.

Moving to revenue and gross margin. During February’s conference call, we said we expected Q1 total net revenue to be flat to up 5% relative to Q4. What occurred in Q1 was that Broadcom generated stronger product revenue growth, thus the total revenue was $1.46 billion. This was up 71% from Q1 of 2009.

Our broadband communication segment, or solutions for the home, came in line with our expectations with growth of 3% in Q4. This primarily resulted from an increase in demand for digital set-top boxes and broadband access equipment. In the mobile and wireless segment, or solutions for the hand, we experienced a revenue increase of 10% compared to Q4. This primarily resulted from the continued ramp of our cellular products and wireless combo chips.

Our enterprise networking segment, or solutions for infrastructure, came in significantly stronger than we had anticipated, with a sequential revenue increase of 15% compared to Q4. This was driven principally by the continued improvement in customer order patterns in the Ethernet switching area. Our Q1 GAAP product gross margin decreased only 40 basis points to 50.5%, down from 50.9% in Q4. This reduction was due to lower non-standard cost benefits and the costs related to the Dune and Teknovus acquisition. The 40 basis points decline was better than the 100 basis points decline in guidance provided during our conference call in February due to favorable mix during the quarter.

Moving to operating expenses, operating expenses were broadly in line with expectations. Total R&D and SG&A expenses for Q1 were up $10 million from Q4 levels excluding the non-recurring D&O insurance receipt of $63 million in Q4. The increase was primarily related to an increase in headcount due to our acquisitions of Dune and Teknovus and other employee cost adjustments from our annual compensation review process and Q1 fringe accounting step-up, which reduces across the year, but seasonal spending on key trade shows.

Stock-based compensation was 8.7% of net revenue, down roughly 600 basis points year-over-year. As disclosed in our 8-K in February, our annual equity granting has reached the level such that we now expect we will reach our target of market value of transfer of approximately 5% of revenue in 2010, roughly a year ahead of the plan we outlined in our 2008 Analyst Day.

Moving to the balance sheet, as I mentioned earlier, total cash and marketable securities were $2.4 billion as we generated positive cash flow from operations of $268 million. We repurchased approximately 5 million shares of stock in the quarter at an average price of roughly $30 per share as part of our ongoing goal to offset dilution associated with our annual equity grant.

Our inventory turns came in roughly flat at 6.9 times, primarily as a result of the company’s decision to build inventory in a period of tight capacity and meet potential upside demand we saw beginning back in Q4. Our accounts receivable days sales outstanding increased slightly to 38 days in Q1. On Analyst Day in December, we committed to growing operating expenses substantially slower than revenue while we were below our operating margin of 15% to 17% on a GAAP product basis. We remained focused on this target.

Digging a bit deeper into today’s Q1 results and Q2 guidance, you can see we are already at our target for product operating margin net of acquisition and one-time costs, but simply have to wait for some of the legacy option grants to work their way through the numbers.

Moving to guidance, we currently expect net revenue in Q2 to be up approximately 5% to 12% relative to Q1 for a total net revenue range of $1.535 billion to $1.635 billion, which at the midpoint would be up over 50% versus Q2 a year ago. We anticipate healthy sequential growth in our broadband and mobile and wireless segments, and the enterprise networking segment sales are expected to be roughly flat. We expect Q2 product gross margin to remain roughly flat relative to Q1.

With respect to R&D and SG&A expenses in Q2, we expect these expenses to increase by approximately $20 million to $25 million, which based on a strong revenue growth is consistent with our margin improvement goal. Expense growth will be driven principally by employee cost adjustments from our annual compensation review process, recent acquisitions and hires and an increase in legal spending activity delayed from Q1 and Q2. Design and development costs are anticipated to be roughly flat.

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 our home platform, our Q1 revenues from broadband communications grew a bit over 3% sequentially, driven by double-digit growth with the satellite set-top box and broadband access product lines. Our diversification strategy in the set-top box business is bearing fruit through technological advances in home networking such as MoCA, increased consumer adoption of high definition broadcast content and devices, and our increased presence at overseas carriers.

We expect IP set-top boxes to be one of our faster growing markets this year, with Broadcom-based IP set-top boxes shipping in volume to multiple top tier carriers throughout the year. We also welcomed the recent legislative changes in China, allowing cable operators to offer voice and data services along with a nationwide push to increase HD broadcasting throughout China, resulting in a significant increase in orders for HD set-top box chipsets from Chinese customers.

We are still in nascent market in terms of units. We have been positively surprised by the rapid development of 3D TV capable products and content. We believe our 3D TV technology is in a leadership position in terms of bandwidth savings and maturity and will allow MSOs, carriers, and consumer electronics brands to rapidly deploy products that offer 3D TV capability.

Moving to infrastructure, Broadcom’s enterprise networking business delivered the highest sequential growth rate in the first quarter at approximately 15%, with record sales of switches and strong growth in controllers. We continue to see strength in our core organic portfolio from new product adoption and dramatic increases in service provider sales due to broadband and network infrastructure upgrades and rollouts.

As Eric mentioned, we expect networking sales to be roughly flat in the second quarter, with 10-Gigabit product demand likely to increase throughout 2010 from increased adoption by enterprise and data center customers. With respect to our recent acquisitions, we completed Teknovus during the first quarter and are beginning to see the benefits from Dune, which we completed in December of last year. These two companies have strong product and marketing teams. The integration activities have gone well and we are pleased with the customer traction to date.

Moving to our hand platform, within our mobile and wireless business, Broadcom experienced double-digit sequential revenue growth with particular strength in cellular baseband and wireless LAN. Within the cellular baseband market, we are pleased with both the growth and diversity of shipments in our current Tier 1 customers, Samsung and Nokia. We now have many popular models available with carriers around the world putting the first mobile handsets in the United States. While the majority of units use our single-chip EDGE solutions, 3G has become a significant percentage of the mix in both units and revenues.

In Q1, sales growth was driven largely by ramping 3G shipments and resulted in our chips at ASP increasing on a sequential basis. This quarter, we also announced the availability of our new HSPA baseband chipset designed to address the smart phone market. Within our wireless connectivity markets, wireless compass solutions continue to do exceptionally well, with our solutions shipping to five of the top six cellular handset manufacturers.

The rollout of our industry-leading products continued in the quarter, with shipments of our BCM2075, which is a Bluetooth FM and GPS combo device shipping to Tier 1 handset OEMs. Broadcom is particularly pleased with our performance throughout our wireless LAN portfolio. We have strong revenue growth in each of our wireless LAN market segments and expect significant sales and market share gains again in the June quarter.

We believe the market will continue to grow for our wireless connectivity solutions. Examples include wireless LAN and cellular handsets, printers, TVs and Blu-ray, Bluetooth in tablets, TV remote controllers in the automotive market, and GPS chips into cellular handsets, tablets, net books, notebooks, and digital cameras. We expect that our GPS business will be one of our largest percentage growth drivers this year.

Finally, in the rapidly evolving tablet market, we are seeing strong interest in our tablet reference design, which includes our application processor, running Android, and our wireless connectivity chips. Our tablet solutions are already shipping to multiple carriers.

In summary, we believe our communications and connectivity products are well positioned to benefit from improved global demand and increased penetration in mobile and home devices. Cutting-edge products in rapidly growing markets, combined with a strong free cash flow generation model are the engines for Broadcom’s continued success. Broadcom’s operating strategy for 2010 remains unchanged.

We are focused on gaining market share, while manage operating results to our target financial model. This concludes our prepared remarks. We are now ready for your questions. Christine, may we have the first question, please?

Question-and-Answer Session

Operator

(Operator instructions) The first question comes from Tim Luke from Barclays Capital. Please go ahead.

Tim Luke – Barclays Capital

Thank you so much. Just Eric, I was wondering, with respect to your strong guide, could you give some color on some of the framework for the gross margins as you move through the year? You are obviously raising the revenue expectation there for June, but with a flattish gross margin, is that much or is it just a reflection of the mix with the enterprise being flat and how do you see that shaping through the year? Thank you.

Eric Brandt

So, yes, enterprise is flat and you can see the mobile and wireless segment and the broadband segment will be the stronger growers in Q2. I think that we are seeing a benefit certainly in the gross margins of our products as we continue to ramp 65 nanometer products and reduce cost. We don’t provide guidance much beyond that, certainly as we ramp into part of the year which has more consumer products, those products tend to have somewhat lower gross margin. But overall, I think we are quite pleased that our gross margin is operating within our targeted model.

Tim Luke – Barclays Capital

And if I may, just a follow-up for Scott, with the traction that you are seeing in your baseband business, could you just expand on baseband on what you are seeing in terms of mix? It sounded like you are seeing more 3G with Samsung, could you give us a sense of what we might expect in terms of the traction with Nokia when potentially you might see a 3G there and I believe there is a new architecture coming, and if you could give us a sense of what the timeline maybe for that? Thank you.

Scott McGregor

Good, I am happy to help. We are definitely seeing an increased mix towards 3G and 3G is definitely ramping, and as I said in my earlier remarks, it’s becoming a significant part of our business and we expect that to continue. We are beginning to ramp with Nokia, but I am afraid, I can’t really give you any more color there. As their new products come out, and as teardowns become available, we can comment more, but again to protect the privacy of our customers, we are not going to say much more on that, until those products start rolling out.

Operator

The next question comes from Craig Ellis from Caris & Company. Please go ahead.

Craig Ellis – Caris & Company

Thank you. Scott, you are seeing kind of strong connectivity bundling with the baseband solutions last year, are you continuing to see that and is there any difference on the EDGE product versus the 3G product?

Scott McGregor

We are seeing a strong bundling. Generally when we get a baseband win, we usually see connectivity wins as well. In the lower end 2G space, we don’t typically see much of the wireless LAN content and more likely to include Bluetooth and FM or Bluetooth, FM and GPS, one of our new products rolling out, a little less on the wireless LAN side, but overall, w are seeing the amount of connectivity increase in penetration and phones, and I think that’s going to be a trend over the next few years. And the biggest, I think drivers to our overall revenue are going to be the expansion of wireless LAN beyond just smart phones into the future phones. And GPS is really making a broad penetration there, and that underlies one of my comments earlier that we expect GPS to be on a percentage basis, one of our fastest growing products.

Operator

(Operator instructions) The next question comes from James Schneider from Goldman Sachs. Please go ahead.

James Schneider – Goldman Sachs

Good afternoon and thanks for taking the question. I guess many of your peers have talked about increased visibility in terms of longer dated visibility, in terms of the order book. Is that consistent with what you are seeing and to the extent you can comment, in which of your three end markets do you think you have seen biggest potential upside going forward?

Scott McGregor

I think due to supply tightness in our industry, we are seeing customers place orders earlier than they would have been in normal times. So, we are seeing some acceleration of orders. So, from a histogram point of view, they come in earlier. That gives us a little more visibility perhaps, but again, I would attribute that to tightness in the industry supply overall.

Operator

The next question comes from John Pitzer from Credit Suisse. Please go ahead.

John Pitzer – Credit Suisse

Yes, congratulations. Thanks for letting me ask the questions. Scott, just relative to the enterprise guidance of flat for the June quarter, can you help me put that into context, is that what you would consider normal seasonality, is that a digestion after a very strong March quarter and do you expect re-acceleration after that or just help me understand how I should think about that?

Scott McGregor

Enterprise is normally strong in the first quarter or the second quarter. Its first half generally when we see seasonal strength in that business, it also had exceptionally strong growth in the last two quarters, and so, it’s a combination of those things. We believe that business remains very strong, great design win traction there and we are very pleased with how that business is done in the last couple of quarters.

Operator

The next question comes from Glen Yeung from Citi. Please go ahead.

Glen Yeung – Citi

Thanks. You have now set record revenues for the past couple of quarters, and I wondered if you thought about how much of that is derived from you being in new markets or with new products as far as how much of that and some of your existing businesses returning to prior highs. And then I wonder if you could also actually see these revenue ramps substantially, can I compare that to what you saw in 2000 in terms of how your customers are acting towards, you would say, and let us know if you see any similar variance or differences to them?

Scott McGregor

2000 was a long time ago, so probably it’s hard to draw inferences there. We have completely different set of customers and so forth. I think you question in terms of what’s driving the growth, I think it’s a combination of things. I think it’s a combination of the market coming back a bit. Certainly it was very depressed last year with the economy being down and economy seems to be improving and people are certainly buying more products. But I think it’s really more than that.

Broadcom has invested in number of areas that are giving us growth here; the cellular baseband area for example is really taking market share coming from a small position there. In our broadband business, we are getting into Blu-ray players and digital TV. Those are new markets for us, IP set-top box new market for us where we are taking share there. And I think also in the enterprise space, moving into 10-Gig and other things, we have got an opportunity to have some Greenfield growth there. So, I would say, Broadcom is certainly benefiting from the overall economic recovery, but it’s a lot more than that with growth in a lot of new product areas and ramping with a lot of new customers.

Peter Andrew

Hi Glen, this is Peter. One other comment there is if you take a look at it, it’s not just the new areas that are driving our growth. If you take a look at broadband and the enterprise networking space, those are also areas that are hitting record high revenue levels at this time. So, it’s growth coming mainly from new areas but also the core.

Scott McGregor

Which by the way is consistent with our objective as a company to outgrow the market. We believe we have outgrown the market in Q1, and our guidance would have a sales growth of market in Q2, and that’s how we get rewarded. So, we think it’s not just a return to the patterns of the existing products, which will be similar for the rest of the industry, but it’s actually physically gaining market share.

Operator

The next question comes from Mahesh Sanganeria from RBC Capital Markets. Please go ahead.

Mahesh Sanganeria – RBC Capital Markets

Thank you very much. Scott, you mentioned about the 10-gigabit, is that a controller or the switch or both?

Scott McGregor

It’s both; we have a range of products there. We have got some really leading-edge engine switches that we have just announced that we think are going to be really competitive in that space going to 40-nanometers. We have also got a number of new controller products and so really a combination of the two.

Mahesh Sanganeria – RBC Capital Markets

And how is the competitive landscape on the controller side, but Intel is obligating a little aggressive on that market.

Scott McGregor

That’s a competitive marketplace, but I think we have produced the new competitive products in that space, and I think we are holding our own, especially in the service space.

Operator

The next question comes from Adam Benjamin from Jefferies & Company. Please go ahead.

Adam Benjamin – Jefferies & Company Hi guys, looking at your profitability by segment, I was curious if you can kind of just comment directionally how we should be thinking about that going forward. Broadband has been pretty stable around 20 percentage range. Obviously, the mobile and wireless has been kicking up pretty nicely with the highest talks really and sometime about 11% in the recent quarter. And the days been spend has always been a drag on that, so you are seeing some good leverage there. I am just curious where that can go to overtime and then lastly, enterprise has been kind of around the 30% range. You saw sort of outsized performance in Q1, not sure if that’s sustainable given higher levels. So, I am just curious if you can directionally talk about some of the profitability by segment.

Eric Brandt

So, you could see broadband year-over-year and the Q should be out any minute now, but you will be able to – you can see it in the press release as well, but there’s a date on the Website. That broadband has improved year-over-year significantly, revenue was up about 46% and operating margins up from about 3% or 5% a year ago to that 18%, and that’s a product of two things. Improvement in gross margin although not as much as we think we can actually achieve overtime as we transition to the next generation of products as well as the benefit of the revenue spread across the R&D spend that broadband has, particularly due to the pickup that they had at the end of ’08 into ’09 with the digital PV business. So, good R&D efficiencies and a pickup in gross margin. In the case of mobile and wireless, it goes from about a negative 11, I think to about 11 or positive 13, with revenue up about 80%, 85% year-over-year. Again, good strength, ramp in the cellular business, coverage of R&D in the cellular side that we didn’t’ have before as well as improvement in gross margin, both on the wireless connectivity side of the house as well as on the mobile side of the house, as Scott mentioned, as our mix in 3G continues to improve, and we see some pickup in the aggregate ASP of our cellular chips.

With respect to the enterprise space, you raised a good point. I mean, the margin is up from about, revenue is up about 85% as well and margins up from about 19% to 38%. I don’t know that, that business runs at 38%, I think that the revenue has extraordinarily well and there will be some pickup on the R&D side of the house as we run our business. I think if we harking back to what we said in the past which is that you go back to the old non-GAAP model, that’s the way we will run our business and that’s what we are trying to manage to in terms of the infrastructure we put in place to drive long-term growth and be effective in the way we run our business.

So, you can see that we got there probably a year ahead of what we had anticipated and many of you had anticipated, and we expect to sort of stabilize those two to drive value across our business portfolio.

Operator

The next question comes from Harlan Sur from JP Morgan. Please go ahead.

Harlan Sur – JP Morgan

Hi, good afternoon and thank you for taking my question. Within your networking segment, this is on the switch side, as you mentioned 10-gigabit of Ethernet upgrade has been a solid geography of business over the last couple of quarters and going forward, question for you Scott, is where are we in that transition, 20% to 30% of delays through the upgrade cycle. And then kind of on a similar note, it looks like the book of your business with your Asia base networking equipment customers like Huawei for example is picking up here heading into the second quarter, maybe some color on what’s driving the pickup there with those set of customers?

Scott McGregor

Harlan, a couple of things. I think the 10-Gig transaction is in very early days, it’s like first inning in baseball, because a lot of that was deployed; lot of installed infrastructure is 1-Gig. There is another important phenomenon going on which is the amount of bandwidth that people are consuming is just really going up a lot. I don’t think you can open a web page these days without some video playing in the corner and some animations going on, and people are really trying to use a lot of this social networking devices to get excess video content.

So, I think that’s going to drive a lot of bandwidth overall. So, I think it’s early in the transition to 10-Gig and I think the overall switch market worldwide is going to pickup overtime to supply the demand for all video and data that’s being consumed.

Harlan Sur – JP Morgan

And then the question about the pickup with your Asia base networking customers?

Scott McGregor

Yes, we are definitely seeing a large deployment in Asia and I think it’s a combination of things. I think it’s China in particular doing very large deployments of both 3G and the mobile side, but also deploying broadband access to a large number of communities, which generates the lot of need for switches to aggregate a lot of that data. But it’s also other countries as well in the whole Asia region. I think just really trying to deploy broadband to their consumers and finding out that once they do that, they consume a lot of bandwidth. So, they need to put the switches in place to cover that.

We are also seeing a pickup in the corporate side where the corporate IT data centers are starting to use more 10-Gig switches, and we think that will be a driver for us over the course of the next year or two.

Operator

The next question comes from Sumit Dhanda from Banc of America. Please go ahead.

Sumit Dhanda – Banc of America

Yes, hi Eric, on the delayed legal expense and the pickup into Q2, do you have any more visibility on when that particular line on the P&L would be down to stable lower residual level?

Eric Brandt

We are quite pleased with the favorability we have seen into Q1. I think legal was outperformed probably our guidance by about $10 million in Q1, and the pickup we see in Q2 is less than that. There is one sort of open item left for us which relates to the derivative action and we moved to dismiss that. We will see how that plays out. Beyond that, the only other thing of significance was continue to bump along our patent, of significant patent suits to again serve and again (inaudible).

But I would expect that once we stood out where the last piece of the options matter goes, then we will start to get to a more normal level, but we just don’t have an answer to that. I believe that the hearing for that is the end of Q2, beginning of Q3.

Sumit Dhanda – Banc of America

Okay. And could you size that residual options expense, options –?

Eric Brandt

I think what we have said is the line on that, that line that we provide in the disclosure which is run as high as 45ish million dollars, could get down to 20 or 25, and this quarter, you can see us getting close to that level. So, I suspect that once we start through that, that’s a more normative level, but we will provide more information on that as time goes on.

Operator

The next question comes from Uche Orji from UBS. Please go ahead.

Stephen Eliscu – UBS

Yes, thank you guys. This is Steve calling on behalf of Uche. First question regarding the broadband business, in terms of your Blu-ray player and also digital TV SOC businesses, is it safe to assume that the gross as far as seasonal declines in Q1 and if so what is the expectation for Q2 in terms of just relative growth for Q2?

Scott McGregor

We don’t guide individual businesses, but we believe those businesses certainly see strong seasonality in the third and fourth quarters, especially in the third quarter, to some extent the second quarter, and we would expect them to benefit not only from seasonal trends, but also from the fact that we are winning a lot of new designs and we expect to take market share.

Stephen Eliscu – UBS

Okay. And follow-up question to that, in terms of the competitive landscape for both of those businesses, how is that currently and do you see the continued evolution of the feature set for those products being a benefit to overall pricing and margins for their business, or do you see the competitive landscape as being quite strong at this point as well?

Scott McGregor

I think what Broadcom has done in both of those areas has really changed the game. Instead of doing just TV or just Blu-ray chips, we do all the things we normally do, we just create a single integrated SOC, we have also added a lot of other capabilities such as internet access directly on the chip, including switch, including a lot of the processor capabilities, all within the chip to do those kind of things. In Blu-ray we have integrated front-end and backend complete SOC here. We will continue to add additional features in TV. I think the move to some of the high refresh TVs to get things like 3D capability in. In addition to the Internet connectivity and those are things we will do in single chips and a lot of our competitors having to do that with chipsets and far more expensive solutions. So, it enables us to get a premium in the market. And that’s sort of what we do at Broadcom. And we will apply that in the consumer space in TV and Blu-ray as well.

Operator

The next question comes from Craig Berger from FBR Capital Markets. Please go ahead.

Craig Berger – FBR Capital Markets

Hi guys, thanks for taking my question. The first one is just given the substantial strength seen in the first half, how should we be thinking about second half relative to typical seasonality, and is this strength sustainable? And then I have a follow-up.

Eric Brandt

We don’t guide generally past one quarter, so we are guiding the second quarter and we are seeing incredible strength, I think was what we gave in our guidance there. We will see how the market develops, we will see how the economy develops, but overall, we believe over the course of the year, we have got some good growth drivers in our business, we are taking share, we got some very good products.

Scott McGregor

Yes, I will just comment, Craig, Q1 normal seasonality is down 5.5, we were up 9. So, you are talking about 14.5 points swing on seasonality in Q1, and then with what looks pretty close to normal seasonality in Q2, I don’t know what normal is, I mean, my guess would be more muted seasonal in the back half of the year, but we just don’t know at this point in time. I think we are quite pleased with the Q1 results and really pleased that we are actually able to see the strength that we are seeing going into Q2.

Craig Berger – FBR Capital Markets

Hi Thanks and then the follow-up is can you just help us understand given maybe the growth in combo chips and cellular kind of maybe what your top four biggest product groups are?

Scott McGregor

You mean product groups in terms of size?

Craig Berger – FBR Capital Markets

Yes.

Scott McGregor

Or growth or, sorry I am not sure –

Craig Berger – FBR Capital Markets

Just in terms of absolute revenue contribution, I know you guys don’t break out the groups, subgroups separately, but just kind of a rank order of what may be the biggest three to five groups are in terms of revenues?

Scott McGregor

Rank order, as you said, we don’t break out the groups. But certainly some of our largest businesses are in the combo space. In fact, I will tell you a couple of facts, the 4325 chip, which is our Bluetooth FM wireless LAN chip was our number one seller, highest volume shipped in Q1, and it’s successor the 4329 will be our highest volume chip probably in this quarter. So, very, very good strength there. Certainly, our set-top box business is quite large; our cellular business is ramping nicely. The switch business, not only is that a solid business, but again had very, very strong growth in the first quarter. So, those are some of our largest businesses.

Operator

The next question comes from Mark Lipacis from Morgan Stanley. Please go ahead.

Mark Lipacis – Morgan Stanley

Thanks for taking my question. On the networking business, did you give a rough or can you give us a rough idea about how that business has split between telco versus enterprise type equipment, whether one of those markets drove the upside relative to the other one?

Peter Andrew

Yes, if you take a look at, Mark, this is Peter. If you look at the rough mix between enterprise and service provider, I would say service provider is quickly approaching 50% of our total switching business, and a lot of that has been driven by growth in Asia markets.

Mark Lipacis – Morgan Stanley

Okay. Fair enough. And follow-up is on the Wi-Fi business, Scott, I think you mentioned, correct me if I am wrong, I think you mentioned that you expect to continue share gains. Is that a comment on the PC client business or was that we referring to Bluetooth Wi-Fi. Thank you.

Scott McGregor

That’s a comment on the overall wireless LAN business. Basically using the numbers that we reported, and our guidance and using competitor numbers reported and their guidance, and so, we expect a gain share on that base.

Eric Brandt

Yes, we are not double-counting the Bluetooth on top of that. We are looking strictly at Wi-Fi versus Wi-Fi. That’s your question.

Operator

The next question comes from Stacy Rasgon from Sanford Bernstein. Please go ahead.

Stacy Rasgon – Sanford Bernstein

Hi guys, thanks for taking my question. Question on the enterprise networking guidance, so you have guided flat, but you closed Teknovus at the end of Q1, which implies to me that the Teknovus revenue would be in Q2. Does that actually imply that without Teknovus, you are sort of guiding enterprise network not even far but maybe even down a little bit, and with an overall, and on top of that, with an overall revenue growth at the end midpoint of about 8% or so next quarter, can you give me some feeling for within the other businesses, do you expect like mobile, wireless to grow significantly more for instance than the broadband communications in order to reach that 8% total growth of the business in an area where the enterprise networking is flatter, maybe a little bit down?

Scott McGregor

So, Stacy, let me just start with the enterprise piece – with and without Teknovus would not change the guidance. Without Teknovus does not mean that we are guiding down, we are still guiding roughly flat. But you are talking about $400 million in revenue in the enterprise business for an acquisition which represents single-digit millions of dollars. So, it’s not moving the needle all a lot. In terms of the relative growth between the two segments, we said growth between the two. I think there will be pretty good strength in both broadband sequentially as well as in the mobile and wireless space. And depending on ramps and some of the combo chips, there may be some relative growth strength in the mobile and wireless space relative to broadband, but I think you will be pleased with the broadband results if you do the math in terms of flat and up and up.

Stacy Rasgon – Sanford Bernstein

Got it, thank you.

Operator

The next question comes from Daniel Amir from Lazard Capital Markets. Please go ahead.

Daniel Amir – Lazard Capital Markets

Thanks a lot. Can you give us a bit of info with regard to the line shrinkage to 40 X node to kind of which products that you are focused on where should we see kind of the mix here by the end of the year? Thanks.

Scott McGregor

In terms of mix by the end of the year, you should expect us to be predominantly in 65-nanometer through the year. Now, that being said, we are taping out very large numbers of 40-nanometer products, and we have already started to sample a number of 40-nanometer products. I think you will find them across all of our businesses in the networking business. It’s important to do that simply to be able to get the number of ports and the absolute switch capacity, which is driving us the smaller feature size such as 40-nanometer. I think in the broadband space, we are able to really continue our integration roadmap there and get some additional cost benefits. And certainly in the mobile and wireless space, you get pickups in power savings and smaller dies, which benefit as well.

So, I would assume that 65-nanometer will be about 50% of our business at the end of this year. 40-nanometer is still very small, beginning to ramp a little bit at the end of the year, more of a next year phenomenon will start to see some pickup in 40.

Operator

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

Alex Gauna – JMP Securities

Thank you for taking my questions. Scott, you mentioned taking share in IP TV set-top boxes, and I was wondering if you could give us an idea by what metrics you are winning? Is it because of the SOC solutions, is it because some of your capabilities in terms of integrating the MoCA or the Wi-Fi capabilities, maybe a little color around what’s driving your success in IP TV and perhaps also how average selling prices or opportunity compares to other set-top box categories.

Scott McGregor

So, in terms of why we win in IP TV, I think we have got a lot of things going for us there. We have got a fully integrated SOCs that includes things like MoCA. We have great connections to as you said wireless LAN, but also all the other forms of connectivity that Broadcom offers. We are able to create a very complete and compelling solution. So, on that basis, we have got quite a few design wins, we have got good backlog from those design wins and we expect to be shipping in pretty good volume here.

Alex Gauna – JMP Securities

And as you mentioned, North America being one of the areas. Is North America the largest market or is Asia right now on the IP TV set-top box front?

Scott McGregor

I think it’s North America, Asia, but it’s also Europe. We have got good design wins there as well. So, I think we have got very good position with customers that’s most cooperative today.

Alex Gauna – JMP Securities

Okay, thank you. Congratulations, nice quarter.

Scott McGregor

Thank you.

Operator

The next question comes from Mark McChesney [ph] from BrownPoint Securities [ph]. Please go ahead.

Mark McChesney – BrownPoint Securities

Great, thanks for getting me and so again, congrats on the quarter. Two really quickies, one you talk about tight fab capacity, do you feel like you are leaving any business on the table. Seems like a strange question given the revenue levels, and then also could you comment on your margins in your baseband business? Thanks.

Eric Brandt

In terms of fab capacity, fabs are definitely full. We are able to supply to our customers when they order in normal lead times. So, that generally works out pretty well. We do have customers who order on very short notice with upsides they have and we do our best to deliver those. So, I would say I don’t think we are leaving any business on the table in terms of normal or lead times, but we can’t always fulfill short lead times that we have. In terms of baseband margins, we don’t break those out in particular, but I think you will see in our Q, that will be available in a few minutes, that we do break out the business overall for our mobile and wireless business, and so, you can get a sense of it from there. You will notice that we ramped our baseband business significantly and had still very positive margins in that business. So, to give you a sense there that in terms of how they affect our overall business.

Scott McGregor

We have also seen a richer mix of 3G versus 2G in the quarter, which should also help.

Mark McChesney – BrownPoint Securities

Great, thanks.

Operator

The next question comes from Allan Mishan from Brigantine. Please go ahead.

Allan Mishan – Brigantine Advisors

Hi guys. First, did you have any 10% customers during the quarter, and then second question on the consumer part of the business, looking at broadband up 3%, and then the two biggest pieces set-top and broadband access being up double digits, does that mean that consumer was down 30% or so and if so was that completely seasonal or was there any market share shifts that we need to worry about?

Eric Brandt

On the 10% customers, we only disclose that once a year. I will make a general comment which is that if you look at our overall customer concentration in the Top 5 and Top 10, it’s not moving meaningfully in one direction or another. So, relatively constant across our top customers.

Scott McGregor

In our consumer business, the question you asked, it was seasonal-related things, not market share.

Eric Brandt

Christine?

Operator

Yes, thank you. The next question comes from Shawn Webster from Macquarie. Please go ahead.

Shawn Webster – Macquarie Capital

Hi, thanks for taking my question. Scott, you mentioned your gaining share in growing with the market, can you give us an update or maybe your assessment on how much inventory restocking is still happening and are most of your end markets are positioned inventory levels or can you highlight those which are still below normal? And I have a follow-up.

Scott McGregor

I think we have been talking about inventory restocking now for quite a few quarters, and that’s what’s going on. I think it’s really demand. We talk with a lot of our customers and try to assess, is there inventory building in some huge warehouse somewhere, and we can’t find it. So, we believe that there is a pretty good sell-through to end users as far as we can see with our customers. So, I don’t feel that there is any particular inventory factors going on right now.

Shawn Webster – Macquarie Capital

Okay, so inventory levels overall what you would say are normal?

Scott McGregor

And our inventories, our sales are running at about 7 turns, 6.9 I think for Q1. So, that’s within our target range. So, we are comfortable with our own inventories as well.

Shawn Webster – Macquarie Capital

Okay, and then on the capacity front, is the tightness getting more tight or is it getting better and then could I have or could we get some guidance on tax rates for the rest of the year?

Scott McGregor

That’s a lot of questions. Okay. In terms of fab capacity, I wouldn’t say there is any particular tightness increasing or decreasing on that. I think it is fairly tight. Customers certainly want additional product, but also our foundry partners are adding capacity. I think one thing that’s good about Broadcom is that we do multi-source our products into multiple fabs and fill it, tight it at one particular foundry. If they are not able to give us what we are looking for, we will shift share to other foundries who can maybe help us better. And so, that gives us the ability to balance that.

Eric Brandt

Yes, on the tax rate, I mean, I think you can look at the GAAP tax rate. It’s relatively low and I don’t think it changes a whole lot in the near future. Your non-GAAP (inaudible) to use 10% and I don’t think we have any change to that at all.

Operator

The next question comes from Raj Seth from Cowen & Company. Please go ahead.

Raj Seth – Cowen & Company

Hi, thanks for taking my questions. Scott, quick one for you, you mentioned tablet reference design based on your app processors running in, I am curious while I know it isn’t a focus today, is the power envelope of those processors such that you might be able to, if you wanted to move those into handset applications with discreet basebands? Thanks.

Scott McGregor

We certainly have that capability and the power characteristics of those processors would certainly fit that. Remember that in our baseband chips for cell phones, we do include application processors. So, for example, the smart feature phones and some of the low-end smart phones, there are customers that are shipping using integrated applications plus integrated with the baseband. So, absolutely, we have that capability. In the tablet space, a lot of these tablets of course are battery powered. So, have a lot of the same needs in requirements of the cell phone market where the largest power consuming aspects of the devices are the display of course, but then also the processors, and so they are very sensitive to that. But we are shipping today, as I mentioned before, with carriers, our first one was NTT DOCOMO, and we expect to have others announced shortly.

Raj Seth – Cowen & Company

And I know your current focus is on the smart feature phones with the integrated, as you point out, integrated baseband app processors, is there a real market for you do you think overtime for discrete app processors in phones or no?

Scott McGregor

We are certainly looking at it. I think our focus has been to win volume designs initially with the Top 2 cellular customers, Nokia and Samsung. We certainly have the ability to do stand-alone application processors and we continue to look at that and we don’t pre-announce products, but don’t be surprised that we do something there someday.

Operator

The next question comes from Arnab Chanda from ROTH Capital Partners. Please go ahead.

Arnab Chanda – ROTH Capital Partners

Thank you. Couple of questions. The first one, either for Scott, Peter, or Eric, do you look at your Bluetooth business, whether in the sort of handset area versus the PC area, can you give us a qualitative idea about how much of that business you think is combo with Wi-Fi and how much kind of where you see that sort of share moving to overtime?

Eric Brandt

So, Arnab, it’s Eric, I am trying to do this off the top of my head. I mean, as Scott mentioned, our largest selling chip is the 4325, which is a Bluetooth Wi-Fi chip. I will tell you that our second largest selling chip is the Bluetooth FM chip. Those chips principally are sold into handset devices wherein to tablet type devices. Into PCs, we tend to sell combo cards, daughter cards. So, most of what we are selling right now is either a double-play or triple-play card for Bluetooth. And I think as we think about it and as we sell the triple-play cards and we allocate revenue across them, you are just picking up that additional Wi-Fi ASP in the card. So, that’s basically how it breaks out.

Arnab Chanda – ROTH Capital Partners

Thank you. And then I have a question kind of a little bit bigger picture, it seems like as far as I can tell, you are actually at an all-time high in operating margins in probably the last 10 years. Since the bubble, you are getting, you know, your mobile wireless business is obviously not mature in terms of margin and you are actually still increasing gross margins while your mix probably a little bit worse in Q2. So, I mean, can you talk a little bit about maybe not an exact number, of what do we think there is still opportunity for growth in operating margin expansion as your kind of revenues grow? I am not looking for a particular timeframe sort of, I think 24.5 [ph] of your peak before this, so I am just curious with the changes you have made, what can happen there. Thank you.

Scott McGregor

I think one of the things you need to factor in, we have got very good performance now in a number of our businesses, but cellular still hasn’t hit its stride. And so, as we continue to grow in cellular, you are going to see a contribution of the corporate operating margin as a result of cellular. We haven’t reached target profitability by any means in that group. And so, definitely opportunity for increasing the total there.

Eric Brandt

I think broadly speaking, Arnab, you make a good point that, that we have hit pretty high operating margins again assuming you are a non-GAAP person. I think as a company that happens to us as revenue accelerates the way it has accelerated from last year to this year with up 70% [ph] this quarter, and as I mentioned in my commentary potentially up 50%. And so, there is a little bit of a revenue overshoot as we manage our business and we look to gain market share, we try to operate within a gross margin as we described and in that range, and I think there will be some increase on the R&D side. But as Scott mentioned, there is room certainly on the mobile and wireless side to improve margins. And I think also on the broadband side quite frankly, as they continue to grow and improve the gross margins of their business. But having said that, I don’t think our operating model has changed. We are really trying to drive this business to 15% to 17% GAAP operating model on a product basis plus the licensing benefits you are getting overtime.

Operator

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

Ross Seymore – Deutsche Bank

Hi guys, congrats on the results. Just a couple of questions on the cellular side of things, you mentioned that your ASPs trended up mainly because of mix I assume with 3G, can you talk about any change in the competitive landscape and any pricing dynamics that you see within either EDGE or 3G?

Scott McGregor

I would say those pricing dynamics are pretty much as we expected. I think you may be referring to what some other people are talking about pricing dynamics and we may be part of the reason they are seeing in pricing dynamics, but for us, we are seeing increasing ASPs with a richer 3G mix and increasing volume, both on 3G and 2G.

Ross Seymore – Deutsche Bank

And as I look for the full year, with 3G ramping as fast as you said it now is, would you think for the full year EDGE or 3G would be a bigger part of your cellular revenues?

Scott McGregor

I think for the full year, it’s still going to be EDGE, because while we are seeing strong 3G ramp, for example, at Samsung, Nokia will begin to kick in I think with higher volume and that will probably keep the majority at EDGE.

Ross Seymore – Deutsche Bank

Great. Thank you.

Operator

(Operator instructions) The next question comes from Steve Smigie from Raymond James. Please go ahead.

Steve Smigie – Raymond James

Great, thanks. Just turning to the Wi-Fi spacing a little bit, can you – you mentioned several consumer product categories that you have got into such as TV Blu-ray etcetera, are those primarily the categories where you see opportunity or are there other consumer products out there outside of the handset where you see growth opportunities?

Scott McGregor

In wireless LAN, we really see that going into a lot of devices. I think people have realized that wireless LAN is a cost-effective way to put very high bandwidth between devices. So, any device that has to do with video is going to use that, whether it’s remote cameras, or whether it’s a camera just looking for a fast way to move things over – move it to a CD for example, move a picture to a TV, certainly in Blu-ray for transferring things, I think within the home, wireless LAN is getting enough bandwidth headroom to be able to transmit video around the house, and I think that’s going to make a big difference there. We are also seeing access point just to go into a lot more commercial establishments, fast food, restaurants, all that kind of things that are beginning to put wireless LAN access points in and I think that’s going to really drive the interest in tablets in addition to PCs where you will browse either on your smart phone or on your tablets, a lot of these establishments. So, I think there is a lot going on there. I think it’s fairly broad-based. It’s not clear your refrigerator needs a wireless LAN yet, but I think we are probably headed towards appliances generally including things like wireless LAN for connectivity.

Operator

The next question comes from Ambrish Srivastava from BMO Capital Markets. Please go ahead.

Emily Gessner – BMO Capital Markets

Hi, this is Emily calling in Ambrish. I was wondering if you could talk about the absolute dollar increase you saw on the balance sheet in the quarter, and do you think you have reached the required level or do you feel you need to build more, and particularly how much is in stage for this lead time?

Scott McGregor

I assume your question relates to working capital, is that correct?

Emily Gessner – BMO Capital Markets

Just the overall inventory balance, yes, in absolute dollars.

Scott McGregor

Okay. So, we are at 7 turns, or 6.9, but as I mentioned we typically run our business between 7 and 8 turns. We took it down closer to 7, quite frankly coming out of Q4, because we saw meaningful upsides for Q1 and wanted to make sure we were prepared for the Q1 upside and the Q2 upside. Plus or minus how revenue moves, I suspect that inventory will move at the same rate revenue moves, maybe a little less, maybe a little more, but it will probably move with revenue as we are in this period of tight capacity and having that capacity fairly valuable to our customers.

Emily Gessner – BMO Capital Markets

Okay. Thank you. And then as a follow-up, on the wireless handset side, excluding connectivity in the third quarter, you had hit the $100 million number, just wanted to see if you are back to that level or have you crossed it and then where you think you are going to end the year on a quarterly run rate basis?

Scott McGregor

I am afraid that’s a little more information than we'd like to give out, but I can confirm that in our mobile platforms group, we are above $100 million, so hopefully that helps it.

Operator

That concludes the question-and-answer session for today. I would like to turn the call back to Scott McGregor for closing remarks.

Scott McGregor

So, in closing, I would like to leave you with a couple of thoughts. Broadcom really had a great first quarter. We have grown faster than the industry; we significantly improved our operating leverage even faster than our plan. We begun returning capital to shareholders in the form of dividends and we are looking forward to additional market share expansion and profitable growth throughout 2010. So with that, thank you very much and have a good evening.

Operator

Thank you for participating in Broadcom’s first quarter 2010 financial results conference call. This concludes the conference for today. You may all disconnect at this time.

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