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Executives

Eric Brandt - Chief Financial Officer and Executive Vice President

Scott McGregor - Chief Executive Officer, President and Director

Chris Zegarelli -

Analysts

Shawn Webster - Macquarie Research

David Wong - Wells Fargo Securities, LLC

Craig Berger - FBR Capital Markets & Co.

Mark Lipacis - Morgan Stanley

Uche Orji - UBS Investment Bank

Mark McKechnie - Gleacher & Company, Inc.

Glen Yeung - Citigroup Inc

Daniel Amir - Lazard Capital Markets LLC

Stacy Rasgon - Bernstein Research

James Schneider - Goldman Sachs Group Inc.

Jonathan Smigie - Raymond James & Associates

Edward Snyder - Charter Equity Research

Ross Seymore - Deutsche Bank AG

Mahesh Sanganeria - RBC Capital Markets Corporation

Adam Benjamin - Jefferies & Company, Inc.

Alex Gauna - JMP Securities LLC

Harlan Sur - JP Morgan Chase & Co

Srini Pajjuri - Credit Agricole Securities (USA) Inc.

Kevin Cassidy - Stifel, Nicolaus & Co., Inc.

Christopher Caso - Susquehanna Financial Group, LLLP

Ruben Roy - Pacific Crest Securities, Inc.

Craig Ellis - Caris & Company

Timothy Luke - Barclays Capital

John Pitzer - Crédit Suisse AG

Broadcom (BRCM) Q3 2010 Earnings Call October 26, 2010 4:45 PM ET

Operator

Welcome to the Broadcom Third Quarter 2010 Earnings Conference Call. [Operator Instructions] Your speakers for today are Scott McGregor, Broadcom's President and Chief Executive Officer; Eric Brandt, Broadcom's Chief Financial Officer; and Chris Zegarelli, Director, Investor Relations. I would now turn the conference call over to Mr. Zegarelli. Please go ahead.

Chris Zegarelli

Thanks, 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 will provide on future revenue, gross margin and operating expense targets for the fourth 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 make today. Specific factors that may affect our business and future results, including, among other things, general economic conditions are discussed in the Risk Factor sections 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 statement except as required by law. Please refer to the Investor section of our website at www.broadcom.comparable for additional historical, financial and statistical information, including the information required by SEC Regulation G.

In addition, we have placed a slide deck, which is available now in the Investor Relations section of our website, that is on the right-hand side of the page under Q3 2010 Earnings Information. For increased transparency, we have incorporated additional tables and information regarding our future guidance, historical performance and segment operating income.

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

Scott McGregor

Good afternoon. Thanks for joining us today. Broadcom executed particularly well in the September quarter, with cutting-edge products and strong financial discipline resulting in revenue and earnings above the high end of our expectations. Broadcom's quarterly total revenue of $1.8 billion reached record levels, as well as new highs in each of our business segments. On a product revenue basis, this is up 13% sequentially and over 46% from the solid sales growth quarter one year ago.

Sequential revenue growth in the quarter was led by strength in our Mobile and Wireless and Broadband businesses, which were up 27% and 6%, respectively. The above seasonal revenue growth was driven by new product ramps as more consumer electronic devices are connecting to the Internet and connecting with each other. We're particularly pleased to reach our GAAP product target operating model as both our Q3 and nine-month results delivered dramatic expansions in operating margin. As a result of our surge in profitability, we had exceptional cash flow from operations that surpassed 25% of revenue. This achievement resulted in Broadcom's cash and marketable securities position, increasing approximately $425 million to $2.9 billion.

Broadcom is focused on the most innovative technologies related to connectivity, bandwidth and content. Our products are in the strongest growth market of the semiconductor industry in wired and wireless communications. We're clearly benefiting from product leadership and the consumer's increasing demand for data in the home, on the go and at work. Broadcom's focus remains to create outstanding communications and connectivity products to enable us to grow our market share, while maintaining strong profitability.

I'll now turn the call over to Eric for details on the third quarter financial results and our fourth quarter guidance.

Eric Brandt

Thanks, Scott. Moving to the financial overview. Total revenue was a $1.8 billion including $1.75 billion in product revenue. Q3 total net revenue was up 44% from prior year and 13% from Q2 levels. Total gross margin for Q3 was 51.7%. Product gross margin in Q3 was 50.1% versus 50.8% in Q2, down 70 basis points sequentially. Q3 GAAP R&D plus SG&A expense was $593 million compared to $565 million in Q2 of 2010. GAAP earnings per share for Q3 were $0.60 compared to first call consensus of $0.55. Q3 GAAP product operating margin was 15.8%. Cash flow from operations for Q3 was a record $456 million. Our cash and marketable securities balance was up to approximately $2.9 billion at the end of the quarter.

Moving to revenue and gross margin. During July conference call, we said we expected Q3 total net revenue to be between $1.7 billion and $1.8 billion. Total revenue exceeded the high end of our range at $1.806 billion, up 13% from Q2. In the Mobile and Wireless segment, solutions for the hand, we experienced significant revenue increase of approximately 27% compared to Q2, driven primarily by strength in wireless combo chips, GPS and the ramp of our cellular solutions.

Our Broadband Communications segment solutions for the home was up almost 6% sequentially from Q2. This resulted from an increase in demand for digital set-top boxes and broadband access equipment. Our Infrastructure and Networking segment solutions for infrastructure grew slightly at 1% above Q2 as anticipated.

Our Q3 GAAP product gross margin decreased 70 basis points to 50.1%, down from 50.8% in Q2. This decrease was primarily due to excess and obsolete reserves taken in the quarter.

Moving to operating expenses. R&D and SG&A expenses for Q3 were up $29 billion from Q2 levels versus our guidance of up $25 million to $35 million. The increase was primarily related to an approximately $20 million increase in development, design and math cost, as well as increases in employee costs. Stock-based compensation was 6.3% of net revenue, down around 100 basis points from Q2 and 400 basis points from Q3 a year ago.

Moving to the balance sheet. As I mentioned earlier, total cash and marketable securities were $2.9 billion, which is a record high. Our inventory turns improved to 6.5x, up from 6.2x in Q2 of 2010. Despite this improvement, our turns remain below our long-term target due to timing fluctuations and the new product ramp of select cellular base band and mobile multimedia products. Our accounts receivable days sales outstanding was up slightly to 40 days in Q3.

Moving to expectations. We currently expect net revenue in Q4 to be flat to up $100 million or approximately $1.8 billion to $1.9 billion. We anticipate our Broadband segment to have modest sequential growth and the Mobile and Wireless segment to be up over last quarter, and the Infrastructure Networking segment to be roughly flat. We expect Q4 product gross margin to remain roughly flat to Q3. With respect to R&D and SG&A expenses in Q4, we expect these expenses to increase by $20 million to $30 million, of which about half relates to increases in legal spending as the options related derivative case prepares for trial in Q1. It is our hope that once this trial concludes, we will be able to sunset our spending on this issue. Please note, Q4 guidance does not include the impact of our acquisitions of Beceem and Percello, which are expected to close either in Q4 of 2010 or Q1 of 2011.

Finally, we are very pleased to report 15.8% GAAP product operating margin for Q3, within our goal of 15% to 17% product operating margin, about one year ahead of the plan we discussed on Analyst Day last year. This was achieved with stock-based compensation still running about 100 basis points above our long-term target. In addition, consistent with the guidance we've provided today, we believe we will be within the GAAP product operating margin goal for Q4 as well.

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, Broadcom's broadband communications revenue grew 6% sequentially in the third quarter to a new high, with record sales from core set-top boxes and broadband modems. Our diversification strategy in the set-top business is gaining traction through increased adoption of high-definition broadcast content, our increasing sales at overseas carriers and technological advances in home networking such as MoCA and wireless LAN. We are benefiting from cable operators in China, who were adding voice and data services to their existing video platforms, along with a nationwide push to increase HD broadcasting, resulting in a significant increase in orders for HD set-top boxes and cable modem chip sets.

Broadcom's advanced set-top box technology is a clear differentiator providing best-in-class integration, performance and energy efficiency, enabling us to offer our customers advance functionality, while also reducing the energy requirements in the home. Our Broadband Carrier Axis business continue to show strong year-over-year growth with record revenue in Q3. Revenue was driven by increased VDSL Central Office and CPE shipments for IPTV deployments worldwide, along with ADSL and GPON sales. We have an increased presence at service providers who were continuing their bandwidth recapture and analog shut-off programs to allow for increased HD and DOCSIS 3.0 deployments. During the quarter, Broadcom announced its FastRTV technology that dramatically improves the consumer video experience. As consumers transition from analog to digital broadcast globally, FastRTV technology is a significant benefit in addition to the improved picture quality and increased capacity for advanced services that an all digital platform offers our carrier customers and its subscribers.

In our Consumer Electronics business, Blu-ray experienced strong quarter-on-quarter growth in support of the upcoming holiday shipments, while an industry-wide slowdown in the LCD TV sales resulted in a weaker-than-expected revenue of our DTV SoC solutions. We continue to invest in the DTV business and have sampled our first 40-nanometer DTV part to multiple customers with production shipments expected by year end.

Today, we announced the acquisition of Percello, which expands our broadband portfolio to include Femtocell. Percello's high-performance and energy efficient Femtocell technology when combined with our portfolio of broadband and connectivity solutions will enable Broadcom to offer a robust suite of technology through the conversions of wired and wireless services in the connected home. We expect revenue growth to continue in the December quarter, driven by new product cycles and increases in the adoption of high-definition pay TV services and content across the globe.

Moving to Infrastructure. Broadcom's Infrastructure and Networking business in the third quarter was up more than 35% year-over-year and up slightly sequentially to a new high with record sales of switches. We continue to see strength in our switching portfolio from new product adoption and service provider broadband network upgrades and rollouts. We expect that surging demand for video and data will outstrip expansion in capacity, resulting in a multiyear revenue growth opportunity for our largest businesses of switches and 5s. With the incredible growth of content that challenges data centers, networking infrastructures moving to 10-gigabit Ethernet solutions. We expect a strong adoption of our high-throughput, energy-efficient, low-latency 10-gigabit products by data centers and enterprise customers will be a secular revenue growth driver for Broadcom. We're pleased to announce our initial 40-nanometer product shipments with our 64-port, 10-gig Trident chip, and we expect additional 40-nanometer products to begin shipment in this quarter.

We're seeing strong customer acceptance of our broad portfolio of silicon solutions supporting the newly ratified IEEE energy efficient Ethernet standard. Energy efficiency is a crucial importance to our customer and to the networking industry as a whole. Not only has Broadcom is deeply involved in the development and ratification of the IEEE standard, we also worked diligently to create products that exceed what is defined in the standard. As Eric mentioned, we're expecting network sales to be roughly flat in the fourth quarter.

Moving to our hand platform within our Mobile and Wireless business, Broadcom experienced 27% sequential revenue growth, with dramatic expansion in sales across our wireless connectivity and cellular-based band solutions. Based our customers order plans and solid traction and new product ramps, we expect growth in the fourth quarter from our Wireless Connectivity business and a substantial increase in sales from our cellular solutions. Within the cellular baseband market we're pleased that the revenue growth in shipments on multiple platforms at our current Tier 1 customers. Revenue growth in Q3 was driven largely by increased shipment of our cellular baseband solutions, multimedia co-processors and power management chipsets.

To extend Broadcom's wireless multimode solutions, we expanded our position in 4G with a proven leader in LTE and WiMax solutions through the announced acquisition of Beceem Communications. Beceem will accelerate the time-to-market for our 4G multimode solution or expanding Broadcom's addressable market in handsets, broadband wireless gateways, mobile computing and consumer electronics devices.

Our wireless connectivity platforms did particularly well in Q3, with double-digit sequential growth in most of our lines of business. Broadcom's performance from the wireless LAN and GPS businesses was exceptional, with wireless LAN revenue growth above 20% and GPS sales of more than doubling sequentially. We had strong and broad-based sales growth in our Wireless LAN market segments, expect revenue expansion to outpace Broadcom's corporate growth again in Q4. Our GPS traction is broad-based across the leading handset OEMs, along with sustainable growth in PNDs.

Our Bluetooth technology continues to find its way into more and more innovative consumer electronics devices to address the increasingly sophisticated demand for these popular products. With our Bluetooth products available in leading video game consoles, digital televisions and remote controls, Broadcom continues to push Bluetooth beyond its better-known applications and into the consumer electronics experience. We believe the market opportunity for our wireless connectivity devices will continue to grow as we benefit from increasing attach rates in devices like smartphones, tablets, printers, Blu-ray players and digital TVs.

In summary, Broadcom is in the fast-growing wired and wireless communications markets, with cutting-edge solutions enabling more content and bandwidth. We have strong momentum building with acquisitions in 4G multimode modems, Near Field Communications, switching, broadband access and home gateways, and we began shipments of our new competitive 40-nanometer parts. Broadcom excels at silicon integration and our focus remains creating outstanding communications and productivity products that enabled us to grow our market share.

This concludes our prepared comments. And now, we're ready for your questions. Christine, may we have the first question please?

Question-and-Answer Session

Operator

[Operator Instructions] The first question comes from Harlan Sur from JPMorgan.

Harlan Sur - JP Morgan Chase & Co

Scott, in your Broadband segment, you mentioned China has been a pretty strong driver for the business. Maybe you can just comment on demand trends in the U.S. and Europe in the third quarter and here in the fourth quarter as the cable MSOs go through DOCSIS 3.0 upgrades. We've got HD penetration consuming at the satellite and cable MSOs, maybe just some comments there.

Scott McGregor

Harlan, I think that's a good point you raise. We're certainly seeing a rollout of DOCSIS 3.0 and we believe that, that's going to continue over the next couple of years. People are just really trying to compete across the different carriers, the satellite guys competing with the cable guys and so forth. He's trying to get their bandwidth much higher, and so the DOCSIS rollout is particularly important for the cable guys. We're also seeing a substantial growth in the HD satellite capacity in terms of driving a lot of new channels and a lot of new capabilities there as well. And then I think you're going to see IPTV continue to be a growing force in that market going forward, and we participate in all of those segments.

Harlan Sur - JP Morgan Chase & Co

And then within your networking business, I mean it's been flattish here for the last couple of quarters. Do you think a part of it is just maybe some inventory workdowns by your customers that may have added a little bit of inventories, a little bit more than what they had anticipated in the first half of the year? And then the second part of that question is you talked about 64-port gigabyte Ethernet, your 10-gig Trident part, I've heard it's gotten really good traction out there. Is this setting us up for the networking business to be a pretty healthy growth driver for revenues in 2011?

Scott McGregor

Well, let me answer your question sort of in a reverse order. We don't guide yet for 2011. But I do believe that switching is going to be a good growth driver overall for our business over the next two years, and for the trend I mentioned, which is the 10 gig. The Trident chip is an exceptional chip. It's the most complex, the most integrated switch chip that's out there since 40-nanometer, 64 ports, it's a great chip. We've seen very broad customer adoption of that chip and I think it's going to be a winner for us. Regarding your question on inventory, it's possible people build up some inventory at the earlier part of this year and have bled it off. I don't believe there's a lot of inventory out there in the channel. You can always have pockets of it and so forth. But I think overall, we're seeing a pretty clean channel on that.

Operator

Our next question comes from Mark Lipacis from Morgan Stanley.

Mark Lipacis - Morgan Stanley

First question for Eric. The gross margins, in the deck you mentioned that E&O charged for higher. Is there -- are you guys reserving that up a higher percentage for your MSO, why?

Eric Brandt

Yes, Mark. Actually, our E&O calculation is 90% mechanical. So as we have built inventories across the year and demand shifts across individual parts, you would naturally see that over a period of time. And so, mechanically, what we saw is that as things shifted around on parts and wafers that we had ordered a quarter ago, we take reserves because the demand is different in chips for other parts. Do I think that it ultimately will be spoiled inventory? The answer to that is probably not, but it's a mechanical accounting based calculation.

Mark Lipacis - Morgan Stanley

And could you guys comment on lead times that you've seen on wafers to you and from your suppliers and then lead times to your customers?

Scott McGregor

I think the supply for wafers remains relatively tight, it's probably soften up a little bit in the last quarter or two. 65-nanometer in particular remains tight though, above the other process nodes. So we're still seeing a fair amount of congestion there. We are able to deliver parts to customers who order them from us within lead times, so we're able to get those products to customers. The only challenge we have is that they have upside in shorter than lead time where we have to scramble and expedite, and that's more challenging for us. In terms of our own customers, I think our own customers are probably placing with slightly shorter lead times now than they were maybe a month or two ago. I think as the capacity crunches, ease a little bit in the industry, it's led to moving more towards normal. But I would still say lead times on average are above what I would consider normal in the industry right now.

Operator

The next question comes from James Schneider from Goldman Sachs.

James Schneider - Goldman Sachs Group Inc.

I wondered if you could comment a little bit on the Baseband business maybe in terms of the quarter, and maybe the composition in dollar terms between 2G and 3G and whether do you expect that to change going into Q4?

Scott McGregor

We lost the first half of your question, could you repeat that please?

James Schneider - Goldman Sachs Group Inc.

Sorry, I was wondering about the magnitude of the Baseband business in Q3 and how much was the split between 2G versus 3G roughly?

Scott McGregor

We don't quote specific numbers on that but to give you a little sense of that, we had a newer customer in our Baseband business, have a significant ramp in 2G. And so, that pushed the mix a little bit more towards 2G. And I would expect over the course of the next few quarters, the ramp in that customer to emphasize 2G a bit. But over the course of next year, I'd expect it to start moving more towards 3G and certainly, 2012 is going to be a much stronger emphasis on 3G. So that's probably how they'll mix over the next, say, six or eight quarters.

James Schneider - Goldman Sachs Group Inc.

One and then maybe as a follow-up. Eric, back on the gross margin question. If we strip out the E&O reserves, how would gross margins have looked on kind of a mix adjusted basis? Are there any movements around on the mix adjusted basis, and then how long do we expect the kind of the E&O reserves to persist to this level?

Eric Brandt

As I mentioned, it's a bit of a mechanical calculation, so it's hard to predict. E&O hit gross margin this quarter about 100 basis points. Normally, Q3, we've actually just run some statistical analysis. Normally, Q3 has our high consumer quarters. You've heard us qualitatively comment that seasonally, we tend to be a little bit weaker in Q3 and Q4. And based on the data we were just looking at for the last couple of days, we're about 40 to 50 basis points usually lighter in gross margin in Q3 and Q4 given the mix. In terms of E&O moving forward again, depending on the relative demand levels and the shift in the mix relative to the wafers we purchased three months ago, you would -- that would drive the E&O calculation to the extent that we hit the demand numbers we project and the mix doesn't shift substantially, E&O should flatten out again.

Operator

The next question comes from Glenn Yeung from Citi.

Glen Yeung - Citigroup Inc

Eric, maybe for you to start with, you had record levels of cash, but I think I see in your press release saying you're going to raise some debt, and I wondered if you just have any details as to the strategy behind that.

Eric Brandt

So, Glenn, as you read in the press release, it's is under rule 144A, so it's a private placement and I cannot comment anything beyond what is in that press release. However, what I would say generally as it relates to the company, in terms of the company's capital strategy. As you seen and you'll see actually a paragraph or sentence to this effect in our 10-Q, which says basically, to the extent that rates in the market are very low. We might opportunistically like many other companies, take advantage of cost of capital arbitrage and bring in some additional cash into the U.S., which has a fair amount of flexibility. I think as a company, it doesn't alter, it doesn't signal change in our company strategy.

Glen Yeung - Citigroup Inc

And then, the follow-up is back on the Baseband business. We've now seen Intel acquire Infineon's business, and it seems to be creating some opportunities for sort of market share shift. And I wonder in looking at that acquisition, how Broadcom sees the opportunity evolving for them?

Scott McGregor

I don't think that acquisition changes our opportunities at all. We're really focused on creating SoC to integrate baseband and application processors. In fact, every baseband we ship includes an application processors in the SoC. So we see an integrated SoC solution for cellular phones. And actually, we think of the more as the device you carry in your hand rather than a phone per se, and we're moving in that direction. So we don't see that affecting our opportunities and in fact, even could help us a little bit with some disruption in the customer base.

Operator

The next question comes from Craig Berger from FBR Capital Markets.

Craig Berger - FBR Capital Markets & Co.

I was also wanting to ask a little bit about competitive positioning as you head into 2011. A, on the baseband; and b, on the combo chips. But first on the baseband, are there any metrics you can throw out,design wins or new customers, any quantifiable metrics that can help us understand your design win strength as we head into 2011? And then on kind of the same question, is there anybody that's going to eh able to challenge you guys in mobile and combo chips in 2011?

Scott McGregor

Your comments on specific competitors or customers in the baseband area. But we just observed that we have a slightly different strategy than many, which is to integrate the broad breadth of Broadcom's Communication portfolio into SOCs that we offer into handsets, which really start to expand both our baseband and combo strategies. And we don't particularly think of it as a baseband market, we think of it as the cellular SoC market for those portable devices, which allows us to access the tablet market and various other kinds of portable devices I think you'll see coming out. In terms of new customers, we don't announce those before they do come out. But I can say, I do feel good about our Cellular business as being a significant growth driver for next year. In fact, on a percentage basis, probably the highest, on a magnitude basis is pretty high as well. So we're feeling good about that business going forward. In the combo chips space, I think what competitors have learned the hard way is that it's one thing to create a physical device that has all of the elements of a combo chip in it. It's a completely another thing to have them all be of first-rate quality and to get them all to work at the same time. We've had a number of customers who have a number of competitors who brag about how many different elements they've incorporated into a combo chip and yet when the customer gets it, they find that it's great but you can only use one of them at a time. And the integration of those and especially the coexistence of all those components is particularly difficult and that something, I think, we excel at and the reason we've gotten very, very strong support across a wide range of industry, it's for our combo chips and why that business has done so well.

Operator

[Operator Instructions] The next question comes from Adam Benjamin from Jefferies & Company.

Adam Benjamin - Jefferies & Company, Inc.

Eric, you historically talked about your growth or Broadcom's growth being 30% higher than the semiconductor market. If you look at each one of your segments, do you think that's the case going forward in the next couple of years? And the reason why I ask is, there's been some concern regarding the broadband market, as well as your enterprise segment as well, whether those markets or segments can grow as fast as mobile wireless or could be a drag on the growth going forward?

Eric Brandt

So, Adam, actually what we do is we do a weighted average that we actually compare broadband against the broadband segment multiplied by its mix of business. ING against this segment multiplied by its mix of business, et cetera. So that we don't get distortions around the fact that one business might be growing and other business are not growing. And the objective of outgrowing the market are central to every one of the businesses that Broadcom participates in. And the key question we discussed in our strategic offsite and our budget planning meetings and also becomes the basis by which not just the corporate bonus the board has allocated but how Scott allocates the individual bonuses to each of the business units. So we measure our growth rate against the segments we're in. Now, having said that, I think if you look at the market over the last 10 years or so, communications, semiconductors have outgrown the broader semiconductor market probably eight of the last 10 years and for many of the reasons that Scott has been talking about. And being as firmly supplanted in that part of the market, we expect to both ride that wave and gain market share in the individual businesses, such that we do outgrow our markets by a target of, actually our target is 40% faster than our target markets.

Adam Benjamin - Jefferies & Company, Inc.

And then just a follow-up, I know there's been a lot of questions on combos. But Scott, if you look at that segment and I know there's a lot of end markets that were talking about combos going into over time. But where you see that business today versus where you expect it to be going forward? We're in World Series mode here so, are we second, third inning, are we beyond that? If you can somehow quantify, it'd be interesting to hear your perspective.

Scott McGregor

I think we're getting into different innings depending on what component you're looking at. I think Bluetooth is pretty far into the game at this point, and so I would expect that the attach rate would not rise dramatically for Bluetooth. I think we'll see Bluetooth penetrating the consumer electronic devices and move into other spaces. And I think with some of the Bluetooth low energy and some of the newer technologies coming in the Bluetooth space, I think there's an opportunity to continue to grow. Wireless LAN is, boy, I'm trying to pick of the right World Series analogy here but base is loaded and we've got our batters up on that one. I think that's a really strong play. And the thing that's driving that in particular is the increasing attach rate into the portable devices. I think a lot of the carriers have found that they've got congestion in their networks and so they're now, instead of being against wireless LAN because it took airtime minutes, they are now praying that people with their tablets and smartphones will do their Internet browsing and movie watching over the wireless LAN and not over their 3G network. So that's a big driver of that and I think wireless LAN penetration is going to move down into the feature phone space and that represents potential hundreds of millions of additional devices per year and Broadcom stands to get a good share of that. There's a lot of new technologies coming out. GPS, we've certainly seen very strong growth in that. I think as that hits higher attach rate, that's more early innings for us and then there's some technologies like NFC, we just acquired a technology, that technology a company called Innovision in the U.K. Great team, great technology and that sort of just at the top of the first for NFC, so there's a good potential there. And part of our strategy at Broadcom is to continuously look for not only new components to add to the different combo chips but to look at opportunities to rev the technology within each one of them. Wireless LAN in particular is going through a lot of very interesting phases right now. We have everything from one by one end technology to some of the new technologies, AC, which gives you channel bonding and dramatically increases the bandwidth and a variety of other things that will be coming out in that space. So it's a very fertile area. I'd say overall for combos as a set, it's a tremendous opportunity. We're in early stage of the innings. But hopefully, that was helpful, to give a little color on where each of the components are.

Operator

The next question is from Craig Ellis from Caris & Company.

Craig Ellis - Caris & Company

You mentioned a couple of times, the $2.9 billion in cash in the balance sheet, the dividend was initiated about a year ago. Eric, with cash being churn off at a tremendous pace, can you just give us an update on how you're looking at managing against the different options that you have for cash, acquisitions, buybacks and the dividend?

Eric Brandt

Craig, as you can see this year, we have been pretty active on the M&A front and pretty much right in our sweet spot with the acquisition of Teknovus at the beginning of the year followed by Innovision, followed by our announcement of Beceem and Percello. We continue to look for opportunities to enhance our technology portfolio in ways where we can integrate technologies into broader SoCs and essentially, compete or weigh pockets and devices, which has been our strategy and I would say, that remains our first priority for our cash. I think secondarily, if our cash continues to build much beyond what it is, we would entertain other forms of returning cash. Certainly, with -- considering taking debt, we will maintain a very conservative financial policy. But I would say, we are now a dividend payer. We're considering raising our dividend although that's a small amount of cash and we would also consider buybacks but we do buybacks as you know, consistent with what we issue over the course of the year.

Operator

The next question comes from John Pitzer from Credit Suisse.

John Pitzer - Crédit Suisse AG

First, congratulations on hitting the up margin targets, but you dropped there really on the back of mobile and wireless. If you look at enterprise and broadband, up margins are below recent peaks. And I'm just kind of curious, the prospects of those two divisions going forward, and are you done on the Wireless side?

Eric Brandt

Funny question, John, because having followed us for a while, what a difference a year or two makes, right? Because a year ago, everybody was saying, will you ever make money in Mobile and Wireless. And today, if you read the Q, you'll see that our Mobile and Wireless segment had operating margins in excess of 20%. From an ING perspective, I think that's, that we're in the range maybe even a little bit high. In the Broadband segment at around 21%, that's probably in the range as well. And for those of you, who used the non-GAAP numbers, that's about 23 and change percent operating margin for the company, which is above our long-term target. So I don't think that we intend to squeeze our margins further. I think given the increasing R&D intensity, the importance of IP and SoCs would be to drive our competitive advantage in the products we produce and press our advantage by increasing our footprint in this space.

Operator

The next question comes from Tim Luke from Barclays Capital.

Timothy Luke - Barclays Capital

This is for Eric or for Scott. Broadly, as the industry moves now to have supply and demand more in equilibrium and your lead time somewhat more normalized. How do you perceive the broad elements of seasonality as you look into the beginning of next year? Obviously, you have a big consumer ramp for some of the products as you go into the end of this year. So just trying to feel for how you're beginning to plan for expectations for the beginning of next year. And also separately, Eric, for you, how you feel people should be using a framework for your OpEx investments through next year?

Eric Brandt

So, Tim, on seasonality, we look at a mix of adjusted seasonality just for our business generally speaking. Q4 is usually about flat maybe up a point, you'll see we guided to flat up five and change, so better than seasonal in Q4. Q1 is typically seasonally down as the consumer market sort of recover from the holiday season, typically 4.5% to 5.5%. And then Q2 and Q3 tend to be our strong sequential growth quarters of up 7% to 9%. It's hard to call seasonality for next year, but that's typically what we see on a mix-adjusted basis. In terms of OpEx, I think you'll see that we've been driving significant leverage as Scott mentioned through the P&L, over 1,000 basis points year-on-year on a GAAP basis. And I think what you'll see now is us move to a more, probably, more in line OpEx and revenue growth profile as we try to manage our business within the targeted operating model. Obviously challenging in a cyclical business, but that's something we're going to focus on trying to do.

Operator

[Operator Instructions] The next question comes from Mahesh Sanganeria from RBC Capital Markets.

Mahesh Sanganeria - RBC Capital Markets Corporation

Just another question on the mobility segment. Your revenues went up $170 million in September quarter. It's becoming a pretty big segment. So, if you can give us a color on how much of that dollar increase came from baseband versus connectivity? And also going forward in December quarter, where are you seeing the growth, which one is higher and lower? And if we can get some quantification around that, that will be helpful.

Scott McGregor

We don't break those out specifically. I apologize. We do comment a bit though. We did say that, for example, GPS doubled sequentially and we said, the wireless LAN was north of 20%. So those are two numbers that, we also highlighted, cellular as one of the significant growth areas as well. So I hope that helps you get a good sense of that. I think as a comment I made earlier is that cellular should be a dramatic growth driver for us over the next four or five quarters. I think that business is getting good traction now with the two customers we've announced already, and we hope at some point to add additional customers.

Operator

Your next question comes from Uche Orji from UBS, New York.

Uche Orji - UBS Investment Bank

Scott, you talked a lot about the importance of IP and as you discuss your business areas, one of the things I wanted to talk about is 4G, WiMax and LTE. By your acquisition of Beceem, can you characterize what it brings for you because they'll be charting the industry also about other companies that may have significantly more, a superior IT position compared to Beceem. So can you just characterize how you are positioned now into 4G with this acquisition?

Scott McGregor

Broadcom has been working on a variety of 4G technologies prior to our acquisition of Beceem, but Beceem adds a lot of value in a number of ways. First of all, it brings a really excellent engineering team. And that's one of the things we look at whenever we do an acquisition, is it really Broadcom quality engineers that we'll be adding and we feel very good about that team and their ability to execute. It brings us a WiMax business, which certainly gives us access to many new customers and many new opportunities there. So not only to be able to benefit from the WiMax business itself but to be able to offer all of the other technologies we have to those existing customers in that space. And then very importantly, it also give us a stronger team going forward on the LTE side of 4G, which enables us to get to market more quickly with our LTE solutions in the 3GP space. And so we believe that's a multi-fold advantage for us and that's the basis for the acquisition.

Operator

Your next question comes from Ruben Roy from Pacific Crest Securities.

Ruben Roy - Pacific Crest Securities, Inc.

First on the Wireless LAN comments of growth north of 20%. Is that a combination of discrete Wireless LAN and combo products?

Scott McGregor

Yes, that's a wireless LAN across our all of our segment's markets and various ways it gets to market through combo chips or discrete chips.

Ruben Roy - Pacific Crest Securities, Inc.

And then on the Broadband side, in terms of, I think, you might have talked a bit about North America earlier, so I'm sorry if you mentioned growth trends, but was growth kind of equal for set-top boxes in both China and North America or did one geography outperform? And what are your expectations going forward?

Scott McGregor

They trade around a little bit. I think we'll see China and North America go at different paces. China tends to be more tender driven and surge. North America tends to be more competitive driven and who's running specials to get new subscribers. I think China is beginning to pick up again a little bit. China is interesting because we see the revenue in multiple phases. There will certainly be deployments where they'll go into relatively large cities and regions and deploy additional boxes. And then, we'll see the bandwidth surge requirement there, where we'll get the switches, we'll get follow-on consumer devices as people add devices in their home to take advantage of the new bandwidth they have, either consumer electronic devices or other networking devices. So it tends to smooth it out a little bit versus some of our customers who might be selling a specific box. We have certainly [ph] a broader position in that space. I'm pretty bullish about China going forward, that market seems to be quite hot and likely to continue. And the competitive situation between the different broadband providers in the United States also means that there's going to be a lot of competition, a lot of innovation in products, which is good for us.

Operator

The next question comes from David Wong from Wells Fargo.

David Wong - Wells Fargo Securities, LLC

Tax rate. What do you reckon your long-term GAAP tax rate is going to be?

Eric Brandt

David, I would use the tax rate that you see in our financial. I mean, we typically book tax rate that run 3%, 4% GAAP tax rate. It varies because our cash tax tends to be relatively constant in the sort of $8 million, $9 million, $10 million range per year and so as our revenue grows, the tax rate's been drifting down. But I would just use whatever you see in the GAAP tax rate at this point.

Operator

The next question comes from Ross Seymore from Deutsche Bank.

Ross Seymore - Deutsche Bank AG

Just one clarification on the legal expense popping up, how should we think about the timing and when that might come down? And then one other quick housekeeping, out of the $2.9 billion in cash you have, how much of that is onshore versus offshore?

Eric Brandt

So on the legal spending, the trial is scheduled for February of next year. I suspect that it will grow this quarter and into next quarter as the various teams go to trial. It's an odd trial, a derivative trial, an odd trial in the sense that we are paying the litigation expenses for the defendants. But should there be adjustment the other way, the money comes back to the company. But I expect it will peak in Q1, assuming the trial ends in Q1 and it's done. In terms of cash mix, in the Q, you'll see about 55% of our cash is onshore. If you sort of adjust for inter-company receivables, that would actually be closer to 60% onshore.

Operator

Your next question comes from Mark McKechnie from Gleacher & Company.

Mark McKechnie - Gleacher & Company, Inc.

First on the Beceem acquisition closing in Q4, any changes or thoughts on the accretion dilution in the first couple of quarters?

Eric Brandt

So, in the press release, we said excluding the effect of purchase accounting, we think it's about neutral to our P&L next year. No changes to that since we issued the press release.

Mark McKechnie - Gleacher & Company, Inc.

How close do you think you are to having an LTE product there? Is that the Beceem team, yelling [ph] when we expect to see that in the market?

Scott McGregor

One of the things at Broadcom that we do is we don't announce products until they're in the market, so I can't share with you when we'll have an LTE product. But we have said previously we are working on them. I think to put it in perspective, LTE is going to be mostly a data card market for the foreseeable next few years. That's where it makes the most sense because of the bandwidth, it's probably not going to go into volume cell phone simply because of the power consumption. And it doesn't make voice calls any better when you have very high bandwidth connectivity. It's really a data advantage to have that high bandwidth. And that's makes more sense in laptops and tablets and other things where you'll see a data card either sold separately or integrated onto the motherboard.

Operator

The next question comes from Stacy Rasgon from Stanford Bernstein.

Stacy Rasgon - Bernstein Research

Eric, just one about inventories. If you go $45 million worth of inventory in the quarter, that's add on top of the $87 million that you built last quarter. And I know you've said that last quarter, the other end of that was in preparation of the cellular ramps and the multimedia ramps. Can you just help me with some color maybe on how much of the incremental build both last quarter and this quarter was actually to support those baseband and multimedia process or ramps? How much is going to support some other parts and can you just talk a little bit about inventory expectations for the next quarter?

Eric Brandt

So, what last quarter, it certainly was more of the build in advance of the ramp. This quarter was less of that, more of a mix across different businesses. If you look at our business turn, it's interesting although this isn't a GAAP measure, it's a non-GAAP measure. Two of our businesses are already operating in our targeted range of seven to eight turns. And two of them are not, one of them obviously being the cellular based product and the other being the ING business, which typically operates slightly below the range. Our hope is that these things will improve. Certainly, as you're dealing with tight supply and queuing times, making sure that you have sufficient supply longer out does create some variation in terms of what actually is in the demand pattern. and I suspect that will even out, whether that evens out exactly in Q4 or more into Q1, I can't exactly say, but it should even out over the next six months.

Operator

The next question comes from Daniel Amir from Lazard Capital.

Daniel Amir - Lazard Capital Markets LLC

Your Broadband business I supposed, you said flat to up in Q4. Can you give us an idea what areas might be flat to up and what areas might be flat to down in that segment?

Scott McGregor

I think we said it would be modestly up in Q4. So a little stronger than flat to up. But no, we don't break out particular segments there.

Eric Brandt

The bigger segments though are the broadband modems and the set-top boxes, which typically would drive that growth rate and pull that up.

Operator

The next question comes from Chris Caso from Susquehanna Financial.

Christopher Caso - Susquehanna Financial Group, LLLP

I know you guys have the Analyst Day coming up soon, but I wonder if by way of a preview, you can kind of point us to looking into next year, what are the biggest areas we should be paying attention to with regard to incremental growth drivers as we look into next year? You mentioned cellular as one of them, wonder if you could just kind of go through the biggest ones?

Scott McGregor

Thanks for bring up Analyst Day. That really is where we go into depth in terms of the underlying drivers in our business. But I think some of the things that we see as growth drivers next year, in the broadband space, I would say things like our Consumer Electronics business and DTV overall moving up. I think there's opportunity there in terms of market share opportunity. In the cellular space, definitely, some growth opportunities there for both multimedia, as well as the basebands and related chips. And then I think the wireless combo chips still definitely going strong there and opportunity for growth and I think GPS will be a very high percentage growth driver as well. So that's sort of a quick preview on growth drivers for 2011.

Operator

The next question comes from Steve Smigie from Raymond James.

Jonathan Smigie - Raymond James & Associates

The NFC technology, are you seeing that primarily to drive the level [ph] commerce platforms and you look for the timing here on out?

Scott McGregor

The NFC is a broadly applicable technology. I think we'll use it for a number of things. One thing I think it's very useful for is for pairing Bluetooth, pairing wireless LAN, making it easy to connect devices by bringing them close to each other, having them pair automatically and it's just so much more fun than exchanging Web piece [ph] and doing the normal Bluetooth pairing protocols. We'll also use it for commerce. We have a number of customers interested in that space and there are couple of other interesting applications we'll announce over time.

Operator

The next question comes from Alex Gauna from JMP Securities.

Alex Gauna - JMP Securities LLC

Scott, I was wondering if you could give some color around how you see tablets working into the notebook market share? And the puts and take for Broadcom on that fund. If I could put you on the hook because you are talking to your OGM and OEM customers, what do you think the right outlook is for notebooks vis-a-vis tablets in 2011?

Scott McGregor

I think tablets are going to find some very interesting positions in the market and definitely will cannibalize the netbook market. They're a better form factor, there's just some really interesting innovation going on in tablets. I just see the tablet market fragmenting into a number of different areas. I think we'll see the netbook replacement tablet as one market and that certainly, there off to a very strong start there especially with one customer there. I also believe that you're going to see special-purpose or carrier versions of tablets that make sense to either fill a niche need whether it's a book reader or a media reader or a remote control device. A great example, we're working with a carrier in Japan and shipping today a tablet that they give away for free when you order a triple play from them. So if you call them up and you say, I'd like to order Internet service with TV service and phone service, they give you a free tablet and a little bit like the old way banks used to give you a toaster when you open an account but a little more interesting because this is a pretty full-featured tablet, this has touch display, HD capable display, wireless LAN, the ability to see movies and browse the Internet and kinds of things. And our solution has enabled the total bill of materials for that device to be $100 or less, and that's a 7-inch tablet. We're also working with some folks on some larger tablets and we believe it's going to be just a very interesting innovation market. My guess is that there will be hundreds of tablets solutions introduced over the next year or two, probably many fewer will find a success for the companies that launched them. But I do believe the market overall is going to be interesting. And we participate very broadly. Broadcom has a lot of capabilities in conductivity, in basebands, application processors, Power Management, NFC, VoIP, and all those different technologies that enable us to produce very competitive solutions for tablets.

Operator

The next question comes from Kevin Cassidy from Stifel, Nicolaus.

Kevin Cassidy - Stifel, Nicolaus & Co., Inc.

You mentioned GPON being an area of strength, wonder if you could say what geography you saw that in and what do you see going forward?

Scott McGregor

So today, I believe GPON will be of interest in the United States and Europe. I think EPON is a little more popular in Asia and it will be interesting to see how those technologies move over time and which one wins. As usual, Broadcom has taken an agnostic approach on this and we have both GPON solutions and EPON solutions and various other PON solutions and so we believe we'll participate in the market whichever direction it goes there. But GPON initially, I think we'll see primary success in Europe and the United States.

Operator

The next question comes from Edward Snyder from Charter Equity.

Edward Snyder - Charter Equity Research

Let's talk about the Mobile business and some of the mix shift that you're seeing in more, 2G and 3G. Over the year, we talked about extensively, Scott, you all know about cost and talking about how 3G would be big growth drivers this year. Have you think that hasn't really played out as well as you might have thought. Is it mostly just the change of the OEMs in terms of their of products or is it just may be other competitors coming in with their products. Because the reason that Nokia and Samsung and some of you potentially larger customers, they're all talking about pushing smartphones into the lower tiers, which would essentially require to based to get the cost basis that need you to do it and we still haven't seen that yet, can you give us the kind of a feeling to just fill off for a while or is there a technology that we need to get before we can there?

Scott McGregor

I think we're absolutely getting there. We're shipping a number of smartphones today that are 2G based and when people look at smartphones, I &A defined a smartphone as a phone that's capable of Internet browsing and multimedia, taking pictures, push and pull content, those kind of things define a smartphone for me probably wireless LAN in the device and we see those both as 2G and 3G dominating that today. In the United States, they're going to tend to be more 3G and high-end devices with faster application processors and other things. In the rest of the world, people are looking for cost-effective smartphones and smartphones that they can buy at a more affordable price and so the volume market, I think, is going to be in the smart feature phones, low end smartphone space and that's at the sweet spot of our high end 2G integrated SoCs, as well as the 3G products that we have. Our 3G products are moving up more into the higher end space. But I think that's going quite well. Don't be confused, one of our large customers that started to ramp is primarily shipping 2G devices and so that may be skewing a little bit. But over the next few years, I expect us to really see a lot of great smartphone solutions and those are shipping today. I believe the launch of Android will also create a whole new tier of cost-effective smartphones, that's a market we're very suitable for in our products.

Operator

The next question comes from Srini Pajjuri from CLSA.

Srini Pajjuri - Credit Agricole Securities (USA) Inc.

Scott, just on the tablet to follow up on the previous answer. Looking at your history and the combo chips and the kind of success you've had. Obviously, that does present a significant opportunity but we haven't seen a whole lot of at least talk from you on the CPU side given some of your competitor sellers aggressively going out to this market. I'm just wondering if that is, if you view that as an opportunity longer-term or would you tend to focus on the combo chip and maybe attacked this from an SoC standpoint?

Scott McGregor

That certainly something we've looked at and discussed. Broadcom is really a very strong processor company, we probably ship more arm and mix processors than almost other companies, maybe more than anyone else. We view it more as an opportunity to create an SoC and so I mentioned before that with our baseband solutions, we include application processors with each of them and we'll certainly ratchet up the performance dramatically there. I'd say maybe in the past, we were maybe not as aggressive in terms of pushing the CPU speed on those. But there's no reason we can;t do that going forward. And so, will we do standalone? Yes, that's a possibility. Our primary strategy is to look at SoC solutions, we could certainly do a standalone. And again, our philosophy is we'll announce those products when they're available in the market. So I can;t give you more color than that but we certainly have the capability to do either or both.

Operator

Today's final question comes from Shawn Webster from Macquarie.

Shawn Webster - Macquarie Research

Just one quick clarifying question on the gross margins. Excluding the change in inventory reserves with product margins have grown sequentially?

Eric Brandt

It's about 100 basis points and we were down 70 basis points, so net-net, yes, it would've been up slightly.

Scott McGregor

In closing, I'd like to leave you with a few thoughts. Broadcom really had an excellent Q3. We've grown faster than the industry with market share gains in both our core and emerging businesses. We've significantly improved our operating profitability to achieve our GAAP product financial model and return to capital shareholders.

We're looking forward to additional market share expansion and strong financial performance in the December quarter. And finally as a reminder, we'll be hosting our 2010 Analyst Day event in Irvine on December 14. If you need any additional details on this event, please give Chris or John a call. With that, thank you very much and have good day.

Operator

Thank for participating in Broadcom's Third Quarter 2010 Earnings Conference Call. This concludes the conference for today. You may all disconnect at this time.

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