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Broadcom Corporation (BRCM)

Q4 2006 Earnings Call

February 8, 2007 4:45 pm ET

Executives:

Peter Andrew – VP, Investor Relations

Scott McGregor - CEO

Bruce Kiddoo – Acting CFO

Analysts:

Michael Masdea - Credit Suisse

Ross Seymore - Deutsche Bank

Chris Caso - Friedman, Billings, Ramsey

Craig Ellis - Citigroup

Alex Gauna - UBS

Srini Pajjuri - Merrill Lynch

David Wu - Global Crown Capital

Gary Mobley - AG Edwards & Sons

Mark Edelstone - Morgan Stanley

Seogju Lee - Goldman Sachs

Arnab Chanda - Lehman Brothers

Adam Benjamin - Jefferies & Co

Allan Mishan - CIBC World Markets

Edwin Mok - Needham & Company

Craig Berger - Wedbush Morgan

Satya Chillara - Pacific Growth Equities

Shebly Seyrafi - Caris

Shaw Wu - American Technology Research

Presentation

Operator

Good afternoon ladies and gentlemen and welcome to the Broadcom conference call. At this time all participants are in a listen only mode. Later we will conduct a question and answer session. Please note that this conference is being recorded. I will now turn the call over to Mr. Peter Andrew. Mr. Andrew, you may begin.

Peter Andrew – Investor Relations

Thank you, Operator, and good afternoon to everyone. Before I turn the line over to Scott and Bruce I'd like to make a few quick comments.

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 Q1 2007 and any other future period and statements about prospects for our various businesses and the development status and planned availability of new products.

It should be clearly understood that our actual results may differ substantially from the forward-looking statements we make today. Specific factors that may affect our business and future results are discussed in the risk factors section of our amended annual report on form 10-K(a) for 2005 and the quarterly report on form 10-Q(a) for Q1 2006 and subsequent quarterly reports on form 10-Q and in our other SEC filings.

A partial list of these important risk factors is set forth at the end of today's press release. As always, we undertake no obligation to revise or publicly update any forward-looking statement for any reason. Throughout this call we will be discussing certain non-GAAP financial measures. Today's earnings release and the related current report on form 8-K describe the differences between our non-GAAP and GAAP reporting and presents a reconciliation between the two for the periods reported in this release. Please see the investors section of our website for reconciliations going back to the beginning of 2004 as well as for additional financial and fiscal information, including the information disclosed in accordance with SEC regulation G.

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

Scott McGregor

Thank you, Peter. Good afternoon and thank you for joining us today. I'm going to go over some of the high points of the year and Q4 and then let Bruce give more detail on the financial statements. I'll then come back and add some color on the end markets we serve, our technology and the specific performance of certain of our lines of business before we take your questions.

2006 was a very good year for Broadcom, as we increased our revenue by 37% - or nearly $1 billion - to $3.668 billion. We increased our cash and marketable securities by more than $900 million to just over $2.8 billion at year end. Our 37% revenue growth outpaced the growth of the total semiconductor industry by over four-fold. For Q4, our net revenue came in at $923.5 million which is a bit better than we expected and due to strong demand for some of our customers' consumer products in the holiday season.

We ended 2006 with an amazing team in place and we continue toward our mission of being the leading communications semiconductor company. We plan to achieve this goal by focusing on hiring the best talent, continuing to bring new products to market and expending to new end markets. Today we also announced that our board of directors has approved a new share repurchase plan for up to $1 billion. We believe this program will enhance shareholder value by returning capital to our shareholders and reducing share dilution.

Now I'll turn the call over to Bruce Kiddoo, our acting chief financial officer, to talk about Q4 and give guidance for Q1.

Bruce Kiddoo, Acting CFO

Thanks, Scott. Overall, we are pleased with our Q4 results. Revenue of $923.5 million was up $21 million or 2.3% from Q3 and slightly ahead of our expectations. Non-GAAP gross margins of 51.9% was up 90bps from last quarter and was in our long-term model of 50-52%, consistent with our guidance. Total non-GAAP operating expense increased by $30 million over Q3 due to investments in new product areas in 65 nanometer process technology plus increased legal and accounting costs related to the restated financial statements that we filed on January 23rd.

Non-GAAP EPS were $0.31 down from $0.32 in Q3. Our cash and marketable securities on hand increased by $247 million for the quarter, leaving us with a record balance of $2.8 billion. Inventory for the quarter decreased by over $20 million to $202.8 million, or 8.8 turns. This is our second consecutive quarter of significant reductions in inventory. This demonstrates the excellent work our operations team can do to adjust our supply to an ever-changing environment. The turns level of 8.8 times is well above our long-term goal of seven to eight turns.

For the full fiscal year we had very strong results, growing revenue just shy of $1 billion and growing cash and marketable securities by over $900 million. Broadcom's revenue growth outpaced the overall semiconductor industry by over four fold, driven by revenue growth in each of our target end markets in excess of that of the overall industry. Moving on to revenue and gross margin, in our October call we said we expected Q4 revenue could be approximately $903-912 million. We said we expected revenue growth to be led by our mobile and wireless products. We expected growth in almost all major segments including cellular, driven by growth in both 2G and 3G phones, Bluetooth driven by cellular, the ramp of Nintendo Wii and PC applications and wireless LAN driven by the ramp of Nintendo Wii.

This is exactly what occurred. We exceeded our revenue guidance in Q4 due to seasonally strong sales of solutions in the mobile multimedia devices, Bluetooth for handsets and PC applications as our customers wanted to make sure that they had adequate product on the shelves.

In other areas, as expected, our switch business did growth in Q4, but this growth was offset by softness in sales of controllers due to excess inventory and a mix shift from server enterprise related products to consumer oriented products. With respect to our broadband communications market, strong growth in cable modems was more than offset by decline in other lines of business. In cable set top boxes, our revenue was down, consistent with our guidance, as a major customer purposely built up inventory in Q3 due to a manufacturing transition. In addition, there was a mix shift to lower-end set top boxes.

Our DSL was down as we worked through the remaining excess inventory. We had expected growth in our

digital TV business in Q4, but instead we experienced a fall off in our much older design wins in this space, offset slightly by the commencement of shipments to a second tier one customer very late in the quarter. In terms of revenue distribution for Q4, broadband communications accounted for approximately 36% of total revenue; mobile and wireless for 33% and enterprise networking for 31%. In Q4, we once again had two customers who accounted for 10% or more of our revenue: Motorola and Cisco.

With respect to our gross margin, as we guided to in October, we began to see the supply chain capacity open up, resulting in a more favorable pricing environment. Q4 gross margin of 51.9% was above Q3 and at the high end of our long-term model. Regarding operating expenses, non-GAAP operating expenses were up $30 million from our Q3 levels due to increased investments in new product areas, up approximately $11 million and investments in 65 nanometer process technology up approximately $7 million. As we have indicated before, to put this level of investment into perspective, approximately 30% of our R&D spending is in markets that represent little to no revenue today. In addition, just to illustrate how quickly we are making a transition to 65 nanometer, in Q3 less than 5% of our tape outs were in 65 nanometer. That percentage jumped to 33% in Q4 and by Q4 2007 we expect almost 90% of our tape outs will be in 65 nanometer.

65 nanometer is giving us a definite competitive advantage in terms of low power and the ability to integrate features and functionality that most of our competition simply cannot achieve. Our expenses also increased by approximately $6 million due to legal and accounting costs associated with our recent equity award review.

We increased our total company headcount from Q3 by 194 to a worldwide total of 5,233. This includes over 3,808 employees in engineering, or 73% of our total headcount. This has increased from approximately 68% two years ago. Our annualized revenue per employee was $706,000 in Q4. Turning to the balance sheet, we continue to generate strong positive cash flow, increasing total cash and marketable securities by $247 million to an all-time high of $2.8 billion.

Consistent with Q3, the positive cash flow was generated primarily from operations as proceeds from employee stock option exercises and outlays for our stock repurchase program were both negligible due to the suspension of our S-1/A Registration Statement while our financials were not current. Capex did increase in Q4 and will remain above average in Q1 and Q2 as we prepare for the move to our new Irvine campus late this quarter.

After lowering our inventory by over $54 million in Q3, we lowered our inventory further in Q4 by over $20 million to $202.8 million. Inventory turns were 8.8 in Q4 compared to 7.9 in Q3. A percentage of our sales made through distributors, approximately 13%, remain consistent with our Q3 levels. As a reminder, we recognize revenue through distributors on a sales out basis. Broadcom's low inventory and relatively low distributor sales have given us a higher level of visibility than is the case for many others in the semiconductor space.

Our accounts receivable DSOs decreased from 43 days to 38. Our linearity of shipments was good, shipping only 29% of the quarter in the third month, reflecting the seasonal requirement for product early in the quarter.

Also today, we announced a new share repurchase program, under which we can purchase up to one billion of our class A common stock over the next 18 months. Although we currently anticipate that we will repurchase that amount in the first 12 months of the program, the rate of our repurchases will of course depend on market conditions and other factors. The objectives of this program consistent with prior years are to manage our net share dilution and to return capital to shareholders.

Our first priority will always be to invest in our business, we believe that given our strong cash flow, this is an excellent use of our cash. Moving on to Q1 guidance, in Q4 we exceeded our revenue guidance due to seasonally strong sales in mobile multimedia devices and Bluetooth handsets and PC applications. For Q1, we expect a seasonal decline in our more consumer oriented businesses which we anticipate will be partially offset by growth in switching and certain areas of our broadband business. Specifically for Q1, we expect revenue to be down slightly in the range of $890-900 million.

Looking at what we expect to happen in Q1 versus Q4, in broadband communications we expect growth in satellites as operators enter the year with their new capital budgets, and in DSL as our customers have worked through their inventory issues and resumed their normal level of shipments. In mobile and wireless we expect a seasonal decline in our mobile and multimedia and Bluetooth businesses. In enterprise networking, we expect continued recovery of our enterprise switch and buy business offset by weakness in our Ethernet controller business due to excess inventory in the PC market.

For non-GAAP gross margin, in Q1 we expect to see continued benefits from the supply chain capacity opening up, resulting in a slight increase in gross margin compared to Q4. For non-GAAP operating expenses in Q1, we expect continued investments in new products and 65 nanometer process technology, both of which we believe are critical to our revenue growth and gross margin in 2007 and later years. In Q1, we expect non-GAAP operating expenses on a dollar basis to increase but not by the same magnitude as they increased from Q3 to Q4.

Historically when our spending increase is above our business model, it is due to specific customer opportunities that we have a good track record of converting to revenue. However, we remain very conscious of our long-term profitability models and will take whatever steps we reasonably can to ensure we operate within that model while continuing to fund our growth opportunities and other priorities. Finally, cash flow from operations for Q1 is expected to remain strong. Now I'd like to turn the call back over to Scott to talk about the state of the business.

Scott McGregor

Thanks, Bruce. During Q4 we successfully brought to market the first of many products we plan to offer in 65 nanometer. Our early ability to deliver products in smaller geometry processes will continue to be a theme for Broadcom as we combine the low power and integration potential offered by 65 nanometer to deliver products that are truly differentiated in all of our target end markets. Combine these abilities with our solid balance sheet and one could easily observe that we're very well positioned to lead this industry. We have over 20 different lines of business focused on three separate end markets that we classify as broadband, mobile and wireless and enterprise networking. Another way to look at it is that Broadcom solutions touch an individual at home, at work and while mobile.

These lines of business change from time to time but none represented over 15% of revenue in Q4 and only three are above 10% of sales, which is a testament to the diversity of our product stream and the fact that we're not being driven by any single end market product, technology or customer. Moving on to the product lines, in broadband communications, revenue was down in Q4 due to weakness in our DSL and cable set top box businesses but that was offset by continued growth in our cable modem business. In DSL, we believe that Q4 marked the bottom as we resolved excess inventory and experienced product transition issues with specific customers.

We now believe that excess inventory has dissipated from our customers' supply chain and expect DSL revenue to increase in Q1 2007. Overall, we finished 2006 with more than 100% unit growth in our DSL line of business and with market share greater than 45%. Our funnel of design wins indicates that further increases in market share are possible in 2007. We see excellent opportunities to grow this business longer term, driven by additional unit growth, ASP increase as we add voice, switching and wireless LAN to these platforms and our expansion into the VSDL 2 space. We believe that we can achieve a share position in VDSL 2 similar to what we have today in ADSL 2+. Coming from a small base, our VDSL 2 CPE revenues more than doubled from Q3 to Q4.

In cable modems, our business remains strong in Q4 are our main customers continue to see strong demand for both data and voice modems. As the market continues to convert from data to voice modems, we expect that we will generate more revenue from voice modems compared to data modems some time in the middle of 2007. Bruce already talked about the historical performance of our cable set top box market business. We anticipate that in Q1, cable set top customers' order patterns will be similar to the first half of 2006. Based on recently reported results from our top two customers in this space, demand for set top boxes remains strong.

In our DTV business, we had two significant developments. First, we started shipping to another tier one DTV OEM and we anticipate that the customer will be significant as we move through 2007. Second, we delivered the industry's first single chip 65 nanometer high definition blu-ray digital TV solution. This solution enables TV and other consumer equipment manufacturers to cost effectively build TVs and displays with the industry's highest quality HD resolution. Customer interest is strong and consumer products incorporating this solution should who up in the 2007 holiday season.

During Q4, we announced the industry's first complete system on a chip solution that combines both blu-ray and HDTV optical disc formats into a highly integrated single chip design. Blu-ray and HD DVD are the next generation of optical disc formats for recording, rewriting and playing high definition video and digital data. The new Broadcom SoC has an advanced feature set coupled with a software stack that's compliant with both blu-ray and HD DVD specifications. It provides OEMs with a complete platform for future generation media players that support both disc formats.

Our expectation in this space is that universal players such as the one that one of our customers demonstrated at CES will become a strong force in the market because they solve the customer quandary of which format to buy.

Moving onto enterprise networking. Revenue was down slightly in the quarter, driven primarily by weakness in our controller business due to excess inventory and a mix shift from enterprise, client and server products to more consumer-oriented products. One line of business that experienced relative strength was gigabit Ethernet switching as we worked through the inventory correction in prior quarters and in market demand. We expect to see this trend continue. Looking beyond gigabit Ethernet, we see adoption of 10 gigabit Ethernet technology primarily being driven by the server and blade server markets as well as by switches and other data center equipment markets.

At the beginning of Q1, we acquired LVL7 Systems, a developer of production ready networking software that enables networking OEMs and ODMs to reduce development expenses and compress their development timelines. Through this acquisition, we are better able to address our customers growing demand for integrated hardware and software solutions. Broadcom continues to be the market share leader by a wide margin in the enterprise switching and controller market and during the quarter we announced some exciting new products and technologies to address higher levels of port density and higher levels of integration.

Our recent announcements include first of all a new roller switch family that enables intelligent, reliable networks for the small to medium sized businesses through a combination of hardware integration that includes up to 50 gigabit Ethernet ports and on-chip [inaudible] processing.

This new family enables Broadcom to deliver a feature rich solution that's easy to set up and keeps system costs at an affordable level. We also announced the industry's first all DSP-based 10 gigabit Ethernet serial transceiver that provides significant performance manufacturing and reliability advantages over competing analog solutions. Enterprise data centers can now achieve higher bandwidth and performance while maintaining significant savings in cost resources and manpower when they upgrade to 10 gigabit Ethernet links.

Moving on to mobile and wireless, the sequential net revenue growth in our mobile and wireless business was driven by seasonal strength in our Bluetooth wireless LAN, mobile multimedia and mobile communication businesses. In Bluetooth we had a very strong quarter. We experienced growth that was a bit above our initial expectations due to the strength in the cellular NPC space. During the quarter, we saw growth in demand for solutions for handsets, embedded products such as the Wii, PC products and even audio products. As we look into 2007 we believe the drivers to Broadcom's continued Bluetooth growth include the following: first of all an increase in overall attach rates, especially in the cellular handset space. We're also entering the mono headset market in which we believe we'll achieve significant market share in 2007.

Also end customers starting to ship products with our integrated Bluetooth and FM part will be a driver for us. We remain the only company with a working blue tooth plus FM single chip that's in production. We expect four of the top five handset OEMs will use our combined solution and anticipate shipping our first million units by the end of Q2 2007. Running that out, last week we announced our integrated 65 nanometer Bluetooth plus FM plus WiFi part. This product is out there ahead of the competition. We expect to see it in consumer's customer's products in late 2007 or early 2008.

In our wireless LAN business we continue to see continued strength in 802.11g into embedded, access point and router applications. In 802.11n we believe Broadcom shipped more 802.11n parts than anyone else in 2006 in both unit and revenue terms. We have a diverse customer base that includes all top five retail OEMs and five of the top six PC OEMs. During Q4, we made several announcements regarding our wireless LAN products and applications.

We had two new announcements in our router business. We announced a new WiFi gigabit Ethernet processor that provides a significant boost in performance compared to other 802.11n processors. We also announced the industry's first WiFi router that integrates a baseband with an 802.11g radio. Ethernet switching and MITS(?) processors were also incorporated into a single chip design. We expect adoption of Broadcom's 802.11n solution to grow in 2007 for the following reasons.

First of all, we have lower cost access points to clients and you'll see $99 retail prices for access points, which we think will encourage consumer demand. We also see a lot more skews that are enabled with 802.11n. We see the adoption of a draft 2.0 standard which we think will encourage overall growth in the industry and also the WiFi alliance will start certifying draft 802.11n by mid year.

All of these things we think are good for growth in the market and our business. While our VoIP business is smaller than wireless LAN or Bluetooth, our VoIP business has been fairly consistent in 2006. We look forward to this business accelerating in 2007. AT our analyst day, we announced a number of new initiatives aimed at rounding out our footprint in the cellular handset market. These products included the following. We entered the application systems processor market with a monolithic high performance system on a chip that combines the industry-leading Broadcom video core multimedia processor and an ARM-11 applications processor.

Our solution is optimized for high volume markets including mobile phones, mobile TVs and portable audio video game devices, and delivers an unprecedented level of integration, multimedia performance and low power dissipation. We also entered the portable power management market with a system on a chip PMU solution that intelligently manages power consumption in the mobile devices to optimize system operation and therefore maximize battery life. The PMU can be paired with Broadcom or other baseband processors, multimedia processors or application processors to provide the complete system solution required by leading mobile device manufacturers.

We followed that up with the world's first 65 nanometer EDGE radio frequency RF transceiver which was announced earlier this week. Designed as a monolithic die in pure digital CMOS technology, this new Broadcom device integrates all transceiver and analog baseband functionality to deliver savings in power consumption, size and cost. This highly integrated single chip solution is designed in a 65 nanometer CMOS process that delivers the industry's lowest power consumption as well as a little bit of material cost. We're looking forward to seeing many of you at the 3GSM show at Barcelona next week, where we'll show our cellular and wireless solutions.

Before I turn the call over to your questions I'd like to anticipate one of them right now and highlight a few of the areas that are shaping up to generate strong growth for us in 2007. First of all, digital television. We'll be shipping with additional tier one customers and we expect growth in the customers that we already have. The second is Bluetooth. As our products and customer base grows, we begin to penetrate more into the PC and mono headset space and we should see good growth in our revenue. The third one is Wireless LAN. As 802.11n and embedded applications grow, this will benefit us as well. Fourthly, network switching as the migration to gigabit Ethernet continues and we begin to penetrate into the metro space.

With that, let me now turn it over to your questions. Operator, will you please take some questions?

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Questions-and-Answer Session

Operator

Operator instructions. Your first question is from Michael Masdea - Credit Suisse.

Q - Michael Masdea - Credit Suisse

Maybe to start off first if we can get a little bit more explanation of that $50.6 million charge and my assumption is that it's not recurring. Can we get a little bit more color on that?

A - Bruce Kiddoo

As you say, it's not a recurring charge. It was primarily related to employee related expenses related to our equity award review. The items in there were related to our employee stock purchase plan where we weren't able to do a purchase during when our S-8 was suspended. It was also related to a testing period - excuse me, exercise period for employees that had terminated and we had to extend that. In general, it was all expenses that were solely related to the impact of our S-8 being suspended and the impact on employees with the Broadcom management philosophy that we weren't going to penalize our employees due to something that was outside of their control.

Q - Michael Masdea - Credit Suisse

While we're on that topic, do you have any idea what stock comp charge ballpark is going to be this year versus last year at all, or is it too early to tell?

A - Bruce Kiddoo

Generally we run about $100-120 million a quarter. I think that's going to be consistent YoverY.

Q - Michael Masdea - Credit Suisse

Maybe for Scott, on the wireless side, give us an idea - 3G has been slower to roll out than I think a lot of people were hoping and I know you guys have a better position in 3G and an exciting position. Is that having an impact at all on your designs or your thoughts on that market? Or the timing of that market, which you guys were looking for?

A - Scott McGregor

No, not really. We feel pretty comfortable with where we are on our product offerings and where we see the market going. Michael, I think we'll be able to say a little more about that at 3GSM next week and the following.

Q - Michael Masdea - Credit Suisse

Just a last one from me, in a lot of these markets you have this diversity and it does make a big difference, but a lot of these markets, we see a couple of strong quarters and then sort of an inventory correction or a little bit of an adjustment and then it returns to health. Again I think we've talked about this before, but are there any of those markets you're seeing right now where you're seeing strength? Maybe you think there's a little bit of a pause coming close to that or vice versa where you're really seeing inventory refill coming back and I just want to make sure we're understanding what the real market trends are versus some of the inventory cycles.

A - Scott McGregor

Well, we mentioned that we had cleared inventory for example in DSL and in network switching. Those were two that we highlighted last time. We do believe our customers are through that and so that's why we see growth trends from there. But in general, it's a little hard for us as a chip supplier to see where our customer inventories are. But again, it's one of the things I like about Broadcom's business. We do have a lot of different business lines. We love all our businesses. We've got some diversity, so no one of them hurts us if it gets into an inventory issue.

Operator

Our next question comes from Ross Seymore of Deutsche Bank.

Q - Ross Seymore - Deutsche Bank Securities

Thanks and also congrats on a solid quarter. Just wondering on the cost side of things, you're transitions to 65 nanometer rather fast for all the reasons you've said in the past. On the cost side of that transition, is there a period during this year where the costs start to flatten out as you get up above, say, 50% penetration in tape-outs? Or is there anything strange that will happen in the trajectory of those costs during the year?

A - Scott McGregor

Well, you're absolutely that we've been very aggressive on 65 nanometer. And I think as other competitors of ours start to tape-out 65 nanometer costs parts you're going to see the costs there as well. A mass set for 65 nanometer costs over $1 million dollars. So your ability to get it right is really important. If you have to run a few iterations of a product that not only costs you time to market but gets expensive. You will see probably an increase in 65 nanometer mass costs as we have just an amazing number of parts queued up over the course of the year. That is an investment we make. But for each one of those that tapes-out, then we have a 65 nanometer very competitive product in the market and generally our competitors don't. We see that as a very positive thing. And they're going to have to spend it eventually too if they want to catch up. Over time, we expect the 65 nanometer mass costs to come down and it could get below $1 million dollars at some point. But right now it's significantly above $1 million dollars and not yet at that point.

Q - Ross Seymore - Deutsche Bank Securities

So the way we would see that manifest itself on the income statement is higher R&D but you can make up a bunch of that with revenue growth and theoretically better gross margins as well?

A - Scott McGregor

Yes, what you'll see is you'll see R&D costs go up initially with the mass costs. And then as the products go out to customers and they start deploying them, you should see a revenue and margin pick up as we have a competitive part.

Q - Ross Seymore - Deutsche Bank Securities

And then the next question, a couple quick ones on product lines. Scott, you mentioned in the cable set-top box area you thought it would be similar to how it behaved in the first half of last year. Can you give us a little bit more on what you mean behind that statement?

A - Scott McGregor

Yes. I expect that cable set-top box market will continue to grow. We see a number of things driving that. We see promotions going on in some of the customers. We see a real eagerness to get the video recording and the MPEG4 technology out there. People buy these great products in the TV side and they want to upgrade their set-top boxes. We definitely see some pick up from that.

Q - Ross Seymore - Deutsche Bank Securities

And then the final one, really quickly, on the digital TV side. You mentioned that that would be a growth driver for 2007. As you guys are taking share within that, how should we think about the linearity of that business through the quarter? Can your share gains offset some of the typically back end weighted seasonality or would your digital TV business pretty much look like what a normal seasonal year would look like with a bigger back half?

A - Scott McGregor

That's a real good question. I'd say we don't yet have so many customers and so many models that we've got a real predictable curve on that. The digital TV business typically peaks in Q3. They're heavy products. They don't get shipped by air. They want to build them ahead of the holiday seasons. And so, you generally see a peak in Q3 from a seasonality point of view. We are adding a number of additional customers and some of the products like the new 1080P product probably is going to be more of a Q4 driver. Where you would normally see a peak in Q3 and a little bit down in Q4, we may have some pick up in Q4 if we're real successful with that product. But again, we're in a number of models now with a number of our top tier guys. The rate of growth will depend on how rapidly they deploy our solutions into additional models and how rapidly our 1080P solution gets picked up in the market. There's a bit of uncertainty there but we feel really good about the overall direction. Customers are really excited about that 1080P product. We demonstrated that at CES and we had extremely strong interest from customers. All asking can we pull it in? Can we make it faster? Can we get it in products so they can ship this year?

Operator

And our next question comes from Chris Caso of Friedman, Billings.

Q - Chris Caso - Friedman, Billings, Ramsey

Thank you. I wonder if you could talk a little bit about the set-top market. And you talked about a mix shift that occurred in Q4. Is there something going on there within the marketplace that would cause the mix to go down to lower levels or you consider this just a short term issue and could you explain why?

A - Scott McGregor

I consider it a short term issue. I think depending upon what's going on in the market there will be different surges between low end and high end set-top boxes. We believe over time the trend is towards additional PVR functionality and MPEG4 ABC boxes. And so one of our goals over the course of this year is to get our single-chip advanced Kodak solutions out into more and more boxes. And we think that will be the dominant trend over the course of the year.

Q - Chris Caso - Friedman, Billings, Ramsey

Okay. And with respect to the Bluetooth market, you talked about an intention to get into the mono headset market. Could you give us a little bit about your strategy there? Obviously, you're up against a pretty entrenched incumbent there. What's the strategy for breaking into that market.

A - Scott McGregor

Well, step one is have products. In the past, they were pretty much unopposed in that market. And we did not do the products that were targeted. We had a stereo headset product but we didn't really do a cost optimized mono headset product for that market. Where you had pretty much a single supplier in that space, we've now introduced some very competitive parts. And generally, customers like to have competition among their suppliers, so we're seeing a great deal of interest. And so we expect a pretty good pick up as those customers add our parts in. And we expect to take double-digit market share pretty quick there.

Q - Chris Caso - Friedman, Billings, Ramsey

Back at the analyst day, I think you guys were pretty clear, talking about handsets for you guys not really being a growth market for you this year. How should we think of that sequentially as we go through the year? Should we be anticipating sequential declines in the revenue you guys get from handsets over the next few quarters or should it be more flattish?

A - Scott McGregor

I think you should think of this year as the year where we need to win design wins that are going to take us into growth in 2008 and 2009. And what I think you'll see is a bit of a decline in some of our legacy 2G business. We'll have some pick up in our 3G business. I think if you model it flattish, that's probably going to be pretty close to what to think there. That's not a growth driver for us this year, though. I think in 2008 and especially 2009, that's going to be a major growth driver for us.

Operator

Craig Ellis of Citigroup has our next question.

Q - Craig Ellis - Citigroup

A detail on the operating expenses. You mentioned that the options inquiry related expense was up $6 million in Q4. How much was it in total? How much do you expect it to be in Q1? And I would expect that just goes away in Q2 so we should have a step function change down in opex in Q2, shouldn't we?

A - Bruce Kiddoo

Yes. I think the bulk of the expenses were really in Q4 and so for the full year it was just a little bit above that $6 million. When we look into Q1 it will clearly go down and by Q2 we expect that to be gone as you indicate. When we look at our overall legal expenses, though, with the Qualcomm litigation picking up activity in the first half of the year, we think that will probably offset the declines in the legal costs related to the restatement.

Q - Craig Ellis - Citigroup

So Bruce, with staffing up for new products and the new technology transition to 65 and then just legal expense, we should expect a sequential increase in operating expense through the year?

A - Bruce Kiddoo

Yes.

Q - Craig Ellis - Citigroup

Then switching gears a little bit to the gross margin line, you expected and obtained the gross margin increase. Typically, there's a multi-quarter period where gross margin will benefit from the supply chain opening up. Where are we in that process? Are we about middle stages or is that opportunity going to narrow after Q1?

A - Bruce Kiddoo

It's hard to tell. Clearly, like you say, it is a multi-quarter. We did guide that we are continuing to see some benefits for Q1. As we go out into Q2, we'll just have to wait and see. Obviously, from what the capacity situation looks like and our mix of businesses, clearly long-term, well continue to look for the 50% to 52%. And as we have done in the past, when we get in these kind of favorable situations, we're able to be at the high end or slightly above that long-term model. But we still think for the long-term that's the right range to model us at.

Operator

And our next question comes from Alex Gauna of UBS.

Q - Alex Gauna - UBS

First off, I'm noticing that your revenue guidance is a very tight range in a relatively uncertain environment. I'm kind of curious, what is it that giving you the confidence to be guiding such a tight range? And then secondarily, also noticing how nicely controlled your inventory is. And maybe you can give us a little more color on what Broadcom does so well that allows them to move through these downturns with such grace, while others kind of fall apart as they hit the downturn walls?

A - Bruce Kiddoo

Sure. I think from a revenue point of view, as most people know, as we go into a quarter, we generally have 80% to 90% on backlog. And so that gives us good visibility into a quarter. The other things that we do that helps us is we have a small amount, relatively 13% in Q4, that goes through distribution. And so again, that gives us good visibility into really what our end customers need and want. And so because of that, I think we feel comfortable from the revenue guidance point of view. I think as you know, we generally come in relatively close and we certainly make sure that we're prudent and we incorporated all the risk into that, so that we at least hit the guidance that we've given. Concerning inventory, for many of the same reasons that we're able to have the good visibility into revenue, it helps us manage inventory as well. And that's staying very close contact with our customers. We obviously always focus on large customers. And we're able to work with them, understand their forecast. In many cases, this allows us to work with the end customer and understand if the supply chain is building up too much or too little. And so that allows us to closely match kind of our build plan with what our customers actually need. And so going forward, we watch that very closely. And I think that's a huge benefit for Broadcom is that that kind of close coupling with our customers. It helps us from a revenue forecast, it helps us from an inventory management point of view.

A - Scott McGregor

Alex, one other perspective on that. I think as a fabless Company, we have an advantage because when we see some softening up we just cut wafer starts right there. Whereas I think if you own your own fabs you're more likely to have some optimism that this must be a short lived phenomenon because you're going to pay the wages for all the people who work in the fabs anyway. And so, you're more likely to run the fabs and hope things pick up, rather than take the hit on your cost of goods for unloading your fabs. I think that's a factor too, fab versus fabless.

Q - Alex Gauna - UBS

Can you comment, you mentioned the backlog in the distribution here. Is that on an improving trend here as we've moved into the new year or is it just stable to no change, similarly with distribution?

A - Bruce Kiddoo

Well, as a percentage of total sales, Alex our sales to the distribution channel remained constant Q to Q at right around 13% of sales.

Q - Alex Gauna - UBS

I'm asking for color on how they're acting now in the new year? We're relatively deeply into it for you guys. Usually, you report much earlier.

A - Bruce Kiddoo

I don't think there is any new information out there.

Q - Alex Gauna - UBS

Scott, if I could ask you, you made some comments on the cable set-top boxes and we've seen some pretty healthy numbers from your customers. And also, we've heard some pretty robust capex increases from the carriers. I'm surprised you're not being a little bit more upbeat on that category. Does that have the ability to upside on the positive side or are there share issues or again, mix issues that are keeping you a little bit more sedate on that front?

A - Scott McGregor

I think the positive things you heard from our customers were generally for parts they already purchased. Now, if they continue to have positive numbers, then of course that would weigh positively on our behalf. The capex increases we're seeing on behalf of a lot of these MSO's and so forth is a good trend and if that continues and others have that we could see some pick up from that.

Q - Alex Gauna - UBS

And Cisco mentioned on their conference call the effect of, I believe, cable card they were referring to here middle of this year. How should we think about that potentially impacting Broadcom and how are you planning to manage through that?

A - Scott McGregor

I don't think there's a whole lot of impact to us for cable cards. It's a relatively inexpensive part on that cable card that sells for $50. It's not a lot of silicone behind that. I wouldn't see that as a dramatic effect on our business.

Q - Alex Gauna - UBS

In terms of the channel? Is it going to be building up inventory for that or do you see no real change?

A - Scott McGregor

I think there may be some strategies from some of the MSO's in terms of balancing the different boxes they have, in terms of what's wavered and what's not and other things. But I think that probably would be kind of difficult to model. I think you're better off just looking at that on a fairly simplistic basis driven by capex cycles at the MSO's.

Q - Alex Gauna - UBS

I was surprised by the VDSL client side strength. Are you able to comment on which service providers or which geographies are taking those solutions and also what your prospects are on the CO side?

A - Scott McGregor

I can't comment specifically on the customers and if I told you the geographies you might figure out the customers. Let's just say they're big ones, though, Alex.

Operator

Our next question comes from Srini Pajjuri of Merrill Lynch.

Q - Srini Pajjuri - Merrill Lynch

Two questions. The first one is on the Gig-E controller business. You said that's been weak and it's going to decline again this quarter. I'm wondering, the growth in that market, is that purely a function of 10 gig taking off at this point or do you see any other growth drivers?

A - Scott McGregor

Srini, I think that you might have misheard us. We said that the controller market is declining but gig Ethernet switches and so forth is increasing, actually.

Q - Srini Pajjuri - Merrill Lynch

Absolutely, that's my question. On the controller side, the decline, will 10 gig be the primary growth driver going forward or do you see any other drivers out there?

A - Scott McGregor

I think it's a little early for the 10 gig. I think you'll see gig as the primarily driver for that for a while. For us, it was a bit of a mix shift issue. Again, moving more from some of the high end enterprise, moving more into the consumer, which we get a lower ASP on.

Q - Srini Pajjuri - Merrill Lynch

And then more of a longer term question. On the EDGE RF that you just announced, if I look at your portfolio, your focus is clearly shifting to 3G and you had some success in EDGE and now you're announcing RF. I'm trying to understand what your strategy is in in announcing an EDGE RF product this late in the ball game?

A - Scott McGregor

That's a good question. One of the things we said is that we would focus primarily on 3G unless there were EDGE opportunities at large customers. Meaning, top five headset customers. So that EDGE radio is targeted for top five cellular handset customers.

Q - Srini Pajjuri - Merrill Lynch

And when do you expect to see revenues from this product?

A - Scott McGregor

Yes, early to say. It takes a while for them to build that in. Normal handset development cycle is anywhere from nine to 18 months.

Operator

And David Wu of Global Crown Capital has our next question.

Q - David Wu - Global Crown Capital

I was curious about one thing, on the cost side, the last time we have situation like this where the foundries are full, you had very, very good contracts available. And I was wondering whether I should assume that this is the same situation today? As you switch to mostly 65 nanometer wafer tape-outs, how many foundries would you be using? And would that affect your cost in terms of negotiating for those kind of class products in terms of either prices or per die costs?

A - Scott McGregor

On the 65 nanometer cost question, we're going to follow the same strategy that we have done for every other process technology and that is that we will multi source this across the various foundries. That process is going along very well. We do have multiple fabs that are either qualified or in the process of being qualified for 65 nanometer. We do expect that we will be able to achieve the similar pricing compared to the rest of the industry for 65 nanometer as we had for older technologies. Concerning your first question about going into an environment like this, certainly with our low inventory levels, one of the advantages is that we're able to take advantage of the favorable pricing in kind of very immediate wafer purchases. We do expect that we will see that benefit, as the guidance we gave, increasing gross margin in Q1.

Q - David Wu - Global Crown Capital

t

Can you lock in those costs for the rest of this year or it goes quarter to quarter?

A - Scott McGregor

We generally don't lock into long-term supply commitments with our foundry partners.

Operator

Gary Mobley of A. G. Edwards has our next question.

Q - Gary Mobley - A. G. Edwards & Sons

I was hoping you could share with us trends in your wireless LAN business both for Q4, as well as your Q1 outlook.

A - Scott McGregor

So wireless LAN, we did see a pickup in Q4. We do see growth in there, again driven by the seasonality there. Wireless LAN and Bluetooth tend to be seasonal products, so those are things you would expect of to see a slight seasonal decline in Q1 and that's partly reflected in our overall guidance.

Q - Gary Mobley - A. G. Edwards & Sons

As 2007 shapes up, how would you expect your market share in 11n to trend now that Intel is shipping on a motherboard?

A - Scott McGregor

Well, given we have a new competitor coming into the market, they're obviously going do get some share. What we think, though, is that the overall market will grow faster than any share declines that Intel might create. Intel primarily plays in the PC space. We don't really see them in the retail space or imbedded space or many of the other product areas. But we do hold our own in the PC space very well, as we have in G for many years.

Operator

Our next question comes from Mark Edelstone of Morgan Stanley.

Q - Mark Edelstone - Morgan Stanley

Obviously, you've got a lot of moving parts here as you go through 2007. But from your comments, it certainly sounds like you've got a lot of growth drivers and business in the process of bottoming. Can you just kind of give us a sense as to what the trajectory of growth looks like? As you go through 2007, I'm assuming that growth comes back in Q2. But maybe just what you think the shape of that growth might look like and if you want maybe compare it to how you came out of the last industry correction that we saw towards the end of 2004 going into the growth phase of 2005?

A - Scott McGregor

Well, it's a little hard to model that. Mark, I don't really think we even have great visibility on that. I think the thing that is an exciting driver for us is just the number of 65 nanometer products that are going to be coming out. You've seen a few of them already. But there is going to be a pretty steady drum beat of 65 nanometer parts taping-out. And as those start getting integrated into customer products, I think that's going to be major driver of our growth over the next 18 to 24 months. I think some of it will also have to do with industry pickup as well. Probably a little harder to model that. I leave it to experts like you guys to take a shot at that.

Q - Mark Edelstone - Morgan Stanley

Fair enough. And then you mentioned on cellular that revenues this year are fairly flattish. And this is really a year for design wins with growth really happening in 2008, '09. Any change to your expectations, I think, you've set for the end of the decade in terms of what kind of share you expected to have there?

A - Scott McGregor

I've stated before that we're looking for 10% to 15% market share in the base band by 2009. I think that's still a very achievable goal for us. One of the things I'd observe is that for those of you who just think of it in terms of a base band market, I think you need to think of it as a cell phone chip market by 2009 going forward and not necessarily discrete base bands. And that's really where Broadcom has an advantage. You saw us just announce a 65 nanometer radio. And you've seen us announce a number of other pieces. And going forward, I think we've got the ability to pull all that together.

Q - Mark Edelstone - Morgan Stanley

And then just lastly, for Bruce. Bruce, if you look at your opex increase in Q1 over Q4 on a non-GAAP basis, can you give us a dollar figure for the type of sequential growth you're expecting there?

A - Bruce Kiddoo

We haven't provided that level of guidance, Mark. We said we were up $30 million in Q4 and we said we would be up in Q1 but not at that same level. We do expect, as we indicated, that there will be continuing investments in new products, continued investments in 65 nanometer. And then kind of the finishing off of the investments as we move into our new campus at the end of Q1.

Q - Mark Edelstone - Morgan Stanley

Maybe to just look at it a different way then, you're sort of below here in Q4 on a non-GAAP basis, you're below the Company's stated operating margin objectives. When do you think you can get back to your operating margin targets?

A - Bruce Kiddoo

I don't think we can go out there and peg a target in terms of what quarter we get there. I think one of the key things is, though, if you look at Broadcom over time, we have proven time and time again that when we're below it, we have the ability to get back into it. And we believe we can get back there at some point in time. We just can't call out which quarter it's going to be exactly.

A - Scott McGregor

Mark, if you look at the model, the R&D is the high number right now. And that's primarily where the gap is coming from. And that R&D is being invested again in 65 nanometer parts and just really putting out a whole new range of parts that you're going to see. And again, that will take care of itself as we start getting revenue from those parts and we'll pick up and cover that percentage R&D cost, which will flow through to the operating margin.

A - Bruce Kiddoo

Our history is clearly that whenever we've had a spike in our R&D as a percent of revenue, it's because we were investing in design win opportunities. And we have historically always converted that into revenue growth going forward.

Operator

Our next question comes from Seogju Lee of Goldman Sachs.

Q - Seogju Lee - Goldman Sachs

Thank you. Just in terms of the operating expense targets, you've talked about in the past how you're changing your compensation structure, moving away toward less options within that compensation structure. As you shift that, do we need to review the total sort of operation expense targets in the model or just how do you think about that would be very helpful, thanks?

A - Bruce Kiddoo

No, we've been doing this over the last couple years already, increasing our cash compensation expense while moderating on the options and the RSU's. That's already kind of baked into our numbers. There's no step function going forward on that. We do have our normal focal process or salary review process that occurs in Q2 of the year, which does generally result in an increase in Q2.

A - Scott McGregor

But Seogju, remember on a long-term basis, our goal is to keep total dilution down in the very low single range.

Q - Seogju Lee - Goldman Sachs

On the options dilution?

A - Scott McGregor

On the options dilution, correct.

Q - Seogju Lee - Goldman Sachs

And then just lastly, Scott, in terms of the litigation with Qualcomm, just if we could get an update there that would be very helpful? And good luck. Thanks.

A - Scott McGregor

On the Qualcomm litigation, we were very pleased. We had a ruling the other week where they had accused of us of patent infringement for some H264 patents. And we were pleased with the jury result. The jury found not only did we not infringe but there was some question about whether Qualcomm had misused the patent process, which would make the patents unenforceable. And also, whether they hid information and that they didn't play fairly with the standards organizations. And I believe that motion on that will be heard by the judge this Friday, so we expect to see a binding result on that. It was a jury recommendation and we expect to see the judge's ruling on that Friday. So we're looking forward to that. We also see a number of other trials coming up. Again, there are many trials here and we believe that we are well-positioned. We have a lot of very solid patents that we believe Qualcomm infringes. And I get back to the two issues we have here. Number one, is we want to be fairly compensated for our IP. And number two, we want a level playing field in the cellular business. Those are our two objectives and we're going to hold out for those.

Operator

Our next question comes from Adam Benjamin of Jeffries & Company.

Q - Adam Benjamin - Jefferies & Co

Thanks. Good afternoon, guys. Scott, you talked about several drivers for the rest of this year. I'm curious if you can talk a little bit, as all of us kind of model many buckets of Broadcom, if you can kind of take a look at where your business is today? And kind of give us some insight maybe from a year from now, are there any particular buckets that will be of material revenue a year from now that we're not really looking at today? Or are we really looking at 2007 as kind of the transition year and we'd expect some of those new line items to materially contribute in 2008? And then I just have a follow-up on that.

A - Scott McGregor

The four that I named before, DTV, Bluetooth, wireless LAN and network are the ones that would be our best picks for the growth drivers in 2007. We've sometimes have been surprised that some come out and deliver much better than we would expect. So we could do well in other areas. I would guess ones that are going to show up more in 2008 or beyond, certainly cellular. That's one that isn't something in 2007 but we've made a very large investment in there and we've got some absolutely stunning technology. And we believe that is going to deliver good results as we go into the latter years. Another one that I think could be exciting is this HD DVD Blu-Ray. The players are pretty expensive right now. They've over $1,000. But I think this universal player model is going to be a real winner. We've seen, definitely, a lot of skepticism when LG first announced that. And then when it won the Best of Show award at CES. And we had a number of analysts start pointing out that if you're a consumer you don't want to own the next obsolete technology box. And so, having a universal player is sort of a no-brainer from the consumer point of view. You just don't have to pick which one the winner is going to be or which movies you want to watch that come out in which format. I believe right now there's a scramble going on among a lot of the consumer companies to quickly get universal boxes to market. And we believe we're the only solution out there right now that really does a good job at that. So that plays in our favor. As those prices come down, as they get the laser prices down, the transports are very expensive in those boxes and really drive a lot of the cost. And with our low cost solutions for universal players, we think that that will drive the price to a point where the market can really pick up. So I don't know whether that's the very end of 2007 or whether it's not until the holiday season in 2008. But somewhere between those two points I would expect to see a decent pick up in that market. Those are two that I would suggest as interesting drivers in 2008 that aren't really showing up in our numbers in 2007.

Q - Adam Benjamin - Jefferies & Co

And then just a follow-up. Historically, you guys have shied away from doing a public acquisition. You're now at a roughly $4 billion annualized run rate here. It's getting a lot harder to grow at 20% plus on a YoverY basis. And given the fact that you've been relatively quiet on the M&A front and your history, as I said, has historically been of the private side. I'm just curious if you would think about changing that strategy going forward and would contemplate, given the right scenario and given the right fit, would contemplate a public acquisition if it provided you significant revenue opportunity that could move the dial for you?

A - Scott McGregor

I think the distinction is not whether it's public or private but rather whether it's sort of near revenue technology versus more mature businesses. And we believe very strongly that, as a growth Company, we want to get into technologies on the early side. And so we do target companies that are really at that just about to get revenue or in early revenue stages and that tends to be private companies. If we found a public Company, though, that had those attributes we wouldn't be concern about it at all. What we do shy away from is buying companies that are at the mature phase and not particularly growing. We've seen some of our competitors purchasing revenue. We don't think that makes sense. You won't see us buy companies to purchase revenue. You won't see us buy big public companies that will disrupt the Broadcom culture of execution and really getting the high technology out the door. We don't want to disrupt the cultural model and we want to continue on the growth path and we think that's our responsibility for shareholders.

Operator

Shaw Wu of American Technology Research has our next question.

Q - Shaw Wu - American Technology Research

Thanks. Just two quick questions. One, is on the your inventory levels. They seem to be very low, down two quarters in a row. Should we expect that to trend up in future quarters? And then second, on your margin model, your gross margin is at the upper end of your kind of long-term gross margin model. Do you think these levels are sustainable? You commented that you expect that to go up sequentially. Is the 52% and higher sustainable?

A - Bruce Kiddoo

On your first question, on the inventory, we are at 8.8 turns in Q4. Generally, we target to be in the 7 to 8 turns category so we do expect the 8.8 to sort of trend down. And so as our business continues to grow, the inventory level will grow. We think for Q4 the kind of the decline in the turns offset by the decline in the revenue inventory should be relatively flat to maybe just slightly up. On the question on the gross margin, as we have said before, we target 50% to 52%. When we're in periods where we're able to achieve favorable pricing, we have gone over that 52%. And to be clear, to the extent when we can, we will always maximize our gross margin. If we can achieve over 52% we absolutely will and we've done that in prior periods. We do believe that long-term, as we look at our business and kind of the mix of business that's we're in, that 50% to 52% seems to be the right long-term model for us to use.

Operator

Our next question comes from Arnab Chanda of Lehman Brothers.

Q - Arnab Chanda - Lehman Brothers

Not to keep beating a dead horse here, but another question on the gross margin side. It seems like we are towards the bottom side of the semiconductor industry and your gross margin is already higher than your historical range and you talk pretty optimistically about the mix of 65 nanometer. Would it not be fair to say that you should be able to go somewhat higher than your long-term range? Long-term, we may be all dead, I'm thinking about maybe 2007. Tell me where I'm wrong here. Thank you.

A - Bruce Kiddoo

Again, our visibility going out, even out past Q1, as you know in this industry it can change and so I think we are comfortable that we did give guidance up in Q1. As you know, when you talk about 65 nanometer, when products initially come out you're usually going for time to market. And so initially from a product life cycle you have usually lower margins on that. And then once you start hitting volumes and you do the cost optimized chip, then you start seeing improved margins. And that's the model that we see on all of our chips and I think it's going to be the same on 65 nanometer.

A - Scott McGregor

But Arnab, we aren't going to artificially hold our margin down if it wants to go up.

Q - Arnab Chanda - Lehman Brothers

A couple more product questions, if I could. First of all, you have obviously been very successful in the wireless LAN in kind of PC retail side. Been not really there much in embedded side, maybe excluding the game console, maybe excluding Wii, etc. When should we expect revenues from that side or does it have to integrate the productivity launch? Could you talk a little bit about what is going on there?

A - Scott McGregor

I think the reason we weren't as present in the embedded space is that we, as you said, have focused on the other spaces. The embedded space cares particularly about power consumption. What we've done recently is really focused on power consumption. We've got a great line up of products there. And if you look at some of the specs on the 4325 we just announced, that's the combo product with Bluetooth and FM that is a killer product. I think the competitors are going to have a real hard time competing with that in the embedded space. And that in particular would target not only cellular handsets but also other products. And we do already have a significant design win for that product just on the basis of how strong the performance of that is.

Q - Arnab Chanda - Lehman Brothers

One question about your cable and satellite businesses. One of the bigger drivers historically had been ASP expansion because of moving to sort of MEG4 or PVR or voice-over-IP. Are we starting to get to a point where we will grow more in line with the unit growth of those boxes or does that continue for a while?

A - Scott McGregor

I think that continues for a very long time. Our strategy has always been to integrate additional functionality in other components. If you open up a set-top box, any chips that aren't already part of our solution we would look to integrate, whether that's tuners, whether that's additional media functionality or other things. We would look to put in. And then also as time goes on, people do want additional functionality. For example, set-top boxes of the future are likely to be communicating whether they have wireless LAN or whether they have other kinds of connectivity technology. Those would be obvious things to put in going forward. And it's a long list. So I believe the basic model works of continued to add additional functionality and integrate it into the chip.

Q - Arnab Chanda - Lehman Brothers

Last question about a couple of your laggards. Don't want to forget any of them, since you love all your products. Are we going to start to see growth in the ServerWorks business on the one side? And base band, which seems like it's kind of hit a pretty low level in Q3, when can we see those businesses, those two, obviously, totally unrelated businesses coming back to sequential growth?

A - Scott McGregor

Well, ServerWorks, of course, our server products, those have seen some sequential growth as we saw AMD pick up. We got sort of hammered when Intel made the front side BUS proprietary and so that took us out of that business. But we did then see it come back up. I don't think the server chipset business is going to be a strong growth driver for us going forward. It's a good solid business but it's not something that's going to deliver a huge amount of revenue. Good revenue nonetheless. I think the base band side, as we said, I think you should model this year fast but at some point in 2008 and certainly in 2009, we expect dramatic growth in that space reflecting the products we're fielding today.

Operator

And our next question comes from Allan Mishan of CIBC World Markets.

Q - Allan Mishan - CIBC World Markets

You made a couple of comments on DTV. Was it up this quarter? And the same question for the satellite business.

A - Scott McGregor

DTV was down in Q4. DTV normally has a seasonal peak in Q3. We did expect it to actually go a bit in Q4. That was surprising to us but it happened to do with the fact that some of the older products we had phased out a little sooner and the new Tier 1 customer got their products to market a little later than we thought. That was the transition issue there. We do expect DTV to grow going forward, though. So no long-term issues in that space.

Q - Allan Mishan - CIBC World Markets

What about satellite?

A - Scott McGregor

Satellite was down in Q4. No particular trend. Normally, that's a counter-seasonal product line, in that the capital cycles from the satellite operators and in the cable space as well, the MSO's, tend to be in the first half of the year when the capex gets approved and then they buy the additional boxes. That's why you typically see first half strength from there so that the reverse seasonality we see from some of the wireless products.

A - Bruce Kiddoo

And that is the trend we expect to happen in 2007.

Q - Allan Mishan - CIBC World Markets

Okay, great. And then, for Bruce, what's the share count you're expecting for Q1?

A - Bruce Kiddoo

In Q4 we were right around 605 million. If you can predict the share price, we will help you on that. Given our share repurchase plan, we expect that to be relatively flat throughout the year.

Q - Allan Mishan - CIBC World Markets

Okay. Great. And then the last question is one of your competitors announced a win with your key cable set-top customer, some next generation box. What do you guys think about that? And then also, have you got any traction in China on the cable business and what do you think about that?

A - Scott McGregor

Well, that competitor has announced wins before that haven't materialized. Generally, I think you need to wait and see. We feel good about our position our major customers. We have very strong products. And so, we don't see any major disruptions in our business regardless. In the China space, we haven't spent as much energy there but clearly that's a growth opportunity for us going forward.

Operator

Our next question comes from Edwin Mok of Needham.

Q - Edwin Mok - Needham & Company

I've got a question on the DSL. You mentioned that DSL you expect to be up. How much of that is expected from the VDSL space? And also going forward, you think that your VDSL will eventually reach your DSL market share target. What kind of time line are you looking at for you to reach that goal?

A - Scott McGregor

I think it depends really on how rapidly the VDSL market develops. But that's not a 2007 phenomenon. I think VDSL is going to come into its own 2008 and beyond.

A - Bruce Kiddoo

Yes, VDSL is very, very small today.

Q - Edwin Mok - Needham & Company

Thanks for covering that. And then about 802.11n and you mentioned that you expect the 802.11n will be growth driver and will grow in 2007. In terms of linearity and throughout the year, do you expect it to be more back end weighted or do you expect it to become more linear for the year?

A - Scott McGregor

Absolutely, I would expect 802.11n to be back end loaded because the attach rate, the NPC's and things like that is going up over the course of the year. Yes, absolutely that will be back end loaded for that reason and also for seasonality.

A - Bruce Kiddoo

The BlackBerry is kicking in. But also, don't forget we'll have two other things driving it. Number one, is we'll have draft 2.0 starting to come into its own very shortly, as well as we'll have the Wi-Fi Alliance starting to certify products that are draft n compliant right around the June time frame. There's a whole lot of things that could provide a lot of momentum for 802.11n in 2007.

Operator

Our next question comes from Craig Berger of Wedbush Morgan Securities.

Q - Craig Berger - Wedbush Morgan Securities

Good afternoon. Thanks for taking my questions. With respect to the digital TV business, I know it's early for the 2008 design cycle still but what are your thoughts on your progress for some of the 2008 wins?

A - Scott McGregor

Well, I think certainly the 1080 chip we announced is going to generate revenue in 2008. Earliest revenue from that could be 2007. That will be wins over the course of this year generating revenue in 2008. My guess is that some of the 2008 design wins we get are going to be with chips we haven't announced yet, so stay tuned.

Q - Craig Berger - Wedbush Morgan Securities

And how long does it take to start driving some revenues on that 65 nanometer transceiver you guys announced.

A - Scott McGregor

You mean in the cellular space?

Q - Craig Berger - Wedbush Morgan Securities

Right.

A - Scott McGregor

The cell phone cycle generally is nine to 18 months. And so, from the time they start the design to when it actually generates revenue tends to run in that range.

Q - Craig Berger - Wedbush Morgan Securities

Last question. On the share buy back, what's your strategy there or how do you think about that? Any color you can provide.

A - Bruce Kiddoo

So really, we have two objectives with our share repurchase program. One, is to manage dilution. And the second one, is really just kind of return of capital to shareholders. In the past, we have targeted about 5% to 6% from a gross dilution point of view. And we usually try to target 2% to 3% from a share repurchase plan. This year, depending on where the purchase price ends up being, we should probably actually be able to buy back about 5% on that. And so we were out of the market in our repurchase for the second half of 2006 due to the issues around our restatement. So clearly, what we're looking for is to have kind of a net dilution in the low single digits, 3% or less. In some years we may be able to do better than that. And hopefully in 2007, it will be a year we'll be able to come in at the very low end of that.

Operator

And our next question comes from Satya Chillara of Pacific Growth Equities.

Q - Satya Chillara - Pacific Growth Equities

Scott, you talked about four growth drivers, DTV, 802.11n, Bluetooth and network switching. Is there any way you can put some quantification in terms of what kind of growth rates are we talking about for this year?

A - Scott McGregor

No, not really. I wish we had a crystal ball and knew exactly what these would do. But we believe those are the best candidates. There could be other candidates that we haven't announced that could be in the top four. But we do expect those to be certainly leading the pack.

Q - Satya Chillara - Pacific Growth Equities

Okay. In terms of the 65 nanometer tape-out, you talked in the cell phone space, about how many of the tape-outs will be in the cell phone space in terms of where you're expecting revenue and all that stuff of 2008 and 2009? What's the focus on cell phone, what kind of tape-outs are we talking about?

A - Scott McGregor

I'm sorry, I can't give you that information. But we do expect 65 nanometer tape-outs across all of our businesses.

A - Peter Andrew

And if you just go back to a couple of press releases, you can see the first part we actually did was in Dan Marotta's broadband communications group. And then the last couple have been in the mobile and wireless category. You will see 65 nanometer throughout our entire Company.

A - Bruce Kiddoo

We indicated in our prepared remarks that by Q4 2007, over 90% of our tape-outs will be in 65 nanometer. Just as an indication that that is the direction the Company is going to across the board.

A - Scott McGregor

We made a decision about 1.5 year ago to basically cut over the 65 nanometers. We mostly skipped 90 nanometer, except for a few specialty products. And we put the whole Company R&D behind it and made it happen. And now, you're going to see all these products roll out with all our libraries and everything running in 65 nanometer. I'm pleased to report that we're seeing our parts come back and they work on first silicon, which is really great. For example, that radio chip that we just announced, a brand new radio, 65 nanometer works first time in 65 nanometer. It shows I think the strength of the execution of the engineering team we have and a lot of the tools we used to create these products.

Q - Satya Chillara - Pacific Growth Equities

Okay. And the last question from my side, Scott, what are your thoughts on the GPS space and is there any strategy there?

A - Scott McGregor

GPS is clearly becoming an important technology for mobile devices. And with our strategy of integrating all of those different things and including those technologies, we'll definitely make sure we play in that space. We haven't made any specific announcements beyond that, so stay tuned.

Operator

And our last question comes from Shebly of Caris and Company.

Q - Shebly Seyrafi - Caris & Company

Thank you very much. In what product categories are you sensing that the inventory levels at your customers are higher than you would like?

A - Scott McGregor

We didn't specify too many of those. I'd say controller is one area in the PC space where we see some inventory issues remaining. But in general, we see a trend of resolving the inventory issues that we've seen in previous quarters. And DSL and switching are two we gave as an example there.

Q - Shebly Seyrafi - Caris & Company

You also indicated that in satellite set-top box segment that's going to grow, I believe, in Q1 from being down in Q4. What about for cable, satellite and IP set-top box combined, do you expect that segment to grow Q on Q?

A - Scott McGregor

Generally, the cable and satellite markets grow in the first half of the year. Again, because that's when the capital cycles are approved. So as a general phenomenon, yes, that's true. It's a counter-seasonal business.

Q - Shebly Seyrafi - Caris & Company

Also, as you enter the mono headset market, what percentage of your Bluetooth business do you anticipate being non handset by the end of 2007?

A - Scott McGregor

We don't break that out. But handset will certainly be the majority of our business in 2007.

Q - Shebly Seyrafi - Caris & Company

One more, if I can. Your 11n, what percentage of your wireless LAN is 11n now and what do you anticipate that to be by the end of the year?

A - Scott McGregor

Well, it will be more by the end of the year. I don't have a specific number for you sorry. Thank you very much. I appreciate everybody for joining the call. We're really excited about a lot of the 65 nanometer parts that are taping-out. And we think you're going to see quite a number of announcements over the next few quarters as those roll out. Please join us. I think it's going to be an exciting year and looking forward to seeing some of you folks also next week in Barcelona at 3GSM. Thanks for joining us today, bye.

Operator

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

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