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Executives

Eric K. Brandt - Chief Financial Officer and Executive Vice President

Scott A. McGregor - Chief Executive Officer, President and Director

John Dryden -

Analysts

Anil K. Doradla - William Blair & Company L.L.C., Research Division

Romit J. Shah - Nomura Securities Co. Ltd., Research Division

Craig Berger - FBR Capital Markets & Co., Research Division

Stacy A. Rasgon - Sanford C. Bernstein & Co., LLC., Research Division

John Pitzer - Crédit Suisse AG, Research Division

Daniel L. Amir - Lazard Capital Markets LLC, Research Division

Christopher Caso - Susquehanna Financial Group, LLLP, Research Division

Glen Yeung - Citigroup Inc, Research Division

Harlan Sur - JP Morgan Chase & Co, Research Division

David M. Wong - Wells Fargo Securities, LLC, Research Division

Christopher J. Muse - Barclays Capital, Research Division

Ruben Roy - Mizuho Securities USA Inc., Research Division

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

Craig A. Ellis - Caris & Company, Inc., Research Division

Uche X. Orji - UBS Investment Bank, Research Division

James Schneider - Goldman Sachs Group Inc., Research Division

Srini Pajjuri - Credit Agricole Securities (USA) Inc., Research Division

Ross Seymore - Deutsche Bank AG, Research Division

Mark Lipacis - Jefferies & Company, Inc., Research Division

Jonathan Steven Smigie - Raymond James & Associates, Inc., Research Division

Sanjay Devgan - Morgan Stanley, Research Division

Tristan Gerra - Robert W. Baird & Co. Incorporated, Research Division

Shawn R. Webster - Macquarie Research

Vivek Arya - BofA Merrill Lynch, Research Division

Unknown Analyst -

Ambrish Srivastava - BMO Capital Markets U.S.

Doug Freedman - RBC Capital Markets, LLC, Research Division

Broadcom (BRCM) Q3 2011 Earnings Call October 25, 2011 4:45 PM ET

Operator

Welcome to the Broadcom Third Quarter 2011 Earnings Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded, Tuesday, October 25, 2011. I would now like to turn the conference call over to John Dryden, Senior Manager, Investor Relations. Please go ahead.

John Dryden

Thank you, and good afternoon, everyone. Welcome to Broadcom's Third Quarter 2011 Earnings Conference Call. I'm joined today by Scott McGregor, our President and Chief Executive Officer; and Eric Brandt, our Executive Vice President and Chief Financial Officer.

This call will include forward-looking statements that involve risks and uncertainties that could cause Broadcom's results to differ materially from management's current expectations. We encourage you to review the cautionary statements and risk factors contained in the earnings release and our 10-Q, which were furnished and filed, respectively, with the SEC today and are available on our website. We undertake no obligation to revise or update publicly any forward-looking statement to reflect future events or circumstances.

Additionally, throughout the call, we will be discussing certain non-GAAP financial measures. Today's earnings release and the related current report on Form 8-K describe the differences between our non-GAAP and GAAP reporting and present a reconciliation between the 2 for the periods reported in the release. Please also see the Investors section of our website at www.broadcom.com/investors for a slide deck that includes additional information disclosed in accordance with SEC Regulation G.

As it relates to the proposed acquisition of NetLogic, before making any voting decisions, investors are urged to read NetLogic's definitive proxy statement filed with the SEC on October 21 and other relevant materials when they become available because they contain or will contain important information about the transaction.

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

Scott A. McGregor

Good afternoon, and thanks for joining us today. Broadcom executed well in the September quarter, with cutting-edge products and strong financial discipline resulting in record revenue and operating profitability above our target financial model. I'm also pleased to report we generated record cash flow from operations, surpassing 27% of revenue. Our total cash and marketable securities position of $4.2 billion also ended the quarter at record levels.

While many of our businesses set records in the September quarter, our outlook reflects near-term industry softness and uncertainty from our customers. To that end, we're maintaining a tight rein on our overall spending, as shown by our Q3 results and Q4 guidance for R&D and SG&A expenses. Broadcom has a proven track record of success across semiconductor cycles, and we've position the company to once again emerge stronger coming out of the current uncertain economic environment. Our goals remain focused on product innovation and relentless integration that enables us to grow our market share and deliver strong profitability and robust cash flow from operations.

I'll now turn the call over to Eric for details on the third quarter results and fourth quarter guidance, and then I'll go into details on our business units.

Eric K. Brandt

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

Moving to the financial overview. To summarize for Q3, total revenue of $1.96 billion, including $1.9 billion in product revenue. Q3 total net revenue was up 9% sequentially and up 8% from prior-year level.

GAAP product gross margin was roughly flat from Q2 at 49.5%, and non-GAAP product gross margin was 50.9%. Q3 GAAP R&D plus SG&A expenses were down $21 million to $666 million. Net of the non-recurring legal payment in Q2, R&D and SG&A expenses were up only $4 million sequentially. GAAP earnings per share for Q3 were $0.48, which, excluding one-time items, would've been $0.58 per share. Non-GAAP earnings per share was $0.82 or $0.06 above first call consensus of $0.76 per share. Cash flow from operations for Q3 was a record $534 million. Our cash and marketable securities balance was $4.24 billion, up over $443 million from Q2.

Moving to revenue and gross margin. In July and again in September, we said we expected Q3 total net revenues to be approximately $1.9 billion to $2 billion. Total revenue ended at $1.96 billion. Our Broadband Communications segment was up 2% from Q2. As anticipated, our Mobile & Wireless segment was up 16%, driven by strength across both wireless connectivity and cellular businesses. Our Infrastructure & Networking segment was up 4% as expected, driven by a rebound in controller, a full quarter of Provigent revenue and modest growth in switch.

Our Q3 GAAP product gross margin was roughly flat at 49.5%, which is modestly below our expectations of flat to up slightly. This translates to 50.9% on a non-GAAP product basis, once again, well within our target model.

Moving to operating expenses. Total GAAP R&D and SG&A expenses for Q3 were down $21 million from Q2 levels, significantly below the guidance we provided in July of flat to down $10 million. This favorability to guidance was principally driven by lower mask cost and legal fees.

During the quarter, the company took a portfolio action to stop future development of digital TV and Blu-Ray products and reallocate funding to higher value opportunities. This results in a GAAP restructuring charge of roughly $23 million, of which $17 million will be recognized in Q3. In addition, during Q3, we recorded a charge of $9 million associated with the impairment of acquisition intangibles and net settlement charges of $27 million. These items are discussed in more detail in our Form 10-Q filed today.

Moving to the balance sheet. As I mentioned earlier, cash flow from operations was a record $534 million for Q3. Cash and marketable securities ended Q3 at a record $4.24 billion. Our accounts receivable days sales outstanding was 38 days in Q3. In addition, net inventory levels decreased over $50 million, resulting in 7.8 turns in Q3.

Moving to expectations. We currently expect net revenue in Q4 to be roughly $1.7 billion to $1.8 billion. Sequential revenue will be down across all segments, driven by general demand softness. We expect Q4 product gross margin to be flat to down slightly versus Q3 on both a GAAP and non-GAAP basis, principally due to absorption, but still within our targeted non-GAAP model. We expect GAAP R&D and SG&A expenses in Q4 to be roughly flat sequentially. Non-GAAP R&D and SG&A expenses should be flat to up $10 million.

Finally, I want to remind you that in Q1, we have our annual accounting step-up in expenses for fringe, merit and stock-based compensation. In 2011, these accounted for roughly $45 million in sequential growth. For 2012, we would expect an increase to this amount consistent with our employee growth and merit process.

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

Scott A. McGregor

Thanks, Eric. Starting with the Home Platform, our Broadband Communications revenue increased 2% sequentially, with solid sales from core set-top boxes, which was partially offset by a decline in our broadband modem business. Our current generation of set-top box solutions is benefiting from a transition to digital broadcasting, the emerging markets where pay-TV subscribers could reach 0.5 billion by 2016, as well as increased global adoption of HD broadcasting.

Our broadband modem business was soft with solid sales of DOCSIS 3.0 modems, more than offset by reduced DSL, Central Office and CPE shipments. During the quarter, we extended our full band capture technology to our industry-leading satellite products, paving the way for more advanced satellite receivers that expand the number of TV channels available for recording or viewing, while lowering deployment costs and reducing power consumption.

These 40 nanometer devices deliver unprecedented bandwidth scalability and flexibility, resulting in more efficient distribution of video streams and IP services in the digital home, while replacing discrete tuners with one integrated system solution.

We also entered the DBS outdoor unit market, leveraging our full band capture technology to enable digital delivery of up to 24 independent satellite channels via a single cable connection into the home. We recently announced BCM4550 paves the way for digital delivery of satellite video channels via digital home networks, greatly simplifying DBS home installation.

For the December quarter, we expect revenue from our Broadband Communications business will be down, primarily due to the decline in shipment of discontinued DTV and Blu-ray products.

Moving to Infrastructure. Our Infrastructure & Networking business was up 4% sequentially to a new high, driven by a rebound in controller solutions, a full quarter of microwave sales and modest growth in switching products. From an end market perspective, enterprise revenue was better than we expected. Data Center sales increased sequentially, but service provider solutions were soft.

Broadcom's Ethernet solutions continue to outpace the industry, driven by our ability to leverage our broad IP portfolio to deliver complete platforms that enables our customers to deploy scalable and high-performance products, as global IP traffic quadruples over the next several years. Our latest integrated carrier Ethernet aggregation switch solutions deliver the industry's highest port speeds, while reducing power consumption by 40%, improving operator capacity and operational costs.

During the quarter, we announced our intent to acquire NetLogic Microsystems, effectively utilizing the strength of our balance sheet to deliver on strategic fit, leading-edge technology and potential for meaningful value creation. Upon closure, which is projected for the first half of next year, our Infrastructure & Networking business will expand its addressable market threefold to $12 billion and be better positioned to meet growing customer demand for integrated end-to-end communications and processing platforms. For the December quarter, we expect revenue from our Infrastructure solutions to decline sequentially due to softness in demand.

Moving to our Hand Platform. Broadcom grew 16% sequentially in its Mobile & Wireless segment, with a significant expansion in sales across our wireless connectivity and cellular baseband solutions. Within the cellular baseband market, we're pleased with the significant growth in 3G shipments, to Samsung in particular, as well as to multiple other handset OEMs.

Our integrated 3G Android baseband plus application processors sales were strong, enabling our customers to deliver more affordable smartphones with popular features, such as multi-touch screens and downloadable applications. With respect to 4G LTE, while we haven't yet announced products in this space, we have begun carrier testing of our initial solutions.

Our wireless connectivity products did particularly well in Q3, with record shipments of combo chips and strong revenue growth across nearly all our lines of business. Our cadence of introducing new innovative combo solutions is accelerating, driving the most advanced wireless LAN and Bluetooth features into a broadening range of devices.

Our customers launched products supporting the latest Bluetooth 4.0 specification in smartphone, PC and desktop computing platforms, enabling a new class of products supporting Bluetooth low energy. This will enable the deployment of innovative sensor-based products, such as health and fitness monitors and security proximity devices.

During the quarter, we unveiled our family of NFC chips designed to drive to mass deployment of NFC in consumer electronics devices. Manufactured in 40 nanometers, these tightly-integrated solutions reduce power consumption by more than 90% and use a fewer percent -- 40% fewer components in a significantly smaller board area. Broadcom is committed to making NFC as ubiquitous as Bluetooth and Wi-Fi are today. These solutions provide the innovative features and performance that, combined with our leadership and wireless combo chips, will enable OEMs to easily add NFC to their designs. For the December quarter, we expect revenue from our Mobile & Wireless solutions to decline sequentially overall, but for combo chip revenue to increase from Q3 to Q4.

In summary, Broadcom delivered strong Q3 results. We continue to grow faster than the industry, with market share gains in both our core and emerging businesses. We achieved operating profitability above our target model and generated record cash flow. While customer order patterns reflect some near-term uncertainty, our strategic focus is unchanged, delivering innovative communications products related to connectivity, bandwidth and content that enable us to expand our addressable market, grow our market share and maintain strong profitably.

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

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from John Pitzer from Credit Suisse.

John Pitzer - Crédit Suisse AG, Research Division

Scott, quickly on the expected growth in combo chips in the calendar fourth quarter, can you talk about what sort of new socket wins versus just existing customers showing growth or what's happening there? And I guess importantly, with the launch of the Apple iPhone 4S and the waterfalling of pricing on the 4 and the 3S, do we need to think about the tail of the Apple business being bigger and longer than perhaps we were expecting?

Scott A. McGregor

I can't comment on specific customers. But in general, we're seeing a trend in combo chips where many of the discrete solutions that people use previously are being replaced by our combo chips. We're also seeing that in areas such as China, we're increasingly taking share, and the penetration of combo chips is moving down from just high-end phones more into midrange phones. And so that's driving the growth of combo chips.

John Pitzer - Crédit Suisse AG, Research Division

And then, Scott, as my follow on, maybe on the Infrastructure side of the business, can you talk a little bit about your expectations around 10-GigE deployment either in the calendar fourth quarter or as we move on to the first half of next year? Is that expected to be a significant growth driver for you guys? And if you could help quantify, that would be great.

Scott A. McGregor

I think that's a good long-term growth driver. I don't think you're going to see significant growth of that in the rest of this year. But over the next couple of years, we do see it as something that will drive a replacement and upgrade cycle across the infrastructure marketplace. So important in terms of driving new switches, new Fis , new network connections, just overall because the amount of data traffic is increasing so much. We do see that, again, as a definite long-term growth driver for the company.

Operator

Our next question is from James Schneider from Goldman Sachs.

James Schneider - Goldman Sachs Group Inc., Research Division

I guess, in terms of customer inventory levels at this point, could you give us maybe a status update on where customer inventory level sits across your 3 segments? And then maybe given that, which of your segments do you expect to be down most versus least in Q4?

Scott A. McGregor

I guess, in terms of inventory, you could have inventory within the company itself, within Broadcom, and you could have inventory in our customers, and you can have inventory in various part of the channel distribution and resellers and things like that. Broadcom, I think, we've done a great job with inventory management. You saw our turns went up to 7.8. So very, very good inventory management on the part of Broadcom. We certainly don't have any inventory challenges within the company. Within our customers, we know of a few customers that have some inventory, but we also know of a lot of customers that are deliberately running very lean because of some concern on the macroeconomic side. And so I would say to the extent we saw any pickup in the economy, we'd see some expedited orders in those cases. But again, there are a few pockets where we think some customers do have a little bit of inventory. In the channel, we don't have as good a visibility on that, and I think, that's going to be more macro-driven. But certainly within Broadcom itself and within our customers overall, we think it's a relatively normal inventory situation.

James Schneider - Goldman Sachs Group Inc., Research Division

Great. And then maybe one for Eric. In terms of OpEx, you've done a very good job of keeping a lid on OpEx as we've headed through this year. Given the macro environment and some of the weakness there, do you have any more room to kind of pull back further if things get a little bit worse here, given the step-up that you normally see in Q1? Or are we pretty much as tight as we can be?

Eric K. Brandt

Jim, so our cost structure's pretty fixed. It's mostly driven by the people we hire. And as you can see, we've slowed down, I think, from where consensus estimates were at the beginning of 2011, we're probably, based on the guidance we gave today, close to $100 million, $125 million favorable to what people had in their OpEx line. And that's the result of us really slowing down the rate of which we've been adding costs across the year. We'll continue to tighten that up, and the portfolio action that I mentioned today relative to digital TV and Blu-ray is an indication of our view of some of the 0-sum choices we need to make in an uncertain economic environment. So I think there'll be some additional costs beyond that step-up, but our anticipation is we will probably run pretty tight into 2012 in terms of OpEx until we see the economic environment really begin to turn back favorable.

Operator

Our next question is from Uche Orji from UBS.

Uche X. Orji - UBS Investment Bank, Research Division

Two quick questions please. First of all on the DTV and Blu-ray impact, can you just quantify that for us how much that was in Q3 and what impact the shutdown of that business will have on the Q4 guidance? Are you assuming there's no sale there? Or just kind of help us understand that. That's my first question.

Eric K. Brandt

Yes, Uche, in Q3, that business is sort of in the tens of millions of dollars. It will probably, between Q3 and Q4, go down, get cut in half between Q3 and Q4. And then relative to next year, it will be a very small part of next year, as we sort of run out the existing chips that we got and some additional software work. But we are discontinuing further development of new products in this area.

Uche X. Orji - UBS Investment Bank, Research Division

Okay, that's helpful. Real quick on the other side, on the baseband business. Scott, can you just tell me what the key drivers for you will be among the 3 platforms you're involved with: Symbian, Android and Microsoft? When do we expect you to have the Microsoft sort of -- I mean, I don't know if you probably put a timing and if we look at baseband revenue next year, obviously you had some good traction with Broadcom -- with Samsung this last quarter. Just kind of help us understand what would be the platform of focus for you over the next few quarters --

Scott A. McGregor

So we certainly are engaged in discussion with Microsoft, but we don't preannounce products in that space. So I'm sorry, I can't shed any light for you in terms of Microsoft products that would come out. I think the biggest driver for us, from a revenue point of view, is going to be the low-cost Android platforms that are coming out right now. The Samsung GALAXY Y product is a great example of that, very, very powerful product, a very attractive price point. We're also shipping with a number of other Asian OEMs out there today, handset makers deploying our baseband solutions in the high-volume, low-cost Android space. So I think that's probably the biggest growth driver for us over the next couple of quarters. And then, of course, we do expect next year to begin our shipments of 3G with Nokia. So another driver that will come into play as that begins to go to market.

Operator

Our next question is from Glen Yeung from Citi.

Glen Yeung - Citigroup Inc, Research Division

Scott, I'm wondering if you can give us a sense as to whether or not what you're seeing from your customers in terms of slowing down, and I suppose that's x combo chips, is related to specific end demand weakness or more of an inventory drawdown from them. And then as part of that answer, maybe you could address what order linearity looked like for you in the quarter.

Scott A. McGregor

In terms of overall feedback from customers, I would say it's macro-related. Whenever you have a macro economic slowdown, you can get some inventory situations because of that. But I don't think it's the normal kind of thing our industry does of create its own inventory issues. I think it's very much macro-driven, and that's how we see it. In terms of linearity, Eric?

Eric K. Brandt

Yes, in terms of revenue linearity, strongest month was the second month of the quarter. In terms of sort of order linearity, typically, it's stronger in the front part of the quarter, and I don't think this is any different than any other quarter.

Glen Yeung - Citigroup Inc, Research Division

Okay. As a follow-up, we're just now starting to hear customers of yours talk about the implications from Thailand. And I wonder to what extent you've thought about that in your guidance or maybe let us know what you're hearing from your customers about any potential impact from the floods.

Scott A. McGregor

I think the HDD impact is definitely significant across the whole tech industry, and I don't think people have analyzed it and had time to really go through it. Generally, the hard disk drive as an industry was expected to ship on the order of 200 million units in the quarter, and our guess is that there'll be around half that. And so, that will have implications on devices. I don't think Broadcom will be as affected as many other companies, but you could see a slowdown in PCs, which depend on HDD drives, except for the small number that use SSDs. I think also you could see some impact on Data Center. I think you could be some impact on personal video recorders that use hard disk drives. And so we've had conversations with our customers there. So again, still early days on analysis, but we certainly have looked at that and have reflected that in our thoughts on the fourth quarter.

Operator

Our next question is from Harlan Sur from JPMorgan.

Harlan Sur - JP Morgan Chase & Co, Research Division

You mentioned the broadband decline in Q4, digital TV, Blu-ray ramp down. I think you're maybe still trying to assess the impact on DVR set-top shipments. But if I recall, emerging markets sort of the triple play build-out has been the big driver of the Broadband business. Scott, are you seeing signs of a slowdown in some of the faster-growing markets, like China and India?

Scott A. McGregor

No, we're not. Actually, the BRIC countries we're very bullish on and think that as they deploy more and more broadband to their citizens, that's going to be a great long-term driver for us. We put out a number of cost-optimized solutions targeting that market. I think you may recall initially, we went after that market with essentially U.S. set-top box chips that were rather over-configured and excessive cost for that market. We've since come out with 40 nanometer tune devices targeting the BRIC opportunities. And so we think we're very well situated to take share and enjoy growth over the next year in those markets.

Harlan Sur - JP Morgan Chase & Co, Research Division

Okay, great. And then maybe if you could just give us a bit more color in your network and infrastructure business. Is the weakness more enterprise-related or service provider? I mean, for example, we've been hearing about push outs in the widest infrastructure side. Some of these have been rescheduled for kind of first half of next year. In other cases, we're still hearing about component inventory work-downs. Any details from your side would be great.

Scott A. McGregor

We're seeing relatively stronger enterprise business than service provider business. The weakness is more in the service provider business. We've seen some push-outs there. I think China softened up a little bit so driving that. But enterprise definitely stronger than service provider in the current environment.

Operator

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

Craig Berger - FBR Capital Markets & Co., Research Division

I guess, within wireless, I just wanted to confirm you said combo chip shipments would grow sequentially in the fourth quarter, and I guess so that bags the question, what does that mean for your traditional Wi-Fi and Bluetooth businesses? And can you talk about sort of what the mix of business is between combo chips and those legacy businesses and kind of how cannibalization is playing out?

Scott A. McGregor

I don't have exact mix number for you, but we definitely see the majority of the business now in combos, and I think we do see combos growing and therefore, decline in the discrete business. We don't see that as a share loss, we see discretes declining in general for everybody, as the business moves more towards combos. And so that works to our favor as we've very, very strong combo products.

Craig Berger - FBR Capital Markets & Co., Research Division

I guess, just as a follow-up, most of your peers are seeing a couple of quarters of revenue declines. I guess, with you guys being down in the fourth quarter, how are you thinking about first quarter? How should we be modeling it?

Scott A. McGregor

Well, we don't guide the first quarter. We could talk a little more about that at our Analyst Day in December. But sorry, we don't guide to the first quarter at this point.

Operator

Our next question comes from Vivek Arya from Bank of America.

Vivek Arya - BofA Merrill Lynch, Research Division

Scott, my question is on the competitive landscape in connectivity. I assume Broadcom has good visibility into the smartphone tablets coming out in the next few quarters. Do you see any change in your competitive position versus say Qualcomm because the roadmap does contain a number of new connectivity capabilities. I think, they have this integrated GPS in their baseband transceiver. So should we expect any change in the competitive landscape over the next several quarters, whether it's in units or content per smartphone or tablet?

Scott A. McGregor

We generally have about 6 to 9 month visibility based on design wins we've already won. And Broadcom continues to have a very, very strong competitive position in combo chips. We don't expect any meaningful change in our share of the business over that period of time. Our combo chips remain extremely strong. Our customers continue to use them. We don't have 100% of the business though, and so we're going to win some here and lose some there. But overall, we don't see any meaningful changes in our share.

Vivek Arya - BofA Merrill Lynch, Research Division

I see. And one question for Eric. Eric, how should we look at the stock compensation expense line once you add in NetLogic? Do you think that line will go up a lot? Or will it stay within? I think you had some targets as a percentage of sales before.

Eric K. Brandt

Yes. Again, assuming all of the NetLogic shares converted over as we discussed during the transaction, it's about 15 million shares. In terms of stock-based compensation, it doesn't change our objective as a company, and I think depending on how things play out next year, we should continue to see leverage, assuming next year is a growth year. If it's not a growth year in the industry, obviously, that would hurt us. But I think to the extent that it's a growth year, we should continue to see leverage in that line and maybe a blip associated with the transaction, and then we'll start to move down again.

Operator

Our next question comes from Romit Shah from Nomura securities.

Romit J. Shah - Nomura Securities Co. Ltd., Research Division

Scott, you mentioned that Broadcom was seeing some macro impact on handset builds, and I was just curious if that was among Tier 1 customers versus Tier 2 or a little bit of both.

Scott A. McGregor

We're seeing macro impact across all our segments, so it's not unique to any one of them. I don't have a specific breakout for you. I can't do it on customers, but we don't see it specific to high end or low end. It's general across all of our segments.

Romit J. Shah - Nomura Securities Co. Ltd., Research Division

And just trying to better understand why the combo business is holding up so much better than the rest of Mobile & Wireless.

Scott A. McGregor

Well, I think there's some other trends going on. I think Broadcom's able to take share. I think, we're moving more from the discrete chips to the combo chips. And again, as the combo capability as wireless connectivity moves down from just the higher-end smartphones and high-end feature phones into more midrange phones, there's an opportunity for share expansion there. So those are some dynamics that would be more secular rather than cyclical.

Operator

Our next question comes from Ambrish Srivastava from BMO.

Ambrish Srivastava - BMO Capital Markets U.S.

I apologize if you already covered it. For the guidance, what are the relative magnitudes of decline for the 3 businesses, please? And then I have a follow-up.

Eric K. Brandt

We generally expect them all to be down, I would say, in the places where there is a longer supply chain, like you'd find in the Infrastructure segment. To the extent that there is broader demand weakness, we'll see a combination of both, demand weakness and inventory channel effect. So that's probably the one larger place and then I think, more broadly, consistently down across the other 2 businesses.

Ambrish Srivastava - BMO Capital Markets U.S.

Okay. And a quick follow-up is NFC. When should we expect to see this shipping with Broadcom solutions? And then what is the integration play in terms of timing for this?

Scott A. McGregor

I think you'll see NFC initially start as a discrete device and over time, increasingly become integrated into combo chips for the reader side of it. For the tag, it tends to be low cost, that's what you'll put in paper and posters and devices and things like that. And that will remain discrete. So I think you'll start to see that roll out in significant volume next year.

Operator

Our next question comes from Mark Lipacis from Jefferies.

Mark Lipacis - Jefferies & Company, Inc., Research Division

Scott, you mentioned LTE tiles. Can you put that into context of when you could -- when we could expect to see production revenue shipments? When do you think you'll be shipping into production handsets?

Scott A. McGregor

I can't give you an exact forecast on that, but I would not model revenue in 2012 for LTE. I think it's a past 2012 event. So we are in initial trials with carriers. But we believe to field the very strong competitive product in that space, it will take a little while to get there.

Mark Lipacis - Jefferies & Company, Inc., Research Division

And as a follow-up, there was a question about hard disk drive impact. And I guess one indirect -- potentially indirect impact is the chips you sell on the set-top boxes would it be sometimes include or oftentimes included a PVR, and you may be indirectly impacted there. Could you help us quantify the percentage of set-top box chips that you ship that may go into a set-top box that has a PVR and therefore, potentially puts that revenue stream at risk?

Scott A. McGregor

I think about half of our chips in set-top box go into PVRs or high end, just to give you a rough estimate on that. And there is a potential for impact on those devices. We believe we have included what we understand of the issue today in our fourth quarter guidance. But I think the industry's still analyzing that.

Operator

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

Craig A. Ellis - Caris & Company, Inc., Research Division

Scott, with the NETL deal having been announced and out there for a while, I'm interested in what you're hearing from customers on the proposed combination of the 2 companies and their technologies.

Scott A. McGregor

Generally, customers have been very supportive. We've had a lot of very productive conversations with customers that enables us to provide a much more complete solution and participate more broadly in a lot of the opportunities. So generally, favorable conversations with customers.

Craig A. Ellis - Caris & Company, Inc., Research Division

Okay. And then just a follow-up contextual question for Eric. Eric, as you've looked at the landscape now and compare it to the same time in the fourth quarter of 2008, what are the positives and negatives versus then?

Eric K. Brandt

Yes, so I think the interesting thing is when you listen to -- and we've listened to some of the other companies before, some talk about demand, some talk about inventory. And as you know, we've talked about that we think that they're connected, right? When there is demand weakness, eventually the inventory levels begins to stack up, then you'd like to clear them out. I think the difference here is there isn't, at least at this point, the kind of shock to the system that we saw in 2008. And this maybe just sort of a slowing down cleaning out of inventory and snap back. At least, certainly that's our hope. I think for us, and we've tried to make this clear, I think we've been through this before. We've seen how this plays out. And so, we will sort of batten down the hatches and make tough choices, tighten up our spending and manage our business tightly as we roll into next year and probably won't make meaningful changes in resourcing until we see a bounce back. And so we played this out in 2009, and we think to the extent that 2012 plays out as 2009, we have a pretty good formula for that event.

Operator

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

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

You had mentioned lower mask cost. I wonder if you could give us little more details on that. Was that your choice? Or has there been any delays? Is that going to be a cost later on?

Eric K. Brandt

So we don't -- we certainly don't try to manage mask costs down other than the actual cost per mask. So we don't move masks in and out of a quarter. We let them go as they are as they come in. In terms of Q4, I think the slightly up on a non-GAAP basis is driven by the presumption that there will be increased mask cost in Q4. That is normal for us with respect to the fact that most people have a series of objectives to get a certain number of products out and taped out. And so they tend to sort of snow plow and shovel into Q4. And so this is not abnormal. I would say it was lighter than we thought in Q3, and many of those masks that slipped across the quarter and taped out at the very beginning of this quarter.

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

Okay. As you're looking at your product portfolio, what percentage do you expect to transition to 28 nanometer?

Eric K. Brandt

Well, today, we don't have any products selling in 28 nanometer. We are taping out about 65% of our products at 40 and below. We have a roadmap in 28 and maybe I'll refer to Scott to talk a little bit more about that.

Scott A. McGregor

I think 28 nanometer is going to be an interesting process. We certainly have the test chips going out and expect to tape product chips out at 28 nanometers shortly.

Operator

Our next question comes from Sanjay Devgan from Morgan Stanley.

Sanjay Devgan - Morgan Stanley, Research Division

First question is kind of geared towards the baseband business. You talk specifically about opportunities with Samsung and as being a growth driver. I was wondering if you can also touch on the China 3G opportunity, how that's trajecting relative to what do you anticipate and how we should view that going to 2012.

Scott A. McGregor

China is also a great opportunity for us in 3G basebands. We've won multiple designs with a variety of OEMs over there, some of which have already begun shipping. So we see that as a great growth opportunity for us as well. I think Samsung's going to be the most important and largest of our customers in the Android baseband opportunity for now. But certainly, good opportunity with China as well.

Sanjay Devgan - Morgan Stanley, Research Division

Okay, great. And then just A quick follow-up. Now with the NETL acquisition you have a lot of the key components in the wireless infrastructure space, whether it be the baseband processing for wireless infrastructure or whether it be 'the backhaul with the Provigent acquisition. There's been a lot of discussion as we kind of move forward specifically on the backhaul side, and we go to kind of small cells. I was wondering if the timing or the roadmap on bringing these microwave backhaul products from Provigent from the macro side to the micro side. Any kind of outlook there? How should we think about the product roadmaps kind of melding in this wireless infrastructure in general, given that you have so many blocks of IP geared towards this market?

Scott A. McGregor

I think you've made a good observation, and certainly between Provigent, we acquired a company called Percello, which also does femto and small cells. we have done a variety of things in terms of backhaul, in terms of fiber, very strong position there. Switch, obviously, and NetLogic fills in some additional pieces with processors. We also have strong DSP capability within the company. So your observation that we have a large number of pieces to go after that market is correct and certainly, an interesting opportunity going forward, and we'll announce additional products as they come forward.

Operator

Our next question is from Shawn Webster from Macquarie.

Shawn R. Webster - Macquarie Research

Can you remind us again what your total percent of sales is for the combo chip segment? You said it was majority of connectivity, and I'm just wondering if you could clarify that. And also what your mix of -- within your infrastructure, what your service provider versus enterprise is?

Scott A. McGregor

Combo is indeed the majority of our connectivity business at this point, but I don't have other numbers for you there.

Eric K. Brandt

Service providers, roughly 40%; enterprise is roughly 30% of the overall Infrastructure business.

Shawn R. Webster - Macquarie Research

Okay. And then Eric, in terms of the operating expenses going into Q4, that other bucket outside of the $666 million, do you expect other charges there in Q4?

Eric K. Brandt

Other than the second part of that restructuring charge, so the $6 million on top of the $17 million that we booked, I'm not aware of any. Had I been aware, we would have booked them already, so I'm not aware of any.

Operator

Our next question comes from Doug Freedman from RBC Capital Markets.

Doug Freedman - RBC Capital Markets, LLC, Research Division

Scott, for you, if you could talk a little bit about your strategy in the applications processor market. I believe you've set some goals for the company and if you could sort of share where you see your development efforts going there. And in that, could you also talk a little bit about the ramp of Nokia and the 3G ramp and what the timing of that now that we've gotten closer to it?

Scott A. McGregor

So on application processors, I think, it's certainly an observation that we have not had the most cutting-edge application processes. We have a strategy to bundle them with our basebands, which we think is spot on and the right thing to do and will be majority of the cellular business over time. What we've done is we've put a lot of investment into upping our game in application processors, and I think you've seen us announce processors now north of gigahertz, and you'll see us announce multi-core, multi-thread, faster processors over the course of the next year. So I'd say within the next year, you should see us competitive, strongly competitive in the application processors space. And again, wait for the products to get announced and judge for yourself on that. In terms of Nokia, we've said we expect the 3G ramp in 2012. Unfortunately, as we get closer, I can't give you more clarity on that. We want to protect the proprietary nature of Nokia's business and as they roll out products and whatnot. But we do expect to rollout 3G with Nokia next year.

Doug Freedman - RBC Capital Markets, LLC, Research Division

All right. If I could, as a follow-up, Eric, could you talk a little bit about what you're seeing in terms of foundry pricing? Is there any gross margin good news out of the fact that we are going through this sort of industry-wide inventory correction? And I believe there's plenty of foundry capacity available these days. Is it helping out on the pricing side?

Eric K. Brandt

Yes, what I would say is that it's spotty at this point. I think it's sort of lagging to the extent that there are spot-by opportunities. As a multi-foundry player, we can certainly take advantage of those, and we did in Q2 and Q3. So we're keeping our eyes open. Having said that, I think what we talked about a couple of years ago in terms of better design of our product as we move to 40 nanometer and optimizing some of the 65 and even optical shrinks to 60, that's one of the reasons why we've been able to hold our gross margin so rock-solid as our consumer businesses continue to grow as a percentage of our mix. And I think that, that will continue as we sort of roll into next year. And to the extent there is good foundry pricing, we will certainly be one of the first to jump on it.

Operator

Our next question is from Stacy Rasgon from Sanford Bernstein.

Stacy A. Rasgon - Sanford C. Bernstein & Co., LLC., Research Division

So my first one, I just wanted to clarify regarding your step-up in OpEx for Q1 for fringe and everything else. Did you imply that, that was going to be higher than the $45 million that we saw in the beginning of 2011? That's kind of what I understood you had said. If you could clarify that. And also give us some indicator for how the fringe tends to step down over the course of the year, that would be helpful.

Eric K. Brandt

Okay. So Stacy, typically the way it works is it would be the $45 million plus what we estimate roughly in terms of headcount growth and any sort of merit. So if you include the acquisitions we've done in Q -- we did in Q4 of last year, we're probably looking at about 8% or 9%, maybe 8.5% headcount growth and then a couple of 3%, 3.5% in terms of sort of a typical estimate on the merit side. So if you use 10% to 12% on a step-up on that $45 million, that's the way it should work now it begins to come down across the year somewhere between $10 million and $15 million a quarter in typically, probably the $10-ish million a quarter Q2, Q3 and Q4 depending on sort of how it runs its way out.

Operator

Our next question comes from Ruben Roy from Mizuho Securities.

Ruben Roy - Mizuho Securities USA Inc., Research Division

Scott, first of all can you talk about what was behind the timing of discontinuing the DTV and Blu-ray? And I think you said that you're shifting your focus. Is there something near term that you're seeing within the broadband business that you're shifting focus to? And in light of a maturing modem market on the DSL side especially, do you think broadband grows next year?

Scott A. McGregor

I think in the DTV and Blu-ray business, we originally went into that business thinking that we could create a highly-differentiated strategy with Internet capability and over-the-top capability built into TV sets. That market has just remained stubbornly commodity relatively-low margin and difficult to differentiate and brutal pricing. I don't think anybody makes very much money certainly in the customer side, very tough to make money in that business overall. So we did a portfolio decision, which is we would reallocate the cost to things we thought were higher growth opportunities across all of Broadcom, not just in broadband itself. So while some of those resources were redeployed into the rest of our Broadband business, it also gave us an opportunity to reinvest some of those into things like application processors and cellular basebands to get more competitive in that space as well.

Operator

Our next question comes from C.J. Muse from Barclays Capital.

Christopher J. Muse - Barclays Capital, Research Division

I guess, first question, in terms of the subdued end-markets, you talked about strength in BRIC nations. So curious in terms of developed economies, whether you're seeing broad-based weakness or there are certain geographic areas that are driving weakness today.

Scott A. McGregor

I think Europe and the United States are driving more of the weakness than the rest of the world. I think we're seeing relative strength in BRIC and Asia in general versus the Europe and American markets just overall.

Operator

Our next question comes from Ross Seymore from Deutsche Bank.

Ross Seymore - Deutsche Bank AG, Research Division

Just on the OpEx for the first quarter, I guess, is that a GAAP or a pro forma number? And if I look at headcount, it looks like it was up in the third quarter about 18% year-over-year. So the math you just gave about the fringe side of things, are we talking kind of the $45 million you mentioned, you add on to that fringe, and it gets you into the $50 million to $55 million range, is a ballpark in the absolute?

Eric K. Brandt

So the number I gave was GAAP, so it's both stock-based comp, fringe and merit, so it's altogether. Last year, the stock-based comp was about $15 million. But in there was part of our employee stock purchase plan adjustments. So and your number actually, I think, is off slightly. Quarter -- year-on-year, Q3 is, I think, 14% to 15%, but recall in Q4, we had 3 acquisitions closed and so that will dramatically slow the growth rate that you'll see relative to what you see Q3 over Q3. So if you take that $45 million and sort of do 10%, 12% on top of it, that's probably a good starting point for what those 3 pieces are on a GAAP basis. And if you want to assume that $12 million to $15 million of that is stock-based comp, that's probably decent starting point.

Operator

Our next question comes from Chris Caso from Susquehanna Financial.

Christopher Caso - Susquehanna Financial Group, LLLP, Research Division

When you announced the NetLogic acquisition, you had talked about funding that acquisition through cash flow over the next several quarters. Given that the revenue slowdown in this more difficult environment, does that change your view on how you may fund the acquisition?

Eric K. Brandt

So we had always left open the opportunity to go to the capital market potentially for debt. We don't intend to use equity consistent with what we said. Today, we have $4.2 billion net cash outlay on this transaction. It's probably in the vicinity of 3.4. So we already have plenty of cash to do the deal, and we will generate, unless something strange happens, just based on the guidance, probably in the vicinity of $350 million to $450 million of cash flow in Q4.

Operator

Our next question comes from Daniel Amir from Lazard Capital Markets.

Daniel L. Amir - Lazard Capital Markets LLC, Research Division

Can you -- on the Networking segment, can you compare kind of what you're seeing there into next quarter and the following, comparing to your other 2 businesses? I mean, is it -- do you see real growth opportunity in the Network segment once we go over this hurdle? Or do you expect it maybe to kind of underperform growth in the next couple of quarters, just because of the weakness, the bit you're seeing on the service provider front?

Scott A. McGregor

I think long term, we definitely see our Infrastructure business as a growing opportunity. Certainly, our goal has been to expand the overall TAM or total available market for that business looking at, we talked earlier on the call, about cellular infrastructure. There's certainly the opportunity to, with our NetLogic acquisition, pursue a lot of the markets you would see in the processor space. And so we believe that, plus 10 gig is a great opportunity. Our switch products are very strong in that space. I think there's just a variety of things we can do overall in that business. We've also announced a number of other things in terms of automotive and other stuff. So there's a lot of opportunity broadly in that business for growth. I think also, as Romley starts to deploy, we'll see some pickup on a more cycle-specific basis for that.

Operator

Our next question comes from Steve Smigie from Raymond James.

Jonathan Steven Smigie - Raymond James & Associates, Inc., Research Division

The 40 [indiscernible] per second Ethernet market seems to be getting a little bit of traction here. Just curious what product types you guys think will be the best opportunity for you to address that opportunity.

Scott A. McGregor

So we definitely believe that, again, bandwidth is just exploding. And so 10 gig will move to 40, move to 100. So we will definitely deploy products in that space. Many of our switches today have 40 gig uplinks. And so we see that as a great opportunity going forward. And obviously, we expect to be very competitive in that space.

Operator

Our next question comes from David Wong from Wells Fargo.

David M. Wong - Wells Fargo Securities, LLC, Research Division

Could you give us an update on where you are on 4G baseband products? Are they sampling yet? Or if not, when do you expect that to sample? And roughly what percent of your wireless division sales are wireless handset baseline products at the moment?

Scott A. McGregor

So I mentioned before that our LTE products are in carrier trial, and we don't expect revenue from those now through 2012. By the way, many people define 4G as different kinds of things. Some people believe LTE is 4G, other believe that HSPA+ is 4G. We certainly have HSPA+ products in the market. And so depending on how you count 4G, we'll have a number of products there. We don't disclose our cellular mix. I'm sorry, I can't give you any more color on the other part of your question.

Operator

Our next question comes from Anil Doradla from William Blair.

Anil K. Doradla - William Blair & Company L.L.C., Research Division

A couple of questions. On the low-end design wins for 3G, are most of these increment design wins typically include connectivity? Or are they typically baseband? And can you give us a sense of what is the typical content on this for you guys?

Scott A. McGregor

The low-end Android that I was talking about are both the baseband, and typically, we also win the connectivity at the same time. So we'll often see a full complement of chips from Broadcom in those devices.

Operator

Our next question comes from Tristan Gerra from Robert Baird.

Tristan Gerra - Robert W. Baird & Co. Incorporated, Research Division

Do you see or do you expect the deterioration in the pricing trends for certain of your products? And what will it take, from a macro environment standpoint, to see your gross margin go down further from your Q4 guidance? And also, do you expect OEM auction on inventories to be lower at year-end than currently able, on the basis of your guidance?

Scott A. McGregor

So in terms of declining prices, I think, our industry normally sees prices decline on average of about 10% per year. And that's factored into our business model. It's been a little less than the last few years, and the pricing environment held up a little more, simply because a lot of the prices that we depend on like gold and oil and plastics and other assembly and wafers and things like that have not declined in line with industry norms. So we don't expect anything unusual going on in the pricing environment. In terms of margins, we don't see anything unusual in that space, so nothing particularly unusual to report there.

Eric K. Brandt

Yes, the only -- I would say the standard margin actually as it turns out and going into Q4 is going up. And standard margin is defined as the underlying margin on the product mix adjusted including price. And the thing that's driving the flat to down guidance is the absorption of the overhead of manufacturing on a much lower revenue base. So in Q3, we benefited from an absorption impact offset by mix, as we saw very strong growth in consumer products. And in Q4, we actually have some benefit in standard margin offset by the absorption impact of the lower revenue on the overhead number.

Operator

Our next question comes from Edward Snyder from Charter Equity Research.

Unknown Analyst -

This is Brian Kram [ph]. I'm actually filling in for Ed today. Just had a question surrounding baseband sales. Given that last quarter there was an uptick in guidance attributed to Samsung, why shouldn't we see more seasonal strength going into the fourth quarter in baseband sales?

Scott A. McGregor

We definitely believe we've won a number of designs and certainly see that. But overall, when we look at our Wireless business, we see it net being down.

Operator

Our next question is from Srini Pajjuri from CLSA Securities.

Srini Pajjuri - Credit Agricole Securities (USA) Inc., Research Division

Scott, on the Samsung 3G win that you discussed, I guess, if you take a step back, you guys had a very strong presence in 2G, and it's good to see that you're making progress in 3G as well. But it looks like it did take you guys a little longer to make that progress in 3G. I'm just wondering. Kind of understanding the competitive landscape, is it any different in 3G? And also why -- I'm just curious as to why you're doing well in the low end and not so well in the high end. And then finally if you can touch upon how we should think about the opportunity in the low end versus high end, as we look out to the next 4 to 6 quarters.

Scott A. McGregor

I have to point out that we've been shipping 3G for now for 2 years or so. So it's not our first 3G win. Our first wins in the low-end Android space, the high-volume Android space. So let me just clarify that. And Samsung's done a great job creating products there. They're taking share and creating really innovative products. We're winning in the Android space because we've got a very cost-effective product, and I think our strategy of integrating basebands with application processors is really playing off there, as people look for economic ways to deliver on smartphones. In terms of why we haven't done as well in the high end is because we haven't delivered products in the high end at this point. We targeted low to midrange in those devices, so that's where our wins are. I think what we've said over the last couple of quarters is that we've shifted our investment to target more the high end. It takes a little while to develop those products, but in terms of upping our game on both cellular modems and on application processors, we're definitely making those investments now, and I think you'll see, over the next couple of years, we'll shift our strategy to win not only in the midrange where we play today, but also to pick up high-end business as well. So that covers that space.

Operator

We have no further questions at this time. I'll turn it back over to our speakers for any closing remarks.

Scott A. McGregor

So thank you for joining us today. In closing, we believe our integrated product offerings and scalable business model position Broadcom for where the market is heading. We're pressing our strategic and financial advantages right now to continue to invest in the areas that will bring us future growth. Also, we look forward to seeing you at our 2011 Analyst Day in New York this time, on December 14. And if you need any additional details on this event, please give Chris or John a call. Thank you very much, and have a good day.

Operator

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

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