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Broadcom Corporation (BRCM)

November 17, 2011 10:00 am ET

Executives

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

Analysts

Unknown Analyst

Unknown Analyst

Good morning. Thank you very much for joining us. We have with us today Eric Brandt, Chief Financial Officer for Broadcom; and we also have with us Chris Zegarelli, Director of Investor Relations for Broadcom. The format today will be a fireside chat and I promise to leave the last perhaps 10 minutes for questions from the audience. First of all, Eric, thank you very much for making the time to come. We appreciate your presence, and we'll quickly get started. I'll take my seat and then we'll [indiscernible].

Question-and-Answer Session

Unknown Analyst

So thank you very much. So why don't I just start. I know it's only been a few weeks since the earnings call and I was just wondering if there was any update as to how you view the demand environment and especially as we see the evolving situation in Thailand on the flood situation and what that means for set-top box business. And so if there's any comment, that will just be helpful as a start.

Eric K. Brandt

Yes, I don't think we have anything new to report. We provided our guidance. It reflected our view and typical forecasting methodologies and are trying to be reasonably conservative as we always are. So I don't think there's anything new to report since then that materially changes our view.

Unknown Analyst

Sure. Well, great. Why don't we just go back to something that I think a couple of conferences ago -- yes, UBS, you kind of walked through your investment strategy and how you invest in businesses. Recently, you decided to quit the TV investments you've made after a few years. I wanted to kind of step back and look at the story, where are the growth drivers for the company, where are the margin drivers, and how you are locating investment, both from an R&D and a CapEx front.

Eric K. Brandt

Sure. So we, as a company, run a fairly rigorous portfolio process. We evaluate all of our businesses at the line of business level and quite frankly at the platform level as well, which is below the line of business. We measure them on a variety of metrics. We measure them on growth. We measure them on gross margin. And probably those are the first 2 things we look at in detail because we believe that revenue growth and gross margin are highly correlated to multiple, and driving revenue growth and gross margin will translate into multiple. And beyond that we look at R&D efficiency, operating income turns and cash flow valuation among a number of other things, and that creates a portfolio grid that we then evaluate the businesses across all those metrics and force rank them. And then we allocate R&D, P&L R&D, according to that. As it turns out, the DTV and Blu-ray business scored at the bottom of the portfolio grid, and we made the decision that the right thing to do for us was to reallocate that R&D to other parts of our business, unfortunately resulting in us closing the business down, having to lay off some people, take the restructuring charges, et cetera. But at the end of the day, that's we're, as management, supposed to do, which is make sure that we are allocating resources to the most attractive parts of our business and we take that very seriously, up to and including exiting businesses which we had done at the end of 2007 as well, as you may recall. So that was the choice we made and the place that we principally will be reallocating those resources will be in the Mobile & Wireless space. We'll talk more about that on Analyst Day, which is coming up on December 14 here in New York. So I apologize for the plug. On a capital basis, we don't think dissimilarly from that. Again, we are focused on -- from an economic perspective revenue growth and gross margin. I think from a strategic perspective, we are focused on broadening our IP footprint and bringing in what we believe is integrate-able IP, which differentiates our product set. We look at return on capital hurdles for our business. We understand what ours is as it relates to the market base return on capital expectations, and we typically run above that. And we are not opposed to using both the balance sheet and the P&L with organic R&D investment to drive the underlying growth of our business. We are serial acquirers and to the extent that we can't find a way to make the economics work in an organic investment because there are higher ROI alternatives. And understand that inside the company and while our cost of capital may be somewhere in the 10.5% range, that to get dollars from the P&L perspective, it's got to be much higher than that just because of the trade-off and opportunity cost and other things. And so to the extent that we can't afford to do it on the P&L, we will look to use our balance sheet for things that are accretive ROI projects, but maybe don't meet the P&L hurdle.

Unknown Analyst

Sure. In terms of the scoring for the business groups you want to invest in, Mobile & Wireless, it kind of sounds like that at top of that, it's related, and if so, what is the -- how is the differences between the connectivity part of Mobile & Wireless and baseband side of Mobile & Wireless?

Eric K. Brandt

So the pieces are connected, right? And we do believe that this moves down the path of platform sell. And for us, when you look at the greatest opportunity for market share gain for the company, it's in the cellular side or baseband side of the business. That business naturally drags along the connectivity part of the business. But I would say when we look at the R&D components that are in that top part of the grid, they get roughly equal to what they represent and what they represent in growth. And probably the single source of growth probably outside of where its ranking might be would be cellular, but the issue with that is, is sort of time horizon and the space in which that ramps relative to the investments.

Unknown Analyst

So are you saying going forward you expect to see the cellular business drive the -- the connectivity is much bigger than cellular business today and that has grown independent of your cellular business not being as strong? So I'm just making sure I understand how the connection between the 2 groups of growth.

Eric K. Brandt

So for instance when we win a baseband and a low-end Android phone, we sweep the connectivity as well and so there is a benefit to having a platform position in both. We understand that, and one of the reasons why we're trying to build our business is not just that. It's just because that is the open area for growth for us relative to the market shares we have in the other businesses.

Unknown Analyst

I see. Okay. That's clear. Let me look at the growth opportunities. You mentioned low-cost Android phones, I was going to come to that later but since you mentioned it, why don't we just talk about it now? For you, in terms of the baseband design wins and design pipeline for the low-cost Android phones, where would you rank yourself relative to the market today?

Eric K. Brandt

On what dimension?

Unknown Analyst

On dimension of design wins or in dimension of market share, whatever numbers you want to choose.

Eric K. Brandt

I would say we're starting, right? And we have a number of design wins that people have seen and some that people haven't seen and there's more coming. Our product roadmap was probably a year ago designed much more to the low-end than it was to the high end. And I think over the last year, Bob Rango has done a nice job moving it more up the scale in terms of the roadmap. Having said that, there are a number of chips that we have that were sort of low-end, mid-end 3G chips which were pretty far down the path and we took to completion, which we will sell and you'll hear more about them, the first one being what you're currently seeing in the low-end Android phones, and then there's another one behind it and then a higher end chip behind it. And so I would say we are making good progress. I think that we are establishing ourselves based on the relationships we have with a lot of these vendors in terms of connectivity, et cetera, that we're establishing ourselves as a player moving up the capability stack as it relates to baseband. And that's one of the things I think that's important in terms of people using us as a second source on a variety of different applications. And so you're seeing that now more on low-end Android. You'll see that more as time goes on. You'll see the launch of Nokia's 3G products next year. And I think all in all, we are making pretty good headway. How I rank us? I mean, we're just starting.

Unknown Analyst

Nokia on the 3G side. Obviously, the shift has been now more to the Microsoft platform, but it's also the Symbian S40 that people haven't really paid too much attention to in terms of the products there. I know you -- I don't expect you to preannounce the product in this panel, but when you look at Nokia, are you looking across the entire stock of products that they have? Or is it just simply on the Symbian?

Eric K. Brandt

We are in the mid-ranged 3G products. Beyond that, I can't really say much more.

Unknown Analyst

Okay. Connectivity there. You've been at the reference design for the Microsoft connectivity product, so I will assume naturally that that's the business that will continue to be strong for you within Nokia.

Eric K. Brandt

And in fact, it will expand because we were not the partner on the high-end phones for connectivity. With the Windows-based phones, we are the partner for connectivity. So we'll continue to pick up share at Nokia on connectivity.

Unknown Analyst

Right, okay. Back to low-cost Android phones. What solutions are you selling? At the moment, my understanding of those phones is that it is serious in discrete solutions on connectivity, not a combo solution. Is that a fair understanding yet? Or are you seeing more combo now in the low-cost Android phones?

Eric K. Brandt

Oh, no. We're seeing much more combo in low-end Android design wins across the board. That's one of the reasons why we feel comfortable saying we feel like we're gaining share and one of the reasons why you see that business even in the face of broader softness macroeconomically going reasonably well. So with the advent of the 4330, which is 40% smaller and cheaper, it's a much more viable product in a phone that's EUR 100, or let's just call it $135, $140 phone unsubsidized. And so we are picking up a combo based solution in those devices here. And in the case, we have a baseband offer in the GPS as well.

Unknown Analyst

Right. Just to make sure we understand the run rate for growth in this business, where will you put the combo penetration today on the smartphone in general and also including the low-cost Android phone?

Eric K. Brandt

So I would put it in the low-end Android smartphone, I would assume.

Unknown Analyst

It's a smartphone. I think...

Eric K. Brandt

Yes. I would say combo -- I would say Wi-Fi penetration in smartphones is probably 90%, maybe more, and combo is probably 70%. And so the real opportunity for combo growth is the spread of those phones down into the feature phones set as you would actually get a smartphone that's the same price as a feature phone.

Unknown Analyst

Right. And the penetration is obviously much smaller?

Eric K. Brandt

Well, yes. The penetration of the feature phone is very, very low. The Bluetooth penetration is fairly high, obviously, but the Wi-Fi penetration is low and so the combo chip then brings both and adds to the ASP on the back of it.

Unknown Analyst

Let me speak to NetLogic. That was a fairly sizable deal in the context of the deals you've done in the past. And from the way we understand it, obviously that's fixed, kind of almost completes your wireline product offering. Two questions here. One, why are you, in terms of getting that deal, both closed? And also, in terms of how much synergy you expect to get out of that deal. And what's been the customer reaction so far, if you can just kind of start up that before.

Eric K. Brandt

So from a closing perspective, we said that we expect first half 2012, and that hasn't changed. My hope would be that it would be at the beginning of 2012. It could conceivably be as early as December based on timing of regulatory approvals and if China doesn't go to Phase II, which it does 90% of the time, and their shareholder meeting. But my guess would be first half, sometime next year, probably on the earlier part of that, assuming things follow the normal timeline they have followed in China in the past. In terms of synergies, we don't expect meaningful cost synergies associated with this transaction. That's rarely why we do deals. We're not a consolidator, if you think about it. We tend to buy companies for technology. Sometimes we get some consolidation benefit, but we really are not focused on driving meaningful synergies certainly on the R&D side. There will be some synergies, I think, on the SG&A side but modest. And that's not a large component of the cost structure. So this is really about, as you said, filling out the product line, broadening our capability set and really getting at the one large piece of the networking business that we had not really been in before. The last question was customers. So far as I understand, the customers are pleased with it. I think that we bring a level of capability and skill and scale that enables some benefit in terms of broader product portfolio and the ability to integrate multiple parts together and drive roadmap forward, et cetera, so from a customer perspective, I think reasonably well received. I haven't heard anything negative actually.

Unknown Analyst

Sure. What's -- if really down the road the product matrix across the wireline area, where do you still see the gaps for you.

Eric K. Brandt

There are some small gaps here and there, nothing of large significance. This was pretty much the large one. I mean, if you roll the clock back to the summer of 2010 and when we went through our portfolio process at that point in time, the 2 big strategic gaps we had, number one was to get an LTE asset and we acquired Beceem in Q4 of 2010. And then if you read the proxy materials, you can see late '10 or early '11, I think, I can't remember the exact date, but the first conversation between Scott and Ron. And so when we decide what our focus and priority is, we try to realign and go after those assets fairly quickly. So I would say that as a company, it's hard to think of major things that we would chase. I'll talk more about it, I'll announce in couple of weeks in terms of the way we think about it, but we do think very much along a strategic access and on a financial access in terms of the value created.

Unknown Analyst

Let me just switch a little bit to this cost of broader networking market setup just on the acquisition of on NetLogic. In terms of growth in that market, where are you seeing growth today and where are the areas where you're seeing a little bit less? And I'm just not talking about short term but also medium term in terms of how that business evolves for you.

Eric K. Brandt

So in 2010, I think that was much more the year for the networking business or the provider. There was pretty significant provider growth in 2010 as people built out networks. I think 2011 was more enterprise related. As we look into '12, I would say with the ramp of the Romley cycle and the fact that 10 gig will become more standard in the product offering, I think we'll see a pretty good ramp on 10 gig. In addition, some of our high-end switch products, Trident products, will be continuing to go into production and have been designed into a number of products, as well as a number of our very high-end switch fabric products off of the Dune acquisition we made in 2010. So I think those are the things that will drive growth in the infrastructure networking business for a subject to sort of broader macro.

Unknown Analyst

Sure. Out of China, I mean there's been a talk about GPON, EPON growth recently. Any comments you can make as to what's happening within that region because that's been [indiscernible].

Eric K. Brandt

I'm not that close to it. I know that there is growth. I think that like many of these things, you're going to wind up having a product that is agnostic and is incompatible for either application. It's cost effective for us, cost effective for them. And I know there's already one in the market, and we will move down that path, as you can imagine, given that we have both sets of technology inside the company.

Unknown Analyst

Sure. Two more questions for me, and I'll open it up to the audience. LTE, since the Beceem acquisition, I think -- first of all, I'm not sure where you are in terms of your product qualifications for LTE. I haven't seen any major announcement yet. So I'm a little bit surprised that what we're seeing mostly has been WiMax, and I'm not sure if you bought this thing for WiMax. So in terms of the LTE qualification, where do you find yourself at this point?

Eric K. Brandt

So we have a product which is in carrier trials. It is not a fully loaded product whereas you would imagine has the fallback capability to 3G, et cetera, but getting the new bands tested by carriers to make sure that they actually are interoperable and work according to their standards. I think as a company, we have tried very hard not to be a company that announces products that aren't products yet and then you wonder whether they're going to happen. We had an unfortunate experience with that when I first joined Broadcom, and I hope not to repeat that. And we try to be a company that tells you what we've done as opposed to spends a lot of time talking about what we will do. And so until we have something to really announce, we probably won't announce something. But you can be reasonably assured that we are working aggressively towards it. We're making very good progress. We are certainly applying what you would imagine as a Broadcom formula which is a highly integrated product, and we'll talk more about it when we have something to talk about.

Unknown Analyst

Sure. Okay. On the application processor market, you've announced a standalone application processor product. And just probably, I wonder how late that is in the context of something like the Windows platform, where 3 had been selected, NVIDIA, Qualcomm and TI. At what point do you decide, "Okay, this is not growing fast enough. I'm going to make acquisition there in that market." And I'm just trying to understand what the strategy is for growing the application processor business as an independent app versus a product and also as a combo product.

Eric K. Brandt

Yes. I think the standalone application processor product for us is opportunistic at this point in time. We're going to develop a technology for an integrated chip that will go into wireless devices and whether that's in a baseband and a phone or something larger, our first focus would be on a phone. I don't think that as a company we are as focused on the standalone apps processor as we are focused on an integrated baseband apps processor product for power reasons, particularly as you get to the LTE standard. From a broader perspective, the other thing that we look at is just sort of the competitive space. And if you really do believe it will be integrated in handheld devices, certainly in cellphones, then that limits the number of application processors that will be sold standalone. You then could ask yourself on the tablet side and from where we sit on the tablet side, awfully crowded space with the largest guy doing an ASIC and doesn't appear, at this point for us, to be a place where we would chase. Initially, we would rather follow it or be opportunistic as we develop those cores for an integrated product and be opportunistic with it, maybe follow it after we did an integrated approach.

Unknown Analyst

Fair enough. And then probably lastly for me, set-top boxes. So 2 questions here. One is regionally, the evidence obviously showed that it slowed in terms of penetration and growth. How are you -- what is your expectation of what could reignite growth for set-top boxes as we talk about connectivity is helping that business grow. So that's one question. And then two, in the pecking order of hard drives, if we're to have shortages in hard drives, do you think your customers will get some priority and will that be a problem for growth in that business?

Eric K. Brandt

So from a broader growth perspective, I think the set-top box market has grown reasonably well outside the U.S. and certainly in the developing world. And whether that's China or Brazil or India or Turkey or Russia, you're seeing more and more content coming and more and more either satellite or fiber being laid or cable being laid for people to have content delivered through a set-top box, and those markets are beginning to grow fairly quickly and we have presence in virtually all, if not all, of those markets. Connectivity helps, certainly, and I think that it will continue down that path and it winds up being certainly a focus point in terms of roadmap and discussion inside of Broadcom. So we're quite focused on it as well, and we've done in the broadband home router with our 6352, which has integrated Wi-Fi actually in the router. What was the second part of the question?

Unknown Analyst

Hard drives.

Eric K. Brandt

Hard drives. I think there are some risks certainly and we factor that into the guidance we gave as it relates to Q4 in terms of how the hard drive market has sort of backed off. I think a couple of things. One is there is some inventory on the channel. And two, if you're tracking hard drive pricing, it seems to be moving up pretty aggressively with the scarcity of supply. And I think as that happens, it's easier to some degree to put those hard drives into a set-top box because of the cost envelope of the set-top box and what it is, because it's paid back over time, then it is certainly in a low-end PC with a hard drive that may have gone up 2x or 3x in price. And so I'm not getting a sense other than some natural sort of little bit of tight supply and potentially maybe some spot shortages. I'm not getting a sense of a broad-based issue in broadband. That's not to say that we know because you really wouldn't know until you got to the end of this quarter and then you would really feel it going into next quarter.

Unknown Analyst

We can take one question from the audience. Anybody has a question? I'll probably just ask one more and we'll wrap it up there. Just one last question from me, Eric. If I look at the way you see your margins evolving, and one of the challenges we have is as Intel is setting a pace for process technology and trying to get into some of this business you're in today and TSMC obviously has been your preferred foundry partner, I know you do use all 4 of them at the moment, how do you see the cost element evolving from you from the foundry perspective? Because obviously, they're all trying to keep pace with Intel or the global foundries cost and to grow up from that angle. So you have 2 questions here. One is, are you comfortable in your foundry partners keeping pace and definitely don't fall behind? And then two, do you think that there are cost elements that could affect margins?

Eric K. Brandt

So the keeping pace question needs to be split into 2 pieces. I'm comfortable TSMC is keeping pace, typically one process node behind the Intel, and that's sufficient for virtually what anybody does. I'm a little more worried about the other foundry partners and their ability to keep pace with TSMC. And what that means in terms of TSMC's lead on leading process nodes vis-à-vis competition. And today, even on 40, it's hard to find a supply of 40 other than TSMC. And that does affect pricing certainly, and I think TSMC understands that and has leveraged that to their advantage. Certainly, the ability to come up with a product which may have been in an older process node or even in the current process node at perhaps a fab that we would not necessarily use and get it at a lower cost has been interesting in the product set. I think as this evolves forward and people -- more people use TSMC on leading process nodes and TSMC flattens the cost curve and levels the price point in the playing field, perversely, it actually plays very much to our advantage and to the other advantage of people who sell large amounts of highly integrated chips, because it will be harder now to have a cost advantage on a chip that is not leading technology because you can't -- it could be leading process technology but not fully integrated, and so people have high volumes of chips that are highly integrated will probably get some volume discount. It may not be as large as we are accustomed to in the past. It may or may not, certainly, as we sort of go through this 28 node, where there's likely to be just one source. And I think it will level the playing field that people will make more choices on product capability than they will perhaps on people's ability to find a way to come up with a cheaper, smaller product that doesn't operate as well and the customers good enough with it. And so I don't think it bodes terribly well for cost downs for some period of time in the industry. I think they'll be flatter. We'll see that how plays out when the demand pickup comes back. And it will be very important for these other foundries other than TSMC to really be successful in bringing forward these new process nodes because what could happen is they could be really left behind in terms of volume if they can't catch up.

Unknown Analyst

All right, terrific. Eric, thank you very much for your time, and there will be a breakout session downstairs. So thank you very much.

Eric K. Brandt

Thank you.

Unknown Analyst

Thanks for your time. Thank you very much.

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Source: Broadcom Corp. Presents at UBS Global Technology and Services Conference 2011, Nov-17-2011 10:00 AM
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