Full Transcript of Broadcom's 3Q05 Conference Call - Prepared Remarks (BRCM)

| About: Broadcom Limited (AVGO)

Here’s the entire text of the prepared remarks from Broadcom's (ticker: BRCM) Q3 2005 conference call. The Q&A is here. We recognize that this transcript may contain inaccuracies - if you find any, please post a comment below and we’ll incorporate your corrections. And please note: this conference call transcript is a Seeking Alpha product, so feel free to link to it but reproduction is not permitted without the explicit permission of Seeking Alpha.


Peter Andrew, Senior Director of Industrial Relation

Scott McGregor, President and CEO

Bill Blanning, Vice President Public Relations

Henry Samueli, Chief Technical Officer

Joe Ruehle, Chief Financial Officer

Peter Andrew, Senior Director of Industrial


Seogju Lee, Goldman Sachs

Brian Alger, Pacific Growth Equities

Allan Mishan, CIBC World Markets

Ambrish Srivastava, Harris Nesbitt

Jim Liang, Sg Cowen & Co

Adam Benjamin, Jeffery’s and Company

Jeremy Bunting, Thomas Weisel Partners

Michael Masdea, Credit Suisse First Boston

Charlie Glavin, Needham & Company

David Wu, Global Crown Capital

Mark Devonstone, Morgan Stanley

Cody Acree, Legg Mason

Shah Wu, American Technology Research

Alex Gauna, UBS

Raul Seymour, Deutsche Bank

William Lewis, J.P. Morgan

Srini Pajjuri, Merrill Lynch



Welcome to the Broadcom Third Quarter Fiscal Year 2006 Earnings Conference Call. During presentation all participants will be in a listen only mode. Afterwards we welcome back to Question and Answer session, at that time if you have a question, please press “*” followed by the “1” on your touchtone phone. As a reminder this conference is being recorded, Thursday, October 20th, 2005. The speakers for today are Scott A McGregor, Broadcom's President and Chief Executive Officer, Henry Samueli, Broadcom’s Chief Technical Officer and Co-Founder, Joe Ruehle, Broadcom’s Chief Financial Officer and Peter Andrew, Senior Director of Industrial Relation. I would now like to turn conference over to Mr. Andrew. Please go ahead.

[Peter Andrew, Senior Director of Industrial Relations]

Thank you very much Christine, and welcome everyone to Broadcom Q3 2005 Earnings Conference Call. Before I turn the call over to Scott, I would like to alert everyone that during the 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 target for the fourth quarter of 2005 or any other future period as well as statements about prospects for our various businesses and the development sales and plan availability of new products. It should be clearly understood that our actual results may differ substantially from forward-looking statements we make today. Specific factors that may effect out business in future result are discussed in the risk factors section of our 2004 Forms 10-K and subsequent 10-Q’s and in our other SEC filings. Our partial list of these important risk factors is said forward at the end of today’s earnings press release. As always, we undertake no obligations to revise or update publicly any forward-looking statements for any reasons.

Throughout this call whenever we refer to proforma financial results, we mean non-GAAP proforma. The earnings release published today, describes the differences between our non-GAAP proforma and GAPP reporting. And presents the reconciliation between the two for the periods reported in the release. Please see the investor information section of our website, for reconciliation going back to the beginning of 2003, as-well-as for additional financial and statistical information, including the information disclosed in accordance with SEC regulation G.

Now before I turn the call over to Scott I would like to make one very quick announcement. Broadcom will be hosting our 2005 analyst-day in Santa Clara on November 9th, which we also, which we will also be Broadcasting, via webcast. For more details regarding analyst-day, please see our September 30th press release. With that let me turn the call over to Scott McGregor, Broadcom's President and CEO.

[Scott McGregor, President and CEO]

Good afternoon and thanks for joining us. The third quarter was another strong quarter for Broadcom. We grew revenue nearly 15% sequentially to $695 million, another record level for Broadcom. We have record net-income on both the GAAP and proforma basis and we grew cash and marketable securities by $158 million, even after paying out $242 million in settlements, share buybacks, and funding and acquisition.

The record revenue level in the quarter was once again very broad based. This breadth and diversity of our product in the intellectual property portfolio differentiate Broadcom from many of our peers. I will talk more about our diversity later, but bottom line Broadcom had a great Q3. We expect another strong quarter in Q4. We will continue to invest aggressively to expand our communications product portfolio into new and emerging wired and wireless end markets. We believe that these efforts combine with our diversity, would directly benefit our shareholders and serve to strength and relationships with our customers. Let me now turn the call over to Bill to go into greater detail on our Q3 performance as well as to give our guidance for Q4.

[Bill Blanning, Vice President Public Relations]

Thank you, Scott. Just take a look at some overview numbers at quarterly revenue of $695 million, which is up more than $90 million or just under 15% from Q2. Our proforma gross margin of 53.4% was down 30 basis points from last quarter. Total perform operating expense was up $21.4 million or approximately 10.7% from Q2. And we were able to show perform in non-GAAP operating margin up to 21.5%, which is increase from the 20.6% reported in Q2.

Our proforma diluted earnings per share of $0.39, were up $0.05 from our last quarter. On a GAAP reporting basis, we are profitable for the eighth consecutive quarter reporting diluted earnings per share of $0.35. And as Scott indicated our cash marketable securities on hand increased by $158 million, inspite of some extraordinary displacements. Leaving us for the balance of just over $1.7 billion.

In our July call, we said that we expected our Q3 revenue to be in the range of $660 million to $665 million, an increase of 9 to 10% over Q2. Our actual results showed a sequential revenue increase of 14.9% to a total of $695 million. We’ve experience particularly strong growth in Bluetooth, Wireless Lan, Mobile Multimedia, Cable Modem and our entire Gigabit Ethernet product lining including switches, controllers and points.

Compared with Q3 of ’04, our revenue was up $48.5 million, which is 7.5%. With that growth and perspectives what we called our server chip-set business had suffered a well publicized decline, that business was down by about $56 million, year over year. Therefore in the absence of that decline, we would have been by a $104 million versus prior year or 18%.

In terms of revenue distribution for Q3, broadband communications accounted for approximately 34% from total revenue, mobile and wireless were approximately 27% and enterprise networking for 39%. And looking at our growth in revenue from Q2, broadband communications increased by about 5%, mobile and wireless increased by about 47% and enterprise networking increased by about 8%.

In Q3, we had one customer who accounted for 10% of more revenue and that was Motorola. Our Q3 proforma gross margin at 53.4% was down slightly from the 53.7% reported last quarter. We’ve experienced some change in product mix towards some slightly lower margin products. And in addition with the industry demand improving, we’ve been unable to secure boundary and simply in test pricing on a quite a favorable basis, as we had in recent orders.

Turning to operating expenses, our total proforma operating expenses of $222 million in Q3 were up $21.5 million or 10.7% from the prior quarter. This included in an increase of $14.6 million or 10% in R&D and an increase of $6.8 million or 12% in SG&A. The R&D increase was primarily from the addition of headcount. We added 203 heads in the quarter, including 80 of which 75 are engineers from our silicon acquisition. Our stronger than expected revenue growth allowed us to be very aggressive and adding to our kit product detail facilities and we did that.

Our SG&A increases primarily driven by a higher level of legal costs and by additional headcount. We increased our total company headcounts, by 264 to worldwide total of 4,002. This includes almost 2,800 people in engineering who represent 69% of our total headcount.

Our annualized revenue per employee was $695,000 in the quarter, up from $647,000 in the previous quarter. We look at the profitability in Q3 on a proforma non-GAAP basis, we generated operating profit of $149 million at 21.5% of revenue, this moved our profitability towards the high end of our target range of 20% to 22%. Our proforma in diluted earnings per share was $0.39 up $0.05 from last quarter. Our weighed average shares outstanding increased by 20 million shares in the quarter, of which 15 million were driven by the treasury stock method of fight to outstanding options, as our average stock price increased from a little over $33 in Q2 to little over $42 in Q3.

On a GAAP basis we reported an operating profit of $94 million, our largest reconciling item between GAAP and proforma operating profit was $35 million cash in-process R&D, related to our silicon acquisitions. Our GAAP diluted earnings per share was above $0.35. Additional GAAP expenses including the in process of R&D as just mentioned, as well as certain stock based compensation and other items, were partially offset by income tax benefits relating to certain points securities. Looking to the balance sheet we increased our total cash and short and long term marketable securities by $158 million but it’s just over $1.7 billion. So, some of the extraordinary disbursements we have an quarter included $110 million related into settlement of our securities class action litigation, which we announced last quarter. We also disburse $54 million of net acquisition cost and we disburse $77 million in repurchasing our stock under our stock buyback.

On the cash positive side we collected $219 million from employees stock option exercises. In terms of other working capital items, our inventory balances increased modestly in response to our continued strong demand. Our days of inventory on-hand increased from 44 days to 46 days. That is equivalent to trends rate of 7.9, which is in line with our long-term model. Our day sales outstanding in receivables decreased slightly, from 37 days to 36 as our shipments remained pending.

Looking ahead to the fourth quarter when we gave guidance for Q3, we commented that we believe that some of the strength we were experiencing was coming from purchases by our consumer oriented customers, in preparation for the holiday selling season. We’ve been pleased to see booking trends throughout the third quarter and so far into the fourth quarter remained strong, giving in it’s confidents of revenue in Q4, is also expected to be strong. For Q4 we do expect to see continued broad based strength across future of our major businesses.

Overall we expect Q4 revenue to be up approximately 10% to 12% compared to Q3 to a range of $765 million to $775 million. We believe that some of the strength in our Q4 outlook is coming from our success and entering a number of very large, fast growing consumer oriented business. These businesses are more acceptable to seasonal spending patterns. As those of you who followed Broadcom for sometime now, our revenue is always been driven more by our product cycles and by seasonal spending patterns. However, given the growing portion of our business that is been derived from consumer oriented end markets we believe that it is prudent to expect that our total revenue in Q1 ’06 will be slightly lower than in Q4 of ’05.

It is also important here to make a note of the diversification point, Samueli will elaborate on little more on his remarks. For more than 20 separate lines of business within Broadcom no single line of business accounted more than 12% or revenue in Q3 and this within the typical pattern in recent quarters. We’ve obvious benefited this at any weakness in a particular market segment is not likely to have a major impact on our total Company to growth. We believe that gross margin for Q4 on a proforma basis will be down from Q3 of our suppliers, particularly in assembly and test, retire rates of utilization and therefore how we made the base with in selective cost increase. We also expect our mix of business, we once again Bias starts slightly lower margins.

We are looking for proforma gross margin to be down from Q3 by about 50 to 150 basis points. We expect the proforma operating expenses will increase better to slower rates in this past quarter and at a slower rate in our expected revenue increase. And we expect our cash flow generation, once again be quite strong in Q4. At this time I would like to turn the call back over to Scott.

[Scott McGregor, President and CEO]

Thanks Bill, all often the topic I started earlier, we saw Broadcom as very diverse here at the same time highly focused or this might have first seen contradictory its actually quite accurate. Broadcom has a very broad product line intellectual property portfolio and customer base focused on wired and wireless communications for the transmission of voice, video and data. Here to highlights, in how diverse our business is.

Broadcom is focused on three targeted “M” markets, each of which grew on a sequential basis in Q3, one is much as 47%. Only one customer was more than 10% of sales in the third quarter. All of our top five customers want product from us for multiple business groups. Our top 10 products represent was some 30% of the total sales. Those single line of business accounted for more than 12% of our sales, and we produced well over a million chips a day on a daily basis from five different wafer suppliers with no one of them over 50%.

This diversity in breath is the result of our strategy to drive the conversions of many different technologies products and end markets. This is important to customers as Broadcom is better able to be a one stop provider for all of their voice, video and data needs whether over a wire or wireless medium today, so both to offer a road map of future features of functions. Diversity is also important to our employees as it provides them with the wide verity projects to work on as well as the opportunity to see broad adoption of their work into products.

Finally it is important to shareholder, because the same benefits of portfolio diversification, many of you use in managing your portfolios by the Broadcom in the way we manage our business. The execution on this diversification strategy, can you able to seen by comparing Broadcom’s growth versus the semiconductor industries association or SIA growth estimates. Broadcom has consistently out grown the overall industry and based on SIA estimates for overall growth in 2005, Broadcom is once again poised to out grow the industry. I will now give you a few market highlights before turning the call over to Q&A.

Our global in the wireless group was the fastest growing group this quarter as revenue grew 47% sequentially, driven by the sales of Bluetooth, Mobile Multimedia, Wireless Lan, Voice Over IP solutions. When differentiating Broadcom’s from many of our peers in wireless is but aggressively investing in the wireless technologies, that define the mobile platforms of the future, such as Wireless Lan, Bluetooth, Wideband CDMA BBAH and Mobile Multimedia. We are driving differentiation by offering higher levels of integration so is value added software’s such as security to setup in our Bluetooth software profiles and we are able to leverage many of these ingredient technologies such as Bluetooth, Wireless Lan, Mobile Multimedia and Voice Over IP into our other product lines, such as broadband modems, set top box and others.

With respect to Bluetooth, the market remains very robust. Instat recently raised their expectations for this market to 323 million units for 2005 up from their prior 2005 estimative of 264 million units. This would represent more than a doubling of the market versus 2004. If we look at the largest market segments, selling of our handsets Instat also raised their 2005 estimates from 158 to 237 million units. This represents on a tax rate of about 35% in a segment where we have a strong and growing market position. I want to send a quick note of congratulation to our Bluetooth group, during the quarter they were awarded Marauders supplier of the year award. Marauder award largest manufacturer of Bluetooth model for cell phones and in Marauder 71-year history Broadcom is the first non-Japanese supplier to win this award. So this is indeed a significant honor.

Mobile Multimedia products grew in the quarter, driven by the ramp of our next generation multimedia processors are based on the Video Core II architecture. This product has been adopted in the next generation portable devices that are able to play mp3 as well as video, as an example of how Broadcom is able to extend our existing product line for both new and existing customers. We have again proven our ability to enter new market and gain significant market share. Broadcom is also recently announced its intention to enter another a new end market, mobile digital TV, DVB-H technology, the Wi-Fi Athena semiconductor acquisition which closes this week. Athena brings a strong engineering team on the RS side which when combined with our video core, more power, high performance multimedia engine, enables us to provide a very compelling solution to the mobile digital TV market.

Broadcom’s Wireless Lan businesses continue to grow as we believe a number of our customers are getting ready for the holiday season. We believe 802, 11-G will still be the primary standards this holiday season. And Broadcom is the market share leader in not only 3G, Wireless Lan overall. We believe that the next growth cycle in the Wireless Lan market will be driven by the adoption of 802 11N in incorporating MYMO, which is multiple-in, multiple-out technology.

To accelerate the standard setting process Broadcom is partnering with 29 other companies, help accelerate the adoption of 802 and 11-N. We expect standard phase MYMO products to hit the market in our early 2006. In the cellular handset market we continue to make excellent progress on getting our customers products to the final stage of IOT testing. Our expectation for Broadcom’s 3G ramp remains on track. In the GSM and GPRS markets our largest customers Sony Ericsson has been going through a product refresh and they have announced a follow-on products using Broadcom Silicon. Based on the ramp of these new products, and some small initial 3G revenues we believe that our sale of handset business will sequentially grow in the fourth quarter. Within our broadband communications group, broadband modem revenues grew nicely in the quarter on both the CPE and CEO side.

The key driver for our success in these markets present being approach the market with new protocols and features in our integration roadmap. As an example, to help drive the adoption of voice into the cable modem markets, Broadcom earlier this week announced our second generation of single chip cable modems integrating Voice Over IP.

This solution eliminates the separate DSP and runs the Voice on Rhythm on a dual credit mix core enabling the whole new reveal of integration or at the same time lowering middle materials, accelerating the time to market for our customers. It’s important to point out that seven of our customer products incorporating with the chip is already, have already received pack of cable certification and headed for production as we see. The adoption of voice in the DSL modems is as just strong in the cable modem market. And in Q4 we look to triple the number of voice enabled modems we ship. In DSL 2 market, we are also progressing well with solutions for both CL and CPE. Well, Asia certainly the main market for media sale, we are seeing a high to put interest and near term opportunities in Europe it carries preview ramping up for the up coming world cup by offering triple play services.

Within the set-top box markets Broadcom continue the benefit from the mix ship from the low to high end in cable set-top boxes over satellite set-top boxes benefited mainly from new customer expansion. We believe that the set-top box market is in equilibrium with respect to inventory levels. While we shipping into the market, it does appear to be selling true. As we look forward, we see continued units, new customer in ASP growth opportunities. For example just this week, LG announced they were selected as the first supplier for high definition Stb, by direct TV using Broadcom’s new MPEG-4 technology. For us this is a new customer, a new service provider all using our latest technology.

In enterprise networking, the migration to Gigabit Ethernet continued on it’s growth path on both client and infrastructure side. On the Gigabit Ethernet client side Broadcom maintained its market leadership position and surpassed the 76 million unit milestone growing revenues in all three segments of the market, mobile, desktop and server.

With respect to our next generation converts matrix CNET family we expect to see to solutions ramp in the first half of 2006. In addition to the TCP and IP offload functionality being high on usually switched with, we are also seeing a lot interest in the iSCSI functionality. To address the next major speed step up to 10 gigabit within servers, we extended our roadmap with the acquisition of Silicon Technologies. The Silicon architecture is similar to our own internal architecture meaning that we are going to be able to quickly leverage our high performing software series function, such as TCP-IP offload, audio made for clustering and iSCSI under the higher speed pipe.

On the infrastructure side, we experienced another double-digit revenue growth quarter in Gigabit Ethernet switches and pipes. As carries continue to transition their networks to Ethernet and adopt our vision of using Ethernet everywhere this is opened up an opportunity for Broadcom to sell our Ethernet based product into new markets including metro-Ethernet, IPB Slam, (indiscernible)21:35 infrastructure and PAN equipments. We made progress in the quarter securing design vent in each of these new areas. Even our optical business was strong driven by the demand for OC 192-5. In addition to these expansion opportunities Broadcom won a number of new switch and radar platforms with our 32 and 64 bit broadband processors. As also extending our prior offerings in to other end markets including game platforms, printers and other applications.

So, in summary, we had a very strong broad based growth quarter. Broadcom is powering this communication revolution by offering the widest array of wired and wireless networking option. And by breaking down the layers of complexity enabling us to connect in the most efficient manner possible. With that I like to call over to operator for Q&A.

Question-and-Answer Session



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