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Broadcom Corporation (NASDAQ:BRCM)

Q1 2006 Earnings Conference Call

April 20th 2006, 4:45 PM EST

Executives

Peter Andrew - VP, Investor Relations

Scott McGregor - President & CEO

Bill Ruehle - CFO

Henry Samueli - Chief Technical Officer

Analysts

Ambrish Srivastava - Harris Nesbitt

Michael Masdea - Credit Suisse

Cody Acree - Stifel Nicolaus

Arnab Chanda - Lehman Brothers

Mark Edelstone - Morgan Stanley

Ross Seymore - Deutsche Bank

Jeremy Bunting - Thomas Weisel Partners

Alex Gauna - UBS

Doug Lee - Goldman Sachs

Charlie Glavin - Needham & Co.

Adam Benjamin - Jefferies & Co.

Jeff Palmer - Friedman Billings

Bill Lewis - JP Morgan

Han Lee - Global Crown Capital

Shelby Seyrafi - Kaufman Brothers

Srini Pajjuri - Merrill Lynch

Presentation

Operator

Good afternoon, and welcome to the Broadcom conference call. (Operator Instructions) Your speakers are Scott McGregor, Broadcom's President and Chief Executive Officer; Henry Samueli, Broadcom's Chief Technical Officer and Co-Founder; Bill Ruehle, Broadcom's Chief Financial Officer; and Peter Andrew, Vice President of Investor Relations. I would now like to turn the conference over to Mr. Andrew.

Peter Andrew

Thank you, Christine. Before I turn the call over to Scott, I would like to remind everyone we will discuss some factors that are likely to influence our business going forward. These forward-looking statements include guidance we will provide on future revenue, gross margin, and operating expense targets for the second quarter of 2006; or any other future periods. And, statements about prospects for our various businesses in the development status and planned availability of new products. It should be clearly understood that our actual results may differ substantially from the forward- looking statements we make today.

Specific factors that may affect our business and future results are discussed in the risk factors sections of our 2005 Form 10-K and forthcoming 10-Q and in our other SEC filings. A partial list of these important risk factors is set forth at the end of today's press release. As always, we undertake no obligation to revise or update publicly any forward-looking statements for any reason.

As you may have noticed, beginning this quarter we have eliminated the non-GAAP statement of operations in the earnings release. We are instead including a series of footnotes to provide details on our GAAP to Non-GAAP adjustments related to specific functional line items. The earnings release describes the differences between our Non-GAAP and GAAP reporting and presents a reconciliation between the two for the periods reported.

We have also filed an 8-K with the SEC today with additional information regarding why Broadcom believes that these Non-GAAP measures provide useful information to investors, the specific manner in which management uses these measures, and some limitations associated with the use of these measures. The 8-K can be accessed on the SEC website or via the investors section of our website. Please also see the investors section of our website for GAAP to non-GAAP reconciliations going back to beginning of 2004, as well as for additional financial information and statistical information, including the information disclosed in accordance with SEC regulation G. With that, let me turn the call over to Scott.

Scott McGregor

Good afternoon and thank you for joining us today. The first quarter was another strong quarter for Broadcom. During the quarter, we grew revenue nearly 10% quarter on quarter to just over $900 million, another record level for Broadcom. We grew cash and marketable securities by nearly $440 million, to a record $2.3 billion level. Our nearly 10% sequential revenue growth in the first calendar quarter shows that our results continue to be driven more by product cycles than the calendar, as the semiconductor industry is typically down sequentially in the Q1 versus Q4.

That said, seasonality did negatively impact some of our lines of business, such as mobile multimedia, but that impact was more than offset by revenue momentum in other lines of business. Product cycles can spur growth not only in newer end markets such as BlueTooth and 802-11n but also in established end markets.

A perfect example of this is that in Q1 of revenue from our broadband communication products grew over 30% sequentially. Broadcom was founded to provide silicon for cable modems and cable set-top boxes, which even today makes up a large proportion of total revenue from broadband communications markets. In Q1, each of those lines of business experienced strong revenue, sequential and year-over-year revenue growth.

So why after 10 years are these lines of business growing? The answer is convergence and communications. The convergence of personal video recording and high-definition processing within cable set-top boxes and the convergence of voice, Ethernet switching and wireless LAN into cable modems are enabling these lines of business to grow significantly even after 10 years of shipping product.

These same trends of convergence and communications are driving growth within our satellite set-top box and the DSL lines of business. Broadcom is uniquely positioned to drive these trends in convergence and communications. Our broad and expanding product line and intellectual property portfolio, along with our track record of execution, allow our customers to bring new products to market that enables seamless access to voice, video and data, over both wired and wireless networks. I will go into more detail on how Broadcom is benefiting from these trends in a few minutes, but first I will turn it over to Bill to give an overview of our Q1 and our guidance for Q2.

Bill Ruehle

Thank you, Scott. Q106 growth continued to be very positive. Our record quarterly revenue of $900.6 million was up more than $80 million or 9.8% in Q4. Our revenue was up more than $350 million, or over 63% from Q1 of '05. Our non-GAAP gross margin of 52.9% was down 20 basis points from last quarter, in line with our guidance.

Our total non-GAAP operating expense was up $19.2 million or 8.2% from Q4, which is less than the rate of our revenue increase. Our non-GAAP operating margin increased to 24.7%, up from 24.4% of revenue in Q4. Our non-GAAP diluted EPS of $0.36 was up from $0.34 last quarter. Both EPS numbers and all share numbers have been adjusted to reflect the 3 for 2 split affected in February.

On a GAAP reporting basis, our EPS was $0.22. Of the $0.14 difference between GAAP and non-GAAP EPS, substantially all of it was due to stock-based compensation, including the impact of the new FASB-123R statement regarding the expensing of employee stock options.

Cash and marketable securities on hand increased by $438 million for the quarter, leaving us with a balance of $2.3 billion. Our free cash flow for Q1 -- that is cash flow from operations less capital expenditures -- was $216 million.

In our January call we said we expected Q1 revenue to be in a range of $865 million to $875 million, a mid single-digit percentage increase over Q4. We said at that time we believed some of the strong product cycles we were experiencing would more than offset any seasonal declines we would experience in some of our businesses. At $900.6 million, our Q1 revenue being up 9.8% over Q4, or $80 million, was inline with that.

We expected our strongest growth to come from broadband, and it did. Our total broadband revenue was up 30% over Q4. We had strong increases in each of our principal lines of business. That would include direct broadcast satellite, DSL, cable set-top boxes and cable modems from our mainstream product lines, and digital TV as an emerging business, which is growing off a much smaller base.

In total, our broadband business was up almost 60% over the same quarter in Q1 2005. Our enterprise networking business was approximately 1% quarter over quarter and up more than 30% from Q1 of 2005. Our mobile and wireless business was down approximately 1% quarter over quarter, though up more than 140% compared to Q1 of 2005.

In Q1 of 2006 we experienced strong sequential growth in Bluetooth and wireless LAN, in a quarter that many were expecting would be affected by seasonal softness. We did experience a seasonal decline in our mobile multimedia business that offset the gains in Bluetooth and wireless LAN.

In terms of revenue distribution for Q1, broadband communications accounted for approximately 37% of total revenue; Mobile and wireless for 29%; and Enterprise networking for 34%. In Q1 we had two customers, each of whom accounted for 10% or more of our revenue. That was Motorola and Cisco. The Cisco results now including our shipments to Scientific Atlanta.

Our Q1 non-GAAP gross margin at 52.9% was down 20 basis points from 53.1% reported last quarter. That margin was up 80 points from the 52.1% we recorded one year ago.

In terms of operating expense, our total non-GAAP operating expenses of $254 million in Q1 were up $19.2 million, which was an 8.2% increase from last quarter. We had an increase of $8.5 million in R&D, a 5.1% increase; and an increase of $10.7 million of SG&A, a 15.8% increase. The R&D increase was primarily from the addition of 250 head count, which includes 45 from our Sandburst acquisition. The SG&A increase was primarily driven by higher legal costs and additional headcount.

Our total OpEx in Q106 was up a little over 31% from Q105, which is less than half the rate of our revenue growth from that period. We increased our total company head count from Q4 by 318, to a worldwide total of 4,605. This includes over 3,250 people in engineering, which still represents just over 70 percent of our total head count.

Our annualized revenue per employee for Q1 was $782,000 up from $766,000 in the previous quarter and up substantially from the $617,000 we reported in Q1 of 2005.

Turning to profitability, in Q1 on a non-GAAP basis we generated operating profit of $222.2 million 24.7% of revenue. This operating margin was up 30 basis points from last quarter and up 760 basis points from the 17.1% we reported in Q1 of 2005.

Our non-GAAP diluted EPS was $0.36, up $0.02 from last quarter and up $0.21 from the $0.15 we reported a year ago. On a GAAP basis, we reported an operating profit of $112.8 million. The GAAP operating profit includes, for the first time, the impact of FAS-123R calling for the expensing of employee stock options. Our total charge in the quarter for stock-based compensation -- which includes all restricted share units, employee options acquired through business commendations and options granted to employees and directors, was $93.7 million for Q1. If 123R had been in effect for the first quarter year ago, the charts for Q1 of 2005 would have been $142 million.

Our GAAP diluted EPS was a positive $0.22 cents. The $0.14 reduction between GAAP and non-GAAP EPS is substantially all related to stock-based compensation. In Q105 our GAAP EPS as reported was $0.13. If 123R had been in effect then, we would have reported a GAAP loss of $0.12 per share.

When you look at our financial statements you'll notice that under GAAP accounting rules our weighted average shares outstanding diluted were 602 million; under Non-GAAP the total was 618 million. This difference is driven by the effect of 123R expenses on the rules for applying the Treasury Stock Method to weighted average shares outstanding calculation. The accounting principles behind this calculation are a bit beyond the scope of this conference call, but they are explained in greater detail in the 8-K. When we calculate our non-GAAP EPS, we were conservative and used a higher share count because we're not including the options expenses in non-GAAP numbers.

Turning to balance sheet, we continued our ability to generate substantial positive cash flow, increasing total cash million marketable securities by $438 million to an all-time high of $2.3 billion. Our cash flow from operations was $231 million. Our free cash flow -- which subtracts cash flow from operations, it takes away capital purchases -- was $216 million.

Large disbursements during the quarter included $68 million for acquisition costs -- our Sandburst acquisition -- and $94 million in pursuit of our stock buyback program. On the cash positive side we collected approximately $385 million from employee stock option exercises.

Our inventory balances increased slightly from 46 days to 48 days, remaining within our target range of seven to eight turns. 48 days is equivalent to 7.5 turns. Our DSO increased from 34 days to 36, which is the same as what we reported in Q3 of '05 and is well within our target range. Our shipments in Q1 were still very linear, but in Q4 they were more front-end loaded as customers needed their parts in time for the holiday filling.

In our January call we announced two capitalization initiatives, an increase in our authorized share buyback program, and a 3 for 2 stock split to be effected in the form of a stock dividend. For the quarter ended March 31st, we invested $94 million in open market purchases of our Class A common stock, retiring a total of 2.1 million shares. During that same period we granted employee stock options restricted share units totalling 3.6 million shares. Our 3 for 2 stock split was effective as of February 21st. Please note that all prior period figures for shares outstanding and EPS have been adjusted to reflect this.

In the first quarter we have continued to see particularly strong product cycle driven demand in our broadband business sector and some expected downturn or flatness in some of our more seasonally impacted businesses. As we look to Q2, we expect revenues to be up between 3% and 5% to a total of between $930 million and $945 million. We expect our strongest sectors to be broadband and mobile and wireless.

We believe that gross margin for Q2 on a Non-GAAP basis will be slightly down versus Q1, probably in the range of 10 to 20 basis points. We expect that non-GAAP operating expenses will increase by more than our expected revenue increases in Q1. The two largest items driving the expected increase will be the effect of our annual focal salary reviews, which were effective from April 7, and higher [mask set] expenses related to a number of chip takeouts in Advanced Technologies, including 90 and 65 nanometers. We expect our cash flow generation to once again be quite strong [as in Q1]. Now I would like to turn the call back to Scott to talk more about our business.

Scott McGregor

Thanks, Bill. I will now give a few highlights of recent developments in our target end markets before opening the call to Q&A. As Bill mentioned, broadband communications grew revenue over 30% sequentially as each of the lines of business experienced strong revenue growth in the first quarter, generating over $330 million in revenue. Furthermore, with revenue growth of over 30% sequentially, we're like the fastest-growing in this market.

We experienced strong revenue growth in both cable and satellite set-top boxes driven by end markets subscriber growth, continued strong interest in next generation features and functions such as PVR, personal video recorders and high definition driving an upward bias in ASPs; and, customer and product expansion within the satellite set-top box market.

Highlighting our success and enabling our customers to bring to market next generation solutions, both EchoStar and DirecTV rolled out their first MPEG 4 ABC set-top box offerings, using Broadcom's back end decoder solutions.

Early in the quarter at CES we announced two new front end solutions for the set-top box markets. For the cable set-top box market, we announced a new front-end chip that uses DOCSIS 3.0 channel-binding technology to dramatically increase the transmission speed of cable TV networks. Broadcom is ensuring that the cable MSOs have a road map to keep up with the fiber to curb build outs by the telecom operators.

For the satellite set-top box market, we announced our entry and to the DVB-S2 market and leapfrogged our competition by bringing out a dual tuner, dual modulator solution. We expect this solution to have excellent success as we continue to expand both our customer list and our product offerings in this market.

While some of our competitors are reporting seasonal weakness in broadband modems, Broadcom experienced a strong quarter driven by both units and ASP expansion. Units grew as we clearly attained additional market share in the DSL market and ASPs rose due to a growing customer interest in integrating voice, wireless LAN and switching into their cable and DSL modem offerings.

As we look into 2006 and beyond, in addition to growth opportunities within each of our core broadband communications business, we have additional opportunities in digital TV and new HD DVD platforms.

Turning to our enterprise networking target market, we were pleased to see that last week the Linley Group highlighted our leadership position with the total Ethernet IC market and noted that Broadcom grew its revenue in 2005 faster than any other supplier, meaning that we gained additional market share. A few highlights of the report included, within the total Ethernet IC market, Broadcom's revenues were over twice the size of our closest competitor. In gigabit Ethernet switches, Broadcom's revenues were more than three times the size of our next closest competitor and we outgrew them nearly two to one in 2005.

In gigabits Ethernet 5, Broadcom's revenues were more than twice the size of our closest competitor and grew nearly 60% while the next closest competitor was flat year-over-year.

On the gigabit Ethernet client side, we achieved our 100 millionth gigabit Ethernet controller shipment. In addition, according to Deloro Group, Broadcom maintained its number one market share position for the sixth quarter in a row with more than three times the market share our next closest competitor. We have been able to achieve and maintain this position by continuing to focus on bringing the latest and greatest functionality to the tier 1, PC, notebook, and server vendors.

In Q2 we expect revenue contribution from the expansion of our gigabit Ethernet product line into two new incremental areas. The first area is the white box market in which we plan to offer a solution specifically tailored to meet the needs of this market. Secondly, we plan to expand our server offering into a new segment with our C-NIC, or converged NIC, product line which integrates TCP-IP offload, RDMA, iSCSI, all on a gigabit Ethernet controller.

Briefly on the server I/0 market, we also expect to ramp within AMD-based servers as they roll out their next generation microprocessor line. On the infrastructure side, the key message in the quarter was we are continuing to expand our reach across all dimensions of the networking equipment market from SMB through enterprise to metro.

In the SMB market, Net Gear began shipping a new line of products utilizing our highly integrated five and eight port robot switches. In the Enterprise market, we brought to market the industry's first 20 port 10 gigabit Ethernet switching solution. This is important as we believe we are now seeing signs that the 10 gigabit Ethernet market is emerging. We are shipping this product to numerous tier 1 networking vendors as we leverage our leadership position in gigabit Ethernet into the 10 gigabit Ethernet market.

In the metro market, we closed the acquisition of Sandburst Corporation, which brought Broadcom deeper into the enterprise core switch and router market and into the metro Ethernet market. While this acquisition is relatively recent, we are already seeing traction on two levels. First of all, we have formed significant metro and enterprise designs with tier 1 networking vendors in both Japan and the United States. Second, we benefit overall from having a more complete solution, allowing us to sell the Sandburst packet processor, traffic manager and switch, as well as our [5s, 30], optical and broadband processors.

We haven't talked much about our broadband processor or optical business in a while, but both of these areas experienced strong growth in the quarter, driven by strength in the enterprise and metro switching and router markets.

In mobile and wireless, overall we were down slightly in the quarter as strong growth in VoIP, Bluetooth and wireless LAN were more than offset by seasonality in our mobile multimedia products. VoIP was strong in the quarter, driven by demand for enterprise-class IP phones at four of the top five vendors in this market.

In addition, we continued growth in the enterprise VoIP space. We envision new opportunities as we look into the latter part of 2006 and beyond. These are driven by our recently announced relationship with Vonage, which is the largest residential VoIP carrier in North America; and, the ramp of our wireless LAN enabled VoIP phones to the enterprise consumer. Stay tuned here for announcements as this market develops.

Bluetooth continue to experience another strong quarter, once again showing how product cycles can compensate for the seasonality that some of our peers dealt with in the first calendar quarter. A few weeks ago, IMS Research named Broadcom as the market share leader in providing Bluetooth solutions to the cell phone market. Broadcom continues to focus on and is succeeding at forming strategic relationships with high-volume customers in this market, rather than trying to capture every available design win.

As we look to the rest of 2006 and into 2007, we envision continued Bluetooth revenue opportunities driven by increased penetration into cell phones, growth in the PC and notebook space as Bluetooth starts to get embedded within more platforms; and, we expect to get additional tier 1 Bluetooth customers as we ramp our Bluetooth plus FM radio product.

Longer term, as the fiscal layer of Bluetooth transitions to UWB, we are already working on ensuring that our Bluetooth software profiles will once again be a key differentiator.

Wireless LAN was strong in the quarter due to continued demand for 80211G as we grew both unit and ASP in the first quarter. As the market begins to transition to 80211N, we are leveraging our leadership position in G into the N space g into the n space and have already been shipping products in production volume since earlier this month. You've already seen some of our customers announce shipping products based on our intensified NBase solutions, and we expect more customers to make similar announcements shortly. We expect new Broadcom-powered N solutions to be on the shelves of the top U.S. retailers by the end of this month.

While there seems to be a mad rush of press releases with everyone claiming to be the first to market with N, Broadcom again looks to form long-term relationships with our customers and to being part of their volume platforms. Based on the business awarded to date, we believe that we will have about 75% of the U.S. retail volume for 80211N in 2006.

Our mobile multimedia products experienced a down quarter in Q1 as our largest customer in that space noted seasonally driven volume declines in this product category last night during their quarterly earnings call. We continue to lead the industry in mobile multimedia by providing the highest quality audio and video while utilizing the lowest level of power. In addition, we are investing aggressively to bring out next generation solutions that will enable Broadcom to further penetrate the 900 million unit cell phone market as well as the portable media market.

In cellular base band, we remain on track with respect to our anticipated 3G rollout in Q2. While initial volumes will be small, if we're successful with these first phones we believe there are larger opportunities for Broadcom as we look our over the course of the next year and beyond.

Shipment of this solution is a significant step forward for our penetration into cellular base band market. To help accelerate our penetration into 3G, we announced our Celerity mobile platform. Celerity is a modular software and hardware platform that provides pre-integrated solutions for all of the critical components required for today's advanced mobile devices, including feature-rich functionality, 2G and 3G cellular capability, multimedia acceleration and support for both Bluetooth and WiFi connectivity.

Many investors have asked us why a cellular phone manufacturer would change base band suppliers. The reason is that Broadcom is widely recognized as having a leadership position in many of the surrounding silicon areas such as mobile multimedia and Bluetooth, and can now claim a technology leadership position in the base band itself after making two significant product announcements in Q1.

The first was NStream. This is a revolutionary signal processing algorithm for handsets that provides significant quality and capacity improvements for 2G and 3G cellular networks without any change required by carriers or infrastructure. Utilizing cell phones powered by Broadcom's NStream technology, service providers will experience improved voice quality, coverage and data integrity and low signal areas, as well as increased capacity on existing cellular networks. Leading handset manufacturers and cellular operators are currently NStream technology.

Second, we announced the world's first single chip, and by that we mean a single monolithic chip rather than a SIP, or system in package; 7.2 megabits per second HSDPA solution. The new chip integrates a complete category 8 HSDPA modem, advanced TSP and multimedia functionality, and high performance Arm 11 applications processor. It also supports a 5 mega pixel camera, multimedia encode and decode at 30 frames a second at [SPIF] and [QBGA] resolutions and security processors for digital rights management. We believe these two state of the art developments mark Broadcom's emergence as a top tier cellular technology provider.

With respect to our litigation matters with Qualcomm; we don't normally comment on litigation while its ongoing, however given the magnitude of our current litigation effort, I think a few comments are in order. I am sure you appreciate we can't go into details though, with respect to ongoing litigation. Regarding the complaint in the International Trade Commission trial of the liability portion of our patent infringement claims against Qualcomm recently concluded. Although we do not yet know the result, we are very pleased with how the hearing went. The judge will issue his initial determination in August following a hearing on remedy issues in July.

The ITC action was the first of several patent disputes between our two companies to go to trial. In total we have alleged that Qualcomm baseband, RF and power management products infringe 16 different Broadcom patents. The other cases are going through their normal processes of discovery and [marksman] hearings. Our antitrust case against Qualcomm in New Jersey and the investigation of Qualcomm by the European Commission are both still in their early stages. It is all a work in progress and an investment in the future of our cellular and mobile businesses. It is also an initiative to obtain appropriate recognition by Qualcomm of the significant intellectual property that Broadcom has developed in many areas related to the wireless space.

Today we hold over 1,400 U.S. patents and have approximately 5,400 additional U.S. and foreign patent applications in process. They cover many of the enhanced functions that are being incorporated into 3G cell phones and other mobile and wireless devices. We are investing aggressively in our IP portfolio and have done so for several years.

To summarize overall, Broadcom had a strong Q1 and we're making the investments to deliver growth going forward. We believe our broad and growing product line, coupled with our intellectual property portfolio and strong execution track record will enable our customers to deliver seamless access to voice, video, and data over wired and wireless networks.

As a result, we expect to continue to outgrow the overall semiconductor industry as we have done in every year so far. With that, I would like to now turn it over to Christine for Q&A.

Question-and-Answer Session

Operator

(Operator instructions) The first question comes from Ambrish Srivastava - Harris Nesbitt.

Ambrish Srivastava - Harris Nesbitt

Thank you. I will start off with a tough question, be the bad guy. On wireless 3G, when you say you are going to start shipments in the second quarter, should we expect to see specific customer announcements? How do we gauge the progress? Because there is a lot of confusion in my mind as well as several other investors as to what is going on with the litigation. Does that prevent you from shipping chips? Thanks -- and I have a few follow-ups as well.

Scott McGregor

Ambrish, that is a fair question and let me explain. I would say the litigation is slowing us down from naming customers a little bit, we are being a little more cautious there, but it is not slowing us down from shipping product. We have purchase orders in place and we will not only be shipping but we expect our customer to ship product in this quarter.

Ambrish Srivastava - Harris Nesbitt

A couple of follow-ups then. Bill, if you could please contrast what you are seeing in the supply chain versus last quarter? Specifically with respect to tightness on the front end and the back end. Are you seeing any customer pull in so far? Or, has that situation alleviated? Specifically going into second quarter, how does the supply chain look?

Bill Ruehle

I would say that the supply chain right now, if anything, is a little bit easier than it was at this time a quarter ago, which actually is to be expected given the time of the year. We continue to be able to -- as long as we get orders that are outside our normal lead time, we have had no problems fulfilling those orders. Where we have challenges is when we get customer orders that are inside our lead time where they may want four to six week lead time on a product that takes 14 to 16 weeks to build. The build time is compressing a little bit, but I would not say it is anything dramatic.

Ambrish Srivastava - Harris Nesbitt

One last question; how would you characterize the Ethernet switching market outside of the convergence that clearly you guys are doing a very good job at? Did they get it correct that this segment, the Ethernet switching related enterprise would be down over second quarter as well?

Bill Ruehle

We did not mean to imply that. Probably what you are referring to is the fact that I said I thought our growth would be lead by broadband and mobile and wireless. I did not mean to imply by that that Ethernet would be down. The gig market still looks quite strong, in particular the trend of penetration of gigabit -- do you recall what that is?

Peter Andrew

The latest data for L2 and L3 switching shows that gigi penetration was still only at about 36% in Q4 versus 25% a year ago, so we are still very early in the eventual migration over gigabit Ethernet.

Ambrish Srivastava - Harris Nesbitt

Okay, thanks Peter. Then just to close out, on the client side you are almost done, correct?

Peter Andrew

Almost done in terms of penetration?

Ambrish Srivastava - Harris Nesbitt

Yes.

Peter Andrew

On the enterprise class PC we are probably up in the 80% range plus in terms of adoption of gigabit Ethernet. We still have some client applications as well as some new applications appearing in other devices such as printers and gaming stations.

Ambrish Srivastava - Harris Nesbitt

Okay, great. Thank you very much, guys.

Operator

The next question comes from Michael Masdea - Credit Suisse.

Michael Masdea - Credit Suisse

Let me ask that one question about the lawsuits. Isn't there a risk to your customer that they want to ramp up, that if this lawsuit goes against you they would have some issues there? Or are they not seeing it that way? On the wireless side, that is.

Scott McGregor

Michael, that gets into the details. I am afraid that is something I can't talk about right now.

Michael Masdea - Credit Suisse

I'll pass on that one then. Another question I think I will through out there is, as you are getting broader and broader in your portfolio, at some point here does something change operationally for you guys? Are there any issues with design and leveraging design, or product ramps, inventory risks? Is it getting tough to manage this big of an organization?

Scott McGregor

I don't think so. One of the things that I certainly looked at coming to the Company a year ago was, how do we scale the Company? I think we've got a fairly contained space in the communications space where we get a lot of reuse in all of our IT, and we have structured it as lines of business that are fairly autonomous and can run their own businesses. That seems to be working pretty well. We've got good scope of management, we've got strong managers in the businesses and so I feel pretty good that we can continue to scale the Company from where we are.

Peter Andrew

I also want to take it a little bit further. If you take a look at some new growth areas for us that have recently started to grow quite a bit, it's been more the broadband modems as they start to integrate other functionality that has historically been a discreet function. So such things as WIFI access points, voice MTAs going to broadband modems. These markets are just now really starting to converge.

Michael Masdea - Credit Suisse

I guess to follow up on that a piece. As you converge more and more of certain pure play companies' functionality into what you're doing, what kind of competitive responses are you seeing? Do you get worried when you start to take a company's whole livelihood away that you're going to see some irrational sort of competition?

Scott McGregor

Well there's always a risk. What many companies do if they feel threatened is they cut their price to try and hang onto sockets. What our strategy is with our broad IP portfolio is we do integration of all the different technologies. So we end up eliminating sockets. It's pretty hard to compete if the socket that you're in today has been eliminated by being integrated into a larger SOC.

Michael Masdea - Credit Suisse

On the TV side, is that how you think about differentiation for you guys? It's just that the additional functionality or are you going to be competing on a head-to-head basis based on performance and the quality of chips, et cetera?

Scott McGregor

You're referring to the TV market, right?

Michael Masdea - Credit Suisse

TV market, yes.

Scott McGregor

In digital TV I'd say there are a variety of players in that market today. Some are capable of doing full SOCs, or nearly so. Then there's some that have niche sockets such as particular audio sockets or tuners or things like that. I think the guys who have the niches, whether it's scalers or tuners or audio or stuff like that, are in trouble because those sockets will go away. The ones we'll end up competing with going forward are more the ones who can do a full SOC because the industry really wants a single chip digital television. It's just a question of how do they get there and how quickly can we get the functionality necessary for it?

But today we do have single chip integrated digital televisions that we're offerings to customers. That is the basis on which we expect to see a ramp the second half of this year and into next year.

Michael Masdea - Credit Suisse

Great. Thanks a lot, guys.

Operator

The next question comes from Cody Acree from Stifel Nicolaus. Please go ahead.

Cody Acree - Stifel Nicolaus

You're the second large player in the last couple of days to point to health in the coms infrastructure market particularly. Can you maybe talk a little bit about what it is that you see shaping that environment? Is it mainly this product transition into an upgrade like Gigabit Ethernet? Or is it just more of a broad spending? What do you think we will see from the remainder of the year?

Scott McGregor

Well, I'd say it's a combination of things. I think it is certainly what you said. It is also a combination of new product cycles, and frankly it's also we are also able to take some share. So it's the combination of those that I think allow us to see that growth.

Bill Ruehle

I think the convergence also is a major theme that we see and the fact that we have so many different technologies to bring to any particular solution and the demand is now really materializing for that kind of solution.

Cody Acree - Stifel Nicolaus

Can you handicap where you think we are in this trend? It sounds like this is the first time in a little while that we've really been able to focus on this as maybe an upside driver. Are we in the early stages and expect it to continue, or is this shorter-term?

Scott McGregor

I would say it's a long-term trend because certainly some of the SOCs we have today, as the devices combine themselves, those SOCs will need to combine. So I don't think this is a short-term phenomenon. I think this is something that'll be definitely a phenomenon for the next years if not the decade.

Henry Samueli

Another factor that is leading to our expanding market there is the fact that we are taking complete control of all the pieces of the product platform. We have the optical size, the copper size, the switching, the broadband processors, the security fabrics, the software platforms. So all the different aspects of a complete platform networking, much like we've done similar things in the broadband access space, and the set-top box space where we have the Pac-Man strategy of gobbling up each piece of the silicon and integrating it into an SOC. That same philosophy goes on the networking platforms as well.

Cody Acree - Stifel Nicolaus

Secondly, can you talk a little bit about channel and OEM inventory health? It sounds as though maybe availability has improved a bit throughout the entire supply chain. Can you just talk about what you're seeing as far as pull-ins? Did we get any benefit during the first quarter from some restocking and do you expect any of that to continue on into Q2?

Bill Ruehle

This has been a question that has been out there for some time as a Wall Street worry. Any of the data we have been able to see -- published data including from a number of Wall Street firms and others -- has not been able to locate any particular guts in inventory. There's always isolated pockets someplace.

It appears that the supply and demand are in pretty good balance. There are some of our product areas where our customer's are virtually hand-to-mouth and can take everything that they can get. We have not seen anything of any substance where it is just, Okay, we have all we need for the next X number of months. That's just not happening right now. I think it is a pretty good balance.

Cody Acree - Stifel Nicolaus

Thanks, guys.

Operator

The next question comes from [Arnab Chanda] from Lehman Brothers. Please go ahead.

Arnab Chanda - Lehman Brothers

Thank you, a couple of questions, the first one for Bill. It seems like the first quarter generally tends to be seasonally slow. Clearly you had a huge cut in one of your product lines from Apple and yet you grew 10%. You're only -- maybe we've been spoiled -- only pointing to 3% to 5%. Is there any kind of lumpiness in broadband? Or is there something that is not growing or declining that's offsetting good growth there? It seems like almost all your product lines are seeing good growth. We're just not used to this kind of growth rate from Broadcom. Can you tell us something about that?

Bill Ruehle

Well, of course, one of the great strengths we have is the diversification of product lines. With over 20 different lines of business we are never going to have all of them firing on all cylinders at all time.

That's particularly good on a quarter like this where, yes, there was some seasonality in some of our products that you would expect on consumer-driven products from Q4 to Q1. There are product cycles, some of which is driven by new technology being introduced, some of which is driven by some of our customers having promotional programs to drive more in demand.

When you look ahead to the guidance we have given in this next quarter, it's probably less extremes on upside and less extremes on downside. It's a more balanced growth pattern than what we experienced in the quarter just ended.

Arnab Chanda - Lehman Brothers

Thanks, Bill. The handset business certainly has been in the eye of the storm for you guys. You talked about three design wins, 3G base, or base in general and a couple of for mobile multimedia. What's the status for that? Should we expect that to be a strong growth driver in 2006 or is it more 2007?

Scott McGregor

In 2005 we introduced the metric of number of design wins in various places because we couldn't really talk about any customers. Going forward, we want to talk about customers as they ship. So I'm not going to give you specific numbers, although I do need to tell you I feel good about the traction we're getting with the major cell phone manufacturers, and believe over time this continues to be probably our largest growth opportunity. So we're very encouraged by that.

You should think of it, though, as a longer-term growth area. I think I said before that we see that Broadcom would expect to get 10% or 15% share in the market. That is something to think about over a multi-year period of time. So you should model it as a slow ramp up to a very big opportunity. We're making the investments to go do that. I don't expect it to contribute a lot of revenue in this year, but it will accelerate in each year going forward.

Henry Samueli

And Arnab, this is another area where I think our convergence theme may very well be the strongest in the entire Company. Because if you look at the cellular platform between the base band, the RF, the Bluetooth, the Wi-Fi, the mobile television; in the future you're going to add GPS, ultra wideband. It's just an endless array of technologies that are there for the taking and for the integration into single chip SOCs. I think Broadcom is as well-positioned, if not better positioned, than any company in the world to execute on that convergence roadmap.

Arnab Chanda - Lehman Brothers

What is the status of UMA in handsets? Where do you think you are with your Wi-Fi offering for handsets? It doesn't seem like you're in the early design win. How are you positioned there? When should we see announcements from that? Thank you.

Scott McGregor

Broadcom's initial focus was more on the high-performance 802-11 markets in retail and for PCs and in some of the game areas. We've got great design wins in that space. Frankly we spent less energy on the 802-11n lower-powered solutions for cell phones.

We've since shifted a large amount of our R&D to focus on that. We have a broad range of products that will come out in that space, but we have not announced them yet. We don't like to pre-announce our products, but in this case I'll tell you that you should expect to see our very competitive products in that space in this year.

Arnab Chanda - Lehman Brothers

Thanks a lot.

Operator

The next question comes from Mark Edelstone from Morgan Stanley. Please go ahead.

Mark Edelstone - Morgan Stanley

Nice quarter you had again guys. I had a couple of product questions and one financial one. First on the product side, can you just give a sense now when you look at the set-top box market both in cable and satellite, what percentage now look to be HD going out with your shipments?

Have you looked at the broadband modem market? What kind of percentage is now going out with voice enablement?

Scott McGregor

Sure, Mark. On the first part of the question, if you take a look at cable or satellite set-top boxes in general, roughly 40% to 50% of the units that are shipping today are what can be considered high-end, meaning that they either have HD functionality or PVR functionality.

Mark Edelstone - Morgan Stanley

And penetration of voice mail on the modem side, again with your shipments?

Scott McGregor

Sure. I don't think we're going to break it out on an exact quarterly basis, but remember last quarter we did say about 30% of our DSL modems had voice; that was for Q4. We expected to exit '06 at somewhere in the 40% to 50% plus range.

Mark Edelstone - Morgan Stanley

Do you have a similar kind of view on cable?

Scott McGregor

Cable is right in the same general area.

Mark Edelstone - Morgan Stanley

On the operating expenses, I certainly understand the guidance on the increase in compensation here for the current quarter. Are we looking at OpEx growing a couple of percentage points faster than revenues here in this quarter? Then when you look at the planning for the rest of the year, do you expect to see OpEx grow in line with revenues or do you get some leverage, especially when you get some acceleration in revenues?

Bill Ruehle

As far as the first part of that, namely the current quarter, yes, it's probably going to be a couple points above the revenue gross rate. Going forward we really have not given any guidance on the top line, so I can't give relative guidance on how we are doing on the expense line. Much of that will depend on what happens in the top line.

Let me just say we are very conscious, obviously, of our expense base. Even though we had a very large increase of this year, one data point you may recall from the call, is that from this time a year ago to this time today our revenues have grown twice as fast as our operating expense has. It's gotten us a model up at 24.7% operating margin, which is above the high end of our range.

So clearly we're not going to be growing at half the rate of our revenue going forward. We'll just keep at it. I think we've shown that we are able to control that pretty well and we'll do the best we can on that.

Mark Edelstone - Morgan Stanley

Fair enough and just one last question. If you can give some color on the ongoing litigation expenses that you are incurring today, specifically related to Qualcomm. Can you give us a sense as to what kind of burden that is?

Bill Ruehle

We don't break that out. If you look at our total SG&A expense, it is running at 1.9%. Remember that includes all of our legal expense, all of our other G&A, it includes all of our sales and marketing expense. So it is not an enormous number.

Mark Edelstone - Morgan Stanley

Hey, guys, thanks a lot. Nice job.

Scott McGregor

Thanks, Mark.

Operator

The next question comes from Ross Seymore from Deutsche Bank. Please go ahead.

Ross Seymore - Deutsche Bank

Thanks, guys, and congratulations again on a good quarter. Looking at the 802-11n market, it appears that a couple of your competitors have announced design wins in there. Usually you guys aren't terribly shy with press releases like that. Just wondered if you could give us an update on your progress there and how you see the competitive dynamics in that next generation WI LAN market?

Scott McGregor

Well it was sort of a food fight, I think, on press releases. We decided we didn't particularly want to play in that. We focused our attention on just winning the business. So we believe we have designs with most of the top retail vendors in that space. Certainly we have seen both NETGEAR and Buffalo make announcements that they are shipping with our products. We expect to see more coming forward.

I think the number that I said before, which should be particularly telling, is that we expect -- based on the business we know has been awarded -- that we're going to get 75% of the U.S. retail business this year. So I think press releases aside, we have been busy winning the business.

Ross Seymore - Deutsche Bank

That is always the more important side. Shifting gears a little bit, but staying with N wireless. The new HSDTA chip, the single chip solution that you introduced at CTIA. Are some of the design wins that you're talking about in 3G going to be utilizing that chip already? Or is that something that's going to be more of a very late 2006 and basically a 2007-based ramp?

Scott McGregor

That definitely takes a little longer to roll out. So we're certainly in discussion with customers on that chip. The design win cycle on that chip is a little longer. But it's quite remarkable. Actually a number of customers were quite impressed with that. They thought we could not do it.

To be first out with a single chip HSDPA at the full 7.2-megabit data rate, that's twice the data rate of our competition. It blew away a lot of our customers and got them to take us much more seriously as a result. So we think that that chip will eventually find homes. It's certainly gained us credibility in the key accounts.

Ross Seymore - Deutsche Bank

Great. Thank you.

Operator

The next question comes from Jeremy Bunting from Thomas Weisel Partners. Please go ahead.

Jeremy Bunting - Thomas Weisel Partners

Thank you, one question on Wi-Fi and one question on server chipsets. Wi-Fi was up in Q1 but you mentioned Bill that it was both on units and on ASPs. I wondered if you could perhaps give us a little bit more sort of detail on that? How specifically do you count a revenue of a Wi-Fi function, which is integrated into something else? Is it actually split? Is that Wi-Fi proportion split out and put into the Wi-Fi bucket? Or is it left with DSL cable, et cetera?

Bill Ruehle

If Wi-Fi functionality is integrated into another chip, for example, in a cable modem chip or something like that, that would be go as part of the cable modem revenue. We do not try to allocate that. If it's a discrete chip then we count it as part of the Wi-Fi revenue.

Henry Samueli

I should point out today that our Wi-Fi solutions are yet not integrated in with some of the other SOCs. So when we sell a cable modem gateway it actually does have a discrete Wi-Fi chip so the revenue does go to the Wi-Fi group; or a DSL gateway that has Wi-Fi would be a discreet Wi-Fi chip today. Obviously our roadmap shows integration of Wi-Fi into all of our products. But today they're sold as discreet solutions.

Jeremy Bunting - Thomas Weisel Partners

Thank you. With the chipset business into servers, what do you think your market share is currently of chipsets into AMD-based server platforms? How much of that business it into high end AMD- based PCs versus AMD-based servers?

Scott McGregor

Our share with AMD is really going to take off when they roll out their next generation of servers. You'll have to ask them on the specific timing of that. But we expect that that'll be where we get significant share on those platforms. At that time we expect that our revenue we derive from AMD platforms will exceed our revenue we get from Intel platforms.

Jeremy Bunting - Thomas Weisel Partners

Okay, thank you.

Operator

The next question comes from Alex Gauna from UBS. Please go ahead.

Alex Gauna - UBS

Yes, Bill, I know you clarified earlier that you did not expect the necessarily enterprise to be down, but do you actually expect it to be up in the June quarter? I was wondering if you could characterize the trend line here? Is it normal seasonality? I would have perhaps expected to see some stronger growth given all the convergence trends you've been talking about on the call.

Bill Ruehle

We have not given the granularity on whether that would be up or down. Clearly it's not one of our strong drivers for the next quarter. But it's whether it's up or down, we're not prepared to give that level of granularity. The business has always been somewhat lumpy. In fact, each one of our businesses by itself, I can't think of a single business we have where there's just sort of a predictable monotonic entries by the revenue. It'd be a simpler world if it was. But that's just not the reality.

So we tend to get very large orders when the orders come in. If they don't then that part of the business might be flat or down for a quarter and something else will be up. So it's never really been clear seasonal patterns. If anything, typically in the networking business the first calendar quarter tends to be a little bit slow. I certainly have that same experience in my past life in the networking business. But it's really not been dramatic. Throughout our history as we try to we try to plot seasonality and figure, Okay, what sort of a factor should we put on each quarter? It's just not possible to do that.

Alex Gauna - UBS

Okay. Switching over to the broadband access market. How big is DBS getting for you relative to the cable side of things? Where are you in terms of the DBS deployments with some of your new opportunities? I'm particularly interested in the new platforms ramping with EchoStar and DirecTV?

Bill Ruehle

Was it the size of DBS or DSL were you asking?

Alex Gauna - UBS

DBS. How large is it getting relative to your classic cable set-top box business?

Bill Ruehle

We really have four significant sized lines of business in broadband: cable modem, cable TV, DBS, and DSL. So as to which one is larger or another, there are large opportunities all over.

Scott McGregor

The second part of your question had to do with our ramp within new customers and the satellite set-top box market. We have already seen from both EchoStar and DirecTV, that they are utilizing our MPEG-4 products for the first launch of their new MPEG-4/ABC products in their own existing networks. So we're benefiting not only from the upgrade cycle to MPEG-4 but we're seeing a nice demand for still for MPEG-2 at both DirecTV and at EchoStar.

Alex Gauna - UBS

With regard to MPEG-4, is it still early ramp or has there actually been some considerable pull for channel filling?

Scott McGregor

I think that is probably a better question to ask EchoStar and DirecTV directly on.

Alex Gauna - UBS

Okay. Lastly, also, could you update us on 65 nanometer? How many products in the pipeline? How well that's progressing? What kind of results you're getting in the 65 nanometer?

Henry Samueli

R&D efforts on 65 nanometer are moving along very aggressively. I'd say we have right now about 25 different products in the pipeline being designed in 65 nanometer across all of our business groups. And those products will be completed over the next 18-month period. So it's a very strong push toward 65 nanometer across the board and we're on schedule and hitting all of our milestones.

Alex Gauna - UBS

When will the first 65 nanometer products be in volume production, do you imagine?

Henry Samueli

Volume production, it is hard to say. We certainly will be sampling them this year, but most likely next year in volume production.

Alex Gauna - UBS

Okay, thank you. Congratulations, nice quarter.

Operator

The next question comes from Doug Lee from Goldman Sachs. Please go ahead.

Doug Lee - Goldman Sachs

Thank you. Just wanted to ask you a question of the mobile multimedia product. Just how you expect the opportunities to ramp both in the traditional audio MP3 market as well as in the cell phone market? Also, can you give us a progress update on the product with the integrated encore?

Scott McGregor

We continue to target two markets for our multimedia processors and multimedia devices. First of all, the stand-alone music player and video player market. That was where we saw our initial wins. But we believe the long-term biggest opportunity is in the cell phone space. We do have design wins there and we continue to look for new ones.

So I can't break those out any more specifically for you, but we target both of those markets. We believe we're on track to gain additional design wins in those spaces.

Henry Samueli

Right. In terms of timing on your second question with respect to the integrated encore, we've announced that this is clearly on our product roadmap, but we wouldn't preannounce a product here on the conference call.

Doug Lee - Goldman Sachs

Okay, great. Just to follow-up there, in terms of the opportunities with the cell phones and the mobile multimedia in the audio market, do you see those expanding this year or is it more of a '07 timing type of thing?

Scott McGregor

There are two factors in that. One is how quickly do we win designs? Second is how rapidly does the overall multimedia market attach rate go up in the cell phone space? Both of those are moving forward.

In the case of cell phones with multimedia, I believe certainly a few years from now that'll be just standard capabilities in most medium-range and up phones. At the same time, we are winning additional top tier customers. Some of them take a while to get it out there. It could take between six months to nine months from when we win a design until when we see first shipments on those.

Doug Lee - Goldman Sachs

Great, thank you. Good luck.

Operator

The next question comes from Charlie Glavin from Needham & Co. Please go ahead.

Charlie Glavin - Needham & Co.

Thanks, if I could actually turn to something on the more financial side. Bill, you guys have raised cash now to double what it was last year. While you showed a pretty good chart at the November analyst meeting, showing how you've certainly learned lessons from acquisitions; what can investors expect in terms of your strategic plans sitting on over $2 billion of cash but still some gaps to be filled in?

Bill Ruehle

I think that investors should expect pretty much the type of plans we have been implementing to date. We have been -- and what apparently you're asking is -- are we about to spend a couple billion dollars on an acquisition? I think that is quite unlikely.

We will continue to make acquisitions that make sense for us. You will note that since 2004 we have used cash as the currency for all of our acquisitions. We expect to do that. We did increase our share buyback program. We authorized a half a billion dollars for the year that we're in right now and we are on track in implementing that program. Beyond that we're ready to handle any emergencies that may arise.

We found a strategic mix that has worked well for us between our internal organic development and supplementing those with selective acquisitions of typically early stage companies. I think you should expect to see more of that.

Charlie Glavin - Needham & Co.

Bill, I really didn't expect you to give out any sort of detailed plans and stuff. But let me get a little more hardball. In terms of, one area in which you guys have made announcements in terms of your intent to get in -- and my understanding is you recently set up a design center quietly trying to hire some new people -- that's really within the storage area, more specifically in hard disk drive. My understanding is you tried to make a couple acquisitions. One you may have gotten outbid on.

Is that an approach that you're going to try and hire and do organically given the timing, particularly if you're looking at the cellular market and the integration of small form factor drives as well as some of the integration on separate attached storage would be an area that you guys would excel in. Yet surprisingly, there have not been a lot of developments.

Henry, I think you made some comment in November of '04 about saying that you want to get in. Could you give us an update as far as how you will approach that?

Scott McGregor

We look to both organic growth as well as acquisitions when we want to get into spaces. So it is not one versus the other. Sometimes it is a combination of both. You asked specifically about the storage market. We continue to look at the storage market. We've got a number of products there today in the enterprise storage space, server storage space that we work on. We're always looking at new opportunities. We have not announced any further plans in that space, though.

Charlie Glavin - Needham & Co.

Any preference between the three major ones: the stats, tier, particularly [serial] that you gain with [RAD], and the small form factor as far as areas of priority?

Henry Samueli

I do not think we're going to get into that level of detail on our product roadmap or our R&D strategies. So I'd say we just did not want to address that right now.

Charlie Glavin - Needham & Co.

Thanks anyway.

Scott McGregor

Thanks.

Operator

The next question comes from Adam Benjamin from Jefferies & Company. Please go ahead.

Adam Benjamin - Jefferies & Co.

Thanks, guys. With respect to the satellite set-top box, which clearly showed pretty strong sequential growth in the quarter, how should we be looking in that going forward throughout the rest of this year and into '07? Should we expect that to continue to grow off this base? Or will it be lower over time?

Bill Ruehle

Let me take a shot at that. First of all, we don't give forward-looking forecasts for anything beyond the single quarter and not that level of granularity within the quarter. Just to talk about some of the dynamics in there. As you may recall, we originally grew up in that business on the strength of one customer and we have more recently branched out to a second major customer and are expanding our base business there. So, just by expanding our customer base is helping us to drive growth in that business.

In addition, when we were talking earlier in Scott's remarks about the additional capabilities being added in terms of personal video recording, HD, MPEG-4, all of these have ASP increases in these items. So we continue to believe that that's a very attractive area to be in going forward.

Adam Benjamin - Jefferies & Co.

Okay. Peter, you commented on the fact that in terms of the penetration for the set-top box for high-end of PVR and HD is about 40% today. You expect to finish the year at greater than 50%?

Peter Andrew

Sure. At that time were talking about integration of voice and Wi-Fi into broadband modems. I haven't seen a good estimate yet going forward in terms of the penetration of PVR or HD in the set-top boxes. But when we talk afterwards, I'll try to shuffle through the data to see if I can help you out with some market share estimates.

Adam Benjamin - Jefferies & Co.

Okay, great. Just one last question on the TV, you seem to be talking about that segment a little bit more over the last couple of calls. Is that something we should be looking at given the design cycles at the tier ones of nine to 12 months? Is that something we should be looking at more as an '07 revenue opportunity? Or will be see some more revenue from you guys in the back half of this year?

Scott McGregor

That should definitely kick in in the back half of this year. Certainly it'll be stronger next year, but we do expect significant revenue contribution in the second half of this year.

Adam Benjamin - Jefferies & Co.

Okay, great. Thanks.

Operator

The next question comes from Jeff Palmer from Friedman Billings. Please go ahead.

Jeff Palmer - Friedman Billings

Thanks, guys. Thanks for taking my call. Most of my questions have been answered. But I have this last one for you. Can you give us some color or thoughts on the Bluetooth attach rate? You folks have been growing that business quite strongly here for a couple of quarters. Where do you think it can go?

Scott McGregor

The question is, how high can it go? If you look at most of the market share data, you've got [Instat] estimating that the penetration rate within cell phones for 2005 was around 35%. They see that going up closer to 45% in 2006. Another market surveyor I believe it's ABIRIMS has the penetration rate in 2005 at 25% going to 35% in 2006. One way or another, it's definitely going up higher. If you look out to 2009 I think both of them are converging to somewhere around 75% or 80% of cell phones will have Bluetooth functionality enabled.

Scott McGregor

Of course you know you can get higher than 100% right? Because you get one in your cell phone and then for each of the devices your cell phone talks to, you get a Bluetooth there. So if you have a headset for your cell phone you get another one there. If you have a Bluetooth in your car that you're cell phone talks to, you can certainly get that. So there's an opportunity for quantity expansion both there and then also for ASP expansions.

For example, we just have started sampling our Bluetooth plus FM chip, which combines an FM receiver with Bluetooth at the same time. That's great for a lot of those same markets. We get an ASP increase when we go to that product.

Jeff Palmer - Friedman Billings

What kind of ASP increase you get, Scott?

Scott McGregor

It depends what's integrated in. It's not twice as much, but it's an uplift.

Jeff Palmer - Friedman Billings

Okay. Then if I could, second question in the mobile and wireless group also. So while the competitors are out making press releases and you're getting design wins at the 11n product, can you give a sense how to think about that relative to your current 11bg business? Does it build on top of it? Does it supplant it? How do I think about that over the longer term?

Scott McGregor

I think eventually N will take over the large share of the business, but it will be medium speed. I think you'll get a lot of incremental stuff initially. I think the important thing for us is that this is significant ASP increase on N versus G. It's a multiplicative factor rather than small amount. So, it's very good for us to sell an N unit as opposed to a G unit.

Jeff Palmer - Friedman Billings

Okay, so you do not see it completely cannibalizing the BBG products in the short term, actually helping drive it?

Scott McGregor

Short term, no way because it consumes more power. It's more expensive. It has twice the range and four times the performance. So it is quite attractive from an overall performance and range point of view. If you're an IT manager trying to install this into a company or something like that, it's just great. But for some of the low power or fairly low performance needs, it won't penetrate those markets as quickly.

Jeff Palmer - Friedman Billings

Okay, great. Thank you very much. Great quarter, guys. Thanks.

Operator

The next question comes from Bill Lewis from J.P. Morgan. Please go ahead.

Bill Lewis - JP Morgan

Thanks. First, I have a housekeeping question for Bill. What can we expect the share count number to look like next quarter?

Bill Ruehle

We believe it'll be a much more modest increase next quarter. One of the things that happened that drove the large share increase this quarter is because we have such a big spike up in the stock prices. And we've found over the years whenever there's a big spike up, all of the sudden a lot of employees who have been holding back on exercises.

We had a lot of employee exercise, which among other things was reflected in the cash that we took in from that. So depending on what happens there; in general we would expect a much smaller rate of increase, something more in the order of 6 million or 7 million shares, not the large increase we had this past quarter. It will be a different number down on GAAP and non-GAAP, some accounting intricacies.

Bill Lewis - JP Morgan

Okay, and then on the gross margin outlook, I mean certainly there's a lot of factors at play here. But I guess specifically for this year, given that the supply tightness has eased at least a little bit, is there an opportunity for gross margins here to now start to move up as we move into kind of the slower summer months? Or what's your expectation there?

Bill Ruehle

The only guidance we've given on that was for Q2, which we said we think might be down 10 or 20 basis points, which obviously is a pretty narrow range versus where we are right now. It's difficult to project out a lot farther than that right now.

Bill Lewis - JP Morgan

Okay, and last just kind on the markets, it seems in broadband you are serving a lot of the high-volume markets today. I would be interested in your thoughts on the fiber market as that starts to grow over the next few years. What your interest level is there and how you're thinking about that market?

Scott McGregor

When you say fiber market, are you thinking like fiber to the curb, last mile or are you thinking backbone?

Bill Lewis - JP Morgan

Yes, I'm thinking access.

Scott McGregor

Access. Yes, absolutely that's a market that we look at. We are looking at and evaluating options in that space. We'll explore that over time.

Bill Lewis - JP Morgan

So it's certainly a market we would expect you to serve at a certain time?

Scott McGregor

Our strategy is to be agnostic on technologies. And you see for example on wireless technologies we do all of them - Bluetooth, 802-11, et cetera. Likewise on the last mile technologies we do, we have an CMTS opportunity and we also do DSLM. So to the extent that fiber really takes off and becomes a key technology there, we would look to add that as well.

Henry Samueli

Also if you take a look at the IP TV rollouts today that you're seeing slowly starting to take off. Broadcom is already participating in those rollouts with our partners such as Motorola on the set-top box side as well as TeLabs more on the metro side. So we already are participating in that market today.

Bill Lewis - JP Morgan

Thank you.

Operator

The next question comes from David Wu from Global Crown Capital. Please go ahead.

Han Lee - Global Crown Capital

Hi, this is Han Lee for David Wu. Thank you for taking my question. First, regarding the digital TV market, you talk about your back-end chips being used in EchoStar and DirecTV, so are there any plans to go into the actual television market?

Scott McGregor

Yes, we've announced for over the last year to enter the digital television space. We have chips specifically targeted for that market such as the 3560 and others. And we have design wins at top tier customers already in the digital TV market.

Han Lee - Global Crown Capital

For AMD server chipsets, you talk about the next generation AMD server chipsets. Are you talking about the AM2 server or the KAL servers?

Henry Samueli

It is all the next generation platforms that AMD is about to introduce, we are designed into.

Han Lee - Global Crown Capital

Sorry, have you replaced [NVIDIA] in those design wins? I think those are also heading for server chipset designs.

Scott McGregor

Sure, no, we have design wins across the board. I wouldn't say 100% obviously, but we have a substantial set of design wins in the next generation array of platforms being introduced.

Henry Samueli

We expect to have the majority of the AMD server chipset market.

Han Lee - Global Crown Capital

Okay, thank you.

Operator

The next question comes from Shelby Seyrafi from Kaufman Brothers. Please go ahead.

Shelby Seyrafi - Kaufman Brothers

Yes, thank you very much. So, you had very strong growth in the broadband segment up 30% sequentially. Was that driven, can you say, mostly by penetrating DirecTV? Or by enjoying strong sales to Motorola where digital set-top box units were up over 40% plus QonQ?

Bill Ruehle

It was all of that and more. Our share in the DSL market has gone from a very minor player to quite possibly number one or certainly a strong number two, if not that in the most recent quarter. Cable modem continues to grow strongly. A lot of that is driven now by the increased interest in putting voice in it, and the other factors you mentioned as well. So it was not just one or two things in broadband that generated that growth rate.

Shelby Seyrafi - Kaufman Brothers

Also, for the mobile and wireless segment in the second quarter, do you expect the same segment strength, that is mobile multimedia down and Bluetooth and wireless LAN up in the same kind of growth patterns?

Bill Ruehle

We have not given that level of granularity. What I did say earlier in an earlier remark is that we don't expect to see quite the broad swings that we had in our businesses where some are off quite a bit and some down quite a bit in this most recent quarter.

Scott McGregor

You can expect 802-11n to be a growth driver for us in the current quarter as well.

Shelby Seyrafi - Kaufman Brothers

Finally, are you concerned about TiVo's patent win against EchoStar perhaps negatively impacting your chip sales to EchoStar?

Scott McGregor

You know it's an interesting situation. It would be inappropriate for us to speculate on exactly where that goes from a legal point of view. But we note that TiVo is a customer and EchoStar is a customer and DirecTV is a customer.

We expect that, depending on how that legal outcome works out, there could be different mix shift between the different providers of boxes there. But since each of them are customers of ours, we would be relatively indifferent to how that mix sorts out.

Shelby Seyrafi - Kaufman Brothers

Thank you.

Operator

The last question comes from Srini Pajjuri from Merrill Lynch. Please go ahead.

Srini Pajjuri - Merrill Lynch

I'm good. Thank you.

Peter Andrew

Okay. Thank you very much for joining us today. I appreciate you being with us. We had a good quarter. We look forward to a continued growth story and look forward to seeing you three months from now. Thanks.

Operator

This concludes Broadcom's conference call. Thank you for your participation. You may all disconnect at this time.

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Source: Broadcom Corporation Q1 2006 Earnings Conference Call Transcript (BRCM)
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