Broadcom Corporation (including our subsidiaries, referred to collectively in this Report as “Broadcom,” “we,” “our” and “us”) is a major technology innovator and global leader in semiconductors for wired and wireless communications. Our system-on-a-chip (SoC) and software solutions enable the delivery of voice, video, data and rich multimedia content to mobile devices, consumer electronics (CE) devices in the home and business networking products for the workplace, data centers, service providers and carriers. We provide the industry’s broadest portfolio of cutting-edge SoC solutions to manufacturers of computing and networking equipment, CE and broadband access products, and mobile devices. Our diverse product portfolio includes:
• Solutions for the Home (Broadband Communications) — enabling such products as digital cable, satellite and Internet Protocol (IP) set-top boxes and media servers; cable and digital subscriber line (DSL) modems and residential gateways; high definition televisions (HDTVs); high definition Blu-ray Disc® players; and digital video recorders (DVRs).
• Solutions for the Hand (Mobile & Wireless) — integrating solutions in applications for wireless and personal area networking; cellular communications; personal navigation and global positioning; processing multimedia content in smartphones; and for managing the power in mobile devices; and
• Solutions for Network Infrastructure (Enterprise Networking)— incorporating solutions for the business network requirements of enterprise, data center, small-to-medium-sized businesses (SMBs), and carriers and service providers, featuring high-speed controllers, switches and physical layer (PHY) devices supporting transmission and switching for local, metropolitan, wide area and storage networking and server solutions; processors for broadband network and security applications; and Voice over Internet Protocol (VoIP) solutions for gateway and telephony systems.
Our Class A common stock trades on the Nasdaq Global Select Marketsm under the symbol BRCM.
Reportable Segments and Broadcom® Products
We currently operate in three reportable segments: Broadband Communications, Mobile & Wireless and Enterprise Networking, as described in greater detail in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Broadband Communications Reportable Segment
We offer manufacturers a range of broadband communications and consumer electronics SoC solutions that enable voice, video, data and multimedia services over wired and wireless networks for the home. These highly integrated silicon solutions continue to enable the most advanced system solutions, which include broadband modems and residential gateways, digital cable, satellite and IP set-top boxes and media servers, high definition digital television and Blu-ray Disc players and recorders. Net revenue from our Broadband Communications reportable segment represented 34.0%, 37.0% and 37.4% of our total net revenue in 2009, 2008 and 2007, respectively.
Broadband Modems and Residential Gateways
Cable Modems and Residential Gateways. Cable modems provide consumers and businesses high-speed Internet access through a cable television network. An additional device, called a cable modem termination system, or CMTS, located at a local cable provider’s network hub, communicates to cable modems in subscribers’ homes and controls access to the network.
We offer integrated semiconductor solutions for cable modems and CMTS equipment, with an extensive product offering for ultra high-speed data services to transmit voice, video, data and multimedia services to residential customers, enabling such services as video-on-demand. Our cable modem SoC solutions include integrated circuits, reference design hardware and a full software suite to support our customers’ needs and accelerate their time to market. Our cable modem SoCs provide levels of integration and performance that allow cable modem functionality to be provided by a small silicon core that can be incorporated into other consumer devices for broader distribution of IP-based services throughout the home. We also offer residential broadband gateway solutions that bring together a range of capabilities, including those for cable modems, digital set-top boxes, home networking, VoIP and Ethernet connectivity.
DSL. Digital subscriber line technologies, commonly known as DSL, represent a family of broadband solutions that use a greater range of frequencies over existing telephone lines than traditional telephone services. This provides greater bandwidth to send and receive information. DSL has a number of standards or line codes used worldwide, and we support all of them, such as asymmetric DSL, or ADSL, ADSL2, ADSL2+ and very-high-speed DSL, or VDSL.
We provide end-to-end DSL technology, with solutions designed for both customer premises equipment, or CPE, and central office applications. Our DSL solutions enable local exchange carriers and enterprise networking vendors to deliver bundled broadband services, such as digital video, high-speed Internet access, VoIP, video teleconferencing and IP data business services, over existing telephone lines. For CPE applications, we provide products that address the wide variety of local area network connectivity options, including Ethernet, USB-powered solutions, VoIP-enabled access devices and wireless access points with multiple Ethernet ports. Our central office solutions enable equipment manufacturers of digital subscriber line access multiplexers, or DSLAMs, and next generation digital loop carriers to offer a significant increase in the number of DSL connections that can be supported within telecommunication companies’ tight heat, power and space constraints. We also provide the inter-networking software that is enabling DSLAM technology to transition from Asynchronous Transfer Mode (ATM) to Internet Protocol.
GPON. Gigabit Passive Optical Network, commonly known as GPON, represents a family of broadband solutions that provide data, voice and video services over fiber networks used by telecommunications service providers around the world. We provide several different access devices used for Internet access, gateway routers and voice and data integrated access devices (IADs).
Digital Cable, Direct Broadcast Satellite, Digital Transport Adapter (DTA) and IP Set-Top Boxes
The last decade has seen rapid growth in the quantity and diversity of television programming. In an effort to increase the number of channels available to viewers, digital TV programming is now being offered by various service providers, including cable operators, satellite operators and traditional telephone companies, using the same high-speed connections that bring telephone customers broadband Internet access. In addition to offering more TV channels, these operators compete to differentiate their services through high definition programming, digital video recording services, high quality 2D/3D program guides and the ability to view and stream Internet content. To take advantage of all of these capabilities, viewers need a set-top box in the home to process these functions and distribute them to TVs and other STBs within the home.
Cable-TV Set-Top Box Solutions. We offer a complete silicon platform for the digital cable-TV set-top box market. These highly integrated SoC solutions provide manufacturers with a broad range of features and capabilities for building standard digital cable-TV STBs (for digital video broadcasting), as well as high-end interactive set-top boxes supporting simultaneous viewing of television program and Internet content. Our cable-TV set-top box silicon consists of front-end transceivers with media access controller, or MAC, functions, single-chip cable modems, advanced 2D/3D graphics video encoders and MPEG decoders, radio frequency television tuners based on CMOS process technology, and digital visual interface chipsets. These cable-TV set-top box chips support most industry transmission and television standards, enabling universal interoperability and easy retail channel distribution. Our set-top box SoC solutions can also incorporate DVR functionality, home networking and VOIP technologies.
DBS Solutions. By leveraging our extensive investment and expertise in the cable-TV set-top box market, we have also developed comprehensive direct broadcast satellite, or DBS, solutions. These products include an advanced, high definition video graphics subsystem, which drives the audio, video and graphics interfaces in DBS set-top boxes, and provides multi-stream control to support DVR capabilities; a CMOS satellite tuner, which allows our customers to provide additional channel offerings; front-end receiver chips for set-top boxes, including 65 nanometer receivers that incorporate DVR functionality, and an advanced modulation system to increase satellite capacity; and a digital visual interface transmitter. In addition, we offer a complete end-to-end chipset for receiving and displaying HDTV, and a complete satellite system solution that enables DBS providers to provide Internet access via satellite, combining the functionality of a satellite modem, a firewall router and home networking into a single chip.
IP Set-Top Box Solutions. Broadcom provides a family of advanced video compression, high definition SoC solutions for IP set-top boxes. These solutions include high definition video decoder/audio processor chips and a dual channel high definition and digital video recorder chip. We also offer an advanced IPTV platform based on our solution for next generation STBs and Microsoft’s Mediaroomtm. This platform will enable service providers and equipment manufacturers to offer a range of new services and features such as multi-room digital video recording, high performance user interfaces, and photo and music sharing. Additionally, we offer encoder/transcoder SoC solutions that allow non-compatible video and audio content to be shared and transferred in real-time across several classes of consumer devices to and from the PC.
Digital Transport Adapter or DTA solutions represent a family of devices for both cable and terrestrial applications, and are used primarily to enable legacy televisions to display the latest digital broadcast services as national analog broadcast systems transition to digital broadcast systems. We offer several products that support digital conversion requirements in every major geography worldwide. A DTA product is, in most cases, a very simplified set-top box with a limited feature set and a non-upgradeable configuration.
Beginning in 2009, the Federal Communications Commission, or FCC, required that traditional terrestrial broadcast stations broadcast only in digital format. We offer a complete turnkey digital television-on-a-chip solution and associated software to enable digital-to-analog converter boxes that extend the lives of analog-only TVs by allowing them to receive digital-only broadcasts. Capitalizing on the FCC DTV mandate, as well as on our extensive cable-TV set-top box technology portfolio, we offer a highly integrated DTV SoC solution that, when combined with our existing satellite, cable or terrestrial demodulators, forms a complete platform for the delivery of HDTV, allowing DTV manufacturers to develop digital cable-ready TVs that connect directly to the North American cable infrastructure without the need for an external set-top box.
In 2008 we acquired the DTV business of Advanced Micro Devices, Inc., or AMD, enabling us to rapidly extend our DTV offerings to include a more complete product line that covers all DTV markets, ranging from low-end value and mid-range quality to high-end interactive platforms and panel processors. DTV solutions developed through the integration of this acquisition with our existing technology include (1) a complete advanced video coding, or AVC, connected TV platform that allows viewers to customize their TV viewing experience, and provides new options for accessing video content, and (2) a complete turnkey platform that integrates the customer application ready design reference platform, allowing TV manufacturers to customize both hardware and software designs for differentiating products based on the user interface and visual look-and-feel, while accelerating their time to market.
Broadcom also supports the Digital Living Network Alliance, or DLNA®, technology that allows users to share and access digital media easily across a variety of wired and wireless connectivity technologies, such as Multimedia over Coax Alliance, or MoCA®, Wi-Fi and Ethernet. Support of DLNA allows consumers to easily share and stream digital content (including DVR recordings, music, photos and videos) between consumer electronics devices, mobile handsets, set-top boxes and PCs anywhere throughout their homes.
High Definition Blu-ray Disc Players
With the increasing consumer adoption of HDTV and greater availability of high definition video content, CE manufacturers have begun offering high definition Blu-ray Disc players and recorders, with substantially greater storage capacity and the ability to effectively handle the significantly higher bit rates associated with high resolution HDTV content. Our Blu-ray Disc SoC is a prevalent technology for Blu-ray Disc playback, offering HD video playback at 1080p resolution, picture-in-picture video support, HD multi-channel audio, and world class BD-Java performance for full support of BD-Live functionality. Integrated security and streaming features have enabled manufacturers to deploy a new class of Blu-ray Disc players that feature Internet-based streaming media playback capabilities. We also offer a reference design for the development of Blu-ray Disc media players that includes our HD audio/video decoder chip, as well as an HD digital video system chip and a software platform that affords our customers a wide range of integration options.
Mobile & Wireless Reportable Segment
Broadcom’s mobile and wireless reportable segment offers products supporting a broad range of solutions for the “hand”, leading-edge portable devices that enable end-to-end wireless connectivity at home, at work and on-the-go. Products in this area include solutions in major wireless market segments including wireless local area networking, personal area networking, location technologies, and a comprehensive range of mobile technologies. This portfolio of mobile and wireless products enables a broad range of portable devices including cellular handsets, personal navigation devices, mobile TV products, portable media players, gaming platforms and other wireless-enabled consumer electronics and peripherals, such as home gateways, printers, VoIP phones, home entertainment systems and notebook computers. Net revenue from our Mobile & Wireless reportable segment, our fastest growing segment, represented 38.3%, 32.8% and 31.6% of our total net revenue in 2009, 2008 and 2007, respectively.
Wireless Local Area Networking
Wireless local area networking, also known as WLAN or Wi-Fi networking, allows devices on a local area network to communicate with each other without the use of any cables or wires. It adds the convenience of mobility to the powerful utility provided by high-speed data networks, and is a natural extension of broadband connectivity in the home, office and on the road. Wi-Fi technology was first utilized in applications such as computers and routers, and is now being embedded into a number of other electronic devices such as smartphones, printers, gaming devices, televisions, Blu-Ray Disc players and broadband modems.
We offer a family of high performance, low power Wi-Fi chipsets that supports all of the current Wi-Fi standards, including IEEE 802.11a, 802.11b, 802.11g, and the latest standard, 802.11n. Delivering up to eight times the throughput and up to four times the range of 802.11g, our 802.11n chipsets enable us to serve a new demand for the transfer of HD content between devices and throughout the home. Our entire family of wireless LAN chips consists of all-CMOS solutions that offer advanced security features and are capable of self-calibration based on usage temperatures and other environmental conditions.
Wireless Personal Area Networking
The Bluetooth short-range wireless networking standard is a low power wire replacement technology that enables connectivity among a wide variety of mainstream consumer electronic devices including PCs, mobile phones, smartphones, headsets and consumer electronics. Bluetooth wireless connectivity enables personal area networking, or PAN, at speeds up to 3 Mbps, and can cover distances up to approximately 10 meters. This short-range wireless technology allows devices to automatically synchronize and exchange data with other Bluetooth-enabled devices without the need for wires, and enables wireless audio connections to cellular phones, as well as wireless mouse and keyboard applications.
We offer a complete family of Bluetooth silicon and software solutions for mobile phones, PCs, wireless headphones and headsets, digital televisions, peripherals, gaming and other applications. Our family of single-chip Bluetooth devices and software applications and protocol stacks provides a complete solution that enables manufacturers to add Bluetooth functionality to almost any electronic device with a minimal amount of development time and resources. Our highly integrated Bluetooth solutions are designed in standard CMOS process technology, offering smaller sizes and lower power consumption while reducing manufacturing costs. In addition, we have developed InConcert® coexistence technology to allow products enabled with multiple wireless technologies such as our Wi-Fi, GPS and Bluetooth to collaboratively co-exist and maximize throughput and performance.
Global Positioning Systems
The demand for location based technologies has grown dramatically over the last several years, as evidenced by the increased deployment of Global Positioning Systems (GPS) semiconductors, software and location data. GPS has always been a required feature in navigation devices and is becoming a standard feature in mobile phones and in the PC market. Broadcom offers standalone GPS and assisted-global positioning system, or A-GPS semiconductor products, software and data services. The company also maintains a worldwide GPS reference network that provides assistance data to A-GPS-equipped chips via wireless transport, including cellular data channels (GPRS or 3G) and Wi-Fi, which boosts performance and reduces the time required to determine a location by up to 100 times. Combining our GPS technology with our leading Bluetooth, Wi-Fi, cellular and other mobile technologies allows leading cellular handset and personal navigation device makers to obtain all of the key wireless connectivity solutions from a single source.
Wireless Combination Chips
Consumers increasingly expect their portable media devices to be able to seamlessly communicate with other devices, such as TVs, PCs, printers, remote speakers, headsets and car stereos, utilizing a wide variety of wireless technologies. At the same time, our customers are continually seeking to lower their costs, extend the battery life of their devices and bring new products to market quickly. To meet these demands, we have developed a family of combination chip, or “combo chip”, solutions that integrate multiple discrete wireless technologies into a single-chip solution. For example, we offer combo chip solutions that integrate a complete Bluetooth system (radio and baseband), Wi-Fi radio and baseband and a high performance FM stereo radio receiver into a single die. With these combo chips, makers of multimedia cell phones and digital media players enabled with Broadcom Bluetooth technology can conveniently add Wi-Fi and FM radio functionality to their products while maintaining optimal power, size and cost. In addition, we offer combo chip solutions that combine our Bluetooth and FM technologies onto a single silicon die and a combo chip solution that combines our Bluetooth, GPS, and FM technologies onto a single device.
The cellular handset is transitioning from a pure voice device to a broadband multimedia gateway. Products emerging from this transition allow end users to wirelessly download email, view web pages, stream audio and video, play games and conduct videoconferences with cellular phones, smartphones, notebook computers and other mobile devices.
The international Global System for Mobile Communication, or GSM, standard is currently the most popular standard for cellular mobile communications. Enhanced data communications standards derived from GSM include General Packet Radio Services, or GPRS, Enhanced Data Rates for GSM Evolution, or EDGE, and Universal Mobile Telecommunications System, or UMTS. UMTS technologies, including Wideband Code Division Multiple Access, or WCDMA, and High Speed Packet Access, or HSPA, are typically referred to as 3G technologies. These standards have extended GSM to enable “always on” Internet applications and more efficient data transport with higher transmission rates and better network utilization for a new generation of data services such as Internet browsing, 3D gaming and multimedia messaging with rich graphics and audio content.
We develop and market GSM, GPRS, EDGE and UMTS chipsets and reference designs with complete software and terminal solutions for use in cellular phones, cellular modem cards and smartphones. Our CellAiritytm cellular platform includes baseband processor solutions, which integrate both mixed-signal and digital functions into a single chip as well as our single-chip HSPA processor ‘phone-on-a-chip’ solution that enables manufacturers to build next generation 3G phones with breakthrough features, sleek form factors and an extended battery life. In conjunction with our hardware platform solutions, we offer full software suites for a variety of operating systems to enable complete phone designs by our customers.
Mobile Multimedia Processors
Multimedia has become increasingly prevalent in handheld devices such as cellular phones, Internet appliances and portable media players. To support new multimedia features including imaging, graphics, camera image capture, audio capture, music playback, music streaming, video streaming, video capture, gaming, mobile TV, and more, Broadcom offers our VideoCore® line of video and multimedia processors based on a low power, high performance architecture.
Unlike hard-wired only processor cores, VideoCore processors are built to provide customers the benefit of software flexibility and programmability, as well as low power from hardware acceleration. The programmability delivered by a powerful vector processor enables OEMs to quickly port new and evolving codecs. VideoCore products integrate dedicated hardware blocks for high performance, low power 2D and 3D graphics, high definition 720p and 1080p video recording and playback, and an image signal processor, or ISP, for still image processing. This combination of programmability and dedicated low power hardware enables OEMs to deliver compelling products and an easy migration to new technologies made popular by ever changing Internet applications.
Our VideoCore products can be used either as standalone multimedia processors or as co-processors in conjunction with a host processor such as a cellular baseband.
Mobile Application Processors
The increasing popularity of multimedia features in cellular phones and other portable devices, such as mobile televisions and portable audio, video and gaming devices, is generating a demand for high-end applications processors optimized to work with video and camera capabilities at prices affordable to consumers. Our family of mobile application processors, which integrate our VideoCore multimedia processor and an ARM® RISC processor, software, and reference designs, enable an array of multimedia features, including support for high megapixel digital cameras, HD video encoding and decoding, and TV signal output via composite, component and S-video connections. In addition, the ARM processor runs the operating system found in smart phones and other embedded devices. Our mobile applications processors also support advanced mobile device applications such as e-mail, web browsing, file management and graphical user interfaces.
Mobile Power Management
Increasingly sophisticated functionality and applications are becoming available in new cellular handsets and other portable devices. However, each of these applications adds to the power consumption and power management complexity of the overall system, creating a need for more sophisticated battery charging, monitoring, and highly efficient power supplies and audio drivers. Portable device makers are seeking advanced power management solutions that reduce total system cost, occupy very little board space and are flexible and scalable enough to manage even the most demanding power requirements. Broadcom provides a family of power management devices that intelligently manage power consumption in mobile devices to optimize system operation and maximize battery life in cellular phones, personal navigation devices, and personal media players.
Touch screen functionality is an increasingly popular feature on mobile devices, with many new cellular handsets and portable media players allowing users to access content and navigate menus and graphical user interfaces with the touch of a finger. We provide custom designed low power touch screen controllers to help enable this functionality.
Voice over Internet Protocol
Voice over Internet Protocol, or VoIP, refers to the transmission of voice over any IP packet-based network such as Ethernet. VoIP is stimulating dramatic changes in traditional public switched and enterprise telephone networks since packet-based networks provide significant economic advantages over traditional circuit-switched voice networks. The trend to IP networks for voice has been driven by the significant build-out of the Internet and deregulation of long distance and local phone services. A host of new enterprise services can be enabled when a LAN-based Ethernet switching infrastructure is used to carry both data and voice. Within residential markets, VoIP is gaining momentum as a viable alternative to traditional public telephone networks. In addition to enabling cost savings for long distance calls, VoIP creates a number of consumer product opportunities and applications for equipment vendors and service providers.
Our VoIP phone silicon and software solutions integrate packet processing, voice processing and switching technologies to provide the quality of service, high fidelity and reliability necessary for enterprise telephony applications. Our portfolio also features terminal adapter VoIP solutions that enable existing analog phones to be connected to broadband modems via Ethernet. These products support residential VoIP services that are now being offered by a variety of broadband service providers. Our VoIP solutions allow carriers and service providers to offer low cost and high quality telephone services that can be bundled with high-speed Internet access, IPTV and a host of converged wireless capabilities. By combining our VoIP solutions with our video and mobile multimedia processors, our customers can create scalable solutions that enable the transmission of voice, video data and multimedia content over an IP network.
All of our VoIP processors support our SmartAudio® and BroadVoice® technologies, which feature a wideband high fidelity mode that significantly improves the clarity and quality of telephony voice services.
Enterprise Networking Reportable Segment
Through our Enterprise Networking reportable segment, we design and develop complete silicon and software solutions for infrastructure that is scalable, secure, and easy to manage for service provider, data center, enterprise and small-to-medium business, or SMB, networks. Our solutions leverage industry-proven Ethernet technology to promote faster, ‘greener’ and more cost-efficient transport and processing of voice, video, data and multimedia across both wired and wireless networks. Our products are found in a wide variety of networking equipment including Ethernet switches, routers and gateways, security appliances, DSLAMs, 3G/4G wireless backhaul equipment, cable and VoIP hardware, desktop and notebook computers, servers and storage appliances, and network-attached printers. Net revenue from our Enterprise Networking reportable segment represented 23.5%, 27.0%, and 30.2% of our total net revenue in 2009, 2008 and 2007, respectively.
Local Area Networking
Local area networks, or LANs, consist of various types of equipment, such as servers, workstations and desktop and notebook computers, interconnected by copper or fiber cables utilizing a common networking protocol, generally the Ethernet protocol. Ethernet can scale in speeds ranging from 10 Megabits per second, or Mbps, to 40 Gigabits per second, or Gbps. As the volume and complexity of network traffic continues to increase, technologies such as Gigabit Ethernet, or GbE, a networking standard that supports data transfer rates of up to one Gbps, and the 10 Gigabit Ethernet, or 10GbE, standard, which supports data transfer rates of up to 10 Gbps, are replacing older technologies such as Fast Ethernet, which can only support data transfer rates of up to 100 Mbps.
Gigabit Ethernet has emerged as the predominant networking technology for desktop and notebook computers, and we expect server and backbone connections to continue to migrate to the newer 10 Gigabit Ethernet standard. Convergence around the 10GbE standard will allow massive data flow from remote storage sites across the country over metropolitan area networks, or MANs, and into corporate LANs, without unnecessary delays, costly buffering for speed mismatches or latency, or breaks in the quality of service.
Our complete line of highly integrated, low power SoC solutions includes Ethernet transceivers, controllers and switches for servers, workstations, desktop and notebook computers, VoIP phones, switches and routers, wireless access points and network infrastructure products. These solutions enable users to share Internet access, exchange graphics and video presentations, utilize VoIP and video conferencing services, and share peripheral devices, such as printers and scanners. In addition, we incorporate intelligent networking functionality into our devices, enabling system vendors to deploy quality of service (QoS) features and applications, found typically in the core of the network, to every corporate desktop.
Ethernet Transceivers. Our complex Ethernet transceivers are built upon a proprietary digital signal processing, or DSP, communication architecture optimized for high-speed enterprise network connections. Our DSP silicon core enables interoperability and robust performance over a wide range of cable lengths and operating conditions. We offer a variety of single port and multi-port products ranging from 10 Mbps up to 40 Gbps speeds. We believe this equipment can significantly upgrade the performance of existing networks without the need to rewire the network infrastructure with fiber or enhanced copper cabling. These Ethernet transceivers are driving the market towards lower power and smaller footprints, making it easier and less expensive to build Ethernet network interface cards, or NICs, switches, hubs and routers, and to put networking chips directly on computer motherboards in LAN on motherboard, or LOM, configurations.
Gigabit Ethernet Controllers. Built upon multiple generations of Ethernet media access controller , or MAC, technology, our NetXtreme® family of Gigabit Ethernet controllers supports peripheral component interconnections, or PCI®, PCI-X® and PCI Express® local bus interfaces, for use in NIC and LOM implementations. The NetXtreme family includes comprehensive solutions for servers, workstations, and desktop and notebook computers. These devices incorporate an integrated Gigabit Ethernet physical layer, or PHY, transceiver and are provided with an advanced software suite that supports a variety of operating systems. The NetXtreme architecture also features a processor-based design that enables customers to run advanced management software in firmware so they can remotely upgrade it through simple downloads. The entire NetXtreme controller family incorporates security features, including integrated Trusted Platform Module, or TPM, functionality, to enable PC manufacturers to offer hardware-based security as a standard feature on enterprise client personal computers.
Ethernet Switches. We offer switch-on-a-chip products ranging from low cost, unmanaged and managed, Layer 2 to high-end managed, Layer 3 through Layer 7 enterprise class switch chips. We also offer high-end metro Ethernet scalable switch solutions with applications that include Carrier Ethernet switches and routers, next generation transport equipment, synchronous optical network/synchronous digital hierarchy, or SONET/SDH, telecommunications equipment and Ethernet access equipment. Our Carrier Ethernet switch portfolio offers a broad feature set that enables carrier/service provider networks to support a large number of high value services such as VoIP, IPTV, video-on-demand, HDTV and Internet gaming. In addition, we provide networking software that enables communications system manufacturers to reduce development costs and deliver IP/Ethernet products to market faster.
For SMB applications, our ROBOswitch-plustm product family consists of Layer 2+ Ethernet switches, and our ROBO-HStm product family supports single-chip networking solutions for Layer 2+ Gigabit Ethernet configurations. In 2008 we introduced a family of 65 nanometer GbE switches for this market with full Layer 2 switching to address the feature set and port density requirements of today’s SMB networks. The entire family is designed to support lower power modes and comply with industry standards while utilizing packaging materials free of lead and other harmful toxins creating truly ‘green’ products for the SMB market. To address multi-tenant unit and multi-dwelling unit applications, we also offer a family of Layer 2 managed switches that are designed specifically for the service provider market in Asia to address Internet connectivity and the delivery of high bandwidth content, such as multimedia, to densely populated residential and commercial buildings. Our highly integrated family of switch products combines the switching fabric, MACs, Fast Ethernet and Gigabit Ethernet transceivers, media independent interface and packet buffer memory in single-chip solutions. These chips enable manufacturers to develop multiple switch design options that combine plug-and-play ease-of-use, scalability, network management features and non-blocking switching performance at optimal price points for the SMB market.
For enterprise applications, our StrataXGS® product family provides the multi-layer switching capabilities of our earlier StrataSwitch® II technology with wire-speed Gigabit and 10 Gigabit Ethernet switching performance for enterprise business networks. Our newest StrataXGS IV family of single-chip switches enables the scalability necessary for data center 3.0 applications, the security required for enterprise networks, and the protocols and quality of service needed to implement next generation service provider networks. We also provide the StrataXGS HiGigtm high-density switch fabric that provides a one-half terabit of packet switching capacity on a single chip that can scale to multi-terabits of capacity on a single backplane. These multi-layer switches are capable of receiving, prioritizing and forwarding packets of voice, video, data and multimedia at high speeds over existing corporate networks. The StrataXGS family also enables advanced network management capabilities in the switching infrastructure to track data flows and monitor or control bandwidth on any one of these flows. This results in a more intelligent use of network resources and enables a whole new set of network service applications that require high bandwidth, reliable data transmission, low latency and advanced quality service features such as streaming video and VoIP.
Metropolitan and Wide Area Networking
We offer a portfolio of CMOS OC-48 and OC-192 transceiver and forward error correction, or FEC, solutions, chips for synchronous optical networks and dense wave division multiplexing, or DWDM, applications, as well as a serial CMOS transceiver for 10GbE applications to allow MANs and WANs to address increasing volumes of data traffic. Our use of the CMOS process allows substantially higher levels of integration and lower power consumption than competitive solutions. Optical communications components are a natural extension of our large portfolio of high-speed LAN chips, and allow us to provide end-to-end semiconductor solutions across the WAN, MAN and LAN to increase the performance, intelligence and cost effectiveness of broadband communications networks.
Security Processors and Adapters
Our SSL family of CryptoNetX® high-speed security processors enables companies to guard against Internet attacks without compromising the speed and performance of their networks. These processors are built upon a proprietary, scalable silicon architecture that performs standards-compliant cryptographic functions at data rates ranging from a few Mbps to 10 Gbps. This architecture is being deployed across all of our products, addressing the entire broadband security network spectrum from residential applications to enterprise networking equipment. This scalable architecture allows us to develop standalone security products for very high-speed networking applications as well as to integrate the IP security processor core into lower speed solutions for consumer products, such as cable and DSL modem applications. We also offer a family of secure applications processors for use in PC and desktop solutions and point of sale devices. These new security solutions integrate an on-chip ‘vault’ architecture that houses the credentials and processes all secure transactions rather than running secure applications on the main system processor, which is at greater risk of tampering and theft.
Broadband processors are high performance SoC solutions that enable high-speed computations to identify, optimize and control the flow of data within the broadband network. With the migration from second generation cellular mobile systems, or 2G, to the third generation cellular mobile systems, or 3G, and with the continued growth of IP traffic and demand for new services and applications, networks and mobile infrastructure equipment must also be able to support higher bandwidth rates utilizing low power resource levels.
Leveraging our expertise in large scale integration design, we have developed a family of high performance, low power processor solutions designed specifically to meet the needs of next generation networks. This family of processors delivers four key features essential for today’s embedded broadband network processors: (1) very high performance; (2) low power dissipation; (3) high integration of network-centric functions; and (4) programmability based on an industry-standard instruction set architecture. These processors provide customers with a solution for high-speed network processing, including packet classification, queuing, forwarding and exception processing for wired and wireless networks. They enable complex applications such as deep content switching, routing and load balancing to be performed at wire speed.
Custom Silicon Products
Custom silicon products are devices for applications that customers are able to semi-customize by integrating their own intellectual property with our proprietary intellectual property cores. We have successfully deployed such devices into the LAN, WAN and PC markets. Our typical semi-custom devices are complex mixed-signal designs that leverage our advanced design processes.
Licensing of Intellectual Property
We also generate licensing revenue and related income from the licensing of our intellectual property. The vast majority of our licensing revenue and related income to date has been derived from agreements with two customers, Verizon Wireless and QUALCOMM Incorporated, or Qualcomm. See detailed discussion in “Overview” section in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations. This licensing revenue and related income represented 4.2%, 3.2%, and 0.8% of our total net revenue in 2009, 2008 and 2007, respectively.
We also develop reference platforms designed around our integrated circuit products that represent prototypical system-level applications for incorporation into our customers’ products. These reference platforms generally include an extensive suite of software drivers, as well as protocol and application layer software, to assist our customers in developing their own end products. By providing these reference platforms, we can assist our customers in achieving easier and faster transitions from initial prototype designs to final production releases. These reference platforms enhance the customer’s confidence that our products will meet its market requirements and product introduction schedules.
Customers and Strategic Relationships
We sell our products to leading wired and wireless communications manufacturers. Because we leverage our technologies across different markets, certain of our integrated circuits may be incorporated into products used in several markets.
Customers currently shipping wired and/or wireless communications equipment and devices incorporating our products include Alcatel, Apple, Cisco, Dell, EchoStar, Hewlett-Packard, LG, Motorola, Netgear, Nintendo, Nokia, Pace, Samsung, and Thomson CE, among others. We have also established strategic relationships with multiservice operators that provide wired and wireless communications services to consumers and businesses.
A small number of customers have historically accounted for a substantial portion of our net revenue. Sales to our five largest customers represented 34.6%, 35.8% and 39.7% of our net revenue in 2009, 2008 and 2007, respectively. See Note 12 of Notes to Consolidated Financial Statements, included in Part IV, Item 15 of this Report. We expect that our key customers will continue to account for a substantial portion of our net revenue in 2010 and in the foreseeable future. These customers and their respective contributions to our net revenue have varied and will likely continue to vary from period to period. We typically sell products pursuant to purchase orders that customers can generally cancel, change or defer on short notice without incurring a significant penalty.
Using proprietary technologies and advanced design methodologies, we design, develop and supply complete SoC solutions and system-level software, together with related hardware and software applications. Our proven SoC design methodology has enabled us to be first to market with advanced chips that are highly integrated and cost-effective, and that facilitate the easy integration of our customers’ intellectual property. Our design methodology leverages industry-standard, state-of-the-art electronic design automation tools, and generally migrates easily to new silicon processes and technology platforms. It also allows for the easy integration of acquired or licensed technology, providing customers with a broad range of silicon options with differentiated networking and performance features.
We believe our key competitive advantages include superior engineering execution and our broad base of core technologies encompassing the complete design space from systems to silicon. We have developed and continue to build on the following technology foundations:
• proprietary communications systems algorithms and networking protocols;
• advanced microprocessor and DSP hardware architectures;
• proprietary SoC design methodologies and advanced library development for both standard cell and full-custom integrated circuit design;
• high performance radio frequency, analog and mixed-signal circuit design using industry-standard CMOS processes;
• extensive software reference platforms and board-level hardware reference platforms to enable complete system-level solutions.
Research and Development
We have assembled a large team of experienced engineers and technologists, many of whom are leaders in their particular field or discipline. As of December 31, 2009 we had 5,535 research and development employees, the majority of whom hold advanced degrees, including 546 employees with Ph.Ds. These key employees are involved in advancing our core technologies, as well as applying them to our product development activities. Because the SoC solutions benefit from the same underlying core technologies, we are able to address a wide range of wired and wireless communications markets with a relatively focused investment in research and development.
We believe that the achievement of higher levels of integration and the timely introduction of new products is essential to our growth. While we intend to continue to manage our costs and expenses to attain our long-term business objectives, we will need to maintain significant research and development staffing levels in 2010 and for the foreseeable future. We have design centers throughout the United States, including our principal design facilities in Irvine, California and Santa Clara County, California. Internationally, we have design facilities in Asia, Europe and Canada. We anticipate establishing additional design centers in the United States and in other countries.
Our research and development expense was $1.535 billion, $1.498 billion and $1.349 billion in 2009, 2008, and 2007, respectively. These amounts included stock-based compensation expense for employees engaged in research and development of $351.9 million, $358.0 million and $353.6 million in 2009, 2008 and 2007, respectively.
We depend on five independent foundry subcontractors located in Asia to manufacture substantially all of our products. Our key silicon foundries are Taiwan Semiconductor Manufacturing Corporation in Taiwan, GlobalFoundries, Inc. (formerly Chartered Semiconductor Manufacturing) in Singapore, Semiconductor Manufacturing International Corporation in China, Silterra Malaysia Sdn. Bhd. in Malaysia and United Microelectronics Corporation in Singapore and Taiwan, several of which maintain multiple fabrication facilities in various locations. See “Risk Factors” under Item 1A of this Report for a detailed discussion of the risks associated with our dependence on independent foundry subcontractors.
Most of our products are manufactured using CMOS process technology. The processes we select permit us to engage independent silicon foundries to fabricate our integrated circuits. By subcontracting our manufacturing requirements, we can focus our resources on design and test applications where we believe we have greater competitive advantages. This strategy also eliminates the high cost of owning and operating semiconductor wafer fabrication facilities.
Our products are currently fabricated on a variety of processes ranging from 500 nanometers to 65 nanometers. We evaluate the benefits, on a product-by-product basis, of migrating to smaller geometry process technologies. The majority of our products are currently manufactured in 130 nanometers and 65 nanometers, and we are designing most new products in 65 nanometers and 40 nanometers. See “Risk Factors” under Item 1A of this Report for a detailed discussion of the risks associated with transitioning to smaller geometry process technologies.
Our operations and quality engineering teams closely manage the interface between manufacturing and design engineering. As a result, we are responsible for the complete functional and parametric performance testing of our devices, including quality. We employ an operations and quality organization to work very closely with semiconductor wafer manufacturers. We also arrange with our foundries to have online work-in-process control.
Assembly and Test
Our wafer probe testing is conducted by either our independent foundries or independent wafer probe test subcontractors. Following completion of the wafer probe tests, the die are assembled into packages and the finished products are tested by one of our three primary subcontractors for testing: United Test and Assembly Center in Singapore, EEMS in Singapore and Advanced Semiconductor Engineering (ASE) in China and Taiwan. Our eight key subcontractors for assembly are: Advanced Semiconductor Engineering in China and Taiwan; Amkor in Korea, Philippines and China; ASAT in China; EEMS Test Singapore in Singapore and China; Signetics in Korea; Siliconware Precision in Taiwan; STATSChipPAC in Singapore, Korea, Malaysia and China; and United Test and Assembly Center in Singapore and Thailand. The availability of assembly and testing services from these subcontractors could be materially and adversely affected in the event a subcontractor experiences financial difficulties in the current global economic environment, or if a subcontractor suffers any damage to or destruction of its facilities, or in the event of any other disruption of assembly and testing capacity. See “Risk Factors” under Item 1A of this Report for a more detailed discussion of the risks associated with our dependence on third party assembly and test subcontractors.
As of December 31, 2009 we had 7,407 full-time, contract and temporary employees, including 5,535 individuals engaged in research and development, 707 engaged in sales and marketing, 534 engaged in manufacturing operations, and 631 engaged in finance, legal and general administrative activities. Our employees are not represented by any collective bargaining agreement, and we have never experienced a work stoppage. We believe our employee relations are good.