Broadcom's CEO Presents at Citi 2013 Global Technology Conference

Broadcom Corporation (BRCM) Citi 2013 Global Technology Conference September 4, 2013 2:20 PM ET

Executives

Scott McGregor - President, Chief Executive Officer

Analysts

Glen Yeung - Citi

Glen Yeung - Citi

Good morning, everybody. This is Day 2 in the afternoon of Citi’s 2013 Global Technology Conference. I’m Glen Yeung. I’m Citi’s Head of Global Technology Research and also U.S. semiconductor analyst.

I have been saying this in every meeting but another interesting discussion with a chip company Broadcom, who has some very interesting announcements to make this morning. Scott McGregor is the President and CEO of Broadcom. Scott is going to start off by doing a few slides about this morning announcements so we get the benefit of what is said in the conference call today. I will then move to Q&A. And we will try to leave some room towards the end – we will get more room towards the end for Q&A than we have other meetings since this room is very full. Scott McGregor, the floor is yours.

Scott McGregor

Great. Thanks for everybody coming today. So this morning, we had a transaction where we acquired the LTE assets from Renesas Electronics. And we paid $164 million in foreign cash for the transaction. The timing has already been approved by both Board of Directors and we expect the transaction to close quite quickly on October 1st.

The growth of this and financial impact was follows, we believe that our revenue for LTE will accelerate into early 2014, we believe that on a non-GAAP, the EPS impact is as follows, it will be about $0.12 dilutive in Q4 of this year, it will be about $0.10 to $0.15 dilutive in the first half of 2014, we believe it will be neutral by the second half of 2014 and accretive in 2015.

In the second half of 2014, there will be still some incremental OpEx but we also believe we will have significant revenue by then to help cover the OpEx.

In terms of the OpEx, we will start off at about $75 million a quarter in Q4 and that will decline as incremental OpEx to a little less than $30 million per quarter in the latter part of 2014.

So why are we doing this? The rationale is that we expect this will accelerate our LTE kind of market significantly and get us into early 2014. Renesas product that we have acquired is a multimode, multiband, dual-core Cat 4 SoC, it’s a dual A9. It’s carrier validated today. It’s been carrier validated at AT&T, ATT DoCoMo, Orange, Vodafone and EE in Europe. So this is a very solid product. We expect to turn into a quad-core product by the middle of next year, we will offer that as well. So have a dual-core and a quad-core version available by mid-2014.

This substantially increases Broadcom’s IP portfolio and our talent base as well. This is the original Nokia modem team, it started work on LTE, a better part of a decade ago. These are some of the guys who created the LTE standard and were involved in the original algorithm work of LTE long before other companies were developing LTE, so we believe we found some really good talent here.

Also includes some patents, we got about 1500 patents and patent applications related to LTE, we acquired as part of the – which we think is a significant as well. This substantially strengthens our platform offerings. It gives us a, really a well-proven product here that will allow us to integrate, will take our existing spin modem products and replace the modem in those with these modems. So we have a single modem going forward.

We will be able to take all of these products. We will have again a carrier certified modem, will be able to integrate that and support that with the rest of Broadcom’s IP portfolio including our connectivity products.

This is a sense of what products we have available now and available to ship in early next year is a dual-core, this is FDD, TDD, LTE CAT 4 product. It has all of the 3G protocols and 2G protocols and it also has voice-over-LTE which is very interesting to some carriers and it is a dual-core A9.

In the middle of the year, we will also spin the quad version of this, then you can see the equivalent of that over on the right-hand side of this slide.

This a chart that shows the contributions from each of the companies, on the left-hand side, the acquired efforts we picked up from Renesas, on the right-hand side what we have at Broadcom and we had underdevelopment. And I think the real point here is the carrier validated LTE and carrier validated Cat 4 that they bring and also the 3G standards and they have a carrier qualified VoLTE as well which we think is very interesting technology that’s not something you can easily get from other companies.

They are also working on carrier aggregation and envelope tracking, Broadcom brings in the same categories of development – we were under development with all of these things but they accelerate the carrier certified part and you can see that we also bring things like TD-SCMDA which they were missing which will enable us to deploy into China.

On multimedia and connectivity, we both had APs and GPUs, but Broadcom really shines in terms of the rest of the connectivity portfolio you can see here. We plan to converge as fast as possible and so we will have an integrated technology roadmap with both products fully integrated by the middle of next year.

So today’s transaction in summary, we really believe this accelerates Broadcom LTE to market, there are now only two players on the planet that have carrier certified LTE products like this. It enhances our differentiation. We got not only carrier validated modem products but the full product set including all the connectivity products. We believe this positions Broadcom as a technology leader in LTE going forward.

So with that I will stop and Glen, let you ask a few questions.

Glen Yeung - Citi

Yes. Scott what I think I will do is, I will ask a few about this transaction, I think at that point I’m going to open it up to audience, they can ask about the specific transaction and once we get after that –

Scott McGregor

We do have some other cool businesses.

Glen Yeung - Citi

LTE? I will come back to those. So one of the questions I have is, theme which required a few years ago, how does it impact and what you have been doing there and some of that work now what you stopped there?

Scott McGregor

So certainly some work is duplicated between the two teams and we will look at that and bring that together both as a converged team and as a converged roadmap. There is also some stuff we were doing in the seam. I think the Renesas in its last year had some financial troubles and they do stop working on a lot of the advanced features in LTE and so that’s something we were spending a lot of time and energy doing. So we will be able to bring those advance LTE features together with the Renesas modem and I think create a product that not only has the stability that they offer but also the advanced features we are working on.

Glen Yeung - Citi

When you talk about the incremental cost at cash list and eventually come down, is that rationalizing the assets that you have with the team and the Renesas together is that how you get the cost?

Scott McGregor

Yes.

Glen Yeung - Citi

Both had a conference. And then thought process around integration of all the devices that you have now, i.e. base and AP and connectivity. And I’m just back from Asia where talking to ODMs, the OEMs other players in the market, you really got a sense that the platform approach is increasingly important especially if the market is kind of down shift to lower end. Is that one of the critical goals of what you are trying to achieve here and is that something you think you can get done in a reasonable timeframe?

Scott McGregor

Yes, absolutely. I think platform approach is very important to a lot of other customers for a variety of reasons in terms of power, efficiency, small foot print on device, one vendor to beat up. I mean there is a lot of advantages for that. It makes the most sense I think in the low end because the technology is less critical and the companies are less interested in getting best of class in each of the components, you get good enough is good enough.

I think as you go more towards mid an high-end, you are going to see more discreet solutions and I think this really positions Broadcom is able to deliver a variety of discreet solutions and platform solutions and really need to meet our customers.

Glen Yeung - Citi

Granted since you are a wide array of products that you could deploy, is there a focal point, it is and basically let’s see oriented more towards the low end or the mid-range?

Scott McGregor

I’d say we are looking for not the very lowest but everything about that.

Glen Yeung - Citi

Yes.

Scott McGregor

All the way up to high-end. This is really an opportunity I think for us to have advance LTE, if you chose to target high-end phones, mid-range phones and down into the low end of it. I don’t think we will target the very cheapest phone. But, I think we can create very, very cost effective phones with this for smartphone.

Glen Yeung - Citi

Are you sort of geography agnostic recognizing this is qualified in the U.S., is your mindset that it is opportunity for meeting in places like China.

Scott McGregor

Well, to be fair this is qualified in Japan, all over Europe and the U.S. so far. It’s very much our intension to qualify in China. And you saw one of the pieces that Broadcom brings to the party is TD-SCDMA that’s the one piece in the worldwide perspective that wasn’t in the Renesas modem. And so we will add Broadcom’s TD-SCDMA and then we will have full five mode TD, FT LTE TD-SCDMA 3G and 2G product.

Glen Yeung - Citi

I don't know you can answer this but was there a motivation here to keep these assets away from somebody else?

Scott McGregor

No, that was not out motivation. Our motivation was primarily to get time to market. I think there was some concern that if Broadcom didn’t have parts in the market until the latter part of 2014, the risk is we would be quote in the pack with others. And I think this really takes us out of the pack. I mean, again, there are only two guys today that have this level of certification and puts us into a clear number two position. And now I think puts the challenge on the guys who are in the pack how are they going to catch up in terms of getting certified and getting product output, gives us a clear jump.

Glen Yeung - Citi

Okay. Let’s take five or 10 minutes now, if there are questions from the audience, about this part of the business that might be a decent time to do that. Probably in the front here?

Question-and-Answer Session

Unidentified Analyst

Would you say a competitive process as in today have full blown option and you are competing in some of the other – some of your other peers that were looking to LTE market or is it something that you guys were able to source in kind of?

Scott McGregor

It was a competitive process on two rounds, that was a competitive process within about firstly with no bidders and then there was a competitive process that had multiple bidders and we were the winner in the second round.

Glen Yeung - Citi

Anyone else have other question, one here in the front?

Unidentified Analyst

The price seems to be modest in my view, relative to what it brings to the table. And what was – I think we started discussing seriously before the presentation was how come you didn’t buy them earlier to save yourself of this trouble during the year?

Scott McGregor

I think you can look at the price as modest for what it brings certainly that’s true from our perspective. But you have to understand that this asset is only of value if you already have a lot of other pieces. If you are not in baseband at all this asset is not that valuable because it doesn’t include any of the SoC pieces, it doesn’t include any application processor pieces, it doesn’t include a lot of what you need to make a cellular product its really just the modem.

So it’s a little bit like you are buying just the engine of a car, if you don’t happen to have a car you can put it in, its not that interesting to put on your shelve doesn’t do much by itself. It really acquires if you have all the other pieces. And I think this was unusually valuable for Broadcom because of the specific pieces that they had what help us. And the pieces they were missing happened to be all the other things we have. So for us, it probably had higher value than to a lot of other players. I think it was perhaps a surprise to the seller that they didn’t get more for it but they found that out in the first bidding round.

Again, you need a very specialized buyer for this. I think they had gone to theThis will be funded in cash point where they have decided to shutdown the business and they had actually terminated all the employees in this business, okay. So for them it was a choice of paying severance fees for the people they already terminated or they could get a check which I think was attractive.

Glen Yeung - Citi

Over here.

Unidentified Analyst

Hi, how will this be funded and when will the deal close?

Scott McGregor

This will be funded in cash – it's foreign cash. The deal will close on October 1st.

Glen Yeung - Citi

One here, in the back?

Unidentified Analyst

So the EPS goals you read out, were those based on just the revenue growth from the acquired business and included any kind of OpEx adjustment on the -- your own organic LTE investment?

Scott McGregor

The EPS numbers we showed for dilution are specific to this deal and the incremental value that this deal brings.

Glen Yeung - Citi

Scott, two questions. Can you describe, is it – the simple process just to integrate the Renesas assets LTE assets with your existing platform or do you have to rewrite code and redesign silicon?

And then the second question I have is, when we – when will Broadcom have TD-SCDMA out?

Scott McGregor

So the first question is, is this a simple process no, its not a simple process. Something require many hundreds of engineers a long time to do. But it’s a straight forward process and we prior to doting this transaction, we have had extensive meetings with the teams together, planning the process and we got to extensive project plans now to do exactly that. So we believe we understand very well what we need to do. Fortunately a lot of what we need to do is helped by the fact that a lot of these pieces are very modular and have clearly defined interfaces between them and silicon, cleaning up interface players rather than rewriting a lot of stuff.

We also have some advantages in that if you recall Broadcom’s first large modem customer was Nokia. And this is the Nokia modem team and so they are sort of already familiar with how each other works. And some of our stuff was done originally to be more compatible with this technology. And so its more here that what’s relevant you might get just looking at the names of the companies and things like that.

So is it simple no, straight forward, yes and then when we will make TDSC available, we believe we will have TDSC made available for sampling in the middle of next year.

Glen Yeung - Citi

Okay. I’m just going for our two last questions on this sort of on the topic because related to this announcement there was an updated guidance which included SG&A and R&D that was above the prior range, was this a result of the transaction first of all?

Scott McGregor

Not exclusively, the higher OpEx is into a combination of some accruals but the legal cost of doing this transaction, it’s a very complex transaction involves a lot of work with some of the European work councils and things like that and that drove some of the costs there.

Glen Yeung - Citi

But then also a little bit one time in nature?

Scott McGregor

Yes.

Glen Yeung - Citi

Okay. And the second one, is that you actually modestly increased your gross margin guidance what was driving that?

Scott McGregor

That’s correct. We increased our gross margin guidance from up 50 basis points, up 50 to 100 basis points. And the driver behind that was product mix and primarily in the ING space, our networking infrastructure business is doing quite well.

Glen Yeung - Citi

Well, let’s just (inaudible). What exactly is driving that business because the data points sort of depending on the U.S. but they are a little bit mixed in that space. So tells us what’s driving that strength for U.S. again?

Scott McGregor

So our infrastructure business grew 19% sequentially last quarter. Very, very strong performance after frankly a couple of years of soft industry. We believe that business is doing quite well and we guided up this quarter again. Business has a number of things going in its favor, we’re seeing resumption of CapEx spending by a number of the service providers and countries like China and now in the United States with some of the U.S. cellular carriers increasing their CapEx as well as they deploy infrastructure and that plays in our favor.

We also have some product cycles for example in our switch area, the Trident 2 product is an extremely strong product, won most customers in that space and as that launches and rolls out, we think that will be something that will give us a bit of lift going forward.

Glen Yeung- Citi

Can you just spend a bit more time talking about wireless infrastructure, how is Broadcom exposed to that market and you mentioned China and maybe just give us your thoughts on how that particular ramp is going to play out over the next few quarters?

Scott McGregor

So Broadcom participates in the wireless infrastructure in a number of ways. We have a very strong business in backhaul both in the fiber optics link that come out of these; there are some smaller ones used other kinds of technologies and there are also microwave backhaul. We have probably the best merchant solution for the microwave backhaul or cellular base stations, we also have the switch which is in a lot of base stations, typical base station architecture still have a number of radios and transceivers and then will have a switch that links all the data to the backhaul. And we have a extremely high market share position in that. And increasingly, we have some share on processor side where those processors in there as well. And we have a little bit in some of that front ends and other technology. Our plan is to grow that over time. And so generally if infrastructure spend goes up that’s a good thing for us.

Glen Yeung - Citi

It’s hard I know for companies to do it. Because base stations are obviously different from, well, they are always very different but can you give us a sense as to what your revenue opportunity is for base stations, so let’s think about it that way?

Scott McGregor

Yes. I don't have a number for you there Glen. I mean certainly its double digit dollars and I think it depends a lot on the base stations and what’s in it and what's not. I think as we continue to increase our share of the content of base stations both in terms of the number of chips we do in a base station and then the share in terms of the number of customers we have, I expect to see that go up over time and that’s the area of work.

Glen Yeung - Citi

And how enthusiastic are you about the potential for growth in the market itself, right, China obviously made some announcements, you can arguably, if we are going to get some announcement in Europe as well, what’s your level of optimism there both on a base station perspective and maybe and this what I understand also from backhaul?

Scott McGregor

I think the market for base stations and for networking in general is going to grow significantly. I mean we love these devices. I mean all of us are connected with these things. And as people get more and more LTE devices as they go to Cat 4 and they are able to consume more bandwidth.

As we put cellular connections in our cars as we connect more wearable devices, I mean this is all going to drive the networking band width a lot and we have a certain share in the cellular base stations. But actually, if you look Broadcom on the full network infrastructure, we believe is 99.98% of all of Internet traffic goes across the Broadcom chip. So, it’s not a 100% and still a little more to go but not much. I mean we’ve got tremendous share there and I think as all of our consume more content you know connecting with devices, this is a very, very good positive trend for a Broadcom’s infrastructure business.

Glen Yeung - Citi

We think of Broadcom in the home and in the hand and now we have theoretically a wearable market that be -- is there a Broadcom in the clothes?

Scott McGregor

I believe the wearable markets really an interesting market and there is different names for this, some people say Internet things and they want new refrigerators and other things and cars and what some people refer to as wearables. And they need everything from clothing and fitness monitor or something like that like wearables but there are also dog health monitors and all kind of these funny devices that are coming out today and it’s interesting because on all of these devices, it’s not about the processor, it’s not about some cellular base thing, it’s about the connectivity.

I think the processor is minimal in these things. It’s a very usually low power processor but you wan the battery to last long time. Okay. And many of these devices that we’re working on, kind to run on a coin battery for a year, okay, so, very, very low power. I know some competitors whose processor can’t run on a car battery for a year. Okay. And so, I think that’s a good opportunity there and they’re going to connect in different ways. They’re going to connect in terms of Bluetooth and wireless LAN and NFC and some other technologies that are coming out.

But it’s interesting because the analysts don't have a good judge of that market, there are some that believes it’s going to be a couple of billion, some believe it’s going to be $50 billion and you should have everything in between. We believe it’s a great opportunity would being in products targeted in that market. We’ve got a Bluetooth product. It’s a Bluetooth and a processor in a single device, that will run with a coin battery for a year and we put it in a form factor that’s the size of a button. Okay. We showed it to government manufacturers and you said what can we do with this? You can have lights, you can have it for example the button on your jacket is green when your stock is up and it’s red when your stock is down, you could somebody else suggested something, I think it's kind of cool, you can wear the button on your ski jacket and it could see your Bluetooth device tell you what temperature it is and how much ultraviolet exposure you had so far that day, you probably make that for $10. Okay, I don't know I might buy one of those. So, it’s very interesting what you can do with some of these devices and it's going to be a real interesting market I believe.

Glen Yeung - Citi

That’s fine. I’m 2 billion personally but I guess well, it remains to be seen what that will do. You bring up the point of connectivity though and if you’ve focused that specifically in the handset market, what was obviously had very good market share but recently we’ve seen some sockets go to competitors, we talked earlier about the ideal platform, how much in that figuring into that or is just the case that you can never really hold back kind to high market share for ever?

Scott McGregor

We have a high market share in connectivity because we made great products and we believe that as we continue to innovate in those products, we will continue that strong market share. We don't see any market share in dollar terms eroding in the near future certainly. In terms of reports where people will talk about how we lost the design, frankly you could probably find every month another design that we have not won but what you don't see is the report which other ones we did win.

So probably for balance, you need to look at the totality of the market and we do that in a spreadsheet and that’s why we believe the market is pretty solid there. That innovation constantly driving innovation and connectivity something that we’ve done for many years and for years, people who said, isn’t your share going to go down, isn’t your share going to go down. I think that’s been, maybe six years now, the (peers) said your share has to go down right, your share has to go down right, no, it doesn’t.

Glen Yeung - Citi

And just in that vein, we tend to focus on handsets because it’s very popular today. But the opportunity for you to gain share in modem has not often discussed, right. And so give us a thought there because that’s somewhere where we’re actually Qualcomm/Atheros has historically done relatively well particularly given your (early ATE), how did that shaped up for you?

Scott McGregor

Yes, I think so. I think for us, the shape is to gain share inside the modem is a very big opportunity and when we do, when we do win the modem, we have a very, very high connectivity attach rates, so pretty good when we don’t win the modem but especially if we win the modem and so gaining share there is important for us.

Glen Yeung - Citi

Okay. The other sort of question, its total different now, you made the acquisition today. But thinking about your position in the 3G market, how confident are you with your positioning there and it’s the market to some extent coming to you, because it does, again, maybe its my opinion but it does like a high end market starting to flow and maybe the mid-range, low-range getting the benefit of that?

Scott McGregor

I think the 3G market has suffered a little bit because there are so many competitors in the 3G market. It’s been a bit of a price war in that market and I think all the players even the largest ones that really seen their prices and margins suffer a little bit in that space.

Broadcom has a number of new design wins in the 3G space for rolling out quad core product. And I think that looks pretty good there, really be a big growth driver force, no, I don't think so. If the market is moving very fast towards LTE and I think that underscores the importance of the announcement we’ve made this morning, which is that you really need to have carriers certified LTE products in the market right away and I think we were okay on our products, the second half of next year but that’s not good enough. We really want to do accelerate this forward.

Glen Yeung - Citi

What’s your sense, just sort of thinking about, LTE opportunity in a bigger picture sense because the high end of the market is dominated by two major OEMs for the most part. And to a large extent they would like to use their own silicon to the extent that they can and so maybe the market at the high end is a little limited, how does that figure into your strategic orientation particularly with the LTE – the high-end orientation at least for now?

Scott McGregor

They were two high end customers you are alluding to happen to be our two largest customer. So we work with them well and we try to serve them well and do products that we believe they find attractive. And so that’s a good focus for us. One of our goals also is to diversify our customer base. And I think you will see us expanding to more of the top 10 customers in the cellular space as – over the course of this year and also we are looking to China there are many, many customers in China and we now have a full turnkey team in China that’s already been deploying some of the products we have today and we will now take these new products be acquired this morning’s announcement. And I think we will be able to turn them into LTE products very quickly.

Glen Yeung - Citi

One of the two customers, one could analyze that one of the two customers took some IP in connectivity, what’s yours sense, is that a risk or are they just trying to – I don’t know what they are trying to do but how do you see that?

Scott McGregor

Well, Glen I can’t speak for our customers, you really need to ask them. I observed though that over the last decade, many of our customers have picked up IT some have pondered the idea of doing some chips themselves. So far to-date none of them have been successful doing that. And it takes many, many years in order to do that. Others though sometimes acquire IP and sometimes acquire people in order to help tune the chips they buy from us.

Glen Yeung - Citi

Yes.

Scott McGregor

These days, if you buy a connectivity chip, you need to have a pretty good size of engineering team who understand semiconductors and software in order to be able to make that chip really work well with the platform. And hence the combination of things, be careful not to read too much in the things and again, I can't speak for our customers but could be many things.

Glen Yeung - Citi

Understood. Want to switch gears a little bit and talk about broadband and just first of all, just can you either explain what the growth drivers are -- what are the levers that we as investors have to look at when we are thinking about that business?

Scott McGregor

I think one of the biggest mistakes people make when they look at our broadband businesses, they say well great business, great share, here is the subscriber growth of set-top box in United States, oh, that’s going up like low mid-single digit boring business not interested.

Okay. I think that’s the big mistake because we have been able to outgrow that substantially pretty much every year. And the way we do that is that the broadband group is a great innovative group. They are able to take share as well as to drive new technologies that push the envelope. And I will talk a little bit about each of those.

Broadcom has very high share in the United States and almost as much in Europe and we have not participated as much in the rest of the world and I think part of that was we were focused on the domestic market and the European market. And now we have done a lot of products that are tailored for the markets like mainly emerging markets like South America, Central America, South Asia and many countries beside that and Eastern Europe another one. And so we have seen the opportunity now to go out from relatively low share and take those to relatively high share over the course of the next year. So that’s growth through share growth.

The other is innovation, which is what Broadcom does, I think really well, I think we're arguably the most innovative semiconductor company. And one of the things we have done is, created a new technology and its called HEVC and it’s a way to take the information you send over a cable or satellite link or a wire and send twice as much information at the same bandwidth.

So for example if you are satellite carrier and you got 200 HD channels, this would allow you to have 400 HD channels on the same satellite bandwidth. Okay. If you are a cable set-top box operator twice as many channels or you could compress the channels you already have and add new 4K pay channels. Okay. This is this new 4K2K technology you may have heard of ultra-HD.

If you remember when you first saw an HDTV versus an old standard TV, how great it was. Well, imagine that same scale up in terms of quality of the picture you will see that coming out I think around this Christmas and it will start to get cheaper next Christmas. But the ability to have the bandwidth to transmit that is really important. So the HEVC technology which I think Broadcom is the only one shipping today and in hardwares able to drive that.

And so these are things that will cost cable operators to replace the box you have so they can offer you more services, replace their head-on equipment, replace their other networking equipment.

Glen Yeung - Citi

Is there a link between the growth of 4K and the growth of these type of technologies and can we track the TVs, I think the TV is getting a lot cheaper, a lot faster than people thought.

Scott McGregor

I think that’s definitely true and you can almost assume it’s a 100% chance if they have a 4K TV, they probably get a 4K set-top box.

Glen Yeung - Citi

Yes.

Scott McGregor

Okay. But remember HEVC technology allows the carrier to give you twice as many channels and enable those channels. Okay. So I think you are going to see the HEVC adoption in the carriers go much faster than the TV themselves.

Glen Yeung - Citi

And is that something where – do they have to make a decision at corporate level that we are going to adopt the technology or is it something they have already done and just a deployment issue?

Scott McGregor

Many of them have already done it. It takes them a little while to deploy, they need to do a lot of certification testing and other things. But many of the cable and satellite companies around the world have decided to deploy HEVC simply because it gives them that headroom in that capacity that they don’t have.

Glen Yeung - Citi

And is there a roll for Broadcom in this idea of SmartTV, it had – times in the past it had not gotten off the ground and never done much but it sounds like its got a bit more life to it now?

Scott McGregor

I think you are going to see TVs increasingly get smart. And I don’t know what you guys but in my house today I got a TV that hooks up to the Internet, my Blu-Ray player hooks to the Internet, my Roku player hooks up to the Internet and I have got a few other boxes that hooks up to the Internet. And you could watch your Amazon movies and you can’t remember which box you are watching the Amazon movie on and which remote control to pickup to do something.

I think we have seen smart everything and I believe that trend is going to continue for a while and Broadcom certainly plays a role in terms of the connectivity chips, in terms of networking that access points to the house and a lot of other things.

We used to be in the market making the chip itself for the TV. We don’t do that any more that wasn’t a money maker for us. So we focus on other areas.

Glen Yeung - Citi

All right. We only got a three or four minutes left and I know we already opened up for Q&A with respect to the key acquisition. And if there is a question to any other part of the business (inaudible). One here?

Unidentified Analyst

You touched on couple of things regarding innovation, I was wondering if you can explain your thinking about R&D spending and what other future spend that or innovation we should be thinking about?

Scott McGregor

Broadcom spends a fair amount on R&D, in fact we are the Fortune 500 companies where I think number two on R&D intensity of all the companies and we believe R&D creates a lot value. That being said you had to get a return for it and we are very focused on that. I think you will see Broadcom continue to use R&D as our weapon to drive innovation going forward.

We are investing in a lot of different areas, many of them you are familiar with. But some that we didn’t talk about for example Ethernet technology that Broadcom has done for over a decade, we believe is the future technology of how you are going to network the car and so we are working now on automotive and we believe automotive is going to be an interesting market for Broadcom going forward as many of the car companies have adopted Broadcom’s technology to provide that in the car. So if you need a hook up cameras and sensors and all of that Ethernet is a great technology to do that. But –

Glen Yeung - Citie pay dividends and Br

Can you just remind us on capital return policy given what’s obviously been a pretty meaningful correction in the stock?

Scott McGregor

Sure. Broadcom has about $4 billion of cash about half of that in U.S. cash and about half of that is foreign cash. Structurally the new cash we generate about 2/3rds of it is foreign and about 1/3rd of it is onshore.

And so we typically generate more offshore cash than onshore cash. Of the cash we have, we believe we need about a $1 billion to run the business, the day to day requirements of the business that leaves about $2 billion or 3 billion remaining.

We pay dividends and Broadcom has instituted a dividend policy in the last few years. And our goal is to continue to raise dividends overtime and return more to shareholders doing that. We also look to acquire companies that are accretive to the company’s growth and return. We did something this morning, for example, use foreign cash to do that.

And then we also do share buyback and we do share buyback for two purposes, one is to offset stock-based compensation and so we try to average in a year enough to offset stock-based compensation and then also we are opportunistically in the market when we believe the stock is at a low price and we will more aggressively buyback shares in that case.

I can’t share our trading strategy with you but you can just guess.

Glen Yeung - Citi

May have time for one more please. Okay. If not thanks so much.

Scott McGregor

Okay. Thank you very much.

Glen Yeung - Citi

Take care.