BRCM

Broadcom Corporation (BRCM)

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Broadcom Corp. (BRCM)

Q2 2009 Earnings Call

July 23, 2009 4:45 pm ET

Executives

Peter Andrew - VP of Corporate Communications

Scott McGregor - CEO

Eric Brandt - CFO

Analysts

James Schneider - Goldman Sachs

Randy Abrams - Credit Suisse

Uche Orji - UBS

Sumit Dhanda - Bank of America/Merrill Lynch

Adam Benjamin - Jefferies & Company

Mark Lipacis - Bank of America/Morgan Stanley

Tim Luke - Barclays Capital

Craig Ellis - Caris & Company

Ross Seymore - Deutsche Bank

Craig Berger - FBR Markets

Srini Pajjuri - CLSA

Dan Amir - Lazard Capital Markets

Ruben Roy - Pacific Crest Securities

Cody Acree - Stifel Nicolaus

Suji De Silva - Kaufman Brothers

David Wu - Global Crown Research

Mahesh Sanganeria - RBC Capital Markets

Shawn Webster - JPMorgan

Tristan Gerra - Robert Baird

Arnab Chanda - Roth Capital

Presentation

Operator

Welcome to the Broadcom second quarter year 2009 Earnings Call. (Operator Instructions).

Your speakers for today are Scott McGregor, Broadcom's President and Chief Executive Officer. Eric Brandt, Broadcom's Chief Financial Officer, and Peter Andrew, Vice-President, Corporate Communications.

I would now like to turn the call over to Mr. Andrew. Please go ahead.

Peter Andrew

During this call we will discuss some factors that are likely to influence our business going forward. These forward-looking statements include guidance we will provide on future revenue, gross margin and operating expense targets for the third quarter of 2009 and any other future periods, as well as statements about the prospects for our various businesses, potential market share and the development status and planned availability of new product's.

You should note that the guidance we provide today is based upon forecast that require us to make certain estimates, judgments and assumptions using the information that is available to us at this time. It should be clearly understood that our actual performance and financial results may differ substantially from our forecasts and other forward-looking statements we make today.

Specific factors that may affect our business and future results, include among other thing general economic condition, are discussed in the risk factors section of our 2008 Annual Report on Form 10-K and subsequent SEC filings. A partial list of these important risk factors is set forth at the end of today's earnings release.

As always we undertake no obligation to revise or publicly update any forward-looking statement except as required by law. Please refer to the Investor Section of our website at www.broadcom.com for additional historical, financial and statistical information, including the information required by SEC Regulation-G.

In addition, we've placed a slide deck, which is available now in the Investor Relations section of our website, it is on the right hand side of the page under the "2009, Q2 Earning Information" section. In this deck we have incorporated additional tables and information regarding our historical performance and our future guidance.

With that, let me now turn the call over to Scott.

Scott McGregor

Good afternoon. Thank you for joining us today. We are pleased to report net revenue of $1.04 billion in the second quarter, which came in at the upper end of the guidance range we provided and represented an increase of 22% sequentially and a decline of 13% year-over-year. On a product revenue basis, excluding licensing revenue, second quarter revenue was up nearly 17% sequentially and down about 17% year-over-year. Eric will talk more about the numbers in a few minutes.

Growth in the quarter was driven by a return to more normal customer ordering patterns, following the dramatic decline in orders and adjustments in Q4 2008 and Q1 2009, due to the economic downturn. Our Mobile and Wireless target market led the growth in the quarter, where we experienced strength in a number of areas including wireless combo chips, cellular basebands, stand-alone Wireless LAN Solutions, Bluetooth and GPS.

Within our Broadband Communications target market we experienced broad base growth, as it appears our customers brought their inventory levels more in line with the new level of anticipated end demand.

Finally, our Enterprise Networking target market revenue declined overall as we anticipated. The PC and server related areas grew a bit more than we expected, while our switching business was down pretty much in line with expectations. We believe that we've seen a bottom in switching demand from our Enterprise Networking customers.

Based upon the customer activity we've experienced to-date, we expect the revenue momentum we experienced in the second quarter to continue into the third quarter. We anticipate this revenue growth will be broad based, with the greatest dollar growth contribution from our Mobile and Wireless target market driven by new product ramps and our customers preparing for the upcoming holiday season.

Since the economic situation remains uncertain we'll continue to be cautious about increasing operating expenses. However, we are taking this opportunity to accelerate both 65-nanometer and 40-nanometer tapeout to enhance our competitive and cost position and we'll add resources judiciously for opportunities that have strong ROIs.

Overall, we'll continue to focus our engineering investments on convergence and the positive end-user experience generated by incorporating feature-rich network connectivity into Broadcom's key platforms.

I'll now turn the call over to Eric, for details on the second quarter numbers, and third quarter guidance.

Eric Brandt

Thanks, Scott. As you probably noticed this quarter we modified the presentation of our income statement to break out our intellectual property licensing revenue. In order to provide the appropriate comparison, prior periods have been recast into this new format. As you will note, we've had a small amount of IP licensing revenue included in our financials beyond the revenue associated with the QUALCOMM or Verizon agreements.

Historically when we've provided revenue guidance, as we did in April, it has included these amounts for both gross margin and product revenue. As you look at the financials, the key change is that there was approximately $6 million in licensing revenue in Q1 and Q2 of this year, which has been reclassified from overall revenue to licensing revenue, which impacts product gross margin by approximately 40 basis points in both periods, due to the new presentation format.

Small amounts of chip based licensing revenue have been a part of product sales for sometime and as such have been part of the margin guidance. Please refer to the slide deck on the Investor Section of our website for quarterly data going back to Q1 2007 under this new mapping. We've also included slide showing what Q1 and Q2 results would have been under both the old and new methodologies so you are able to get a clear picture of our results in either scenario.

Moving to the financial overview. To summarize, total revenue of $1.04 billion including $966 million in product revenue and $74 million in licensing revenue. Total revenue was up 22% and product revenue was up 17% from Q1. Utilizing the new classifications on an apples-to-apples basis, product gross Marge in Q2 increased 20 basis points to 46.3% versus 46.1% in Q1. Please refer to the web financials for our full reconciliation of how the reclassification affects these numbers.

Q2 2009 GAAP R&D plus SG&A expense was $502 million. On a comparable basis these expenses increased just $4 million over Q1, which was well below the guidance in April. Earnings per share for Q2 were $0.03. This includes approximately $0.01 per share negative impact associated with the nonrecurring items in Q2 of settlements, our charitable contribution, asset impairment and the remnants of our previously disclosed restructuring that we undertook in Q1 2009.

Stock based compensation represented approximately $123 million or approximately $0.24 per diluted share. Cash flow from operations for Q2 was $328 million, which includes the $200 million payment from QUALCOMM. Our cash and marketable securities balance increased to a balance of $2.3 billion at the end of the quarter.

Moving to revenue and gross margin. In April, we said that we expected Q2 revenue in the range of $900 million to $975 million. What occurred in Q2 was Broadcom generated total net revenue of $1.04 billion, of which $67 million is attributable to the QUALCOMM agreement. Removing the QUALCOMM license revenue yields revenue, using the old methodology, of $973 million in revenue at the high end of our guidance range.

With respect to Broadband Communications we saw solid growth across all targeted end markets. In the Mobile and Wireless end market we experienced broad base growth across virtually all segments. As forecasted our Enterprise Networking targeted end market decline, driven by principally by Ethernet switching, offset somewhat by growth in the controller product lines.

Our Q2 GAAP product gross margin increased 20 basis points to 46.3%, up from 46.1% in Q1, which is slightly below the improvement estimate provided on our last earnings call due to somewhat higher E&O charges than anticipated.

Moving to operating expenses. As you will note from the income statement with respect to operating expenses, we've adopted the format used by other companies with significant licensing revenue, which now includes product costs, but no longer breaks out gross profit or gross margins as distinct lines in the financials. As such, I will refine my commentary on operating expenses through the R&D and SG&A expenses.

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