BRCM

Broadcom Corporation (BRCM)

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Broadcom Corp (BRCM)

Q3 2009 Earnings Call

October 22, 2009 4:45 pm ET

Executives

Peter Andrew - VP of Corporate Communications

Scott McGregor - CEO

Eric Brandt - CFO

Analysts

Adam Benjamin - Jefferies & Co

Ross Seymore - Deutsche Bank

Craig Ellis - Caris & Company

Craig Berger - FBR Capital

Tristan Gerra - Robert Baird

James Schneider - Goldman Sachs

David Wu - GC Research

John Pitzer - Credit Suisse

Mahesh Sanganeria - RBC Capital

Srini Pajjuri - CLSA

Mark Lipacis - Morgan Stanley

Uche Orji - UBS

Sumit Dhanda - Banc of America

Stacy Rasgon - Sanford Bernstein

Quinn Bolton - Needham and Company

Presentation

Operator

Welcome to the Broadcom third quarter 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 of Corporate Communications.

I will now turn the call over to Mr. Peter Andrew.

Peter Andrew

During this call, we'll discuss some factors that are likely to influence our business going forward. These forward-looking statements include guidance we'll provide on future revenue, gross margin, and operating expense targets for the fourth 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 products.

You should note that the guidance we provide today is based upon forecast that require us to make certain estimates, judgments and assumptions using 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, including among other things general economic conditions, 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 press 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 Investors 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 Investors Relation section of our website, it is on the right hand side of the page under the 'Q3-2009 Earning Information'. 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, and thank you for joining us today. Broadcom executed quite well in the third quarter, with substantially better results than we originally anticipated, driven by upside demand in our enterprise networking and mobile and wireless businesses. For the third quarter, we reported net revenue of $1.254 billion, which is up over $200 million and over 20% sequentially from our second quarter.

Broadcom's revenue is now up 47% from the trough quarter in Q1 2009 and down only 3% from our record revenue level reached in Q3 2008. Sequential revenue growth in the quarter was broad-based, as each of our businesses grew between 9% and 37%, driven by a return to more normal order patterns from our customers, a number of new product ramps, and our customers preparing for the upcoming holiday season. Broadcom was also successful in generating strong sequential gross and operating margin leverage.

So far this year, Broadcom has been able to achieve our 2009 financial goals of gaining market share, while at the same time generating strong cash flow from operations. In the last three quarters, Broadcom's revenue declined approximately 11% year-over-year, which is significantly better than the industry. We've generated over $650 million in cash flow from operations, far surpassing our $300 million goal for the entire year. At our upcoming Analyst Day on December 15, we'll discuss our goals for driving additional leverage in our financial model.

Based upon customer activity we've experienced to date, we expect revenue in the fourth quarter and in each of our target markets to be approximately flat with the third quarter of 2009. As I mentioned last quarter, and as we still believe today, the economic situation remains uncertain. Therefore, we'll remain cautious in the way we're running our business.

I'll now turn the call over to Eric for details on the third quarter results and the fourth quarter guidance.

Eric Brandt

As Peter mentioned, please refer to the data breakout in the investor section of our website for additional financial information that will supplement my financial commentary. We have included additional data to reconcile product gross margin and operating expense, as well as our modified presentation of our income statement to breakout our intellectual property licensing revenues that we introduced last quarter.

Moving to the financial overview; to summarize, total revenue of $1.25 billion, including $1.19 billion in product revenue, and $59 million in licensing revenue. Total revenue was up approximately 21% and product revenue was up approximately 24% from Q2 level. Product gross margin in Q3 increased 220 basis points to 48.5% versus 46.3% in Q2.

Q3 2009 GAAP R&D plus SG&A expense was $534 million. On a comparable basis, these expenses increased $31 million over Q2. This increase included $16 million related to our performance-based compensation plan, which I will discuss further in a few moments. Excluding this charge, our increase of $15 million was below the guidance we gave for Q3 in July.

Earnings per share for Q3 were $0.16. This includes approximately $0.02 per share negative impact associated with the asset impairment and the restructuring we undertook in the quarter related to our DTV business. Stock-based compensation represented approximately $129 million, or approximately $0.25 per diluted share.

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