Broadcom Corporation (BRCM)
November 17, 2011 10:00 am ET
Eric K. Brandt - Chief Financial Officer and Executive Vice President
Previous Statements by BRCM
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So thank you very much. So why don't I just start. I know it's only been a few weeks since the earnings call and I was just wondering if there was any update as to how you view the demand environment and especially as we see the evolving situation in Thailand on the flood situation and what that means for set-top box business. And so if there's any comment, that will just be helpful as a start.
Eric K. Brandt
Yes, I don't think we have anything new to report. We provided our guidance. It reflected our view and typical forecasting methodologies and are trying to be reasonably conservative as we always are. So I don't think there's anything new to report since then that materially changes our view.
Sure. Well, great. Why don't we just go back to something that I think a couple of conferences ago -- yes, UBS, you kind of walked through your investment strategy and how you invest in businesses. Recently, you decided to quit the TV investments you've made after a few years. I wanted to kind of step back and look at the story, where are the growth drivers for the company, where are the margin drivers, and how you are locating investment, both from an R&D and a CapEx front.
Eric K. Brandt
Sure. So we, as a company, run a fairly rigorous portfolio process. We evaluate all of our businesses at the line of business level and quite frankly at the platform level as well, which is below the line of business. We measure them on a variety of metrics. We measure them on growth. We measure them on gross margin. And probably those are the first 2 things we look at in detail because we believe that revenue growth and gross margin are highly correlated to multiple, and driving revenue growth and gross margin will translate into multiple. And beyond that we look at R&D efficiency, operating income turns and cash flow valuation among a number of other things, and that creates a portfolio grid that we then evaluate the businesses across all those metrics and force rank them. And then we allocate R&D, P&L R&D, according to that. As it turns out, the DTV and Blu-ray business scored at the bottom of the portfolio grid, and we made the decision that the right thing to do for us was to reallocate that R&D to other parts of our business, unfortunately resulting in us closing the business down, having to lay off some people, take the restructuring charges, et cetera. But at the end of the day, that's we're, as management, supposed to do, which is make sure that we are allocating resources to the most attractive parts of our business and we take that very seriously, up to and including exiting businesses which we had done at the end of 2007 as well, as you may recall. So that was the choice we made and the place that we principally will be reallocating those resources will be in the Mobile & Wireless space. We'll talk more about that on Analyst Day, which is coming up on December 14 here in New York. So I apologize for the plug. On a capital basis, we don't think dissimilarly from that. Again, we are focused on -- from an economic perspective revenue growth and gross margin. I think from a strategic perspective, we are focused on broadening our IP footprint and bringing in what we believe is integrate-able IP, which differentiates our product set. We look at return on capital hurdles for our business. We understand what ours is as it relates to the market base return on capital expectations, and we typically run above that. And we are not opposed to using both the balance sheet and the P&L with organic R&D investment to drive the underlying growth of our business. We are serial acquirers and to the extent that we can't find a way to make the economics work in an organic investment because there are higher ROI alternatives. And understand that inside the company and while our cost of capital may be somewhere in the 10.5% range, that to get dollars from the P&L perspective, it's got to be much higher than that just because of the trade-off and opportunity cost and other things. And so to the extent that we can't afford to do it on the P&L, we will look to use our balance sheet for things that are accretive ROI projects, but maybe don't meet the P&L hurdle.
Sure. In terms of the scoring for the business groups you want to invest in, Mobile & Wireless, it kind of sounds like that at top of that, it's related, and if so, what is the -- how is the differences between the connectivity part of Mobile & Wireless and baseband side of Mobile & Wireless?