Broadcom Corporation (BRCM)

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Broadcom Corporation (BRCM)

December 06, 2012 11:30 am ET


Chris Zegarelli - Director of Investor Relations

Scott A. McGregor - Chief Executive Officer, President and Director

Henry Samueli - Co-Founder, Chairman and Chief Technical Officer

Rajiv Ramaswami - Executive Vice President and General Manager of Infrastructure & Networking Group

Daniel A. Marotta - Executive Vice President and General Manager of Broadband Communications Group

Robert Americo Rango - Executive Vice President of Mobile & Wireless Group and General Manager of Mobile & Wireless Group

Eric K. Brandt - Chief Financial Officer and Executive Vice President


John W. Pitzer - Crédit Suisse AG, Research Division

Anil K. Doradla - William Blair & Company L.L.C., Research Division

Ambrish Srivastava - BMO Capital Markets U.S.

Ross Seymore - Deutsche Bank AG, Research Division

Vivek Arya - BofA Merrill Lynch, Research Division

Joseph Moore - Morgan Stanley, Research Division

Doug Freedman - RBC Capital Markets, LLC, Research Division

Shawn R. Webster - Macquarie Research

Nathan Brookwood - Insight 64

James Schneider - Goldman Sachs Group Inc., Research Division

Sanjay Chaurasia - Nomura Securities Co. Ltd., Research Division

Sam Rosen

Mike Burton - Brean Capital LLC, Research Division

Srini Pajjuri - Credit Agricole Securities (USA) Inc., Research Division

Arnab K. Chanda - WJB Capital Group, Inc., Research Division

Harlan Sur - JP Morgan Chase & Co, Research Division

Christopher J. Muse - Barclays Capital, Research Division

Alex Gauna - JMP Securities LLC, Research Division



Welcome to Broadcom's 2012 Analyst Day. Please welcome Chris Zegarelli, Broadcom's Senior Director of Investor Relations.

Chris Zegarelli

Hello, everyone, and welcome to Broadcom's 2012 Analyst Day. Also I want to welcome those joining us on the webcast as well. We know you have a busy schedule, so we definitely appreciate your time in joining us today. Before we get started, I should let you know that we will be making some forward-looking statements today. These statements may differ materially from Broadcom's actual results, so I would encourage you to review our SEC filings where you'll find the description of our businesses and the risk factors associated thereto. And even on this cautionary statement slide that you see in front of you, I won't read it for you right now but those same risk factors are outlined on that slide as well. To the extent we make references to any non-GAAP financial measures, as defined by the SEC Reg G, you will find those, the requisite reconciliations in the books that you received at registration and you'll also find them on the Investors section of our website as well.

One additional point you will find, an evaluation form in the books that you received at registration today, please fill those out by the end of the event and return them back at registration. When you do, you'll receive a Broadcom-powered device as a thank you for filling out the form and giving us your feedback .

We do have a full day today. We have presentations from Scott McGregor, Rajiv Ramaswami, and Dan Marotta, Bob Rango and Eric Brandt. So let's just get right to it. Please join me in welcoming to the stage, Scott McGregor, Broadcom's President and Chief Executive Officer.

Scott A. McGregor

Good morning. Thanks for joining us today at Broadcom's 2012 Analyst Day. Today, I'm going to talk about Broadcom's strategy for sustained outperformance. And for me, there are 3 aspects of this strategy. One is continuing to outperform and then if you can outperform, you want to make sure that you're in the markets that are really growing. And we believe we are, so we're going to talk about why we believe communications will continue to grow and what are the drivers for that. And the third part of it is if you can continue to perform, if you believe you're in the right market, how do you manage your portfolio to make sure that you can continue to fuel the fire and keep that going. So that's what I'll cover today.

Let's start with outperformance. From a financial point of view, Broadcom has had a very good year this year. I saw a report this morning that said the semiconductor industry as a whole is expected to be down about 3.2% this year. The communications peers are doing a little bit better than that. We estimate our peers in the communications part of the semiconductor industry will be about flat this year. And when we look at our business, we expect we'll be up about 8% in this year. At the same time, in terms of financial results, we expect to have record cash flow as a company this year, and we expect to be in model profitability this year. So both delivering growth significantly faster than our peers and also good financial performance at the same time.

Now this is not a 1-year phenomenon. Let's look at the last 5 years. In the last 5 years, we estimate that our communications peers have grown about 9%. At the same time, Broadcom has a CAGR over the last 5 years of 16% revenue growth. Now it's not just revenue growth, we've grown faster than our peers. If you look at our EPS growth over the same period of time, we've grown 18% CAGR on our EPS growth, delivering leverage on the bottom line because our EPS is growing faster than our revenue. So strong operating results, a keystone of how you measure success for us in this business.

Broadcom has incredibly powerful scale in the market, and I want to share a little bit about that with you. No one else is able to say they ship the better part 1 billion wireless combo chips in the hand market. We shipped over 150 million connections in last mile and 700 million or so Ethernet ports, no one else can do that. We have competitors who have some great products and sometimes they ship a few million of them, okay. But nobody has this kind of scale. And we're working to extend this scale as well. In the hand, we're increasing our 3G basebands, we have a more than a fivefold increase in 3G baseband shift this year. In the Home, we've increased our set-top boxes by 15%. And to put that in context, the subscriber growth for the same period of time was 5%. So we're growing our sales 3x faster than the subscriber growth in set-top box.

In infrastructure, we've managed to increase the content on every line card by more than a factor of 2. So that means that even though the number of systems remains the same, we've been able to increase our content on those systems. So this is part of a great footprint, leveraging that power, and then growing that footprint going forward and no one else can make these statements.

One of the things that is a hallmark of Broadcom is relentless execution. And what does that mean? Relentless execution is when you spec a product correctly, you build it, you get it done on time, you get it to your customers, you help them get their products out on time and you ramp it successfully. That's execution. Okay. Broadcom does that incredibly well. And as a result, you can see on this chart, there are 12 different market leadership positions we have in the Hand, the Home and Infrastructure where we have a worldwide #1 position. In the Hand, #1 in WiFi, Bluetooth, wireless combos. In the Home, we're #1 in pretty much all of the set-top box technologies. We're #1 in pretty much all of the last mile technologies of how data gets into the Home. And this is again because of execution. In infrastructure, ethernet switch, Ethernet Fi and with the acquisition of NetLogic, #1 now in knowledge-based processors. So very, very strong market positions due to execution.

So let me talk for a moment about why we believe the communications market is growing strongly and what we think will drive that going forward. This is an interesting chart because it shows how Broadcom is really at the heart of all of the different aspects of communications. We have other competitors out there who maybe focused on wireless and dabble in some of the other things or focused on wireline and dabble in some of the other things. Broadcom is really the only company with this breadth and exposure to all the elements of communications. And we believe all of these are driving significant growth.

So for example, you see at the lower left-hand side here, we see smartphones accelerating. As people move from 2G phones to smartphones, they use a lot more data traffic on the network. LTE upgrades allow them to use even more, and we expect video will be an increasingly large percentage of the total cellular traffic going forward. And anything that drives bandwidth is good for Broadcom. We see that people moving to social media, doing a lot of video streaming, you cannot download a Web page these days, it seems, without having some video running in the corner of it. All of that is bandwidth. Bandwidth is good for Broadcom.

We see a lot of people moving to the cloud, putting applications in the cloud, both in the enterprise and for a lot of customers. That generates additional bandwidth over the Web. We see consumers moving to richer content using much more bandwidth, and you'll see some presentations from Dan today that will really help you understand how that's going to even accelerate substantially going forward. And that increases the bandwidth to the Home.

And finally, we see tablet computing taking place and tablet computing is interesting because a lot of the old PC model where your PC or your laptop executed a lot of the applications, okay, inside the laptop or on the PC, now being done remotely. So very interesting applications that move a lot of the compute over the network and they can do that because of low latency networks and high-bandwidth. And all of that is a very good trend. It will drive more communications going forward.

Now we estimate that something like 99.98% of all Internet traffic in the world goes across at least one Broadcom chip, okay, sometimes many, many Broadcom chips. And so for us, anything that drives Internet traffic, anything that drives worldwide communications, okay, is a good thing for Broadcom.

So you've seen how there's an overall trend for growth, but there are also some other things that are helping us out in driving growth going forward. One is we see very strong growth in a lot of the emerging markets. They are growing faster than the developed world in many of these areas. For example, the Hand in China, okay, growing smartphones very quickly, you see 34% CAGR for smartphone growth in China. In the Home, we see a variety of pay TV subscriber growth outside the United States and Europe, growing significantly faster, growing at a CAGR over the next few years of around 25%. And then Infrastructure, a lot of the data centers we've developed in the United States, now the growth is moving faster in the rest of the world as they try to catch up, growing data centers there, and we estimate an 80% CAGR, okay, for this business in the emerging markets. So we see strong communications growth overall, even faster growth in emerging markets. And then Broadcom has another accelerator, which is we use new technologies to drive us even faster. Broadcom innovates. Some great examples here in the Hand. Broadcom has launched 5G Wi-Fi. 5G Wi-Fi, it's sort of a no-brainer. It's substantially better performance, substantially better range and lower power. Okay. So it's very easy in terms of existing Wi-Fi applications, access points, other kinds of things, access points growing significantly in 2012. We believe mobile will grow significantly in 5G Wi-Fi next year.

And it also enables new kinds of markets and Bob will talk a little bit about this but you can use Wi-Fi now because it has significant performance, significant range for moving content around the home, for example, for video services. So it expands new markets as well. NFC, another technology, we're really excited about NFC. NFC, we think, enables some really great user interface, some really great mobile banking, financial transactions, games. It's a great technology. We believe next year will be a very big year for Broadcom on NFC. Our products have been in design for a while. We were working with customers. It should a significant ramp for us next year as a new technology.

In the Home, there's a very exciting technology, 4K x 2K. If you remember, the very first time you saw an HD display, okay, you've been watching ever since you grew up as a kid, you watch these TVs and then you saw a 1080p display, you said, "I want one of those." Okay. 4K x 2K, you will have that experience again because it's another doubling of the resolution, okay. It's equivalent to 4 HD sets all-in-one, okay. We think it doesn't require any glasses, so we think it's going to really drive a lot. If you're going to CES this year, look for it. I think it will be very impressive.

On the technology side, we also drove a technology called DOCSIS 3.1, dramatically increasing the bandwidth for cable operators. We also worked with the government of China to create a Chinese version of DOCSIS where Broadcom is right now the sole supplier of that part in China as they roll that out for high-bandwidth cable deployments in China.

On the infrastructure side, 40 gig and 100 gig are really important. They're driving much higher bandwidth. You saw that previous chart talking about the growth of communications. One of the ways we provide that is 40 gig and 100 gig connections in the data centers and in the networks driving that forward.

And then a new area for Broadcom is automotive ethernet, and if you think about the car for almost forever, it's been its own sort of isolated technology, it hasn't related to the technology in your living room or on the network. We believe cars are going to be broadband-connected. There are going to be networked inside the car. All of the technology that Broadcom has in the living room and in our networking and all those other capabilities are becoming applicable to the car. So a very interesting market for us going forward. And Rajiv will talk a little about how we're getting into that, and some of the drivers in that space. So fast-growing communications, faster in emerging markets and then accelerated, yet again, with new technologies.

So let me talk now about how we manage Broadcom's portfolio in the face of these opportunities. How do we make sure that we can continue to outperform. This is an interesting chart. Let me spend a couple of minutes on this. These icons of chips here, there are about 50 of them, they represent all of the A0 tape-outs we had this year for SoCs. Let me explain what is that a little bit. An A0 tape-out is the initial tape you send to a foundry to manufacture a chip, okay, these are for SoCs. And it represents the culmination, if you will, of tens or hundreds of man years of engineering, taking that important step to go to manufacture. So it represents the transition to doing R&D, to getting paid for it. So very important for us.

Now I would bet there are probably no other companies or very few that could show a chart that shows that they did 50 brand new designs, okay, in a single year for SoCs. Lots of people do non-SoCs, jellybean parts, there are lots of those. Okay. There are people who do SoCs. But I bet there aren't very many who do 50. Now we actually tape-out more chips than that. We do variations, we do respins, we do multiple foundry things, so the number of tape-outs we have is actually much larger than 50, but this is 50 brand new products this year.

Now what do we do with those products? About half are for our core markets because we want to take existing markets. We want to do even better, drive better products, defend our share, enable our customers to do even more. But about half of those are also for driving new markets and taking Broadcom into new spaces. And this really is the engine of Broadcom's growth, so very important slide here. Let me give you some examples. We taped-out some of these chips this year. One of them is the Trident 2, the Trident 2 is an incredibly powerful chip. It is the best-in-class network switch chip. No one else can touch this design. Okay. We believe we'll probably get pretty close to a clean sweep across all of the platforms, okay, with this chip versus our competition. It really moves our core up a notch, keeping us extremely competitive in the network switch space.

In set-top box, we've got a great chip here, it's a quad-core chip, Dan will say a little more about it, incredibly powerful chip, no one else besides Broadcom can build that chip because of the amount of IP on it and the capability. It both helps our core business and will help us win some additional customers. 5G Wi-Fi, I think, you know about that, a success story there. Pretty much clean sweep across the access points in the world today in terms of new products and we see that driving very strongly into mobile. The 4335 is the mobile version of that chip, okay, driving for next year, we'll see significant sales ramp on that.

Now the XLP II, very, very powerful processor, embedded processor. Really, the first embedded processor to sample in 28 nanometers. It will take Broadcom into new markets. Digital ODU, Dan will talk about that, we've got a very strong business for satellite set-top boxes. This enables us to now get the outdoor units, the thing attached to the dish that goes on your roof, okay, to get a share of that silicon as well. So it's a growth opportunity for us expanding our footprint in that space. And then LTE, you'll hear more from Bob later today about LTE. So these are the different products. This is what a large part of what you get for spending $2 billion in R&D and doing it very well and very effectively with that relentless execution I talked about before.

So let me talk about how we view the portfolio of Broadcom. We have 3 businesses, 3 business units as we call them, the Home, the Infrastructure and the Hand. In the Home, we've done a great job there in terms of taking share, in terms of building great products, enabling our customers. You can see our revenue here on the chart, about $2 billion this year, and we believe that our total opportunity in the market is about $5 billion. So we have an opportunity to grow here over the next few years in that market. Take additional share, do additional great products.

The strategy for this business unit is what we call profitable growth. That means we want to grow, we want to continue to take share, we want to grow faster than the market and we want to do so generating great profitability. And I'll talk about how that group is doing in terms of that metric.

In infrastructure, we have a great opportunity in infrastructure by increasing the SAM to drive leverage in the group. We've done a number of acquisitions in this space, and there's a great Dilbert cartoon, I don't know if you've seen it, it has these guys arguing about what the best strategy is, and Dilbert says, "Well, the best strategy, why don't we just figure out what makes most money and do more of that?" Okay. So that's our strategy in a nutshell in infrastructure. We have a great opportunity to expand our opportunity there.

In the Hand, we have the largest SAM opportunity. Okay. It's the biggest market in semiconductors. It's growing at a very rapid rate. Our strategy here is invest to win. Okay. We have a great business in wireless LAN, combo chips, Bluetooth, NFC, great opportunities there. We want to extend that franchise into the baseband space and do the whole cellular platform. Now these 3 strategies tuned for each of these businesses is how we think about resource allocation.

So in our first business unit here, the Home, okay, those people will fund the growth, drive their business, continue to go forward. In Infrastructure, we will use our balance sheet to acquire companies to see how we can grow the SAM there and drive that going forward. You've seen us buy NetLogic and a number of acquisitions in this space. In the Hand, we invest to win, a lot of our organic dollars go in this space. There aren't a lot of acquisitions that help you in that space. We invest organically to win in that space. And so that's how we translate strategy into resource allocation.

So let me talk about how we're doing on each of these strategies. In broadband, broadband had a really good year. We said profitable growth, revenue growth this year is 9%. And to put that in perspective, most of the competitors in broadband have lost significant revenue this year. They've declined significantly in revenue. Overall, in that space, we've taken considerable share to grow 9% in that space. At the same time we grew, we increased our operating margin by 450 basis points, okay. That's pretty impressive to both tremendously outgrow your competition and increase your operating margin at the same time. The business unit has done a great job in terms of products tuned to markets, moving to 40-nanometer, other things contributing to that basis point improvement. And as a result, they've achieved $131 million, which is record quarterly segment operating income in this space. So I think this group is doing tremendously well in terms of delivering profitable growth.

If we look at our infrastructure group. Last year, when we looked at the product portfolio, it was essentially in 3 areas, switch, Fi and controller, with a SAM of about $4 billion. What we've done with the acquisitions over the last couple of years is dramatically increase that SAM. And you can see here that we estimate 2015 SAM around $9 billion, including these different technologies. We've added to switch, Fi and controller. We've added businesses in the wireless infrastructure like DSE and microwave, and in the overall networking space for knowledge-based processors, network processors and multi-core processors. And we expect that this additional set of opportunities, growing our SAM, gives us the ability to turn a group that used to be a great profitable single-digit grower into a group that we believe now has a CAGR opportunity of double-digit. Okay. So over the next number of years, we expect this group will now grow in the double-digits, which is tremendous improvement for this group, gives us great opportunity and leverage for Broadcom as a whole.

I want to take one area in particular, which is the network processor space. We've got some tremendous technology from NetLogic. We looked at all the different companies and we evaluated their technology. We're looking to buy one. And we decided NetLogic was by far the best, so we bought them. And how has that done? It's gone very well. We're shipping our 40-nanometer product in volume today. We're sampling our 28-nanometer product, which we believe is best-in-class in the space. We're ramping a lot of new customers, seeing good traction. We've grown that group every quarter since we acquired it. We're gaining share and we're expanding from the data plane into the control plane. So an opportunity to grow into a new space, okay, with those processors. So we're very excited about this technology. We think it's doing very well. We have very high hopes for it going forward.

A year ago, when I was up here, a lot of you had questions about our connectivity business. One of our competitors had announced a new product and a strategy to attack our connectivity business and some of you were questioning, can you hang on to your share? Are you going to see a lot of share erosion? How bad it will be? When will it be and stuff like that? And I told a year ago, we said, well, actually, we think we're probably going to hang on to our share and we might even grow it. And let me tell you what we did. We grew share over the last year in connectivity despite competitors coming into this space. And Bob's going to talk about a lot of the underlying reasons for this, it has to do with innovation and execution, okay. But we've done a great job. And so I'm going to tell you now that this year, going forward, we expect to gain or grow share in connectivity. Again, due to execution, innovation, new things.

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