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Broadcom Corporation (BRCM)

December 14, 2011 12:30 pm ET


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

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

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

Chris Zegarelli - Director of Investor Relations

Unknown Executive -

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

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


Craig Berger - FBR Capital Markets & Co., Research Division

Srini Pajjuri - CLSA Asia-Pacific Markets, Research Division

Romit J. Shah - Nomura Securities Co. Ltd., Research Division

Alex Gauna - JMP Securities LLC, Research Division

Barry Stewart

Brian Blair - Wedge Partners Corporation

John Pitzer - Crédit Suisse AG, Research Division

Stacy A. Rasgon - Sanford C. Bernstein & Co., LLC., Research Division

Christopher Caso - Susquehanna Financial Group, LLLP, Research Division

Unknown Analyst

Edward Charles Long - Gillespie, Robinson & Grimm, Inc.

Harlan Sur - JP Morgan Chase & Co, Research Division

James Schneider - Goldman Sachs Group Inc., Research Division

Ruben Roy - Mizuho Securities USA Inc., Research Division

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

Ross Seymore - Deutsche Bank AG, Research Division

Sanjay Devgan - Morgan Stanley, Research Division

Vivek Arya - BofA Merrill Lynch, Research Division

Shawn R. Webster - Macquarie Research

Ambrish Srivastava - BMO Capital Markets U.S.



Welcome to Broadcom's 2011 Analyst Day. Please welcome to the stage Chris Zegarelli, Broadcom's Director of Investor Relations.

Chris Zegarelli

Hey, everyone. It's really great to see so many people out with us today in our first ever New York-based Analyst Day, so I want to welcome you first to our 2011 event. I also want to thank the people that are joining us on the webcast as well. We know you all have a very busy schedule, so we definitely appreciate you joining us today.

Before we get started with today's event, I did want to remind you that we will be making some forward-looking statements today. These statements are based on our knowledge and understanding of the business as of today and are subject to the customary risks that you see on this cautionary statement here on the screen and you can find more detail on our SEC filings as well.

I did want to mention that we will be making some references to non-GAAP financial information. You can find reconciliations in the books that we provided to you at the reception, and you can also find the reconciliations on our website as well.

Just as in prior years, you will find an evaluation form in the Analyst Day books that you received when you checked in. Please fill those out by the end of the event and turn them in at reception, and you will receive a complimentary Broadcom-enabled device as a gift and a thank you for your feedback.

I did want to mention the agenda today. We'll have presentations from Scott McGregor, Bob Rango, Dan Marotta, Rajiv Ramaswami and Eric Brandt. We have a full agenda, so let's 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 afternoon. It's a great pleasure to be here in New York today, and we've been having these events now for a number of years, and we've been alternating generally between Silicon Valley and our Irvine headquarters. This is our first time to try it in New York, and I'm very gratified that we have twice the attendance of either Silicon Valley or Irvine, so it's great to have some additional folks here today and excellent.

New York is an impressive place and impressive city as you know, although I find that sometimes getting your mobile data to work in the middle of the day is not so good here, but we can help with that, and we'll talk a little bit about that. This is a group I think also that understands the importance of connectivity and bandwidth. You use that in your daily lives, and we see some very interesting trends happening in that space. We'll talk about that today, and how Broadcom, we believe, is uniquely positioned to really address the needs of an evolving world. You saw some of the eye candy coming in we had on the screen, and I think these are pretty interesting events that are going on. In the human species, we went hundreds of thousands of years before we had our first connected device. You can argue whether that was 1969 with the first ARPANET or maybe a little later with the first mobile phone or something like that. But next year, we will have the same number of connected devices as people on the planet, so quite a step forward. But we will make that next step to double that, okay, in less than 5 years. And so there is an exponential curve and an explosion of devices connecting to the Internet, connecting to each other, and that's going to continue to go on and go very quickly here. In fact, we believe by 2020, there are going to be 50 billion of these devices, so just an incredible growth.

So you have to ask yourself is, why is the incredible growth happening? What's driving this? And we believe it has to do with content. And if you look at the content consumptions and the traffic across the Internet, it started off fairly slow when we had devices like PCs, some of the original phones weren't very clever, SMS was this great invention that would allow you to do something not as good as an e-mail, sort of a tweet over your cell phone. It was miraculous when it happened. Kids still like it today. I think there's something really going on right now in the last decade where we've seen an explosion in that data traffic. And a great example is Netflix. Many of you have Netflix subscriptions, I imagine. There are statistics that show that if you take in the United States a typical evening, something like half of the entire Internet traffic is people watching movies over Netflix, okay, and I believe the delivery of content, movies moving to HD, moving to this rich content is going to increase dramatically over the next years, really pushing on the bandwidth capabilities of the Internet, really pushing on the devices. The richness of devices has really increased. Now you can carry with you a tablet or other device, very rich display, you expect to see high-quality media on that. And that's what's driving this curve up. And we think that the last 20 years is nothing compared to what the next 10 years are going to be. We believe that it's really going to take off here. And a couple of statistics to help you understand that, in the next few years we believe that something like 1 million minutes of video are going to be uploaded across the network every second, okay.

And it's also happening on the mobile side. And if you look at the growth rate of data traffic on the mobile side, it has a compound annual growth rate of something like 92%, okay, so that means 26x over the period from 2010 to 2015, so this explosion in content is really important. And I'll come back to this curve a little later and tell you why it's important to Broadcom and important to you as an investor.

So if we look at all of the different kinds of content, what's really enabling them is a dramatic multi-orders of magnitude improvement in communication standards. We put some of our favorite ones up here. You probably use many of these yourself, and we've seen anywhere from 10 to over 1,000 improvement in the speed that these technologies are capable of just in the last number of years. And the implications for this are not only does it enable that content you saw on the previous slides, but it allows you, for example, in your home to access very rich content. It allows you, we believe going forward, to eliminate the distinction between remote and local, okay. So in the past you always had to do the computing in front of you if you wanted to run the application there. Now you can run the application on the Web. The data can be on the Web. You've seen things like Siri in the iPhone, you pick up that, you call that. What it does is it transmits all the data to a Web application, runs it there, including interpreting your voice, and shifts the result back to the phone. Okay, so it doesn't actually have to run in the portable device. So this enablement of thin clients, okay, we believe is going to drive a lot of interesting changes going forward, again making devices less expensive and more powerful at the same time.

So let's talk about what does this mean to our customers. What are their challenges? Well I think their goal is basically to deliver on all of this bandwidth, okay, deliver more bandwidth and deliver functionality as much as they can. Now unfortunately they have some constraints. And so given that goal, some of their constraints are board space. Great example in a cell phone, you open up a cell phone, smartphone these days, there is no spare real estate in that device, it is absolutely crammed with electronics and other things and battery with everything that's left. So in order to add more functionality, it is a real challenge of how you do address the board space issue.

System cost is always a factor, that's always been a factor. There's usually some advantage in getting the price down, you'll see some elasticity in demand. People always want to get the system cost as low as possible.

And then power consumption. Power consumption is important in portable devices. I don't know about you guys, but if you have one of these new smartphones, usually by the middle of the day, you're looking for a power outlet, okay. That's not good. We need to fix that, so you have long time, long use on those devices. And in the data center, on the infrastructure side, the biggest cost component in a data center today is the electrical power, okay. It's not the cost of the hardware, it's not the people who run it, it's not the real estate, it's the cost of the power to run the devices and then to get all the heat out of the room when you're done. And so if you can reduce the power consumption, that's a tremendous gain there. So our customers want to solve all of these problems at the same time. And so this drives a couple of interesting things in our industry.

Let's look at a case study here of set-top boxes. And this is a set-top box. We took a picture of a circuit board of a set-top box from the year 2004. And you probably remember your set-top box from then. It sort of did a good job playing TV, that worked. If you look at the differences between 2004 and 2012, the functionality has absolutely exploded. The security has been upgraded dramatically because the content owners do not want you to rebuff their content. We've seen the advent of transcoders, and transcoders are going to be important going forward because they allow you to receive your video on the set-top box and then maybe sort of sling style watch it on your tablet, okay, and be able to have content anywhere you want it. We're seeing a dramatic increase in CPU speed. People want to run applications on these devices as well as have really nice user interfaces. And we see a lot of different ways these devices are going to connect, okay. HDMI just upgrading the video signal to your TV set but also connecting to the Internet, things with ethernet, Wi-Fi, Bluetooth and MoCA, different ways to connect across the home. And then power management because I think you've seen some studies that show that your set-top box may use as much power as your refrigerator, okay. It's on all the time, it uses a lot of power, okay. Well going forward, we'd like to reduce that to much lower power levels and so putting power management and integrating that into the box helps a lot.

So you would think if you added all of this content into the box, it would greatly increase the size of the box and the chips that go in it. Of course the answer is, no, it doesn't. You'll see in 2012, the goal of the industry has been to integrate a lot of these things, reduce the size, reduce the power. And in the device in 2012, we see a growth of something on the order of 20x the processor performance, at the same time, 5x more tuners, 6x more bandwidth and the capacity of the device itself and at the same time upgrading picture quality and other kinds of things. So these are really a challenge for all of the people in our industry as they go forward.

Let me use another example here. This is one where the complexity was the challenge and how can you use integration to reduce complexity. And in many networking devices -- high-speed networking devices, this is an example of a 10-gig switch. It had a large number of chips, okay, in it. And the goal is to reduce the size, at the same time increasing the performance of the device. And you see the 2011 version with one of our Trident chips here, dramatically smaller board space, 64 ports of 10 gigs, so an increase in the overall capability and at the same time lower power and lower cost. So this is our life in the semiconductor industry working with our customers to use integration to reduce complexity.

So let me go to what does it take for a semiconductor company to play in our world? Okay, if you want to do all those things that are going on in the last few slides I showed you, what do you have to have? We think there are 4 things that a semiconductor company has to have in order to be a solid player these days. The first one is R&D scale and execution. In other words, can you have the technology? Do you have the capabilities to do the technology? And can you execute on it, get it to market quickly? It's great if you can fund technology, but do you have the IP portfolio to do the kind of integration you had? Do you have all the pieces? Does your box of Legos, okay, have all the cool little parts that you need to make the desired object? Next is, do you have a complete solution? Okay, it's not always sufficient to just have the pieces you need to put in one box. Do you have the things that connect it elsewhere in the system, a complete end-to-end solution, perhaps a head end and a client end and a cable network, perhaps a base station and a smartphone in the wireless world? Do you have that complete solution? And then one thing we think that Broadcom is exceptionally good at, which is the ability to integrate. So let me look at each one of those in detail and explain where I think Broadcom comes out on these 4 essential things for an effective semiconductor competitor today.

First one is R&D scale, and when we look at Broadcom, we will spend about $2 billion on a GAAP basis this year in R&D. We're spending a large percentage. We have very high R&D intensity. We believe R&D is the source of innovation of Broadcom. That puts us #23 among all Fortune 500 companies in terms of absolute spend, #12 among all Fortune 500 technology companies and #3 in the Fortune 500 semiconductor companies. So the message is clear: Broadcom invests to win.

So the next question is IP portfolio. Do you have the breadth of IP? And what I've done here is I put up a list of companies, hopefully you're familiar with a few of these, and every year the IEEE organization, neutral third party, ranks all the technology companies in the world on their patent portfolios, and they don't just count the number of patents they have. They look at how powerful, and their words are, are they referenced by competitors, are they essential patents, are they important patents, are they really good patents, not just a body count number. And you can see here, Broadcom shows up #3 in this list, well ahead of many other people that are competitors of ours. And so this is an important area for us, an asset that we've created.

The next question is, who can put together a complete solution? And I've got a picture here illustrating somebody who is on their smartphone. Maybe they took a picture, and they're sending data. That data is going to go to a base station, a cellular base station. In that base station, it needs to get back to the Internet, that's called backhaul, it can be over microwave or fiber or Ethernet, different kinds of connections there. That will typically go into a wireless infrastructure, REN [ph] or RNG, going into a service provider, a packet network, to a data center where it might process an application. And then it goes to perhaps another user. If the person's at home, it could go over cable or DSL, or if they're in the office, it could go over Ethernet to their home. Typically, in their home, many people have Wi-Fi routers today, goes over Wi-Fi, and then to maybe their tablet where they would view this. It's interesting because Broadcom plays in every single one of these areas, okay. And in fact, we did an interesting calculation a few weeks ago that based on some conservative market share assumptions, we believe that 99.98% of all Internet traffic goes over at least one Broadcom chip. And in the case of wireless, which I'm showing in this picture, the answer is 100% because we have 100% market share in a lot of that wireless infrastructure that all the wireless data traffic goes over. And so the message here is: Broadcom can not only deliver the complete solution, but Broadcom is everywhere. And I'll say more about that a little later.

The next question is who can integrate things? And lots of companies talk about how they have pieces and whatnot, but who can actually put them together into a complete solution? We looked in the year 2007, this was an Ethernet switch back then. Year 2011, the number of things you had to put to have a competitive Ethernet switch went up dramatically. And the question we have for competitors, we believe no one else can build that chip on the right-hand side. Broadcom we believe is the only company that not only has the IP but has the ability to put it together and get it to work.

Let me give you another example. This is an example in connectivity. If we look at the year 2007 -- also Ethernet switch, sorry -- if we look at connectivity in the year 2008, we did our wireless LAN combo chip. It was wireless LAN, Bluetooth and FM radio. 4325 by the way is an incredible chip. I think we shipped close to 1 billion of those, okay, so very, very good chip in its time. However in the year 2011, we've improved that. We've created a enhanced die. It's dramatically smaller in size, and yet it has a lot more capabilities in wireless LAN, in Bluetooth and other features than its predecessor. And what's interesting is in this space, Broadcom has really taken the lead because of our ability to integrate. There is a long line of competitors who have said that they also have one of these chips. But you know what? They announce them, and they don't work. Okay, I think what's unique about Broadcom, we announce these chips, we put them in the market, they work, and they get rapid market acceptance. And we have yet to see a competitor able to do the level of integration we can in this space. Bob will talk later about how we plan to keep that advantage going forward.

So let me talk a little bit about our focus for 2012. One of the things that's very important for Broadcom is to expand our IP portfolio. I think we've done a great job creating probably the world's best communications IP portfolio. We're going to make that even bigger. We're going to continue to push new markets, new envelopes. We're going to invest across all our businesses, but we're going to put a special emphasis on investments in 2 areas. Let me highlight them for you. One is cellular. We're going to make an increased bet on winning in cellular in 2012. And we're going to invest more in wireless infrastructure because we believe these are some of the fastest-growing areas and areas that we, as a broad IP company with the ability to integrate, can deliver really good products in this space.

And our mission also in 2012 is to continue to enable this whole next generation of products that go in the hand, the home and the infrastructure that plumbs all this together. By the way, Rajiv today is going to talk about infrastructure, and many of you have asked me and others, too, are there businesses at Broadcom that are ever overlooked? And I think people take it for granted, they see all the wonderful devices in our home that's Dan's going to talk about, the wonderful devices in your hand that Bob's going to talk about, and it's sort of just like magic that these things connect together and the plumbing is magic, okay. Plumbing takes a lot of work to get right, okay, and we believe that's an important area. And anybody who sees all these devices exploding knows that you need a way to tie them together. So that's an area I encourage you to pay a lot of attention to.

So let me talk a little bit about this graph again. I showed this at the beginning of my presentation, and this is network traffic over time, and I think any company that participates in a market that's growing exponentially like this, that's a good thing, okay. Lots of companies are going to make money, okay. Lots of companies are going to ship a lot more products. And the interesting question though is, for Broadcom we are gaining share, we are going into new markets, how do we shape up versus this curve? And so for fun, I plotted the number of units that Broadcom ships over the same time period. And you can see that Broadcom is ahead of the curve on an exponential curve in a fantastic market. I think this reflects our ability to execute, our ability to invest in R&D, the broad IP portfolio you saw and utterly important, the ability to integrate, which many of our competitors lack.

So as I close here, I want to leave you with the point that Broadcom is everywhere. There's a tremendous amount of stuff going on in the home, the hand and infrastructure. As you hear about new innovations in any of these spaces, okay, to the extent that there are new business models to deliver content in the home like I think you're going to see next year, the smartphone revolution and the democratization of smartphones, enabling smartphones to penetrate a huge population that hasn't known them before, and then the plumbing or the infrastructure to glue all this together, if you see those markets growing, that's good for Broadcom because Broadcom is everywhere, whether it's nearly 100% of all the traffic on the Internet, whether it's a lot of these multibillion devices for the hand or all of the new innovations in the home, we plan to be there and we see this as a very vibrant growth, which is why we believe the next 10 years are going to be much better than the 20 years so far.

So with that, let me stop, and I will take some questions at this point.

Question-and-Answer Session

Scott A. McGregor

Let see, we have some folks with some microphones. Let's see, we'll start right there. Please say who you are, who you're with and then your question.

Shawn R. Webster - Macquarie Research

I'm Shawn Webster with Macquarie. So I'll ask a competitive question to start off with. So the last month, one of your competitors was talking about a new product where they integrate Wi-Fi into their baseband. Can you share with us your thoughts on what are the catalysts from your perspective on when that makes sense for you guys or for the industry in general to integrate the whole Wi-Fi into integrated basebands and application processors, and maybe you can share with us your view on market share next year and how this new entrant would fit into how you're viewing the landscape next year.

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