Broadcom Inc. (AVGO) Q4 2010 Earnings Report, Transcript and Summary

Welcome to Broadcom's Fourth Quarter and Year 2010 Earnings Conference Call. [Operator Instructions] Your speakers for today's call are Scott McGregor, Broadcom's President and Chief Executive Officer; Eric Brandt, Broadcom's Chief Financial Officer; and Chris Zegarelli, Director, Investor Relations. I would now like to turn the conference over to Mr. Zegarelli. Please go ahead.

Thanks, Christine. 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 first quarter of 2011 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 forecasts 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 the 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 Factor sections of our 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 update publicly 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 have placed a slide deck, which is available now in the Investor Relations section of our website, that is on the right-hand side of the page under Q4 2010 Earnings Information. For increased transparency, we have incorporated additional tables and information regarding our future guidance, historical performance and segment operating income. With that, let me turn this call over to Scott.

Good afternoon, and thanks for joining us today. Broadcom continued to perform particularly well in the December quarter, with better revenue results than we anticipated. Broadcom's quarterly revenue growth was well above seasonal, with record sales of $1.95 billion. On a product revenue basis, this is up 8% sequentially, and over 47% from the solid sales growth quarter one year ago. Sequential revenue growth in the quarter was led by strength in our Mobile & Wireless business, which was up 14% sequentially. Our Broadband and Infrastructure sales also reached record highs, up 3% and 4%, respectively. Broadcom's strong revenue growth was driven by new product ramps and increasing attach rates in a number of wired and wireless communications markets. Broadcom far surpassed our 2010 financial goals of gaining market share while driving meaningful financial leverage. Broadcom's annual revenue increased approximately 52% year-over-year, significantly better than the overall industry growth of 25%. We delivered almost 17 full points of improvement in product operating margin and achieved record EPS of $1.99. As a result, Broadcom has exceptional cash flow from operations of approximately $1.4 billion, and our cash and marketable securities position increased to a record level of $4.1 billion. Broadcom's goal remains to create great products that enable us to grow our market share and deliver strong profitability and robust cash flow from operations. We believe we can achieve all of these objectives while at the same time increasing the return of capital to our shareholders. Our confidence in cutting-edge solutions and solid financial discipline is the basis for the announcement we made this afternoon to increase our quarterly dividend by 12.5% and to accelerate our share repurchase program. I'll now turn the call over to Eric for details on the fourth quarter results and first quarter guidance.

Thanks, Scott. As Chris 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've included data to reconcile product gross margin and operating expense as well as modify the presentation of our income statement to provide non-GAAP numbers in light of the accounting adjustments associated with the acquisitions closed in Q4. Moving to the financial overview. To summarize for Q4, total revenue of $1.95 billion including $1.89 billion in product revenue. Q4 total net revenue was up approximately 45% from prior year and 8% from Q3 levels. Total GAAP gross margin declined 80 basis points to 50.9%. Product gross margin in Q4 decreased 70 basis points to 49.4% due to the acquisition and warranty charges mentioned at our Analyst Day. Q4 2010 GAAP R&D plus SG&A increased to $641 million in the middle of the updated guidance from Analyst Day. GAAP earnings per share for Q4 were $0.47, which includes approximately $0.11 per share negative impact associated with certain nonrecurring items primarily related to the settlement and asset impairment charges taken during the quarter. Excluding these nonrecurring items, earnings per share was $0.58 compared to a First Call consensus GAAP EPS estimate of $0.57. Also impacting EPS was a higher share count due to option exercises and stock price during the quarter. Cash flow from operations for Q4 was $452 million. Full year cash flow from operations was a record $1.4 billion. Our cash and marketable securities balance was a record $4.06 billion. Moving to revenue and gross margin. In December at our analyst meeting, we said we expected Q4 total net revenue to be approximately $1.9 billion. Total net revenue ended at $1.95 billion, stronger than expected. We believe some of the strength was generated by customers ordering slightly ahead of underlying demand due to the continued tight supply in Q4. Our Broadband Communications segment came in stronger than expected, with growth in broadband modem and digital set-top boxes. In the Mobile & Wireless segment, we saw strong growth as anticipated due to the significant strength in combo solutions and the ramp of our cellular products. Our Infrastructure and Networking segment also came in stronger than we had anticipated, driven principally by Ethernet switches. Our Q4 GAAP product gross margin decreased 70 basis points to 49.4%. This was primarily due to acquisition charges associated with inventory step-up and increased amortization of 20 basis points plus approximately 40 basis points associated with warranty charges mentioned at our Analyst Day. Net of these two effects, product gross margin was roughly flat with Q3, in line with our outlook provided in October. Moving to operating expenses. Total R&D and SG&A expenses for Q4 were up $48 million from Q3 levels, which is in the middle of the updated guidance provided at Analyst Day. As I mentioned earlier, acquisitions added approximately $8 million, which includes roughly $2 million of stock-based compensation. As I mentioned at Analyst Day, we had two items that were not previously included in guidance: $14 million in stock-based compensation due to a step-up in our employee stock purchase plan and increased payroll taxes on option exercises in the quarter. Excluding these items, R&D and SG&A expenses increased $26 million in Q4, consistent with the $20 million to $30 million we expected in October. During the quarter, the company also recorded nonrecurring GAAP charges of $66 million, including $17 million associated with the impairment of acquisition intangibles plus $49 million associated with certain settlements booked in the quarter. Moving to the balance sheet. As I mentioned earlier, cash flow from operations was $452 million for Q4 and a record $1.4 billion for all of 2010. Cash and marketable securities ended 2010 at a record $4.06 billion, benefiting from our strong operating cash flow, our successful debt offering and nearly $850 million in option proceeds. These were offset by approximately $450 million of capital returned to investors in the form of dividends and share repurchases plus roughly $600 million in M&A in 2010. For the year, we repurchased 9 million shares of stock. Our accounts receivable days sales outstanding decreased to 38 days in Q4. Moving to expectations. We currently expect net revenue in Q1 between $1.75 billion and $1.85 billion. Sequential revenue expectations for our Broadband Communications and Mobile & Wireless segments are expected to be down in Q1, while Infrastructure and Networking sales are expected to be roughly flat. We expect product gross margin to remain roughly flat, net of the increased step-up in amortization costs of roughly 60 basis points. On a non-GAAP basis, gross margin will be roughly flat and within our targeted model. We expect GAAP R&D and SG&A expenses to increase by approximately $45 million to $55 million, driven principally by employee cost adjustments from our annual compensation review process and a Q1 fringe accounting step-up totaling roughly $30 million. In addition, stock-based compensation will step up approximately $15 million, also associated with the annual merit process. Fringe and SBC cost will step down in Q2, as usual. Legal spending is expected to also increase by approximately $10 million as the derivative case goes to trial in Q1. R&D and SG&A increases in Q4 and projected in Q1 are above the norm for the reasons outlined. However, given the growth in 2010, excluding legal upticks and the effects of any M&A in 2011, we expect these costs to increase at a slower sequential rate than what we experienced in 2010. GAAP share count is expected to be approximately 585 million to 590 million shares. Finally, as Scott mentioned, we announced a 12.5% increase in our dividend, to $0.09 per quarter. In addition, we announced our intention to enter into a $300 million accelerated share repurchase agreement over approximately the next 90 days to offset some of the shares released in Q4 due to option exercises. We believe this reflects our powerful cash-generation profile as a growth company, our strong balance sheet, and our ongoing commitment to return capital to our investors. And now, I would like to turn the call back over to Scott to talk more about the state of the business.

Thanks, Eric. Starting with our home platform, Broadcom's Broadband Communications revenue grew approximately 3% sequentially to a new high, with record sales from core set-top box chipsets and Broadband modems. We provide technology that delivers performance and integration as service providers expand their media networks to allow more content and bandwidth for next-generation connected homes. Broadcom is also playing a key role in enabling the convergence of voice, video and data services in China with our portfolio of market-leading and high-performance DOCSIS cable modems, set-top box technologies, EPON and GPON chipsets, all while benefiting from the global adoption of HD content. Our Broadband Modem business continued to show strong year-over-year growth with record revenue in Q4. Sales were driven by increased cable modem volume for DOCSIS 3.0, strong VDSL2 central office and CPE shipments, and continued strength in ADSL2+ revenue. In Consumer Electronics, the DTV business shipped production volumes of its first 40 nanometer chip, which was slightly exhibited the TV manufacturers at last month's Consumer Electronic Show, with those televisions winning multiple awards for innovation and picture quality. During the quarter, we announced and closed the acquisitions of Percello and Gigle Networks. Percello's energy-efficient and cost-optimized small-cell and Femtocell architecture provides significant benefits as wireless data usage continues to grow and wireless carriers increasingly look to offload both data and voice traffic while offering subscribers better cell reception. Gigle Network's powerline technology extends our portfolio of networking technologies for the digital home, which already includes Bluetooth, Ethernet, DLNA, MoCA and Wi-Fi. Broadcom is uniquely able to offer service providers and device manufacturers a variety of ways to deploy whole-home connected products and services. These two acquisitions have strong product and marketing teams. The integration activities have gone well, and we're pleased with customer attraction to date. We expect Broadband revenue to decline in Q1 driven by some excess inventory and a couple of our customers ordering more than underlying demand in Q4. But we expect it to subsequently rebound in Q2. Moving to Infrastructure. Broadcom's Infrastructure and Networking business was up roughly 4% sequentially, to a new high, driven by record sales of switches. As discussed at Analyst Day, we expected to see strength at our switching portfolio from new product adoption, service provider, broadband network upgrades and roll-outs, new enterprise solutions, and the increased adoption of 10G in the data center. Enterprise revenue was up sequentially due to new product ramps at several customers. Service provider solutions continued to be strong in developed markets, offsetting a temporary pause in China deployments, which we expect to pick up again in 2011. Broadcom's Ethernet solutions continue to outpace the industry, driven by our ability to leverage our broad IP portfolio to deliver targeted solutions for each of our markets and enable our customers to deploy scalable and high-performance products. In Q4, we introduced the industry's smallest and most powerful multiport 10-gigabit-per-second controllers, a low-cost end-to-end timing-over-packet solution for network operators, and we unveiled the industry's first switch for 100-terabit-per-second scalable systems. In service provider networks, the transition to Ethernet from traditional PDH and Sonic technologies was a large part of our success in 2010, and this growth story is now expanding beyond Asia into the developed markets. We expect that surging demand for video and data will outstrip expansion and capacity, resulting in a multiyear revenue growth opportunity for our largest businesses of Switches and 5s. We are now shipping multiple 40-nanometer products, including our 64-port 10-gig Trident chips that continue to gain wide customer adoption. As Eric mentioned, we expect infrastructure revenue to be roughly flat in the first quarter. Moving to our Hand platform, Broadcom experienced 14% sequential revenue growth in its Mobile & Wireless segment, with significant expansion in sales across our cellular and wireless connectivity solutions. We announced our new 3G dual-core android baseband platform, which enables our partners to deliver more affordable smartphones with popular features such as multi touchscreens and downloadable applications. In addition, Broadcom completed the acquisition of Beceem Communications, who is a proven leader in 4G wireless solutions. Our wireless connectivity products did particularly well in Q4, with record revenue in most of our lines of business. Broadcom's performance in wireless combo solutions was exceptional. Our combo chip success is driven by multiple Tier 1 handset customers and multiple OS platforms. Broadcom's industry-leading combo solutions will benefit from increased attach rates in mobile devices and strong growth in smartphones. In wireless LAN, we're seeing strong traction with our dual-band 802.11n Wi-Fi solution in leading Blu-ray disc players and digital televisions, which give users the benefit of seamlessly connected entertainment and the ability to view Internet content on a large screen. Our Bluetooth technology is increasingly finding its way into innovative consumer devices by providing a more convenient user interface, eliminating wires that can clutter workspaces. We announced our next-generation Bluetooth solution for these devices, enabling longer battery life and lower cost and helping drive the trend towards more widely available wireless user interfaces, such as remote controls, keyboards, pointing devices and 3D glasses. Our GPS business experienced exceptional growth during the quarter. As location-based services become even more important, our proprietary offerings at hardware, software and data services provide our customers with leading location capabilities, both outdoors as well as indoors. In Tablets, we announced our persona carrier reference design, with dual-core one-gigahertz-plus ARM Cortex-A9 processors integrated with Broadcom's industry-leading video core 4 graphics and multimedia subsystem as well as a rich set of peripheral interfaces. Broadcom has created a unique connected home platform by integrating key industry standards and proprietary technologies from its Home, Infrastructure and Handheld businesses. This design enables seamless interaction of devices in the connected home, such as set-top boxes, smart televisions, mobile phones, smart appliances and smart grid applications. As we discussed at Analyst Day, we believe the market opportunity for our wireless connectivity devices will continue to grow as we benefit from increasing attach rates in devices like smartphones, tablets, printers, Blu-ray players and digital TVs. To Ensure that Broadcom remains at the forefront of providing complete solutions for the hand, we've combined our wireless connectivity and mobile platforms organizations into a single business unit, in line with how we've been reporting our quarterly results. Under a unified Executive Management team led by Bob Rango, we believe our Mobile & Wireless group will be even more successful leveraging our complete IP portfolio, integrating more and more functionality into single-chip solutions and executing better than our competition. Getting back to financial performance, we expect our Mobile & Wireless segment revenue to show a roughly seasonal decline in Q1. In summary, Broadcom is benefiting from some very powerful long-term trends entering 2011. We see increasing attach rates for our wireless connectivity devices in phones, tablets and a number of connected home and consumer electronic products. We have new competitive 40 nanometer parts and increased addressable market opportunities throughout our Home, Hand and Infrastructure markets. We have momentum building with acquisitions in 4G multimode modems, Near Field Communications, Broadband access, home networking and Femtocell technologies. Broadcom's focus remains to create outstanding communications and connectivity products that enable us to grow our market share while maintaining strong profitability. This concludes our prepared remarks, and we're now ready for your questions. Christine, may we have the first question please?

[Operator Instructions] The first question comes from James Schneider from Goldman Sachs.

If we look at your Q1 guidance, you talked about, first of all, normal seasonality in the Wireless business. I guess I would've thought that it might be a little bit better than normal given the secular growth you're seeing in smartphones and your attachment to the combo chips there. Can you address that and also address how much revenue in Q1 is incorporated from the acquisitions you closed in Q4?

In terms of Q1 seasonality on our Wireless business, we look across that -- we it to be roughly in line with what we've seen over the last five years. We do believe that, that business will continue to grow strongly. And I would say that will be one of our strongest growth drivers over the course of the year. So I view it as more of a quarterly fluctuation rather than any indication of a let-up in attach rates and strength in that business.

And, Jim, as far as the acquisitions in Q1, they weren't material, they were single-digit-million revenues.

Can you maybe address the profile of OpEx you expect as we move throughout the year? You talked about a fringe step-down in Q2. Are there any other benefits you might see from decreased legal activity as we head throughout the year? Or how should we think about the kind of puts and takes in Q2 and beyond?

There are two step-downs. There is a fringe step-down. There should be a stock-based compensation step-down as well. Beyond that, the merit increase only has, really, one month, so you have a full quarter effect, so that steps up again a little bit in Q2. Legal, I don't know. But over the last year, we did probably, with the exclusion of Q4 and Q1, we were guiding to $20 million to $25 million a quarter. I would expect as we look at 2011 that number to look like $5 million to $10 million less sequentially going forward. So it will be -- it should be a slower ramp based on the current expectations of industry growth rates. If that accelerates, we may accelerate as well, but it would be behind the revenue curve.

The next question comes from Craig Berger from FBR Capital Markets. Craig Berger - FBR Capital Markets & Co.: Can you give us a little more perspective on your design win traction? In particular, in cellular and in the combo chips. And maybe what you think that will add to revenues as we move through the year. Or just any detail there.

In the combo chips, we're seeing extremely strong design win traction. We've got a number of new products we've announced recently, and they're being very well received by customers. We continue to have what we believe are the best combo chip solutions out there. And our customers are reflecting that in terms of their design win choices. So that's really the basis by which we see that as strong growth going forward. Both that and the increased attach rates we talked about at Analyst Day. In the cellular space, we have said previously we are working with additional customers, but we don't have any announcements to make right now. And we'll generally announce those products as they start to ship in the market. Craig Berger - FBR Capital Markets & Co.: Can you provide any other metrics on number of design wins, number of models? Anything so I can kind of grow that number from 500 in 2010 towards something in 2011?

I regret, Craig, it's hard to do that. The customers we have today, we don't like to preannounce their models and their plans, and generally, for new customers, we want to wait for those to come into the market before those are announced. So I'll adjourn on that. Craig Berger - FBR Capital Markets & Co.: Let me try a follow-up on the Broadband inventory. Can you give us a little more detail there? What products and magnitude and timing?

Certainly. In the Broadband, there's one or two customers that we believe ordered more in Q4 than the underlying demand would support. And we think they did that because there'd been a long tightness in the industry, and I think they finally got all they hoped for. And so we believe that's a one-quarter effect in inventory issue in Q1. And as I said in my earlier remarks, we do expect that business to bounce back strongly in Q2. So it is a short-term effect, and I can't give you the specific customer or the specific area. But it is quite limited, but it probably had the effect of moving $10 million or $20 million higher in Q4 versus what we would have otherwise seen in Q1.

The next question comes from Harlan Sur from JPMorgan. Harlan Sur - JP Morgan Chase & Co: I know you mentioned customers ordering ahead of their demand curves being partially responsible for some of the decline here in Q1. I know you just mentioned Broadband being one of those areas. Scott, I think you mentioned service provider customers in Asia. What sort of indicators are you monitoring here in the first quarter that gives you confidence that these segments will return to sequential growth in the second quarter?

I think, going back to the inventory situation, we had a pretty tight supply situation and some fairly long lead times throughout 2010 because of the robust growth in the industry. And so a lot of customers were concerned about whether they would get enough parts. So we think some of them might have gotten a little over-excited on that and maybe ordered a little ahead of what they actually needed. We are in close communication with these customers, and we have pretty good visibility, especially in the Broadband space, into the end markets. And so, based on what we see in the end markets and our conversations with those customers, we believe that it is a fairly simple -- and it's specific to a couple of parts and one or two customers. So we believe we've got a good handle on this. Harlan Sur - JP Morgan Chase & Co: If you look at the opportunities ahead of you, and given your view of the markets sort of in 2011, can you just rank order the growth of your three business segments this year?

Meaning into 2011? Harlan Sur - JP Morgan Chase & Co: Yes, 2011.

I think that's hard for us to do. We're always surprised by what grows the fastest, but in general, I would expect our Wireless business to be our fastest-growing business. We believe we have good opportunities in Broadband and Infrastructure as well. But I would probably say, of the three, I'd expect the Wireless business to be the fastest grower. Probably a little harder to judge the other two.

The next question comes from Tim Luke from Barclays Capital.

With respect to the Wireless area, could you comment on how the cellular Baseband business strategy is developing in terms of traction? You had the two core customers of Samsung and Nokia. Do you have some sense of where you're seeing traction there? Obviously there's been a lot of figures on Nokia and the degree to which they would ramp EDGE production in the current environment. And also, just given the new structure where you may be unifying the management structure, how will that work? What will Scott be doing? Will he be reporting in to Bob Rango now?

Well, our strategy is very much intact, and we've, I think, been quite good at ramping the two prime customers we've already announced. 2010 was a very important year for us as we did ramp Nokia in addition to Samsung. And so we had two very strong customers going into the end of the year. And in fact, our Cellular Baseband business had outstanding performance into the fourth quarter. So very, very good results from that team. We do see a continued drive to create what we believe are integrated handheld devices and that Broadcom's got a very strong advantage across the breadth of our technologies. And the combined organization really allows us to bring all the power of combining various of those technologies into single devices, and we'll continue to do that. I think Broadcom is one of the very few number of companies that are capable of that kind of integration, and so we believe we can offer strong solutions for our customers there. We have said at Analyst Day we will look to add additional customers, and I apologize, I can't announce any of those until they're shipping in the market, but they will indeed show up. And I think for those of you who were at CES, you probably saw some interesting new technologies there, not only the debut of some of our 4G technologies but also significant performance increases on ARM Cortex-A9 processors. And I think if you put all of those together, you can probably get a sense of where we're headed. In terms of organization, Scott Bibaud now does report to Bob Rango, and we'll say more about that over the course of the year.

Just a follow-up, Scott, just on the Wireless side. It seems that, having just focused on the two core customers, that now as you approach the lower-mid-end of smartphones that you'll now have a broader roster of customers. Is that the strategy now? And then, just for Eric, your gross margin, it seemed like it was impacted just by the acquisition charges. But what are the key levers there as you look forward for calendar '11?

In terms of cellular customers, we have a great deal of interest from a lot of the cellular customers. And I think, keeping to our strategy of focusing on the larger customers, we'll probably look for the larger, more important customers as our next customers going forward. So we'll continue that strategy. But I do believe we're seeing a lot of interest from these customers in the products we've been doing.

Tim, as far as gross margin goes, certainly on the GAAP side as we move out of Q1 into Q2, we should get some benefit as we wash out the stepped-up inventory. And that should provide a bit of a tailwind on a GAAP basis. Beyond that, I think it really gets down to the mix cost and price part of our business and continuing to drive smaller die sizes and better cost positions with our products as we innovate. I think that we are very focused on it. All of the businesses are very focused on it. It's hard to have a conversation about a product these days without a discussion about how its gross margin will be accretive to the business. So those are the things that we're focused on. I think as the enterprise market picks up, probably into 2011, we'll benefit from that, certainly on the mix side.

The next question comes from Uche Orji from UBS.

Eric, let me just be sure I understand the comments on OpEx. How should we think about OpEx through the rest of this year? So what kind of seasonal rate should I expect? And how much additional cost does merit and bonus rate of pay add to each quarter?

Again, Uche, the best I can do at this point because of the nature of the way takeouts are lumpy, and sometimes legal can be lumpy, is to say that we certainly are entering 2011 with a more attenuated view on operating expenses than what we did in 2010, which was growing quite significantly. As we roll across the year, I think we will see $5 million to $10 million less sequential increases than what we saw in 2010. Beyond that, because of the way tape out, sometimes snow plow or other costs come in, or if we do an M&A transaction, it's very hard for me to do that. But I'm just trying to give you the best picture of how we're thinking about growing OpEx now that we're at model, much more closely aligned with what we think revenue growth will be.

Scott, let me just ask you about apps process. I'm sorry if I missed the early part of your answers, and I'm asking you the same question again. Now that you've got into this market and your compound is using the reference design, what do you think are the differentiations you bring into this app processor market? It's looking like a pretty crowded market as it is. And how do you -- what is the potential you see for Broadcom in this space?

I think we've said consistently that there are a number of technologies that we do not believe will be stand-alone chips going forward, whether it's cellular baseband or application processor. And we believe that our customers are looking to integrate a lot of these for cost savings, for power savings, also for footprint savings inside of relatively space-constrained devices. And Broadcom's strength is the breadth of our IP and the ability to integrate all those technologies into a single device. If you look at the product that we talked about at CES for tablets, it's a very interesting product. It not only had the north-of-one-gigahertz ARM Cortex-A9s, dual ARM A9s, but it also had all kinds of VoIP technology and video processing technology and a variety of peripheral support and so really created a much more complete solution for somebody creating a tablet, which brings the cost down. And so you're able to create very, very high-performing tablets for a bill of materials that are below $100. And so we believe that making a lot of these great technologies available in a very price-performing package, an overall solution is a real differentiator, and I think you'll see us continue to do that. I think a lot of our competitors who only do application processors, who only do basebands or other things, are going to have a problem that they won't be able to compete in terms of creating that overall solution. They may have a great, excellent component, but as we found with combo chips, having an excellent component doesn't play when things begin to consolidate.

If we look at the enterprise networking markets relative to the growth in other segments of Broadcom, this is one area that grew less. As we look into 2011, can you kind of help me through what you expect from that market? What are the key drivers there? And how would you think about gross prospects for the networking business?

Networking business is driven by a number of things. One is the explosion of data across the networks. And Cisco, by the way, has a very good white paper on this that details exactly where a lot of that growth is coming from and what's driving it. Certainly, as many of the cellular carriers have found, if you put a lot of smartphones on these mobile networks, they use a lot of bandwidth. And so there's a tremendous opportunity not only in providing the air protocols for those devices, but in all of the mobile backhaul as well, and so a tremendous networking opportunity there. And then, of course, tying that together across the Internet backbone, where Broadcom has a very sizable position. And then into the cloud data centers. And in the cloud data centers and in enterprise, as people are trying to drive more video data and pictorial data, it's driving the bandwidth way up. And so, for example, our acquisition of Dune for creating a very high-performance switch fabric is getting incredible customer demand because, frankly, just nothing else can switch at those kind of sustained rates for a very large data center. So those are the kind of things that are driving it. There's also an evolution from gigabit technology to 10G. As the cost and power consumption of 10G over copper, 10GBASE-T, starts to come down, we believe that'll drive both an ASP increase and a replacement cycle in a lot of the high-end enterprise devices. And then just overall switching support for 10G and 40G and 100G going forward.

The next question comes from John Pitzer from Credit Suisse. John Pitzer - Crédit Suisse AG: A couple of questions around the Mobility and the Wireless groups. Just kind of curious, as we look at the EDGE portion of the baseband business this year, is that still a growth business? And if it's not, do we still think about the overall baseband opportunities being a growth business for Broadcom this year?

We do believe that the cellular business is a growth business for us this year. We are still not completely penetrated into some of our larger customers, so there is a potential for larger EDGE sales. So not only larger EDGE sales, but we do expect to grow our 3G business as well. John Pitzer - Crédit Suisse AG: And then, Scott, when you look at the guidance for that business to be down seasonal in the March quarter, are there expectations of Tablet ramping in the March quarter? Or do you see the Tablet opportunity as really a June quarter or beyond? And I guess you can help me understand what you think your content potential is, both on the connectivity side and also on the ops processor side.

Well, connectivity in Tablets is definitely an opportunity in the March quarter. Tablets has definitely captured the imagination of many people, and Broadcom's combo products are in most of the tablet products that are out there. So it really allows us to have an opportunity as Tablets continue to grow and become more popular. In terms of some of the tablet products, which include the processors and other things, that we showed at CES, that's probably not a large opportunity for us in the March quarter. That'll happen more over the next couple of years as we get into some new designs there and get traction on those. We do have some designs shipping today. The NTT DoCoMo product, for example, and some other carrier-based tablets are shipping today, and that'll probably be the first place we see the growth for complete tablet solutions from Broadcom. And in the meantime, we'll do very well in terms of the wireless connectivity side, GPS and then probably, as we go into next year, things like NFC, which I think will be very important in tablets as well. John Pitzer - Crédit Suisse AG: Eric, at Analyst Day, you had a presentation talking about just the structural increase in design cost as you move down Moore's law and start to integrate more and more functionality. Just with the step-up here in the near-term of OpEx, I just want to be clear, you're still comfortable with kind of the long-term OpEx margin targets out there? And if you can remind us what they are, that'd be great.

Sure. So I don't think the step-ups you see really reflect what's going on in the underlying business. The step-up in stock-based compensation in Q4 plus $8 million of acquisition absorption in Q4 really drove the OpEx well above what it would normally be and what the underlying OpEx is. If you look at Q1, again, it's the same thing. It's a series of underlying things that are not within our control. If you add up the merit increase plus the fringe with the stock-based compensation that moves from the merit increase and the legal cost, that's $55 million of the $45 million to $55 million. So what you see is, underneath that, is that our underlying cost control is actually much tighter than what it looks like with the guidance we provided. And so we haven't changed our view of our operating model. And on a non-GAAP basis, with operating margins at 20% to 22%, we're operating above that today. We think we'll operate in that range in 2011 and, from a GAAP perspective, 15% to 17% on a product operating margin basis. So nothing from our perspective in terms of what's going on in our business due to the acquisition-related charges and the step-up of stock-based compensation in Q4 and Q1 change our long-term view of the business. And hence why I made the point that the operating expenses would be lower than what we saw in 2010 as we go across 2011 and we begin to match operating expenses much more closely with revenue growth.

The next question comes from Glen Yeung from Citi.

Can I go back to a comment you made earlier about when you were talking about inventory? Clearly, last year was a year where the industry faced tight supply. But when you think about 2011, how do you assess that same condition? And I'm kind of asking this in two ways. One, I'm going to assume that Broadcom can get the supply that it needs, but is that an advantage for Broadcom in what might be a tight year in general?

I think there will continue to be some tightness throughout 2011. There's been some structural underbuild in overall foundry capacity for the last couple of years, and so I think that'll linger throughout 2011. And certainly, if the economy picks up more strongly than people are expecting, that could become as tight or even tighter than 2011, which would be good for ASPs and other things. I do believe Broadcom can get the wafers we need. We have very good relationships across a number of the top foundry partners. So I think right now, we're seeing some seasonal softness in the industry which has reduced the overloading that the foundries were seeing last year to more normal levels. I think a number of them reported in the last couple of weeks, and they're now getting to be high but relatively normal-loading. And we'll see how that goes forward. Some were bringing on additional capacity, which will help, and Broadcom is certainly looking at migrating a number of our products into smaller feature sizes. Most of our products are now in 65-nanometer, approximately 2/3 of our products, or 65% of our products are in 65-nanometer. I think I recall the other day looking at that coincidence. But we'll be moving more rapidly into 40 nanometer and other things. So in general, I think it's going to be an interesting year. I think it's going to get tight in the second half, and I think Broadcom is in a good position with our various foundry partners to weather that.

The next question comes from Craig Ellis from Caris & Company. Craig Ellis - Caris & Company: In the past, you've mentioned you think you have about 80% smartphone combo share. One, do you think you'll be able to maintain that share this year? And then as you think about the growth in that business, do you see it coming more from units, say, from tablets or smartphones as they go further into the handset population? Or is it more new technology like NFC, dual-mode, Wi-Fi, et cetera.

Let me take a couple of facts on answering that question. Certainly, for this year, all of the design wins have pretty much been decided already for what's going to be in smartphones and tablets this year. So we feel pretty good about our market position continuing to lead in combination chips across smartphones and tablets up throughout 2011. Going forward, we believe that we will increase the competitiveness of our products, both in terms of moving to smaller feature sizes, adding new features and adding new technologies, everything from new varieties of wireless LAN, there's some technologies called 802.11ac and ad, they'd increase bandwidth and increase some of the capacity of those devices. There's various new Bluetooth technologies coming out. NFC, we are big fans of NFC. We think NFC will have extremely high penetration into mobile devices. It could be as high as -- it could catch up with Bluetooth in terms of attach rate because of what a lot of the carriers and other players are thinking of doing with that technology. So there are additional technologies beyond that that we haven't announced or discussed publicly. So we will continue to create very competitive combo products not only with creating great combinations of the products we have today in technologies we have today, but we'll try and push that forefront constantly.

The next question comes from Kevin Cassidy from Stifel, Nicolaus. Kevin Cassidy - Stifel, Nicolaus & Co., Inc.: Going back to the foundry situation, can you say, is the tightness more related to the 65 nanometer and less than 40? Or maybe if you can give a little more details on what you're seeing.

We see tightness more in the 65 and 40 nanometer area and less in the larger geometries. I think a lot of people have moved to those smaller feature sizes. Certainly, we have now with the majority of our volume coming from 65 and down. And so, however, that is where most of the foundries are adding new capacity. So we'll see how that develops over the course of the year in terms of who wins the race, capacity or load.

The next question comes from the line of Mahesh Sanganeria from RBC Capital Markets.

Scott, could you talk a little bit about the linearity of the cellular business. Last year, you were ramping new products, so it was kind of lumpy. You were down in Q2, then strong in Q3 and Q4. Are the number of products coming out now pretty stable that it's going to be more seasonal, or it's going to be lumpy?

I think there's a distinct seasonality to the cell phone business as people tend to buy a lot more products around the holiday season in the latter part of the year. So I would expect, as is normal, to see Q1 and Q2 a little more subdued versus fairly stronger, relatively stronger Q3s and Q4s. I would expect that seasonality pattern to show itself in this year as well. So it's a combination for us of continuing to ramp with that seasonality overlay. And so that's probably how to model that business for us.

The next question comes from Chris Caso from Susquehanna Financial.

Just to clarify on some of the earlier questions, can you clarify what's the extent of product shortages now and lead times? And I guess is there still an incentive for customers to place over orders in some areas of your business at this point? Or is that pretty much done?

I think lead times are getting to be relatively normal. They're probably slightly elevated versus normal but not excessively so. So definitely in the range of normal. Throughout all of last year, Broadcom was able to deliver product to customers ordered at lead time. And so there wasn't a lot of incentive to order more products than you needed except for a very few areas. The one exception we saw was where customers themselves would see a surge in demand on very short notice, and so they would see customer demand over a couple-of-week period. And as you know, when we're looking at 10-plus-week lead times, if they want it in three weeks, it's sort of the old if you have nine women, you can't have a baby in one month. It's a little bit of that problem. And so the tightness we saw in 2010 was more around surging demand. We still do see that from customers. They're selling various products, and they'll get upside in products, and they'll ask us for a lot more than we could possibly deliver. But generally, anyone who orders at lead time, we can provide products for them in those lead times and reliably deliver that.

The next question comes from Sandeep Shyamsukha from Auriga USA.

I had a quick question on OpEx, and then I have a follow-up. For regarding OpEx, you talked about $5 million to $10 million less in the following quarters for 2010, if I got it correctly. I mean, can you remind us what your normal rate increase of R&D or OpEx would be, would you expect, and what that $5 million to $10 million would imply?

Sure. So we were running $20 million to $25 million through most of 2010. And so $5 million to $10 million less than that $20 million to $25 million, I think, is a reasonable sequential growth rate for OpEx as we look at 2011.

The next question comes from Ruben Roy from Pacific Crest Securities.

Scott, on the Infrastructure & Networking segment, do you expect the switch products to drive growth this year? Or are you expecting kind of more of a diversified growth profile with things like PON, et cetera? And then in terms of your comments on NFC, as you look out into, I guess, 2012 is when you're targeting some revenues flowing in, initially, are you expecting that to be from discrete NFC devices? Or are you expecting to be able to provide integrated combo functionality in an NFC-type platform?

With regard to switches, we do expect to see some growth from switches this year, although it'll be moderate and not the kinds of levels of growth we would see from some of our wireless technologies this year, but it should be good, solid, steady growth in that space. In terms of NFC, the market right now is selling NFC as discrete products, and we certainly have the capability to do discrete products. I believe over the next few years, the market will transition to integrated products, and for us, it makes a lot of sense to see NFC integrated as part of a larger product and makes less sense as a stand-alone product going forward. And so as we announce products and make it more visible what we're doing in that space, I think you'll see us follow that market trend of moving towards integrated products over the next couple of years. But it will be a discrete market initially.

The next question comes from Ross Seymore from Deutsche Bank.

The share count, Eric, how should I think about that as we go forward beyond the first quarter, considering the ASR? And what should we think stock-based comps should do in the full year?

So I think a couple of things. First of all, on the share count, I think it will begin, most likely, to flatten out. It'll drift up a little bit over the course of the year depending on option exercises, but for the most part, I think it'll begin to flatten out from what it's grown at, in the 5% to 10% range, once we get past that. The second question you had on stock-based comp, I think it'll step up in Q1, and then it'll proceed to step down through the rest of the year, probably down -- hang on one second. I have that -- but down some amount. You said $5 million to $10 million a quarter? About $5 million to $10 million a quarter.

The next question comes from Stacy Rasgon from Sanford and Bernstein.

Just the first one, on gross margin, I just want to clarify. So flat quarter-over-quarter, excluding the acquisition of warranty charges. So including them, you're guiding product gross margins down below 49%. I just want to see if, number one, is that true. And then how long is the amortization of the step-up cost going to be a headwind? Over what time period do they roll off? And then a question on your internal inventories. Those look like they were up about 12% in the quarter. Your turns came down just a hair. They're still well below the kind of 7% to 8% range. Can you give us some color on what drove the additional inventory build and what your outlook is, I guess, for inventories, your own internal inventories in the next quarter and maybe for the rest of the year?

Sure. So as it relates to the inventory side of the house, they were up about $60 million quarter-on-quarter. They're actually up about 65% year-on-year on revenue growth of about 55% on a product basis. And the delta there is principally driven by increased VMI-related inventory, which hits us about a half a turn. Pretty much from this point going forward, it's been going from about 10 or 20 basis points going up to closer to 50. And with a bit of the longer lead times that we saw -- that'd probably hit us somewhere between a quarter and a half a turn. I would guess that as we sort of roll into 2011 that we'll, and things stabilize on the lead times, that we'll see inventory turns begin to stabilize and maybe drift back up towards the 7% range. So 6.5% is probably a little low for where we'd like to be. I think 7% is closer. 8% is probably harder now with the increase in BMI inventory that we've got. With respect to gross margin, your math is correct. It would be right around 49% or just below 49%. The step-up charges, pretty much the inventory that we acquired, should wash its way out in Q1, maybe a little bit in Q2. There will be continued amortization charges, but part of it is also what's going on with respect to absorption. And as we step down in revenue from quarter-on-quarter, we get hit probably close to 30 basis points on absorption. As the revenue continues to grow to the more seasonal side of Q2 and Q3, we'll pick up absorption benefits as well. And obviously, the higher revenue, the lower the impact from the amortization as it goes through.

The next question comes from Arnab Chanda from Roth Capital.

Two questions, one for Scott. So historically, you've been kind of seeing a longer design cycle for some of these baseband products, and you've obviously successfully entered the market late in 2½G or 3G. Seems like with the application design cycles are speeding up. You've got guys in the PC industry that are doing, basically, six months of a new part a year. Obviously, coming with success of entering the late in the market many times in the past, but does that mean you have to kind of exploit R&D in that area kind of the longer term? And then I just have a follow-up about gross margins. Obviously, while it's becoming a bigger and bigger part of the business -- that's obviously great, given that's the fastest-growing part of the market. Does that mean that over time as wireless becomes bigger and bigger, gross margin start to drift down? Because clearly, the other businesses just don't have quite the growth profile.

The first question on tablet design cycles, I'd say they're roughly the same as what we see in cell phone designs. There are companies that take a long time with cell phones and do a lot of differentiation and added value, and there are companies that rush them to market and have relatively little differentiation. I think there's a flurry of tablets being rushed to market right now with little differentiation. And so certainly, for those, it'll move fairly quickly. I think we will see a broad opportunity to participate in wireless connectivity, as I mentioned before, and increasingly in complete tablet solutions as we roll out the products we announced at CES and additional products going forward there. In terms of some of the people who do add more value in tablets and more differentiation, we continue to work with them on a variety of fronts and see opportunities there. So I wouldn't characterize it, really, as a different environment or one that requires radically different R&D than what we're doing anyway in some of the cell phone space and smartphone space. It's interesting that most of the successful tablets are really smartphone architectures put into a larger form factor with a larger screen and battery.

And with respect to your gross margin question, I think it's probably useful to step back from all the stuff that goes on and the other cost of sales and look at the standard margin of the company. When you look at the standard margin of the company, and Q4 being a very, very strong growth year for growth quarter well sequentially from Q3 on the Mobile & Wireless side, the standard margin between Q3 and Q4 is, ostensibly, flat. So even as the mix is shifting to the Mobile side of the business, we've been pretty good at holding our standard margins relatively constant. And part of that is driven by the continued introduction of a number of the new products that are cost-optimized, both in 65 and now, as we look in 2011, more in 40, which will repair, in some cases, where we have certain 65 nanometer products that are below margins. So while the Mobile & Wireless business can be below the corporate average and it does present a bit of a challenge, I think to the extent that we can improve the margin in that business and improve the margin in some of the other businesses with the new and more integrated products we're launching, you will see the ability, we believe, to try to head off some of that mix effect that you're talking about.

The next question comes from Daniel Amir from Lazard Capital Markets.

In your prepared commentary, you talked about the spending pause a bit in China on the networking infrastructure side. Can you give a bit of commentary, when do you think that starts to pick up again? And also on the Broadband side, can you give us some commentary on the DTV side? Sounds like you're gaining momentum there again with the 40 nanometer chip. And kind of what you see there this year.

In China's spending, it's hard to give you much more color than we did, but we do work very closely with some of the largest infrastructure providers in China. Some of the largest networking companies there work closely with us, and if you open up their boxes, they're largely made of Broadcom chips. So we do have some insight into that market, but hard to give you much more color on that. In terms of digital television, we do have a lot more competitive chips out right now. Our 40 nanometer chips are seeing quite good traction in the market. I believe we're getting very strong design win traction and have gotten that over the last year. And as those products deploy, I do believe that's going to be one of the higher-percentage growth driver businesses for us over the course of this year.

The next question comes from Romit Shah from Nomura Securities.

When the Qualcomm-Atheros merger was announced, it seemed like the knee-jerk reaction from the market was that this is a negative for Broadcom. Scott, could you share your thoughts on how you perceive this merger and how it may impact you competitively in some of the areas like connectivity, cellular, networking?

I guess I see it largely as not a big factor for us. I mean, Atheros was a competitor for us in wireless LAN, and as part of Qualcomm, we expect they will continue to be a competitor for us. We believe that our ability to create combo chips is better than them in the past and better than them in their new home. We would observe that in their new home, they still don't have good Bluetooth. They still don't have a good NFC solution. They still don't have good FM radio. And while we wouldn't put it past our larger competitor to buy CSR and SLAB and all the rest of those guys, it's a big difference between, first of all, not having those components, which is the current state, to having them and figuring out how to integrate them into a high-quality solution. And one of the things we found with combo chips is that the combo chip is only as good as the weakest link in the combo chip. So you can have the best wireless LAN in the world, but if your Bluetooth isn't top-notch, if your FM radio isn't top-notch, they won't use the chip. And so I think that's what's really interesting about Broadcom is that we are best-in-class in GPS, best-in-class in Bluetooth, best-in-class in wireless LAN, FM radio, NFC, across the board. And that's an unusual combination, and I think our competitors are going to have a hard time putting the same thing together.

Today's final question comes from Shawn Webster from Macquarie.

Just two questions. One is I wonder if you can share with us the size of your wireless LAN business as it exists today. You used to talk about it in terms of the combined, I guess, wireless chip businesses. And then my second one is, Eric, in terms of the ongoing amortization charges, it was $14 million, roughly, in Q4. What should be model going forward?

In terms of the wireless LAN business size, we don't break out that number, I apologize. But I'll let Eric speak to your amortization questions.

Yes. It will step up. Shawn, maybe what we can do is follow up on that. I don't have that number on my hands right here, but it will step up as we go into Q2, because that Q4 is only a partial quarter of amortization. So my guess is in the vicinity -- I don't want to guess. We'll follow up with you when we give you a call, but it'll step up probably some amount in Q1 and beyond for those transactions as we get the purchase accounting complete for those transactions.

So that brings us to the conclusion of our call. In closing, I'd like to leave you with a few thoughts. Broadcom had an exceptional year in 2010. We've grown more than twice as fast as the industry, with significant market share gains in almost all of our businesses, and we're looking forward to additional share expansion and model profitability in 2011. And finally, as a reminder, we'll be hosting an analyst open house at Mobile World Congress in Barcelona on Valentine's Day, February 14, for all of us who will be enjoying that away from home, at 4 p.m. local time. If you need additional details on this event, please give Chris or John a call. And with that, thank you very much, and have a good day.

Thank you for participating in Broadcom's Fourth Quarter and Year 2010 Earnings Conference Call. This concludes the conference for today. You may all disconnect at this time.