Broadcom Inc. (AVGO) Q4 2011 Earnings Report, Transcript and Summary

Welcome to the Avago Technologies Limited Fourth Quarter and Fiscal Year 2011 Financial Results Conference Call. At this time, for opening remarks and introductions, I would like to turn the call over to Jacob Sayer, Vice President of Business Development and Investor Relations. Please go ahead, sir.

Thank you, operator, and good afternoon everyone. Joining me today are Hock Tan, President and CEO, and Doug Bettinger, Chief Financial Officer of Avago Technologies. After the market closed today, Avago distributed a press release and financial tables describing our financial performance for the fourth quarter and fiscal year 2011. If you did not receive a copy, you may obtain the information from the Investor section of Avago’s website at avagotech.com. This conference call is being webcast live and a recording will be available via telephone playback for one week. During the prepared comments section of this call, Hock and Doug will be providing details of our Q4 and fiscal year 2011 results, background to our Q1 2012 outlook, and update to our medium-term business model, and some commentary regarding the business environment. We will take questions after the end of our prepared comments. In addition to US GAAP reporting, Avago reports certain financial measures on a non-GAAP basis, which are provided in addition to and not as a substitute for the comparable GAAP measures. A reconciliation between the GAAP and non-GAAP measures are included in the tables attached to today’s press release. Comments made during today’s call will primarily refer to our non-GAAP financial results. Please refer to our press release today and our recent filings with the SEC for information on the specific risk factors that could affect our business and financial condition and cause our actual results to differ materially from the forward-looking statements made on this call. At this time, I would like to turn the call over to Hock Tan. Hock?

Thank you, Jacob. Good afternoon, everyone. I’m going to start today by reviewing some of the recent business highlights, and then Doug will provide some review of the fourth quarter and full fiscal year financial results. Now, as you may have seen from our earnings announcement, we had a solid fourth quarter with record revenues and income from operations. Revenue in the fourth quarter 2011 is up 9% year-on-year from the fourth quarter a year ago. We saw strong sequential growth in our wireless communications business, in fact, better than we expected at the beginning of the quarter. This was offset partially by weaker than expected performance from our industrial and consumer end-markets. We believe worldwide volatility in the financial markets and slow growth in China’s economy is causing a number of OEMs and most distributors to take risks out of the business models and to substantially reduce their inventory levels. Because of these, we see the impact of lower component demand in our industrial markets. In contrast, however, we also experienced certain phenomena that [leads] our revenues in this period of demand uncertainty. In particular, certain wireless OEM winners in the marketplace have been able to grow for us. Additionally, in wide networking, investments in core routing and data centers remain strong, very much to our benefit in SerDes and fiber. The recent and ongoing flooding in Thailand is having an impact on various semiconductor and optical supply chains. While the impact on our own business was small in Q4, we expect revenue could be negatively impacted in the range of $10 million to $20 million in Q1. Certain of our multi-market wireless and industrial products were being tested, assembled with a contract manufacturer based in the flood zone, whose facilities have been shut down as a result. We…

Okay. Thanks, Hock. Good afternoon, everyone. Thanks for joining the call. Before reviewing the fourth quarter and fiscal 2011 financial results, I want to remind you that my comments today, as always, will focus primarily on our non-GAAP results. A reconciliation of our GAAP and non-GAAP data is included with the earnings release that we issued today. It is also available on our website at avagotech.com. Record revenue of $623 million in Q4 represents an increase of 3% from last quarter and an increase of 9% versus the same quarter a year. And as Hock reviewed, the sequential increase was in line with our guidance; however, revenue from our wireless and wired target market came in better than we expected, and revenue from our industrial and consumer target markets came in worse than we expected. Resales from our distribution partners declined in Q4 relative to Q3, while our distribution inventory rose somewhat. This put us at the end of the quarter at the higher end of our desired distribution inventory model. And as Hock alluded to, we expect this inventory level will be down in Q1. I would point out, somewhat fortuitously, the uptick in inventory is mitigating the impact from the Thai supply disruption. And just a final comment on (inaudible) while we have not seen resales begin to grow again, the decline that we saw in Q4 seems to have stabilized at this lower level. Q4 gross margin was 51.2%. This was down from last quarter and slightly below the midpoint of our guidance. The biggest driver of this sequential decline in gross margin was lower revenue from our high-margin industrial end-market and higher revenue from our lower-margin wireless end-market. During the quarter, R&D expenses decreased $2 million sequentially to $79 million. SG&A also decreased just by $5…

Ladies and gentlemen, if you have a question, please press star 1 on your phone. Or if your question has been answered and you’d like to withdraw from the queue, press star 2. Please press star 1 to begin. And our first question comes from the line of Ross Seymore with Deutsche Bank. Please proceed.

Hi, guys. Just a couple of questions. The first one, just a clarification, when you gave the segment guidance for the fiscal first quarter, did you guide the industrial business down single digits or low double digits? Deutsche Bank: Hi, guys. Just a couple of questions. The first one, just a clarification, when you gave the segment guidance for the fiscal first quarter, did you guide the industrial business down single digits or low double digits?

Single digits. Mid to high single.

Oh, mid to high, not mid to low. Okay. So, kind of 8 to 10, got it. Beyond that then, a more substantive question, the CapEx guidance increasing for the wireless business, is that something that you have visibility in the design wins for that? Is it kind of a cost driver, a revenue driver? What’s leading to that decision? Deutsche Bank: Oh, mid to high, not mid to low. Okay. So, kind of 8 to 10, got it. Beyond that then, a more substantive question, the CapEx guidance increasing for the wireless business, is that something that you have visibility in the design wins for that? Is it kind of a cost driver, a revenue driver? What’s leading to that decision?

Well, it’s combination of reasons, Ross, one of which is we’re improving our -- into a much better improved process for gallium arsenide, and improving process is a very engineering intensive and rather proprietary approach that we chose to take. So, we decided to build it ourselves. Secondly, is right now we’re completely outsourced on our gallium arsenide products. Our demand for our products is growing. And we figured that is a good way to dual-source it and at the same time do it internally. The side benefit of that is naturally we would have an improvement in gross margin as we go into production with a mix of internal and external sourcing (inaudible).

Hey, Ross, this is Doug. Let me just clarify. I think I said mid to high on industrial. It’s actually low to mid single digits on the industrial guidance. Sorry about that.

Got you. And then I guess one quick follow-up, the flood impact, $10 million to $20 million in your guidance, how should we think about that snapping back if in fact it will? Deutsche Bank: Got you. And then I guess one quick follow-up, the flood impact, $10 million to $20 million in your guidance, how should we think about that snapping back if in fact it will?

Well, I would certainly believe that it will snap back probably in Q2, not so -- the way we are planning it, anticipating it in our guidance is that it will have that $10 million to $20 million on revenues for Q1, but it would certainly -- result in us shipping below what we otherwise could have shipped in natural demand. But in Q2, I would expect Q2 to pick up a lot of that slide.

Okay. Thank you. Deutsche Bank: Okay. Thank you.

Thanks, Ross.

And our next question comes from the line of Terence Whalen with Citi. Please proceed.

Great. Thanks for taking the question. This one is on the industrial end-market. It seems like after a 10% decline in October, you're expecting that decline to mitigate to low to mid single digit in January. What about beyond that? Based on current consumption levels that you see, can you help us understand if you would expect industrial seasonality to improve in April? I'm trying to understand the difference between the consumption levels and the inventory changes and how that’s affecting net revenue. Thank you. Citigroup: Great. Thanks for taking the question. This one is on the industrial end-market. It seems like after a 10% decline in October, you're expecting that decline to mitigate to low to mid single digit in January. What about beyond that? Based on current consumption levels that you see, can you help us understand if you would expect industrial seasonality to improve in April? I'm trying to understand the difference between the consumption levels and the inventory changes and how that’s affecting net revenue. Thank you.

All right. As you can gather, most of our industrial business go to distributors. And as you also know, we recognize revenue on a shipping basis into the distributors. And the interesting thing we see in this whole process is that a resale, which is the end-demand that our distributors see, has, as Doug pointed out in his remarks, kind of flattened out in this quarter, Q1, has gone -- has pretty much flattened out. However, on a shipping basis to our distributors, we continue to bring down revenues here specifically, and part of the reason for that is, one, is the fact that one related to the Thai flooding, where a lot of industrial products are affected. We had brought in products to mitigate that flooding impact in Q4. But two, is also our ability to ship has been reduced in this quarter. So we’ll be shipping less -- bottom line is we’re shipping into distributors lesser products than likely we are reselling in Q1.

Okay, terrific. And then, the second question is on some of the commentary around the wireless business. I think you made the comment, Hock, that you would expect, based on adding some of the in-house gallium arsenide capacity, you’d expect the gross margin profile of that business to improve. Can you help us understand when you’re making that comment, are you talking you expect the mix of MMPA to just regular PAs to improve, or are you also making a comment about FBAR content increasing as well? Thanks. Citigroup: Okay, terrific. And then, the second question is on some of the commentary around the wireless business. I think you made the comment, Hock, that you would expect, based on adding some of the in-house gallium arsenide capacity, you’d expect the gross margin profile of that business to improve. Can you help us understand when you’re making that comment, are you talking you expect the mix of MMPA to just regular PAs to improve, or are you also making a comment about FBAR content increasing as well? Thanks.

Okay. No, I was referring specifically to power amplifiers, PAs, whether it’s MMPAs or discrete PAs, it’s related to PAs. And by the way, so (inaudible) that -- this capacity expansion (inaudible) and we do not really see the impact of that margin improvement until 2013. Maybe late 2012, but definitely largely in 2013.

Great. Thank you. Citigroup: Great. Thank you.

Thanks, Terence.

And our next question comes from the line of Blayne Curtis with Barclays Capital. Please proceed.

Hey, guys. Just to follow up on the wireless guidance, I mean you still should have some customers that are ramping. So, maybe you can talk about maybe some of the ramps of more successful phones are impacting some of your other customers. And then, with the OFM business, is there -- are you seeing some share loss or is this really just demand from the customer? Barclays Capital: Hey, guys. Just to follow up on the wireless guidance, I mean you still should have some customers that are ramping. So, maybe you can talk about maybe some of the ramps of more successful phones are impacting some of your other customers. And then, with the OFM business, is there -- are you seeing some share loss or is this really just demand from the customer?

Okay. Let me take your second question first. On OFN, we don’t believe we have seen any significant share loss. It’s related to the fact that our inventory in the pipeline, in the supply chain of customers, particularly one major customer, and that’s the main reason for the weakness or the softness or the reduction, I should say, sequentially, of our OFN revenue. We don’t think there’s any significant impact on our share at all in so far as OFN is concerned. In the first question, I'm sorry about that, Blayne, but it’s really not our policy or practice to name customers in this public forum. Sorry.

No, I was not looking for you to name customers. I guess I was just wondering if you could provide some color, are you seeing some of your customers see some weakness due to share loss? I'm just trying to reconcile -- Barclays Capital: No, I was not looking for you to name customers. I guess I was just wondering if you could provide some color, are you seeing some of your customers see some weakness due to share loss? I'm just trying to reconcile --

Okay. There is -- and you would not -- I assume you were not surprised, the audience, and you too, Blayne, is that, yes, as in any other end-market, in the handset market in particular, there are multiple, there are several players. And we have seen over the years a continual change, adjustment in shares as one player comes up with a new phone that is much more popular than another. And we continue to see that, and in particular, this recent quarter or so, we have seen that very, very much so, as new generation of smartphones launch, as a lot of features come in, including LTE, WiMAX and others. So, yes, we continue to see this adjustment in market share among our customers. And those changes are very dynamic.

Okay. Thanks, Hock. Barclays Capital: Okay. Thanks, Hock.

Thanks, Blayne.

And our next question comes from the line of Mark Lipacis with Jefferies. Please proceed.

Hi. Thanks for taking my question. Doug, for you, I think you mentioned that the distributor inventories were higher than you -- than normal. Could you quantify that at all? Where are they now? What’s normal? Can you talk about where they were in the financial crisis? Jefferies & Co.: Hi. Thanks for taking my question. Doug, for you, I think you mentioned that the distributor inventories were higher than you -- than normal. Could you quantify that at all? Where are they now? What’s normal? Can you talk about where they were in the financial crisis?

I haven’t really had the practice of quantifying it numerically. I think all I’d tell you, Mark, is that they were up and at the higher end. We’ve got a model for where we’d like to see them. And when we exited Q4, they were at the higher end of that model. And so we’re bringing it down in Q1. I don’t want to get into the habit of quantifying it numerically though.

Okay, fair enough. And Hock, I think, correct me if I'm wrong, I may have misheard you, you talked about beyond distributors that decided to lower inventories at OEMs or beyond the distributors, or were you just talking about demand contraction? Jefferies & Co.: Okay, fair enough. And Hock, I think, correct me if I'm wrong, I may have misheard you, you talked about beyond distributors that decided to lower inventories at OEMs or beyond the distributors, or were you just talking about demand contraction?

Oh. Boy, I really made a mess of that, did I? Okay, let me try to clarify that. No, what I did say, a couple of points I’d been trying to indicate is it’s interesting to note that over the past 12 months in fiscal ’11, our OEM demand has been very consistently sequentially up from the beginning of Q1 all the way up to this past recent Q4. Our OEM demand, OEM revenue has been sequentially up all the way through. And even in Q1 where we’re guiding a normal seasonal downturn, we see only a relative [normal] seasonal downturn with respect to our OEM revenue business. In contrast to that in our distributor side, revenue has been rather all over the map. But more than not is, especially since the middle of fiscal ’11, we’ve seen the revenues into our distributors and resale from our distributors obviously decline and roll over in fact and start to decline. And the decline accelerated, in particular, in our fiscal Q4, on resale, and our revenue too. And our resale from our distributors will be almost flattish from Q4 in Q1. But in terms of adjusting our inventory in our distributors, we will continue in this guidance in our forecast to continue to ship less into our distributors. And that’s why distributor revenue in Q1 will be down significantly from Q4.

That’s clear. Thank you. Jefferies & Co.: That’s clear. Thank you.

Okay. Thanks, Mark.

And our next question comes from the line of Vivek Arya with Bank of America. Please proceed.

Thanks for taking my question. I think you mentioned about the $10 million to $20 million impact from the Thai floods. Is that specific to the industrial segment? And if it is, excluding that, it appears that the industrial segment is sort of holding flattish. So, the question, is that the right way to look at that impact? And if it is, then, are you being conservative enough with your guidance on the industrial side? Bank of America: Thanks for taking my question. I think you mentioned about the $10 million to $20 million impact from the Thai floods. Is that specific to the industrial segment? And if it is, excluding that, it appears that the industrial segment is sort of holding flattish. So, the question, is that the right way to look at that impact? And if it is, then, are you being conservative enough with your guidance on the industrial side?

We think we are being realistic in our guidance. And you correctly looked at it, yes.

Vivek, it’s primarily industrial. There is some multi-market wireless in there, but a lot of it is industrial.

Got it. And then the trajectory of OpEx, I know you're taking it down a bit in Q1. How should we look at the trajectory for the remainder of the year? Does it snap back as quickly also? Is Q1 the new level? Or how should we look at it? Bank of America: Got it. And then the trajectory of OpEx, I know you're taking it down a bit in Q1. How should we look at the trajectory for the remainder of the year? Does it snap back as quickly also? Is Q1 the new level? Or how should we look at it?

Vivek, a lot of variation quarter to quarter in OpEx is driven by variable compensation. And so, business levels grow, the spending will grow. And if business levels don’t grow, the spending will be relatively constant. In a more medium-term level, I would refer you back to that business model that I described. We do have an inclination right now to try to spend a little bit more as a percent of revenue on R&D. That helps us grow the business over the medium to longer term. So, we are kind of looking at incremental R&D programs. But we’re being very cautious right now.

Got it. And just one last one, if I may. Do you think OFN is still a growth business for you given that one of the larger customers for that is facing some market share issues? Bank of America: Got it. And just one last one, if I may. Do you think OFN is still a growth business for you given that one of the larger customers for that is facing some market share issues?

It’s probably not a growth business, Vivek. It’ll hang in there for a while, but I don’t think it’s going to grow all that much.

Okay. Thank you. Bank of America: Okay. Thank you.

Thanks, Vivek.

And our next question comes from the line of Venk Nathamuni, please proceed, with JPMorgan.

Hi, yes. Thanks for taking my question. Hock, on the last earnings call, you talked about 37 models in which you have some design wins, especially in the 4G and LTE phones. Where do you expect the ramp for those phones to occur in terms of the timing? And also, do you expect to offset some of the seasonal slowdown in your [other] wireless business? JPMorgan: Hi, yes. Thanks for taking my question. Hock, on the last earnings call, you talked about 37 models in which you have some design wins, especially in the 4G and LTE phones. Where do you expect the ramp for those phones to occur in terms of the timing? And also, do you expect to offset some of the seasonal slowdown in your [other] wireless business?

Well, I guess -- most, to answer your first part, most of these 37 phones, some of them have launched, the rest are yet to happen and probably will happen through the first half of calendar 2012, the rest of them. And some of them already start to happen and it’s helping obviously cushion the seasonal downturn -- typical seasonal downturn in wireless in this current Q1 quarter. But we will still -- we believe we’ll still see this seasonal downturn for Q1. It’s pretty much expected. We have seen that the last couple of years in Q1. But thereafter, Q2 onwards, we do expect sequential growth in our wireless revenues through the rest of fiscal ’12.

Okay, thanks. And as a follow-up, for Doug -- Doug, where do you think margins can trough for the current cycle, especially, what was [acquisition] rate? And given that the last time your revenue was on the $550 million range, which is kind of the midpoint of guidance that you’ve given for next quarter, how should we think about gross margins beyond the current quarter? JPMorgan: Okay, thanks. And as a follow-up, for Doug -- Doug, where do you think margins can trough for the current cycle, especially, what was [acquisition] rate? And given that the last time your revenue was on the $550 million range, which is kind of the midpoint of guidance that you’ve given for next quarter, how should we think about gross margins beyond the current quarter?

Venk, I don’t like to give specific numbers beyond the current quarter. I gave you the longer-term model of 50% to 53%. So, one would think, if that’s how we’re trying to manage the business, we hope we’re at the low point, lowish point. From a year ago, our gross margin, if you go to the midpoint of the guidance for Q1, if you look at Q1 last year, gross margin was actually a little bit higher. And the phenomenon there is our industrial business is down from where it was a year ago, and that is our highest margin business. So, that’s kind of what’s going on relative to where we were at revenue levels at this point before.

Okay, that’s helpful. And then just as a follow-up on the question on utilization, where they were last quarter. JPMorgan: Okay, that’s helpful. And then just as a follow-up on the question on utilization, where they were last quarter.

Yes. Utilization was kind of the 70, mid-70s range, Venk, and it will be down a bit in Q1 as we’re seasonally down in wireless.

Okay, great. Thank you very much. JPMorgan: Okay, great. Thank you very much.

Yup.

And our next question comes from the line of Romit Shah with Nomura. Please proceed.

Yeah. Hey, guys. I'm struggling a bit to get a map to work on the revenue guidance for the quarter. You said wireless com down low to double digits, but the other segments, wired will be down high single, and industrial will be down low to mid single. I don’t see how that gets you to down 10 to 14, unless we’re assuming that consumer and computing business drops off dramatically. Can you help me out there? Nomura Securities: Yeah. Hey, guys. I'm struggling a bit to get a map to work on the revenue guidance for the quarter. You said wireless com down low to double digits, but the other segments, wired will be down high single, and industrial will be down low to mid single. I don’t see how that gets you to down 10 to 14, unless we’re assuming that consumer and computing business drops off dramatically. Can you help me out there?

Well, we do expect the consumer business is going to be off in Q1. We didn’t give you a specific number, but the math works out.

So, I mean, just based on my number, I would see consumer going from close to $30 million to less than $10 million. Nomura Securities: So, I mean, just based on my number, I would see consumer going from close to $30 million to less than $10 million.

No, it’s not down that much. It won’t be down that much. Consumer will be down double digits, kind of high teens, maybe almost 20%, in that range. And if you go do the math on all the rest of it, you’ll find that the numbers do work out.

And our next question comes from the line of Aalok Shah with D.A. Davidson. Please proceed.

Good afternoon, guys. Maybe just a quick comment, question on the wired business. How do we kind of view that going forward, and especially going into Q1? How -- why is the weakness there? Is it just seasonal weakness or is there something else, a new ramp that maybe is delayed a little bit? Can you walk us through how you view that business going into 2012? D.A. Davidson: Good afternoon, guys. Maybe just a quick comment, question on the wired business. How do we kind of view that going forward, and especially going into Q1? How -- why is the weakness there? Is it just seasonal weakness or is there something else, a new ramp that maybe is delayed a little bit? Can you walk us through how you view that business going into 2012?

Well, it’s -- a growing significant part of our wired infrastructure business is in core and Edge routing. It’s where our parallel optics are rather proprietary, very high bandwidth, affordable, high bandwidth optics play-in. It’s a fairly substantial part of our business now. And it gets lumpy quarter on quarter, and it’s because the investments made are usually by service providers, and they make -- when they buy, they buy in a big chunk. And last quarter was very strong, Q4. We don’t expect it to -- in Q1 to be as strong. And that’s the reason why it dropped. It just says in Q2, it might resume some lumpy buying in some programs, whether it’s America or China, and it will bounce back up again. That’s the only reason. But it’s big enough now that it does swing by a few points the level of growth of our wide infrastructure business.

Okay. And then, I think you may have answered this, but maybe I can get some more clarification, in terms of what you're shipping into this year right now, do you think your shipments are matching what maybe end-markets and analysts expect at this point? D.A. Davidson: Okay. And then, I think you may have answered this, but maybe I can get some more clarification, in terms of what you're shipping into this year right now, do you think your shipments are matching what maybe end-markets and analysts expect at this point?

In Q1, we expect to be able to do that, if not, as I mentioned, we’re likely under-shipping it. But part of the reason is last quarter, Q4, we believe we over-shipped. Now, part of the reason we over-shipped, as Doug calls it, fortituously, was it was industrial, a big chunk of industrial is produced or test in Thailand, and we got them out before the floods hit us.

Okay. And just real quick, in terms of a housekeeping question, is all of this then from industrial or is there something else also (inaudible) taking account -- D.A. Davidson: Okay. And just real quick, in terms of a housekeeping question, is all of this then from industrial or is there something else also (inaudible) taking account --

There are other things that are in this that’s not industrial. Industrial was the biggest piece but it’s not the only piece.

Okay, great. Thank you. D.A. Davidson: Okay, great. Thank you.

Yeah.

And our next question comes from the line of JoAnne Feeney with Longbow Research. Please proceed.

Yes, thanks. Maybe to clarify the guidance and these numbers, I think the $10 million to $20 million hit from the Thailand flooding, that’s in addition to your segment by segment guidance, is that correct? Longbow Research: Yes, thanks. Maybe to clarify the guidance and these numbers, I think the $10 million to $20 million hit from the Thailand flooding, that’s in addition to your segment by segment guidance, is that correct?

No, it’s part of the segment guidance, JoAnne.

Okay. I'm having trouble too making those numbers work, but okay. Then a separate question, could you talk a little bit about where you see the consumer in computing going after this, and what kind of activity do you still have on the super-computer side of things? Longbow Research: Okay. I'm having trouble too making those numbers work, but okay. Then a separate question, could you talk a little bit about where you see the consumer in computing going after this, and what kind of activity do you still have on the super-computer side of things?

Okay. On consumer, it’s obviously, as you have seen over last 12 months or even longer than that, our business here has actually shrunk, continues to shrink, and that’s because we’re really down to optical miles and encoders for basically printers, particularly HP printers. Now, both markets are not growth markets. And in fact, those two markets have some ASP pressures, but the main reason is those markets are not particularly strong; they don’t grow much. And so it’s been a shrinking market compared to the rest of our business which are all fairly robust and growing broadly speaking. So, that’s pretty much why our consumer business is down less to 4% of our overall revenues, just have two product lines, none of which are growing. And your second question, JoAnne, would you mind repeating that?

Yeah, on the super-computer side of things, is that still on the computing segment? And if it is, is that -- Longbow Research: Yeah, on the super-computer side of things, is that still on the computing segment? And if it is, is that --

Sorry, no. It is in wide infrastructure. It’s really -- we classified it because we sell in the super-computing rather proprietary parallel optics fiber, [interconnect]. And so we classify it under wide infrastructure.

Right. So, how is that business proceeding at this point? Longbow Research: Right. So, how is that business proceeding at this point?

It’s still holding up. It’s still holding up. As you know, our major customer here has launched this and are delivering systems out there, and it’s pretty much consuming what we expect to consume. So, it’s holding up very well. It ramped up last six months. And it’s pretty much holding, stabilizing.

Okay, great. Thanks a lot. Longbow Research: Okay, great. Thanks a lot.

Sure.

Thanks, JoAnne.

And our next question comes from the line of Ed Snyder with Charter Equity Research. Please proceed.

(inaudible) Charter Equity Research: (inaudible)

I'm sorry, Ed, your line is going in and out. We’re unable to hear you clearly. You may need to disconnect.

Is this better? Charter Equity Research: Is this better?

Perfect.

Okay. So, Hock, you’ve obviously gained share North American (inaudible) -- Charter Equity Research: Okay. So, Hock, you’ve obviously gained share North American (inaudible) --

Ed, you're breaking up again. Operator, why don’t we move on to the next question?

And our next question comes from Sanjay Chaurasia with Nomura. Please proceed. Sanjay, you may need to un-mute your line. And our next question comes from Vijay Rakesh with Sterne Agee. Please proceed.

Yeah, hi, guys. Just looking at your comments on the distributor inventory, you said it’s at the high end but they’re dropping in significantly. So, as you read Q1, do you see that in the mid to low level of your inventory (inaudible)? Sterne Agee: Yeah, hi, guys. Just looking at your comments on the distributor inventory, you said it’s at the high end but they’re dropping in significantly. So, as you read Q1, do you see that in the mid to low level of your inventory (inaudible)?

We expect to get it back in the normal part of the range, midpoint of the range, where we like to have it, Vijay.

Got it. And the second question, what’s your backlog coverage, and do you think given that there’s some handset seasonality [in the Jan] quarter, Thai floods, you see some recovery going out, and also industrial, probably you do some of this inventory adjustment getting done, do you think 1Q should be the trough year? Sterne Agee: Got it. And the second question, what’s your backlog coverage, and do you think given that there’s some handset seasonality [in the Jan] quarter, Thai floods, you see some recovery going out, and also industrial, probably you do some of this inventory adjustment getting done, do you think 1Q should be the trough year?

We generally don’t guide beyond one quarter at a time. You know what? Frankly, can’t really tell. There’s too much volatility going on in the world economy, and one, it should have a direct impact (inaudible) in the behavior obviously of how OEMs and distributors manage and handle their working capital. So, I’d like to pass on that question.

And Vijay, our coverage is where it normally is.

Okay. And last question, what’s the distribution -- what’s the exposure of this piece? Sterne Agee: Okay. And last question, what’s the distribution -- what’s the exposure of this piece?

I'm sorry?

What was your exposure to this piece? Sterne Agee: What was your exposure to this piece?

How do you mean exposure to this piece again?

What percent of revenues goes to distributors? Sterne Agee: What percent of revenues goes to distributors?

It’s about a third, Vijay.

It’s about a third of our total revenues.

Great. Thanks a lot. Sterne Agee: Great. Thanks a lot.

And our next question comes from the line of Sanjay Devgan with Morgan Stanley. Please proceed.

Hey, guys, thanks for taking my question. Hock, first question is, a lot of your competitors in the wireless space, there’s been a lot of talk as we move to these advanced interfaces, like LTE, etc. They’re talking about converged PAs, converged solutions. I was wondering if you can discuss that, give us a little color on your roadmap and your thoughts in general about converged solutions. Morgan Stanley: Hey, guys, thanks for taking my question. Hock, first question is, a lot of your competitors in the wireless space, there’s been a lot of talk as we move to these advanced interfaces, like LTE, etc. They’re talking about converged PAs, converged solutions. I was wondering if you can discuss that, give us a little color on your roadmap and your thoughts in general about converged solutions.

I see. Well, I mean, this is -- I know some of our competitors use that term, and I’ll be honest, I'm not even 100% sure what they mean by that. I mean, what you have now, we call it multi-band, multi-mode. In some ways it’s -- converged PA might be a subset of that. The whole concept is, as you need more and more interfaces, 3G or UMTS, multiple bands, LTE add-on for the bands, bands being different parts of the frequency, you basically, theoretically, you have a duplexer and a PA for every band. And you’ll never get away from duplexers, one duplexer per band. But in the case of power amplifiers technology and ways the things get designed and processed, you may be able to get away with sharing power amplifiers among those. And I don’t know if that’s what people mean. But really by sharing single power amplifier among a few bands, that’s really what they -- what we mean by multi-band, multi-mode PAs. And maybe that’s what somebody else means by converged PAs. But I'm not really sure what they mean, but from our point of view, we don’t use that term. We call it multi-mode, multi-band PAs, which is really using one or more PAs to share multiple bands.

Right. Okay, great, that’s helpful. And then, I guess just as a follow-on, perhaps you can talk about, as you kind of layer on the capacity for your gallium arsenide products, how should we think about your internal versus external production? Any -- care to venture an estimate as to what portion of your production will be in-house versus external? Morgan Stanley: Right. Okay, great, that’s helpful. And then, I guess just as a follow-on, perhaps you can talk about, as you kind of layer on the capacity for your gallium arsenide products, how should we think about your internal versus external production? Any -- care to venture an estimate as to what portion of your production will be in-house versus external?

No, it’s a bit premature at this point, but we certainly will use a lot of external -- we’ll still use a lot of external foundry, continuing to use external foundry while we build up an internal capability, and (inaudible) situation, we will never build enough capacity internally to obviate the need for using foundries externally. We see that as really dual sourcing.

Okay, great. Thank you. Morgan Stanley: Okay, great. Thank you.

Thanks, Sanjay.

And our next question comes from Ed Snyder with Charter Equity Research. Please proceed.

Ed? Ed, are you there?

Are you there? Hello? Charter Equity Research: Are you there? Hello?

Yeah.

Sorry, guys. I don’t know about the connection problem. My question is, you gained quite a bit of share in North America in handsets, and I imagine that was part of fueling your growth last quarter in wireless. And I expect that’s going to continue. I'm curious about your guidance for the Q1 then. If you are gaining share, is the seasonal guidance, which would seem to indicate downside, is that due to a share loss with other OEMs, weakness at other OEMs? Mix? Or pressure? I'm just trying to get my arms around why you wouldn’t be seeing better than seasonal performance in Q1 given how well you’ve done in North America. Charter Equity Research: Sorry, guys. I don’t know about the connection problem. My question is, you gained quite a bit of share in North America in handsets, and I imagine that was part of fueling your growth last quarter in wireless. And I expect that’s going to continue. I'm curious about your guidance for the Q1 then. If you are gaining share, is the seasonal guidance, which would seem to indicate downside, is that due to a share loss with other OEMs, weakness at other OEMs? Mix? Or pressure? I'm just trying to get my arms around why you wouldn’t be seeing better than seasonal performance in Q1 given how well you’ve done in North America.

Very interesting question, Ed. And what we’re guiding obviously is that we -- Q1 every year is a seasonally down quarter compared to Q4, because Q4 is just so strong and our Q1, as you recall, covers not only late -- covers not only -- covers December but also covers the whole of January, when things tend to be slowed down, regardless of whoever it is, whichever player there is. So, it’s based on historical precedent that we’re guiding this expected seasonality. And as I mentioned, in handsets RF, we are guiding the normal seasonality, which is really more close to single digits. But coupled with that was the fact that OFN, as I mentioned, which gets classified in wireless, is also flattening, declining in fact, because of inventory adjustments that we see in a major customer. So, that together, those two effects combine to show wireless going down below normal seasonality, which is double digits.

So, it is kind of a slowdown in maybe another OEM. And then towards your FBAR products, can you provide any color on that? Is that going to grow -- you expect normal seasonality with that? Are you doing better than you expected, a little bit worse? Any color there? Charter Equity Research: So, it is kind of a slowdown in maybe another OEM. And then towards your FBAR products, can you provide any color on that? Is that going to grow -- you expect normal seasonality with that? Are you doing better than you expected, a little bit worse? Any color there?

Well, let me start clarifying. In RF components, we just, we’re getting normal seasonality. So, across the board, we would say that, yeah, there are some winners and there are some not some -- losers, so to speak, in handset OEMs. But on a combined basis, given our share position and our exposure to such a breadth of handset -- media handset players today, I don’t think we’ll be totally immune from the impact of specter showing a seasonal weakness. That’s the reason why we’re guiding to normal weakness or normal seasonality downwards for our RF business. And that includes both FBAR and power amplifiers, by the way. It’s just a normal seasonality regarding those.

Right. Charter Equity Research: Right.

And that’s typically in the single digits. As I say, we’re over-laying on it, [the effect of OFN].

Great. Thanks a lot. Charter Equity Research: Great. Thanks a lot.

Thanks, Ed.

And our next question comes from Brendan Furlong with Miller Tabak. Please proceed.

Good afternoon; thank you. Question following Ed’s question there, are you having some impact from maybe one of your major customers that hadn’t maybe slowed down in [SEE] phones in the last quarter or so? Miller Tabak: Good afternoon; thank you. Question following Ed’s question there, are you having some impact from maybe one of your major customers that hadn’t maybe slowed down in [SEE] phones in the last quarter or so?

There are puts and takes, as Doug likes to call it. No, there’s no one particular one making that particular impact (inaudible) to kind of drive our forecast seasonally. Far from it. But using that normal seasonality, and as you know, lead time in this -- in the handset business tends -- can be very short, especially in November/December period. So, what we’re doing, giving you is a normal guidance. We are not picking out nor are we in any manner alluding to specific weakness in any OEM on our side.

Okay. Question for you then on your under-shipping into the disti channel in Q1. Do you think you will have stopped under-shipping as we get into Q2, will you return to normal shipments into the normal disti channel in Q2? Miller Tabak: Okay. Question for you then on your under-shipping into the disti channel in Q1. Do you think you will have stopped under-shipping as we get into Q2, will you return to normal shipments into the normal disti channel in Q2?

We expect to, especially if China starts to wake up.

I guess that was the other question I had, the -- you referred briefly to China earlier on in the conversation, and if you want to offer any color around your thoughts on China there. Miller Tabak: I guess that was the other question I had, the -- you referred briefly to China earlier on in the conversation, and if you want to offer any color around your thoughts on China there.

Well, yeah, obviously China is probably one of the biggest industrial end-markets for us for our industrial, in fact. And of course, we sell to major OEMs in Germany, in Europe, in Japan, even in the US, or then re-export to China. So with the weakness or softness in China that happened almost like six, nine months ago, we have obviously seen some level of weakness over the past, I would say, six to nine months, and all largely due to China. It also -- and it would be great if we see China recover as some indications may be already happening.

Okay, great. Thank you. Miller Tabak: Okay, great. Thank you.

Thanks, Brendan.

And our next question comes from Ian Ing with Lazard Capital Markets. Please proceed. Ian Ing – Lazard Capital Markets: Thanks for taking my question. First question is in wireless. There were some competitors talking about improving their RF presence on the Qualcomm reference designs. I think you have some incumbency there. So, how important is that? And do you have any granularity on opportunities for reference design platforms in the future like Qualcomm?

Well, we’re very closely engaged with multiple base band players. Of course, we are particularly engaged very well with Qualcomm, so, are a few of our competitors, by the way. So, we don’t really see that situation changing. And I will not say we are pure the only one in any reference design Qualcomm. I think there are multiple other players in many of their reference design. But we are definitely a very close partner or, yeah, component partner to Qualcomm in many of their reference designs. Ian Ing – Lazard Capital Markets: Great. And second question, R&D about 14% next fiscal year. Last year, at the Analyst Day, you had a breakdown on the spending in the different segments. Perhaps you could talk a little bit about that and any investments in industrial, assuming, if -- should China and renewable stay where they are?

Yeah. Ian, I don’t remember the exact numbers we showed you last year, but I wouldn’t guess the breakdown is terribly different this year than it was last year. We invest heavily in wireless and the wired infrastructure market. It’s the growth engines of the company, and so that’s where the R&D dollars get allocated. That’s not to say we don’t invest [in the other] end-markets, it’s just to a lesser extent. Ian Ing – Lazard Capital Markets: I think last year you had wireline more than wireless. So, is that still the case or?

They’re probably pretty comparable. Ian Ing – Lazard Capital Markets: Okay. Thanks.

And our last question is a follow-up from Terence Whalen with Citi. Please proceed.

Hi. Thanks for fitting me in with the follow-up. This is a longer-term wireless question. As we see the constitution of smartphone growth move more toward Asia, out of the more penetrated US market, how does that affect the wireless business? How does that affect the proportion of FBAR as a portion of your sales? And is that a factor contributing to your bringing more of the [gas] capacity in-house? Thank you. Citigroup: Hi. Thanks for fitting me in with the follow-up. This is a longer-term wireless question. As we see the constitution of smartphone growth move more toward Asia, out of the more penetrated US market, how does that affect the wireless business? How does that affect the proportion of FBAR as a portion of your sales? And is that a factor contributing to your bringing more of the [gas] capacity in-house? Thank you.

Interesting question, Terence. And [here’s we’re] not thinking long term of the wireless RF component business [for us]. And as you know, we supply both FBAR duplexers, the filter that is, as well as the power amplifiers now. And where we see is, you're right, more and more of the growth, if you look at smartphone growth as opposed to total headset growth, more and more smartphone growth will be coming from emerging countries like China, where -- in certain parts of Europe, but definitely China and emerging countries, where smartphones are lesser penetrated. So that will be one factor of it. Having said that, one of the interesting thing we find in this wireless handset market or smartphone market is it pushes, constantly pushes the envelope in next generation, as we see from 3G to 4G/LTE or 4G, as we call it, and will be next 4.5G, 5G. And as each -- what it implies is more and more bands are out there. And more and more bands out there, more and more roaming throughout different countries come in, which basically require every phone, every smartphone to have more and more RF content. So what we see is another situation, whether it’s developed countries or emerging countries, particularly so in developed countries, where the content of -- the RF content of a smartphone increases fairly rapidly. As I mentioned earlier, one band requires, in theory, one duplexer, discrete duplexer, and one PA. You can integrate the PA, the power amplifiers, so that they share across bands. But duplexers, much, much harder, in fact, impossible. So, the duplexer content will definitely grow very linearly with the complexity of smartphones as we move to higher wireless bandwidth over time. Power amplifiers may not grow as linearly, but still the content will increase. And so for us, we see this smartphone market as an extremely interesting opportunity that will continue to grow very, very well for us.

That’s very helpful. Thanks, Hock. Citigroup: That’s very helpful. Thanks, Hock.

Thanks, Terence.

And we have no further questioners in queue at this time. I’ll turn it back over to Jacob Sayer for closing remarks.

Thank you, operator. Before we close, I’d like to remind everyone that Avago will be presenting at Barclays Technology Investor Conference in San Francisco on December 7. This presentation is going to be webcast live and archived for replay in the Investor section of our website. Thank you for participating in today’s earnings call. We look forward to talking with you again when we report our first quarter fiscal year 2012 financial results in late February.

That concludes Avago’s conference call for today. You may now disconnect.