Broadcom Executive Insights: More Mobile and Wireless Details, Baseband Opportunities

On Tuesday, Broadcom Corporation (NASDAQ:BRCM) reported its first quarter earnings and discussed the following topics in its earnings conference call. Here’s what the C-suite revealed.

More Mobile and Wireless Details

Harlan Sur – JPMorgan: Good job on the quarterly execution. Within your Mobile & Wireless division in Q2, Scott, can you just give us a little bit more detail about the moving pieces, so you said that excluding the 2G ramp and 2G ramp down in multimedia core processor declined. Are you – within that, are your 3G baseband processors and combo solutions both going to grow in Q2?

Eric K. Brandt – EVP and CFO: Yeah. We – let me put a little more color on that. We originally said that we expected 3G to cross-over 2G sometime mid-year of this year, and instead what we saw is considerable strength in our 3G baseband business, and they crossed over in the first quarter. We do expect them to continue to grow in the second quarter, so that’s one of our growth drivers in the second quarter. We still see some softness in our 2G business, and we expect that to continue to decline over the curse of the year, but I think after the second quarter the headwinds are pretty much gone, and we don’t expect to see headwinds in Q3 or Q4. With some customers for example like Samsung we’re primarily 3G today. At Nokia (NYSE:NOK), we’re a 100% 2G, and at this point we don’t expect material revenue from Nokia 3G this year. We expect that will be a 2013 event at this point.

A Closer Look: Broadcom Earnings Cheat Sheet>>

Harlan Sur – JPMorgan: Can you just talk about at a high level customer and channel inventories exiting the first quarter in your three segments and just give us a sense in terms of how much of the growth you’re seeing in Q1, if that inventory replenishment versus end demand pool and/or new product ramps?

Scott A. McGregor – President and CEO: I think inventories are generally in pretty good shape. You can see that we exited Q1 with 7.7 turns. So, our inventory is incredibly good shape and if anything, we probably like to even increase it a little bit to have more parts on hand. We do have customers in some cases still having a little bit of inventory they need to work down. But in many other cases and becoming more common, we have more customers expediting parts and trying to pull in orders. So, I’d say it’s a fairly normal inventory situation at this point. We see some customer with more or less but looks pretty normal. I don’t think it’s driven so much by inventory replenishment but more natural demand that we are seeking from customers.

Baseband Opportunities

Ross Seymore – Deutsche Bank: Congrats on the good quarter and guide. On the baseband side of the business and even to a certain extent on the connectivity side one of your competitors has made a lot noise with their fully integrated solution that they are having a little bit of difficultly manufacturing now. What impact does that lack of ability to manufacture having on your business, is that opening up opportunities, what sort of threats or even opportunities you’re seeing on the combo and baseband side of things.

Scott A. McGregor – President and CEO: First of all, I have to comment that the fully integrated solution doesn’t use any fewer chips than our solutions. So, that’s more of a marketing phrase then I think a reality out there. We have heard rumors from customers that they are struggling with manufacturer of that part and little hard to determinate whether it’s a allocation issue or whether it’s a product issue or other things we hear various rumors along those lines, but I think one of the messages that’s clearly come out is that customers are hesitant to bet on Qualcomm (NASDAQ:QCOM) that has not worked well as a strategy for those who put all their eggs in one basket, which is very favorable for us. So, I’d say, we’re seeing much more interest from customers especially as we get our own more advanced 3G and 4G solutions better to market. So, I’d say overall, we see an improving interest in customers in our products and contributing to design wins going forward.

Ross Seymore – Deutsche Bank: As my one follow-up on the gross margin side of things, Eric, you guys had a nice beat to the upside in the first quarter. Your guidance were flat in the second quarter, can you go through a little bit of the puts and takes there because from the end market mix in your growth drivers on the revenue side, it seems like mix would be a positive?

Eric K. Brandt – EVP and CFO: It actually is Ross, half – so we guided flat. We were up 150 basis points, roughly half of that is standard margin and roughly the other half of that is what I’d call under cost of sales principally release on the E&O line. We don’t forecast that as an ongoing trend, so if you think about it and you assume that that reverts back the way it was, then really the underlying gross margin was up about half of that 150 basis points and going into Q2 it’s up the other half of that 150 basis points on the flat guide given that we’ve sort of reversed the benefit in our forecast of that E&O side. Now we don’t know we just – that’s just the way we forecasted. In addition, there is another head – there is a couple of other headwinds on the other cost of sales like picking up some of additional royalties from patent trolls and things like that from some of the settlements we’ve got, but fundamentally the margin trend is favorable as I mentioned last quarter and we are cautiously optimistic as I go across the year.