Broadcom Corp. Q4 2009 Earnings Call Transcript

123jump.com Staff
05 Mar, 2010
New York City

Revenues rose 18.6% to $1.34 billion & net income was $59.2 million or 11 cents a share. Total gross margin improved 220 basis points to 53.1%. Product gross margin in Q4 increased 240 basis points to 50.9% versus 48.5% in Q3. Cash flow from operations was record $332 million or 25% of net revenue.

Broadcom Corp. ((BRCM))
Q4 2009 Earnings Call Transcript
February 3, 2010 4:45 p.m. ET

Executives

T. Peter Andrew - Vice President, Corporate Communications
Scott A. McGregor - President and Chief Executive Officer
Eric K. Brandt - Senior Vice President and Chief Financial Officer

Analysts

Sumit Dhanda - Banc of America/Merrill Lynch
Craig Berger - FBR Capital Markets & Co.
Craig Ellis - Caris & Company
Adam Benjamin - Jefferies & Co.
Ross Seymore - Deutsche Bank Securities
Uche Orji - UBS
Tim Luke - Barclays Capital
James Schneider - Goldman Sachs
Ruben Roy - Pacific Crest Securities
Stacy Rasgon - Sanford C. Bernstein & Co.
Arnab Chanda - Roth Capital Partners LLC
David Wong - Wells Fargo Securities, Llc
Allan Mishan - Brigantine Advisors Llc
Edward Snyder - Charter Equity Research
David Wu - GC Research Ltd.
Suji De Silva - Kaufman Brothers
Srini Pajjuri - CLSA
Brian Blair - Wedge Partners

Presentation

Operator

Welcome to the Broadcom Fourth Quarter and Year 2009 Financial Results Conference Call. During the presentation all participants will be in a listen-only mode. Afterwards, we’ll conduct a question-and-answer session. As a reminder, this conference is being recorded, Wednesday, February 3, 2010.

Your speakers for today are Scott McGregor, Broadcom’s President and Chief Executive Officer; Eric Brandt, Broadcom’s Chief Financial Officer; and Peter Andrew, Vice President of Corporate Communications.

I will now turn the call over to Mr. Peter Andrew. Mr. Andrew, you may begin.

T. Peter Andrew

Thank you very much, Monica. 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 2010 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 the 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 include among other things general economic conditions are discussed in the Risk Factors section of our 2009 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 lease.

As always, we undertake no obligation to revise or update publicly any forward-looking statement except as required by law. Please refer to the Investors 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 Investors section of our website that is on the right-hand side of the page under Q4 2009 earnings information. For increased transparency, we have incorporated additional tables and information regarding our future guidance, historical performance and the last three years of segment operating income.

With that, let me now turn the call over to Scott.

Scott A. McGregor

Good afternoon. And thanks for joining us today. Broadcom continues to execute well in a difficult economy and executed particularly well in the fourth quarter with substantially better results than we originally anticipated, driven by upside demand in several of our businesses.

For the fourth quarter, we reported net revenue of $1.34 billion, which is up over 7% from our third quarter. Broadcom’s quarterly revenue reached a record level and is up 57% from the trough quarter in Q1 2009.

Sequential revenue growth in the quarter was a result of overall strength in our broadband and enterprise businesses, which were up 14% and 18% respectively, offset by an expected seasonal decline in our mobile and wireless business.

The upside in revenue was driven by new product ramps, normal customer order patterns and a better than expected holiday season along with strong demand from customers in Asia. Broadcom far surpassed our 2009 financial goals of gaining market share, while at the same time generating strong cash flow from operations.

Broadcom’s annual revenue declined approximately 4% year-over-year significantly better than the overall industry decline of 9%. We generated $987 million in cash flow from operations for 2009, far surpassing our $300 million goal for the entire year and reached a record level for Broadcom despite the difficult market environment entering the year.

Broadcom’s goal remains to create great products, that enables us to grow our market share and deliver better than industry revenue growth. Broadcom has also been successful in generating strong sequential growth in operating margin leverage and is committed to returning to our financial model as outlined on our Analyst Day last December.

We believe we can achieve all of these objectives while at the same time initiating a return of capital to our investors. That confidence in our business is the foundation for the announcement we made this afternoon to initiate a quarterly dividend.

I’ll now turn the call over to Eric for details on the fourth quarter results and first quarter guidance.

Eric K. Brandt

Thanks, Scott. As Peter mentioned, please refer to the segment breakout data on 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 further breakout revenue and income related to our intellectual property licensing.

Moving to the financial overview, to summarize for Q4, total revenue of $1.34 billion, including $1.28 billion in product revenue. Q4 total net revenue was up approximately 19% from prior year and 7% from Q3 levels.

Total gross margin improved 220 basis points to 53.1%. Product gross margin in Q4 increased 240 basis points to 50.9% versus 48.5% in Q3. Q4 2009 GAAP R&D plus SG&A expense was $481 million. This included a network recovery of legal expenses of $63 million. On a comparable basis, excluding this recovery, these expenses increased $10 million over Q3.

Earnings per share for Q4 were $0.11. This includes approximately $0.33 per share negative impact associated with certain settlement costs primarily related to our proposed class action settlement. It also includes $0.12 per share positive impact associated with the recovery of legal expenses discussed above. Excluding these non-recurring items, earnings per share were $0.32, compared to a first call consensus of $0.22.

Stock -based compensation dropped to 9% of net revenue to approximately $121 million and represented approximately $0.23 per diluted share. Cash flow from operations for Q4 was a record $332 million or 25% of net revenue. Full year cash flow from operations was also a record of $987 million.

Our cash and marketable securities balance was flat sequentially at $2.4 billion at the end of the quarter despite $215 million in share repurchases and $166 million used primarily for the acquisition of Dune Networks.

Moving to revenue and gross margin, in December at our analyst meeting, we said we expected Q4 total net revenue to increase approximately 5% sequentially over Q3. What occurred in Q4 was that Broadcom generated stronger total sequential net product revenue growth of approximately 7% thus the total revenue was $1.34 billion.

Our broadband communications segment also known as solutions for the home came in stronger than we had expected with growth in broadband cable modems and digital set-top box target markets.

In the mobile and wireless segment also known as solutions for the hand, we experienced modest seasonal revenue decline as we had anticipated due to the significant strength in Q3 ahead of the holiday season.

Our enterprise networking segment, otherwise known as solutions for infrastructure, also came in stronger than we had anticipated driven principally by the continued improvement in customer order patterns in the Ethernet switching area.

Our Q4 GAAP product gross margin increased 240 basis points or 170 basis points net of E&O to 50.9% up from 48.5% in Q3, which is above the improvement estimate of 100 basis points net of E&O provided at our analyst meeting in December. This was primarily due to favorable changes in product mix and continued focus on cost improvements.

Moving to operating expenses, once again we had better than expected performance in controlling our R&D and SG&A expenses. Total R&D and SG&A expenses for Q4 were up $10 million from Q3 levels, excluding the non-recurring D&O insurance receipt of $63 million, compared to the increase of $20 million we expected in October.

The favorable under run to guidance in Q4 was principally driven by lower than anticipated employee costs. Legal expenses actually increased beyond our original guidance due to costs associated with a trial in the quarter.

During the quarter, the company also recorded settlement costs of $176 million of which $161 million related to our proposed settlement of our securities class action and $12 million related to a post-acquisition technology transfer fee to the Israeli government related to our acquisition of Dune Networks.

Moving to the balance sheet. As I mentioned earlier, total cash and marketable securities were $2.4 billion, as we generated positive cash flow from operations of $332 million. We repurchased approximately 7 million shares of our stock in the quarter at an average price of roughly $29 per share as part of our ongoing goal to offset dilution associated with our annual equity grant. For the full year, we repurchased 15 million shares as part of this program.

In addition to the record cash flow from operations in the quarter, Broadcom also produced record cash flow from operations of $987 million for the full year in the face of one of the toughest economic environments since the depression, reflecting our alignment and focus on the key cash flow metric we outlined just over a year ago at our 2008 Analyst Day.

As we projected in December, inventory turns came in at seven times. Our accounts receivable day sales outstanding decreased from 39 days in Q3 to 35 days in Q4 driven by strong collections at the end of the year.

Moving to expectations. We currently expect revenue in Q1 to be flat to up 5% to Q4, which would be up over 50% versus Q1 a year ago. Sequential sales expectations for our segments of broadband communications, mobile and wireless and enterprise networking will roughly follow the overall guidance of flat to up somewhat.

We expect decline approximately 100 basis points in Q1. This is almost entirely driven by the temporal distortions associated with E&O and acquisition accounting. Excluding acquisition-based charges of amortization and inventory step up and our base assumption of zero E&O, product gross margin would be essentially flat to Q3 and be comfortably within our targeted model. Please note that this guidance does not contemplate any impact from the transaction announced today.

With respect to R&D and SG&A expenses in Q1, we expect the expenses to increase by approximately $10 million, excluding the effect of the net recovery of $63 million of legal fees received in Q4.

This will be driven principally by employee cost adjustments from our annual compensation review process and our Q1 fringe accounting step up which reduces across the year plus seasonal spending on trade shows, et cetera.

Legal spending is expected to drop by approximately $15 million as an anticipated options related trial in Q1 was canceled. Tapeout and prototyping expenses are anticipated to be roughly flat. Before I turn the call back to Scott, let me comment more broadly on the anticipated legal spending for 2010.

We are pleased to have the favorability in Q1 but for now are cautious about additional favorability throughout the year. We still have exposure to legal fees in the remaining derivative action and there continues to be some uncertainty surrounding the options matters that were dismissed last quarter.

We anticipate being able to provide a better picture when we report Q1 in April 2010. Finally, as Scott mentioned, we announced today our decision to initiate a dividend at $0.08 per quarter.

We believe this reflects our powerful cash flow generation profile as a company, supports our commitment to financial discipline and will provide our investors an additional opportunity to earn a return on their investment in Broadcom.

And now, I would like to turn the call back over to Scott to talk more about the state of the business.

Scott A. McGregor

Thanks, Eric. Starting with our home platform, our Q4 revenue from broadband communications grew almost 14% sequentially driven by growth within the set-top box and broadband access product lines and with flat revenue from our consumer electronics product lines following the typical peak third quarter holiday shipments.

We made several important broadband product announcements. First, was a new line of HD cable set-top box SoC solutions with integrated MoCA for the North American and European markets. Our integrated MoCA products are built on our very successful line of set-top box silicon solutions for the cable service provider markets.

Second was a new crystal HD solution that brings high definition video to netbooks alongside Intel’s Atom Microprocessor. Our HD video accelerator is a companion chip to be CPU, providing a cost effective and power efficient solution for the netbook market that leverages our portfolio of video intellectual property.

Third was we are the first to ship a single-chip Blu-ray Disc solution integrating proven optical front-end and back-end video decoding and display technologies on a single die. Independent industry analysis now confirms that Broadcom has become the leading provider for silicon solutions for Blu-ray Disc players.

We believe that the connected home provides a number of large and long-term opportunities given our broad video processing, wired and wireless connectivity portfolio.

For those of you who attended the Consumer Electronics Show, I’m sure that you walked with a better understanding of our horizontal integration strategy and the increased penetration of wireless connectivity and Ethernet capabilities into broadband communications products. We believe the breadth and depth of our product portfolio is a long-term strategic competitive advantage for the digital home market.

Moving to infrastructure, Broadcom’s enterprise networking business delivered the highest sequential revenue growth rate in the fourth quarter at approximately 18% with record sales of switches and PHY.

Growth in the quarter was broad-based and our customers in the enterprise and service provider markets continue to increase their demand and roll out new platforms. In particular, our switching and PHY products are used extensively by OEMs to build switches and routers for 3G and broadband network infrastructure in Asia.

We also experienced a strong increase in demand for 10-gigabit products throughout 2009 from enterprise and data center customers. To further advance our competitive position, today we announced we are sampling several new 10-gigabit Ethernet products. The first of these is the industry’s first to sample 40-nanometer lowest power 10GBASE-T PHY in both dual and quad configurations.

10GBASE-T enables connections up to 100 meters over inexpensive UTP cables to enable wide scale deployment of 10-gigabit Ethernet with backward compatibility to gigabit Ethernet installed infrastructure. At approximately 3.5 watts per port, OEMs will be able to design cost effective, high density 10GBASE-T switches and adapters to bring down the total cost of ownership.

The second announcement we made this afternoon was our third generation dual port 10-gigabit Ethernet Converged-NIC with a number of cutting edge features including bidirectional line rate performance across both ports and greater than 1 million IOPS of storage engine processing capability for both FCoE and iSCSI.

This is the only offload chip in the industry that supports iSCSI, FCoE and TCP Chimney simultaneously over a single Ethernet port and it truly delivers on the vision of a converged data center network for the enterprise cloud and financial markets. The new device supports a complete set of virtualization features and is the world’s first 10-gigabit controller supporting the Energy Efficient Ethernet or EEE standard.

Broadcom switch products have achieved wide adoption across the world for DSL and PON deployment. To further advance our portfolio of industry leading platforms supporting the rapid build out of broadband networking in Asia, we decided to enter the EPON market and participate in the service provider buildout in the region. That’s why today we announced the acquisition of Teknovus, which is a major player in the EPON market.

Moving to our hand platform, within our mobile and wireless business, Broadcom experienced a sequential product revenue decline of approximately 4% as growth in wireless LAN and VoIP were offset by declines in other connectivity products after above seasonal growth in both the second and third quarters of 2009.

Within the cellular market, we are pleased with the performance and traction we are receiving from current Tier 1 customers, Samsung and Nokia and we are excited about our roadmap customer diversification opportunities of other handset OEMs and ODMs.

We announced a new multimedia co-processor solution during the quarter in 40 nanometers, which delivers 10 ADP camcorder and high-performance 1 gigapixel per second 3D graphics all in the power envelope of a mobile phone. We look forward to displaying this and our other cellular platform solutions at Mobile World Congress in two weeks. We hope you can join our open house on February 15.

Wireless combo solutions continue to do exceptionally well. The roll out of our leading industry products were timed for market acceptance of multiple integrated connectivity radios as proven by our shipments of approximately 500 million wireless combo devices to date.

For the full year 2009, wireless combo product revenue exceeded 10% of Broadcom’s total sales. We believe our combo portfolio is a competitive advantage that will extend in 2010 as the majority of large designs and RFPs in the mobile phone market now require more three or more connectivity radios versus standalone or dual radio designs in previous years. We are designed into a number of key Android handsets today and are a lead connectivity supplier into four of the five significant smartphone operating systems.

Finally, one of our newest triple-play combo parts, the BCM2075, which integrates Bluetooth, GPS and FM, has been named as the 2009 product of the year from Electronic Products China.

We are also seeing increased adoption of Broadcom’s wireless connectivity chips in the consumer electronic devices such as digital television, Blu-ray and set-top boxes which are on retailer shelves today.

Wireless LAN provides Internet connectivity which enables access to video services like NetFlix and Skype. Bluetooth enables a new generation of user-friendly remote control devices with QWERTY keyboards, streaming audio and connectivity to mobile handsets.

In summary, Broadcom is benefiting from some very powerful long-term trends entering 2010. We have momentum building with acquisitions in the data center and broadband access space, new competitive 40-nanometer parts, increased addressable market opportunities through our home platform integrating connectivity in Ethernet, upcoming third-generation combo products and the ongoing ramp of our cellular baseband products.

These factors combined with a strong free cash flow generation model are the engine for Broadcom’s continued growth and gives us the confidence to introduce a dividend to return capital to our shareholders.

That concludes our prepared comments today and we are now ready for your questions. Monica, may we have the first question, please?

Question-and-Answer Session

Operator

Certainly. We will now begin the question-and-answer session. If you have a question, please press star then one on your touchtone phone. If you wish to remove from the queue, please press the pound sign and hash key. If you are using a speakerphone, you may need to pick up the handset first before pressing the numbers. Once again, if there are any questions, please press star then one on your touchtone phone.

Our first question comes from Sumit Dhanda of Banc of America.

Scott A. McGregor

Hey, Sumit. Can you hear us?

Sumit Dhanda - Banc of America/Merrill Lynch

Yeah. Sorry about that.

Scott A. McGregor

Mic…

Sumit Dhanda - Banc of America/Merrill Lynch

Quick question. On the legal expense front, Eric, is the understanding that the $15 million sequential decline you’re seeing this quarter that will revert back up again or it will stay flat at this level pending more clarity?

Eric K. Brandt

Sumit, all I can give you is guidance for Q1. As you know, the company has moved down the path to resolve its legal matters and there remains open the derivative action and potentially we still don’t know what the SEC and DOJ are going to do in terms of appeals.

So until we have a better picture of that we are remaining cautious but we are quite pleased to give you the $15 million at least in Q1 and we will have a better picture when we get to April.

Operator

Sumit, does that answer your question?

Scott A. McGregor

Sumit, did you have another question? Okay, Monica, take the next call.

Operator

Our next question comes from Craig Berger of FBR Capital Markets.

Craig Berger - FBR Capital Markets & Co.

Hey, guys. Nice quarter. And thanks for taking my question. You seem to be shipping above seasonal in some businesses in the first quarter. Is that because your customers need product to meet their demand or are they trying to replenish a little bit here in the seasonally slower part of the year? Can you just give us any color around what you see with your customers?

Scott A. McGregor

Sure, Craig. Happy to do so. What we see is a scenario where Christmas happened but seasonality doesn’t appear to be happening, we see a very strong first quarter. There are many theories people have, is it budget flush, is it inventory building or is it just genuine strength from our customers. We certainly see the latter. We see the customers definitely selling through and building a lot of strong products and we have some very good product ramps that are contributing to our growth.

We don’t see particular inventory in the channel. We had discussion of this over the last week. There are always a few pockets here and there but we don’t see any abnormal inventory building up. And I can’t comment on the budget flush but certainly we do see strength in our customers and strength in the product ramps.

Craig Berger - FBR Capital Markets & Co.

Great. And I guess this is a follow-up. How do we think about your wireless combo chip opportunity this year? How do we think about growth there and new product generations and what are your plans for a number of new product launches this year? Thanks a lot.

Scott A. McGregor

You can certainly expect we will introduce some new products as we advance. But we have some great products out there right now. I think the triple-play parts, the 4325, 4329 and the latter in particular are really strong. We’re seeing design wins just across a lot of different markets and very, very good strength there.

As I said to my prepared remarks, we are also seeing a move away from the discrete parts and the two component parts to triple component parts. And that’s also very good timing as we launch our GPS products, GPS, I see as definitely a pickup. Both wireless LAN penetration and GPS penetration I think are going to drive good growth for our wireless combo products across the year.

Craig Berger - FBR Capital Markets & Co.

Great. Thank you so much.

Operator

Our next question comes from Craig Ellis of Caris & Company.

Craig Ellis - Caris & Company

Thanks, guys. Nice job. Eric, can you just talk about some of the gives and takes on the gross margin line? As we look ahead how much benefit from 60-nanometer mix shift progress is there and are there any headwinds out there that we should be aware of as we think about 2010?

Eric K. Brandt

Sure. So, in general, I would say we are certainly quite pleased with the performance this quarter being up 170 basis points net of E&O. I would say about a quarter to a third of that is mix related and about two-thirds to three quarters of that are actually related to cost improvements.

Cost improvements embody to things. They embody actual good work on our ops group to get lower costs on the wafer side but is also the ramp of some of our newer and lower cost products which will ramp across the year.

So the reason why I made the comment that in Q4 and in Q1 net of E&O and acquisition related charges we’re comfortably back in our targeted model and pretty much right in the center of that. I can’t give long-term guidance but as I mentioned earlier, last year, our focus on gross margin is paying off and you’re seeing it now.

Craig Ellis - Caris & Company

Okay. Congratulations on that. And I don’t know if this next one is for you or Scott, but, one, on the dividend, how did the company settle on $0.08 a share and two, as we think about the company now being a dividend payer. What does that mean for the acquisition prospects for the company?

Eric K. Brandt

Sure. So Craig, I would say, that we thought about the dividend a lot and talked about it a lot internally. You have heard us sort of even thinking about it out loud to some degree. As we thought about $0.08, we wanted to make sure that we selected a number that was meaningful in terms of the dividend yield and in our view as we looked at the companies that were growth companies, the growth in income companies that number is typically around 1% or slightly above that. I don’t think Broadcom is ever really going to be a yield company, I think we are a growth and income company.

And so as we set our targets for the dividend and for our plan, we thought very much about growing revenue faster in the market, growing profits faster than revenue and being able to deliver cash back to the shareholders. As we looked at our cash flow, you can see, again, in one of the worst economies since the depression, we has record cash flow from operations and we look at our plan going forward we believe we have sufficient cash flow to pay a dividend, to buy back shares to offset dilution and to make acquisitions. And that’s how we balanced it and we will continue to balance that on an annual basis as we think through it.

Eric K. Brandt

Thanks, Eric.

Operator

Our next question comes from Adam Benjamin of Jefferies.

Adam Benjamin - Jefferies & Co.

You guys, Eric, first question just a continuation on gross margin. I know that E&O has gone back and forth a little bit here with a downturn in 2009. But and I know you don’t want to give guidance for Q2 specifically. But as it relates to that charge, does that go back in your favor as you get into Q2?

Eric K. Brandt

So, the reason why I gave you the number net of E&O is because I want you to understand what the underlying gross margin of the company is, excluding these swings back-and-forth. Between Q4 and Q3, we have had about 150 to 160 basis points or release in E&O part of which in Q3 was masked by the DTV impairment. And so I think we are actually consuming the excess E&O that we had on our books.

I think there might be some marginal favorability across the year but I do think the right way to look at it is to wash it our of the number and understand what the underlying gross margins of the company is net of these E&O swings and net of any of these acquisition related charges.

Adam Benjamin - Jefferies & Co.

Got you. And then just to follow up on the, just the better than normal guide, given some seasonality in the mobile and wireless business obviously the ramps elsewhere. Can you just comment regarding just how we should be thinking about what’s going on out there, I know there is a lot of back and forth. Cisco seems to be indicating that business has improved dramatically and they’ve built some inventory but have a pretty significant guidance for the next quarter. So it would seem to justify where business trends are going.

But, Scott, I wonder if you could comment on commentary with your customers about that inventory discussion? I know you guys have typically shied away from saying we’re convinced there is no double ordering or there isn’t inventory out there because you typically don’t know for sure. But I was curious if you just give some commentary with your recent discussion you mentioned last week, Scott?

Scott A. McGregor

Certainly. I’m happy to do so. First, I just want to clarify that we believe that all three of our segments are in the range of flat to up slightly. So I think you had said at the beginning that you thought our mobile and wireless might be down and offset. So I just want to correct that, but in terms...

Adam Benjamin - Jefferies & Co.

I’m just saying typical seasonality would be that way, but…

Scott A. McGregor

Okay. Fine. In terms of the conversations we have of customers, frankly we have a number of customers expediting parts and they are absolutely shipping to end-users. So we see a lot of customers where if we could supply more parts, we could ship more, so we see a little bit of that going on.

We don’t believe they are building inventory, we do believe they are shipping through. I’m certain there must be some customers somewhere building inventory, as you point out. But generally we don’t see a typical environment out there. We have looked at distributor inventories. We have looked at a variety of things. We just don’t see a story for inventory build this point.

Adam Benjamin - Jefferies & Co.

And just one follow-up on that. You mentioned you would ship more parts if you could. Are you constrained and if you are, any specific, of your three main end markets, some perspective there would be helpful and when you think you could be less constrained going forward would be helpful to know?

Scott A. McGregor

Our constraints are not coming from inability to get silicon. We believe we can get access to all the silicon we need now and going forward this year. The constraints are coming more from very short order lead times from customers where they are hoping to get parts substantially within our lead time, typically because they have gotten orders within a short lead time for them.

So that’s where typically the expedites are coming from. So it’s hard to predict how that will trend throughout the year, so I will decline to do that but right now we do have some customers who wish they could get parts faster than we can deliver them.

Eric K. Brandt

Yeah. I’d just add to that, Adam, I mean, you can see that we have taken our inventory from the normal eight turns down to seven turns. I think part of that is in light of the strength we saw in Q4 rolling into Q1 and part of that was just in light of the fact that we understand the capacity is relatively tight. We want to make sure we have sufficient inventory of some of the new parts that are ramping.

So we are doing our best to make sure that we have supply. I think our customers are pleased that we are able to supply them and to the extent there are upsides we will do our best to manage them.

Adam Benjamin - Jefferies & Co.

Great, guys. Thanks. Very helpful.

Operator

As a reminder, participants are asked to limit themselves to one question. Our next question comes from Ross Seymore of Deutsche Bank.

Ross Seymore - Deutsche Bank Securities

Hi, guys. Congrats on the strong quarter. Last quarter you gave some helpful color on what the baseband revenues were. Can you give us an idea on what they did in the fourth quarter and maybe 2009 as a whole?

Eric K. Brandt

I’m glad you’re pleased we gave that guidance last quarter but we’re not going to do that every quarter. We do believe and I will certainly reiterate that we do expect basebands to be a growth driver for us, a significant growth driver for us in 2010.

We see new models ramping from both of our major customers and we believe that will drive significant growth in that business over the quarter. Generally we are pretty pleased with both the quality of the models and the quantity of the models we are seeing and the revenue, we believe will come from that.

Scott A. McGregor

And also the mix, the mix changing from 2G over to more 3G.

Eric K. Brandt

Correct.

Ross Seymore - Deutsche Bank Securities

Got you. And then completely changing gears, now that the legal expense side, a lot of it is now behind you, but I think we’ve all seen in the press some of the stuff about the founders of the company wanting to come back. Does that in any way impact anything on the managerial structure or strategy that you guys are putting into place?

Scott A. McGregor

No. It doesn’t.

Ross Seymore - Deutsche Bank Securities

Thank you.

Operator

Our next question comes from Uche Orji of UBS. Please go ahead.

Uche Orji - UBS

All right. Thank you very much. Scott, just a couple of quick questions. One is Teknovus. Can you give me an idea what the annual revenue is and headcount, and also how the margins for that business now compare to your GPON products margin?

Eric K. Brandt

Sure. So, it’s Eric. The Teknovus revenue is sort of in the tens of millions of dollars. There are about 100 people maybe a little bit more,

Scott A. McGregor

About 140 people.

Eric K. Brandt

140, about 100 or so in the engineering side of the house. Was there another question embedded in there?

Uche Orji - UBS

No. I was just wondering how the margins at the moment compare, but if you compares with...

Eric K. Brandt

I would say, as a business, often what we find is that when we buy smaller companies, our pricing is better than smaller companies. And as I think we look at our enterprise business, as we look at Teknovus’ business we think their margins are consistent with our enterprise business, over the time as we work through that.

Uche Orji - UBS

Okay. That’s great. A different question. On crystal HD, Scott, you talked about that in the opening remarks. Let me ask you this, what kind of attach rate are you seeing with that product along with Atom and in the marketplace? One will want to see that product against NVIDIA and what is the feedback you’re getting as to the cost benefit of crystal HD versus any other competitor solution out there?

Scott A. McGregor

Uche, I don’t have the specific number for you, but we are seeing very, very good reception for that product. It’s a great product in that it hits a very good price point. It’s exactly the feature components that people want and it’s very low power.

So compared to some of the other solutions out there, it generally provides substantially better battery life and it’s substantially cheaper. And it gets the job done beautifully to play back 1080p HD video, which is really the sweet spot for that product. So we are seeing a lot of interest in a lot of designs from OEMs all over the world.

Uche Orji - UBS

Okay. And then just finally, I’m not asking you for guidance per se for 2010, but if one were to look down through 2010 and one had to say, is that the top five revenue drivers for Broadcom for 2010, how would you describe that? I mean, there are just so much concern on the micro.

So I know it’s difficult to kind of give that much of a view, but how would you kind of guide us into thinking about how revenue, what products will to drive revenue in 2010? Thank you. That’s my last.

Scott A. McGregor

It’s hard to predict exactly which ones will do that. But I can give you a list of a handful that I think are going to be significant drivers. Certainly as I mentioned already, we believe that cellular baseband will be a significant growth driver for us in this year. And I think many people also underestimate the overall multimedia products that we have and so those into cell phones and other products, I think are going to be a significant growth driver.

In the combo space, GPS and wireless LAN are very strong. I believe the increased penetration rates of those features will drive very strong revenue growth for us over the course of the year.

The consumer electronics space, digital TV and Blu-ray and all the over the top services we enable with some of those devices, I think are going to give us a growth driver in that space.

And then in the enterprise space, certainly the 10-gig transition, we’ve seen a multi-fold increase in products in 10-gig over the course of the last year. I expect that is going to continue. Those have higher ASPs. They add a lot more value for customers and so a 10-gig should be a driver as it manifests in PHY’s and switches and other related products.

So those of you my best guess as to the strongest growth drivers for us but we always have one or two surprises and there may be some others as well.

Operator

Our next question comes from Tim Luke of Barclays Capital.

Tim Luke - Barclays Capital

Thank you so much. Scott or Eric maybe often the beginning of the year in areas like wireless can be seasonally lower and it sounds like you’re expecting all of the businesses to be flat to higher in the beginning of the year. Do you have a feel of what you see now as to how you think the rest of the year may shape given the business drivers? Do you anticipate that you would see some a modest sequential progression through the year?

And then, separately, Eric, if you could just clarify, you said that the OpEx, the legal spending is going to be down $15 million, I think but overall the OpEx is up 10. What are some of the factors with that? And it sounds as if you are inferring that there is some ongoing legal uncertainty in the options case that might bring back legal expense.

Can you just frame that at all as to why that would be the case that you would have to have incremental spending on a case that seems to have been dismissed and how material we think we should think about that? Thank you so much, guys.

Eric K. Brandt

So, let me start with the last one, which is on the legal side. And essentially, Tim, as you know, I tend to be fairly conservative, so I don’t want to count my chickens before they hatch. But the criminal case was dismissed, although it’s unclear whether there will be an appeal on that.

In the process of clearing the criminal case and settling the class action it accelerates the derivative action, which could go to trial in Q2, which could cause additional costs. Our hope is that it will get settled and resolved, which will save the company a lot of money but at this point I don’t want to count on that until it happens.

Moving to the OpEx, just to give you a sense, you’re right, legal is down 15 and I said up about 10. There are some odd accounting things that occur in Q1 and just give you a sense between the fringe step-up I mentioned and vacation accrual which reverses from the holiday season, so it doesn’t really reverse, but it steps up from people taking a lot of vacation during the holiday season that hits us about $20 million.

And then the other thing is between the focal both the salary and stock-based comp, you are talking $5 to $10 million as well. So there are just a couple of natural step-ups and so our annual merit increase, which occurs every year except in 2009, sort of feathers its way in Q1 and Q2, it used to the Q2 and Q3, this year it will be Q1 and Q2.

Moving to, so from my perspective, I think from an OpEx point of view, although we are adding some resources to key areas of the company, I don’t think it’s a big OpEx jump as much as they love it is driven by some accounting factors.

Moving to the revenue piece, which you asked when you started, I think in the first half of 2009 seasonality was out the window as everything went down. And then in the second half of 2009, seasonality sort of went out the window or exaggerated in the second half of the year in 2009 and into the first quarter of 2010. And, again, just to remind you, on a mix adjusted basis, Q1 is typically down by 5% to 5.5% for us. So we are seeing somewhere between a 5.5% and 10.5% swing on seasonality.

You know, I hope that normal seasonality continues through the rest of the year. But I just don’t know, I think we are in uncharted waters, I mean, I hope that, we can see the back part of the train starting to move. I just hope that the economy, which is the engine of the train, is starting to move on the front part of the train.

Operator

Our next question comes from James Schneider of Goldman Sachs.

James Schneider - Goldman Sachs

Good afternoon. Thank you taking my question. I guess as we look at the mobile and wireless business, in the 10-K you just filed it looks like you posted an operating income of just under 7% for that business relative to double digits and much better for the rest of the businesses.

Could you talk about what your target is for that business? What we might expect it to be, say in 2011 whether you think the target would be still lower than the rest of the business or not as baseband grows?

Scott A. McGregor

We don’t give targets for the particular businesses but I think what you are seeing there is the nascent cellular business where we still have a significant R&D costs and we are still in the early phases of ramping up. So do I expect that number to go up, absolutely, yes. But I hope it came as a positive surprise to most people that overall our mobile and wireless business is probable today.

Operator

Our next question comes from Ruben Roy of Pacific Crest.

Ruben Roy - Pacific Crest Securities

Hi. Thanks. Scott, I was wondering if you could comment a little bit around the Teknovus acquisition, recently the Dune acquisition and you guys came with a split in the enterprise networking group of network infrastructure technologies group. Is that going to be a separate segment?

And you know, can you characterize the revenues to date of that area and how you think that plays out over the next several years as a growth driver for Broadcom? Thank you.

Scott A. McGregor

The infrastructure segment we discussed pretty much lines up with our enterprise networking group today. So think of those as approximately synonymous, when we -- what we call the divisions internally, we are trying to separate that a little bit from how we view that there are three primary platforms that we attack, the hand, the home and the infrastructure and so, sorry, for any confusion there. But you can think of those as roughly synonymous.

In terms of the acquisitions, we are definitely looking for ways to grow in the enterprise space, in the infrastructure space. We see there’s a lot of opportunity, it’s a good market. The PON opportunity, the cloud computing opportunity, we saw those as both areas that we wanted to accelerate our participation in.

As you know, we often do things organically and we always look in the market for are there really great teams and great companies that we could acquire that would be eventually very accretive to the company and would accelerate our penetration into those areas? And we found that in both Dune and Teknovus. They are both very talented technical teams. They have done impressive things in the marketplace. Dune has some just fabulous high-end switch products and are really going after the scale of the cloud computing there. Frankly, we hadn’t put as much attention towards and as we see cloud computing accelerate that’s very attractive for us.

Teknovus, I think you’re probably aware, we have some GPON products and we are making great progress in the GPON space. A lot of Asia is focused on EPON. So GPON being more U.S. and European centric, EPON really giving us the fiber-to-the-home, fiber-to-the-curb coverage that we wanted worldwide. And so we believe that completed our fiber portfolio and really gives us access to the worldwide market now for that.

Operator

Our next question comes from Stacy Rasgon of Sanford Bernstein.

Stacy Rasgon - Sanford C. Bernstein & Co.

Hi, guys. Thanks for taking my question. Had just a quick question on gross margins. So you had cost improvements that were driving most of the improvement this quarter. Your guiding flat next quarter but you’ve got revenues going up, you might even have mix maybe helping you a little bit there. I’m just curious why the flat product gross margin excluding the no impact? What are might be some of the headwinds that would stop that from actually going up?

Eric K. Brandt

Well, there is no, as you know, there is normal ASP declines that go on in the business. I mean, there is a combination of effects that go across the two quarters. As we look into Q1, we begin with some of the new pricing that we have with our customers as we start annual sort of our annual schedule of negotiation.

But I think there will be continued cost benefits in Q1 by some of the new products and reductions in some of the pricing we’re getting on our wafers. And it may even be greater as a percentage than the mix benefit we got into Q4, obviously, with the mobile and wireless sector down slightly and the enterprise space up a fair bit. So as mobile and wireless begins to grow in the beginning part of the year, there could be some less mix benefit.

Operator

Our next question comes from Arnab Chanda of Roth Capital.

Arnab Chanda - Roth Capital Partners LLC

Thank you. Scott, if you could talk a little bit about what your situation is in terms of share and something you are very successful, Bluetooth and combo chips. And maybe something you are not been so successful as in digital TVs? Thank you.

Scott A. McGregor

We don’t generally estimate shares. We leave that to the third parties to do that. But I believe the third parties are showing that for Bluetooth and combo chips, we are a clear number one in both of those areas.

In digital TV, I think we got off to a slower start there than we had hoped for. I think that the economy really took a dive just as we were getting into that market and so for a while people were buying so many digital TVs and that was a headwind for us. We also saw our customers losing a little bit of share to a competitor that we didn’t have chips in and we saw some fluctuation in designs.

But we believe that’s back on track and that’s why we listed that as a growth driver for Broadcom this year. We think our team has been a great job there of getting that back on track. We have won a bunch of new designs, at CES, you saw us demonstrating in some of the coolest new TVs.

I think the real strength we have in the digital TV space going forward is something we do really well at Broadcom which is combining all of the different technologies into single SoCs and so TVs have moved away from being just traditional TV functionality to far more of things like Internet and wireless connectivity and other things. That’s a real strength of Broadcom.

We are bringing those capabilities so you have over the top services and connectivity, things like DLNA. Those are really things that we can add a lot of value to and many of the traditional legacy TV chip makers just really don’t have that capability. So I think long-term it’s an area for us to shine and it will certainly be a growth driver for us this year.

Operator

Our next question comes from David Wong of Wells Fargo.

David Wong - Wells Fargo Securities, Llc

Thank you very much. Could you, in terms of your inventory growth, was that fairly even across your various product segments and end market segments or are there some end markets where there is a greater need to build inventory to make sure that you have plenty for increasing demand?

Eric K. Brandt

Yes. In fact, there are a couple of new products are ramping and I don’t want to be specific. But there are a couple of new products that are ramping where we wanted to make sure, an example, just generally speaking, would be some of the combo chips. But we wanted to make sure we have a sufficient supply to meet the demands of our customers particularly to the extent that they see some upside and given the strength, again, that we were seeing coming out of Q4 and into Q1.

Operator

Next question comes from Allan Mishan of Brigantine Advisors.

Allan Mishan - Brigantine Advisors Llc

Hi. You mentioned that the merit increases will feather in over Q1 and Q2 this year. So does that mean that there will be a step up from that portion of your OpEx into Q2 or does that just mean that it’s taking the step up in Q1 and just sustains in Q2?

Eric K. Brandt

So the way the merit increase is working is that the actual salary piece goes in the third month of the quarter and the equity goes in the second month of the quarter. So typically, on the cash component, the salary component, it runs in the $10 million a quarter range. We anticipate in Q1 that we’ll see about $3 million of it. So somewhere in the vicinity of four, five, six will step up into Q2.

Operator

Our next question comes from Edward Snyder of Charter Equity Research.

Edward Snyder - Charter Equity Research

Yeah. Thank you. A couple here if I could. Your baseband was strong, I’m sorry, your broadband was strong across all customers or did you see that concentrated in one or two? Because given Motorola’s comments about relatively weak performance in its set-top business, I was wondering what checks you have that you are not growing inventory in some of your customers versus end market demand?

And then also, Eric, in the list of drivers for baseband growth this year, you highlighted kind of an increased mix in 3G. Is that going to be based on new products coming out or are you expecting to gain traction with the existing products, say, beyond Samsung which is now using it?

Scott A. McGregor

It’s the broadband, we really see that broad-based and we don’t comment on specific customers. But we see that broad-based across customers and not a specific thing with one or two customers.

In terms of your baseband question, we certainly see revenue in the near-term from products that we have already announced and you will just have to see down the road. We generally don’t announce new products until they are at least sampling or shipping. So it’s hard for me to comment on that. You’ll have to wait and see as the year develops on that. But we do expect growth in 3G for sure, increasing as a percentage versus the mix with 2G and 3G.

Operator

The next question comes from David Wu of GC Research.

David Wu - GC Research Ltd.

Scott, I was wondering whether you could shed some light on a couple of things that we saw at the CES show. A lot of these handheld products are kind of ARM-based. I guess you have an ARM license, architectural license. What part of your business do you think will migrate towards the ARM architecture and will that affect any of the LiPS -- existing LiPS-based products?

And the other correlative thing was the how do you see Android as an operating system? There are a lot of links out there, but is Android really getting the pick, not only for smartphones but also for things like set-top boxes and other consumer electronic products?

Scott A. McGregor

David, let me answer both questions there. In terms of handheld products and the use of ARM, we use LipS, we use ARM, we use a variety of other processors. We consider ourselves sort of agnostic in terms of which is better. We have the flexibility to even change our mind, some of our products have been LipS one year and ARM another year. We will move that around, quite often for embedded applications, the customer doesn’t particularly care what the instruction set is.

We find that very typically in consumer electronics products and a lot of other infrastructure products where they really care about basically performance per watt and cost performance which are the major drivers and what instruction set it is fairly moved. So we are an ARM licensee, we expect to continue to be an ARM licensee, we’re also a MIPS licensee, expect to continue to be a MIPS licensee. And I don’t think I can add particular color there.

In terms of your question on Android, we see a lot of interest for Android, especially in the handheld space. As I think as I have said to a few of you, it has really captured the imagination of a lot of consumers and a lot of customers. And so we have a significant effort on Android. I think I mentioned that we do have a lot of handset design wins Android-based with a variety of our wireless products.

And so we do expect that to be a growing operating system as a percentage of the total operating systems we support in the course of this year. And we think it’s a significant new driver going forward in terms of gaining share in the operating system space.

Operator

Our next question comes from Suji De Silva of Kaufman Brothers.

Suji De Silva - Kaufman Brothers

Hi, guys. You showed at your Analyst Day and at CES some smart feature phones. When do those ramp-up? Is there an inflection point coming and when those do ramp, they get to be large enough to be something of a headwind on margins versus the larger business?

Scott A. McGregor

The smart feature phones are ramped today, in fact, if you look at the Samsung Star phone it’s shipping many millions of units a month. I would say that’s quite ramped, in fact, Samsung told us it was the fastest ramping phone in their history. So smart feature phones are ramped today and therefore, does it change our margins or anything, I think, is moot. It is already factored into the fairly excellent margins we reported in Q4.

Eric K. Brandt

If anything as the mix improves that should also help out on the margin side.

Scott A. McGregor

Yeah, yeah. Smart feature phones are really going to get us better return than lower end 2G phones, absolutely. The more smart features we put in there, the higher the attach rate for GPS, for wireless LAN and for other capabilities, multimedia, other capabilities we could add. So both smartphones and smart feature phones are very good for Broadcom in that they drive additional attach on silicon.

Operator

Our next question comes from Srini Pajjuri of CLSA.

Srini Pajjuri – CLSA

Thank you. Just a clarification, Eric. It’s good to see you guys paying a dividend. My question is, does it change you’re buyback or M&A policy going forward especially, my question is does it roll out a larger potential acquisition in the future? Thank you.

Eric K. Brandt

Yes. Srini, it does not. I think, again, in one of the world’s worst economies ever we had record cash flow from operations and you can see in Q4 and Q1, we’ll have record quarters.

We think our cash flow will continue to grow. We think we have enough room to pay a dividend, buyback shares to offset dilution and make meaningful acquisitions. So I think as a company, the dividend is just a sign of the true financial strength of the company’s cash flow and position.

Operator

Our next question comes from Brian Blair of Wedge Partners.

Brian Blair - Wedge Partners

Hi. Thank you. You’ve talked a bit about the connected TV market and I just wanted to know if you could give a little more color on what your expectations are as we get towards the holiday season at the back of this year, in terms of what percentage of overall TVs might be connected?

And I know you don’t always make your own numbers. But can you just give us a sense of how you see this opportunity as we get into this holiday season and maybe provide a little color on what you see beyond that?

Scott A. McGregor

That’s a hard question to estimate and I think you put your finger on the reason is that we don’t determine that. If we could determine that it would 100%. But it really depends on what the consumers are interested in buying and how our customers price those products to market. The good news is we’re seeing some very aggressive pricing and promotion of the features.

That and 3G, 3D, sorry, are also things that I think are driving new consumer interest in a lot of the TV sets. So I apologize. I can’t give you an exact number. But we do see that is becoming a must have feature certainly in upper midrange and high-end TV sets. And that will drive the penetration I think further into the others going forward.

Eric K. Brandt

Also remember, it is not just wireless LAN, it’s also Bluetooth, Ethernet another technologies that we are able to incorporate on those products.

Operator

We have no further questions at this time.

Scott A. McGregor

Thank you all for attending today. I have just a couple of thoughts I would like to leave you with before signing off here. Broadcom really had a great Q4 and we believe we have grown faster than the industry. We have improved our operating leverage as we said we would. And we are looking forward to additional market share expansion and increased financial leverage across 2010.

One final reminder, we’ll be hosting an open house at Mobile World Congress in Barcelona on February 15th at 4:30 p.m. local time. And if you need any additional details or an invitation to this, please give Peter a call.

With that, thank you, again, for joining us today and have a good day.