Highlights From BRCM's Q2 Conference Call: Revenues Up Almost 13% Year-over-Year

Broadcom Corp (NASDAQ: BRCM) reported Q2 EPS of $0.72, $0.09 better than the analyst estimate of $0.63. Revenue for the quarter came in at $1.8 billion versus the consensus estimate of $1.81 billion. Shares are trading up 10.25% today.

Highlights From BRCM's Q2 Conference Call:

• Sees Q3 Sales of $1.9-$2.0 billion, versus the consensus of $1.93 billion.
  
• (Scott A. McGregor) April. Our total quarterly revenue was $1.8 billion, which on a product basis was up almost 13% year-over-year.
  
• With the boost in profitability, we had record cash flow from operations that surpassed 27% of revenue. Our strong free cash flow enabled about $350 million in acquisitions and about $300 million in share repurchases and dividends, with minimal impact to our cash balance.
  
• (Eric K. Brandt) Moving to the financial overview, to summarize for Q2: total revenue of $1.8 billion, including $1.74 billion in product revenue. Q2 total net revenue was up approximately 12% from prior year and down 1% from Q1 levels.
  
• Q2 total GAAP gross margin increased 40 basis points, to 51.1%, from Q1.
  
• GAAP product gross margin increased 70 basis points, to 49.6%, and non-GAAP product gross margin increased 60 basis points, to 51.1%.
  
• Q2 GAAP R&D plus SG&A expenses were up $9 million, to $686 million, which includes a non-recurring legal fee of $25 million related to the derivative settlement. Net of this non-recurring item, R&D and SG&A expenses were down $16 million sequentially. GAAP earnings per share for Q2 were $0.31 per share, including a negative $0.14 of one-time items.
  
• Non-GAAP EPS was $0.72 per share, above first-call consensus of $0.63 per share. Cash flow from operations for Q2 was a record $489 million. Our cash and marketable securities balance was $3.8 billion, down slightly from Q1.
  
• Moving to revenue and gross margin, in April, we said we expected Q2 total net revenue to be approximately $1.75 billion to $1.85 billion. Total net revenue ended at $1.8 billion.
  
• Our Q2 GAAP product gross margin increased 70 basis points, to 49.6%, which is significantly better than our expectations, including the impact of Provigent. This translates to 51.1% on a non-GAAP basis. This increase was primarily due to cost improvements as we continue to increase our mix of 65-nanometer optimized products.
  
• Moving to operating expenses, total R&D and SG&A expenses for Q2 were up $9 million from Q1 levels, which, if normalized for the $25 million of non-recurring legal fees related to the derivative settlement, is actually down $16 million relative to the flat sequential guidance provided in April.
  
• During the quarter, the company also recorded non-recurring GAAP charges of $74 million associated with the impairment of acquisition intangibles and $25 million in charitable contributions, offset by settlement gains of $45 million principally associated with the termination of the derivative action.
  
• Moving to the balance sheet, as I mentioned earlier, cash flow from operations was a record $489 million for Q2. Cash and marketable securities ended Q2 at $3.8 billion. We returned roughly $300 million in capital to shareholders in the quarter in the form of dividends and share repurchases, as well as acquired Provigent and SC Square for approximately $350 million.
  
• We expect Q3 GAAP product gross margins to be flat to up slightly and within our GAAP targeted model. We expect GAAP R&D and SG&A expenses to be roughly flat to down $10 million, with Q2's $686 million. Excluding the $25 million settlement-related non-recurring legal fee in Q2, expenses would be up roughly $15 to $25 million sequentially in Q3.
  
• (Scott A. McGregor) Starting with the home platform, our Broadband Communications revenue increased 5% sequentially, with solid sales from core set-top boxes and broadband modems, offset by a decline in our Consumer businesses.
  
• Our Broadband Modem business continued to show solid growth, driven by an increased cable modem volume for DOCSIS 3.0, strong VDSL2 central office and CPE shipments, and a continued strength in ADSL2+ revenue.
  
• We expect broadband revenue growth to continue in the September quarter, driven by new product cycles and increases in the adoption of high-definition pay-TV services and content across the globe.
  
• Moving to infrastructure, our Infrastructure and Networking business was stronger than expected, with record revenue, driven by our industry-leading switching and PHY solutions.
  
• Finally, we announced that Alcatel-Lucent utilized our Premier Custom IC Program to develop and deploy the industry's first 400-gigabit-per-second network processor, leveraging our advanced design methodology, extensive IP library, and over 100 customized libraries.
  
• Moving to our hand platform, our Mobile and Wireless segment experienced a 5%sequential decline in revenue, which was in line with our expectations. We expect our Mobile and Wireless segment revenue to increase by double-digits sequentially in Q3, with strong growth across all lines of business. Growth in Q3 is driven by seasonal strength in wireless connectivity, combo chips, baseband, and multimedia co-processors in cellular handsets, tablets, and other consumer devices.
  
• In Q2, we announced our newest Bluetooth wireless LAN single-die combo chip, expanding the opportunity for OEMs to deliver innovation in PCs supporting next-generation Windows and Android systems. This powerfully integrated 40-nanometer device provides a significant reduction in footprint, a lower bill of materials, and a 40% reduction in power consumption. By extending our leadership in wireless connectivity to 40 nanometers, we're delivering the most cost-effective and industry-proven integrated solutions for the wireless handset, tablet, and PC markets.
  
• We have new competitive 40-nanometer parts, strong momentum in switching, and increased addressable market opportunities all across our business. Broadcom excels at silicon integration, and our focus remains creating outstanding communications and connectivity products that enable us to grow our market share while maintaining strong profitability. Our Q3 guidance is strong and reflects significant sales expansion across our strategic business segments.
  
• (Q&A) Scott, just given what we're hearing broadly across all the regions in terms of GDP and then if you look at some of the company-specific results from Microchip and then Qualcomm not being that great in their outlook, what would you highlight as the biggest company-specific drivers for Broadcom here in the third quarter? Because the guidance does look pretty good. (A) The guidance is good, and I can't speak for those other companies, but we're certainly seeing our markets rebound nicely to give us the guidance that we do have. I think we were sub-seasonal in the first quarter, and so we certainly get some benefit maybe from rebounding a bit there. But Broadcom has very strong products right now, and we do see an opportunity to grow our market.
  
• Do you think in the second quarter that you burned inventory in the wireless channel, and is that helping you at all? (A) I don't think we burned inventory. The question is did some of our customers bleed off inventory. I think we'll know more on that as the year goes by. But we said earlier that we were seeing some pickup and some share gains in our connectivity. We said that on our last earnings call. So, I think that growth certainly helps us a little bit here, and others might not be seeing that.
  
• Scott, a major investor question has been the competitive changes and your very high-growth connectivity business, especially from the likes of Qualcomm, Atheros, next year when Qualcomm is planning to launch a 28-nanometer product. My question is where can Broadcom be surprised in the connectivity side, and what specifically are you doing to maintain your edge in this market? (A) Broadcom has very strong connectivity products, and I think the key elements of that is made up of a few things. One is as we have best-in-class IP in each of the things that go into our connectivity combo products. And like a chain, if you have one link that's weak, then the whole chain is weak, and we've got extremely strong links in our chain. We've moved to 40-nanometer, and also our concept of integration is a little different than others in that we include all the analog and radio as well as the digital pieces. Some of our competitors are including all the digital stuff within digital chips and not including the analog pieces, so you've got to be a little careful when you hear what some of the competition says. It's not always an apples-to-apples comparison.

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