Summary of BROADCOM CORP - Yahoo! Finance

Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Cautionary Statement
You should read the following discussion and analysis in conjunction with our Unaudited Condensed Consolidated Financial Statements and the related Notes thereto contained in Part I, Item 1 of this Report. The information contained in this Quarterly Report on Form 10-Q is not a complete description of our business or the risks associated with an investment in our common stock. We urge you to carefully review and consider the various disclosures made by us in this Report and in our other reports filed with the Securities and Exchange Commission, or SEC, including our Annual Report on Form 10-K for the year ended December 31, 2008 and subsequent reports on Forms 10-Q and 8-K, which discuss our business in greater detail.
The section entitled "Risk Factors" contained in Part II, Item 1A of this Report, and similar discussions in our other SEC filings, describe some of the important risk factors that may affect our business, financial condition, results of operations and/or liquidity. You should carefully consider those risks, in addition to the other information in this Report and in our other filings with the SEC, before deciding to purchase, hold or sell our common stock.
All statements included or incorporated by reference in this Quarterly Report on Form 10-Q, other than statements or characterizations of historical fact, are forward-looking statements. Examples of forward-looking statements include, but are not limited to, statements concerning projected total net revenue, costs and expenses and product gross margin; our accounting estimates, assumptions and judgments; the impact of litigation related to the January 2007 restatement of our financial statements for prior periods; estimates related to the amount and/or timing of the expensing of unearned stock-based compensation expense; our success in pending litigation; the demand for our products; the effect that recent economic conditions, seasonality and volume fluctuations in the demand for our customers' consumer-oriented products will have on our quarterly operating results; our dependence on a few key customers and/or design wins for a substantial portion of our revenue; our ability to adjust operations in response to changes in demand for existing products and services or the demand for new products requested by our customers; the competitive nature of and anticipated growth in our markets; our ability to migrate to smaller process geometries; manufacturing, assembly and test capacity; our ability to consummate acquisitions and integrate their operations successfully; our potential needs for additional capital; inventory and accounts receivable levels; the impact of the IRS review of certain income and employment tax returns on our results of operations; the effect of potential changes in U.S. or foreign tax laws and regulations or the interpretation thereof; the level of accrued rebates and our plans to implement cost savings measures. These forward-looking statements are based on our current expectations, estimates and projections about our industry and business, management's beliefs, and certain assumptions made by us, all of which are subject to change. Forward-looking statements can often be identified by words such as "anticipates," "expects," "intends," "plans," "predicts," "believes," "seeks," "estimates," "may," "will," "should," "would," "could," "potential," "continue," "ongoing," similar expressions, and variations or negatives of these words. These statements are not guarantees of future performance and are subject to risks, uncertainties and assumptions that are difficult to predict. Therefore, our actual results could differ materially and adversely from those expressed in any forward-looking statements as a result of various factors, some of which are listed under the section entitled "Risk Factors" in Part II, Item 1A of this Report. These forward-looking statements speak only as of the date of this Report. We undertake no obligation to revise or update publicly any forward-looking statement, except as otherwise required by law.
Overview
Broadcom Corporation is a major technology innovator and global leader in semiconductors for wired and wireless communications. Our products enable the delivery of voice, video, data and multimedia to and throughout the home, the office and the mobile environment. Broadcom provides the industry's broadest portfolio of state-of-the-art system-on-a-chip and software solutions to manufacturers of computing and networking equipment, digital entertainment and broadband access products, and mobile devices. Our diverse product portfolio includes solutions for digital cable, satellite and Internet Protocol (IP) set-top boxes and media servers; high definition television (HDTV); high definition DVD players and personal video recording (PVR) devices; cable and DSL modems and residential gateways; high-speed transmission and switching for local, metropolitan, wide area and storage networking; server solutions; broadband network and security processors; wireless and personal area networking;

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cellular communications; global positioning system (GPS) applications; mobile multimedia and applications processors; mobile power management; and Voice over Internet Protocol (VoIP) gateway and telephony systems.
Net Revenue. Our product revenue is generated principally by sales of semiconductor devices and, to a lesser extent, software licenses and royalties, support and maintenance agreements, data services and cancellation fees. Our licensing revenue is generated from the licensing of intellectual property. The majority of our product sales occur through the efforts of our direct sales force. The remaining balance of our product sales occurs through distributors.
We sell our products to leading manufacturers of wired and wireless communications equipment in each of our target markets. Because we leverage our technologies across different markets, certain of our integrated circuits may be incorporated into equipment used in multiple markets. We utilize independent foundries and third-party subcontractors to manufacture, assemble and test all of our semiconductor products.
The following table presents details of our total net revenue:

                                     Three Months Ended         Nine Months Ended
                                       September 30,              September 30,
                                      2009         2008         2009         2008
            Product revenue (1)        95.3 %       96.6 %        95.0 %      96.5 %
            Licensing revenue           4.7          3.4           5.0         3.5

            Total net revenue         100.0 %      100.0 %       100.0 %     100.0 %

(1) Includes software licenses and royalties, support and maintenance agreements, data services and cancellation fees totaling less than 0.8% of total net revenue for all periods presented.

The following table presents details of our product revenue:

                                                        Three Months Ended                  Nine Months Ended
                                                           September 30,                      September 30,
                                                       2009             2008              2009             2008
Product sales made through direct sales force           76.8 %           81.2 %            79.0 %           83.9 %
Product sales made through distributors(1)              23.2             18.8              21.0             16.1

                                                       100.0 %          100.0 %           100.0 %          100.0 %

(1) Product sales made through distributors increased as a percentage of product revenue in the three and nine months ended September 30, 2009. The increase is due to the ramping of mobile and wireless products sold by stocking distributors serving as an interface for certain of our customers as well as incremental demand in our enterprise networking products in the Asia market.

The demand for our products has been affected in the past, and may continue to be affected in the future, by various factors, including, but not limited to, the following:
• general economic and political conditions and specific conditions in the markets we address, including the continuing volatility in the technology sector and semiconductor industry, the recent global economic recession, trends in the broadband communications markets in various geographic regions, including seasonality in sales of consumer products into which our products are incorporated;

• the inability of certain of our customers who depend on credit to have access to their traditional sources of credit to finance the purchase of products from us or purchases of capital equipment from others, particularly in the recent global economic environment, which may lead them to reduce their level of purchases or to seek credit or other accommodations from us;

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• the timing, rescheduling or cancellation of significant customer orders and our ability, as well as the ability of our customers, to manage inventory;

• our ability to specify, develop or acquire, complete, introduce, market and transition to volume production new products and technologies in a cost effective and timely manner;

• the rate at which our present and future customers and end-users adopt our products and technologies in our target markets; and

• the qualification, availability and pricing of competing products and technologies and the resulting effects on sales and pricing of our products.

For these and other reasons, our total net revenue and results of operations for the three months ended September 30, 2009 and prior periods may not necessarily be indicative of future net revenue and results of operations.
From time to time, our key customers place large orders causing our quarterly net revenue to fluctuate significantly. We expect that these fluctuations will continue and that they may be exaggerated by the seasonal swings in consumer products and changes in the overall economic environment. In addition, an increasing percentage of our inventory is maintained under hubbing arrangements with certain of our customers. Pursuant to these arrangements we deliver products to a customer or a designated third party warehouse based upon the customer's projected needs, but do not recognize product revenue unless and until the customer reports that it has removed our product from the warehouse to incorporate into its end products. Historically, we have had good visibility into customer requirements and shipments within a quarter. However, if a customer does not take our products under a hubbing arrangement in accordance with the schedule it originally provided to us, our predicted future revenue stream could vary substantially from our forecasts and our results of operations could be materially and adversely affected. Additionally, since we own inventory that is physically located in a third party's warehouse, our ability to effectively manage inventory levels may be impaired, causing our total inventory turns to decrease, which could increase expenses associated with excess and obsolete product and negatively impact our cash flow.
Sales to our five largest customers, including sales to their manufacturing subcontractors, as a percentage of total net revenue were as follows:

Three Months Ended Nine Months Ended September 30, September 30, 2009 2008 2009 2008 Five largest customers as a group 36.3 % 33.5 % 34.2 % 35.9 %

We expect that our largest customers will continue to account for a substantial portion of our total net revenue for the remainder of 2009 and for the foreseeable future. In the three months ended September 30, 2009 we had one greater than 10% customer. The identities of our largest customers and their respective contributions to our total net revenue have varied and will likely continue to vary from period to period.
Product revenue derived from all independent customers located outside the United States, excluding foreign subsidiaries or manufacturing subcontractors of customers that are headquartered in the United States even though such subsidiaries or manufacturing subcontractors are located outside of the United States, as a percentage of product revenue was as follows:

                                                                  Three Months Ended         Nine Months Ended
                                                                    September 30,              September 30,
                                                                   2009          2008         2009         2008
Asia (primarily in Korea, China, Japan and Taiwan)                  37.5 %       31.9 %        37.2 %      30.5 %
Europe (primarily in the United Kingdom, Finland and France)        10.4         10.3          12.4        10.1
Other                                                                5.3          0.3           2.3         0.3

                                                                    53.2 %       42.5 %        51.9 %      40.9 %

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Product revenue derived from shipments to international destinations, as a percentage of total product revenue was as follows:

                                                    Three Months Ended                Nine Months Ended
                                                      September 30,                     September 30,
                                                   2009             2008             2009             2008
Asia (primarily in China, Hong Kong,
Singapore and Japan)                                92.9 %          89.2 %            90.5 %          86.0 %
Europe (primarily in Hungary, France,
Germany and Sweden)                                  2.1             2.8               2.9             2.8
Other                                                1.3             2.1               1.3             2.6

                                                    96.3 %          94.1 %            94.7 %          91.4 %

All of our revenue to date has been denominated in U.S. dollars. Product Gross Margin. Our product gross margin, or gross profit as a percentage of net product revenue, has been affected in the past, and may continue to be affected in the future, by various factors, including, but not limited to, the following:
• our product mix and volume of product sales (including sales to high volume customers);

• the positions of our products in their respective life cycles;

• the effects of competition;

• the effects of competitive pricing programs and rebates;

• provisions for excess and obsolete inventories and their relationship to demand volatility;

• manufacturing cost efficiencies and inefficiencies;

• fluctuations in direct product costs such as wafer pricing and assembly, packaging and testing costs, and other fixed costs;

• our ability to create cost advantages through successful integration and convergence;

• licensing royalties payable by us;

• product warranty costs;

• amortization of purchased intangible assets;

• stock-based compensation expense; and

• reversals of unclaimed rebates and warranty reserves.

Net Income (Loss). Our net income (loss) has been affected in the past, and may continue to be affected in the future, by various factors, including, but not limited to, the following:
• stock-based compensation expense;

• cash-based incentive compensation expense;

• required levels of research and development and other operating costs;

• licensing of intellectual property;

• in-process research and development, or IPR&D;

• litigation costs and insurance recoveries;

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• settlement costs or gains;

• charitable contributions;

• income tax benefits from adjustments to tax reserves of foreign subsidiaries;

• the loss of interest income resulting from lower average interest rates and investment balance reductions resulting from expenditures on repurchases of our Class A common stock;

• amortization of purchased intangible assets;

• impairment of goodwill and long-lived assets;

• deferral of revenue under multiple-element arrangements;

• other-than-temporary impairment of marketable securities and strategic investments;

• gain (loss) on strategic investments; and

• restructuring costs or reversals thereof.

In the three months ended September 30, 2009 our net income was $84.6 million as compared to net income of $164.9 million in the three months ended September 30, 2008, a difference of $80.3 million. This decrease in profitability was the direct result of $55.2 million less product gross profit principally due to a decline in product revenue and product gross margins, offset in part by $15.1 million of additional licensing revenue.
Net revenue in the three months ended September 30, 2009 decreased in our broadband communications and enterprise networking target markets, offset in part by an increase in net revenue in our mobile and wireless target market. The decrease in net revenue from our broadband communications target market resulted primarily from a decrease in demand for broadband modems, digital set-top boxes and digital TV products. The increase in net revenue from our mobile and wireless target market resulted primarily from the ramp of our cellular products and an increase in demand for our wireless LAN product offerings. Also reflected in our mobile and wireless target market was an increase in licensing revenue of $15.1 million primarily as a result of our licensing agreement with QUALCOMM Incorporated, or Qualcomm. See discussion under "Settlement and Patent License and Non-Assert Agreement" below. The decrease in net revenue from our enterprise networking target market resulted primarily from a broad-based decline in demand for our Ethernet switch and controller products.
In the nine months ended September 30, 2009 our net income was $6.1 million as compared to net income of $374.0 million in the nine months ended September 30, 2008, a difference of $368.0 million. This decrease in profitability was the direct result of $344.8 million less product gross profit principally due to a decline in revenue and product gross margins, a $50.0 million charitable contribution, an increase in impairment of long-lived assets and restructuring costs of $16.7 million and $13.3 million, respectively, offset in part by $35.7 million of additional licensing revenue and a net settlement gain of $73.1 million.
Net revenue in the nine months ended September 30, 2009 significantly decreased in our broadband communications and enterprise networking target markets, offset in part by a moderate increase in net revenue in our mobile and wireless target market. The decrease in net revenue from our broadband communications target market resulted primarily from a decrease in demand for broadband modems, digital set-top boxes and digital TV products, offset in part by an increase in demand for our high definition DVD products. The increase in net revenue from our mobile and wireless target market resulted primarily from the ramp of our cellular products and an increase in demand for wireless LAN product offerings, offset in part by a decrease in demand for our Bluetooth products. Also reflected in our mobile and wireless target market was an increase in licensing revenue of $35.7 million as a result of the Qualcomm Agreement. The decrease in net revenue from our enterprise networking target market resulted primarily from a broad-based decline in demand for our Ethernet switch and controller products.
We expect research and development costs to increase slightly over the short term and continue to increase over the longer term as a result of growth in, and the diversification of, the markets we serve, new product opportunities, the number of design wins that go into production, changes in our compensation policies, and any expansion into new markets and technologies.

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We currently do not believe the acquisition of the DTV Business of AMD, Inc. in late 2008 will achieve earnings neutrality by the end of 2009. In the three and nine months ended September 30, 2009 we recorded an impairment to customer relationships, completed technology and certain other assets of $7.6 million and $18.9 million, respectively, related to this acquisition. In addition, in the three months ended September 30, 2009 we recorded charges of $10.4 million for excess and obsolete inventory related to the DTV Business of AMD. The primary factor contributing to these charges was a continued reduction in our revenue outlook for this business.
Settlement and Patent License and Non-Assert Agreement. On April 26, 2009 we entered into a Settlement and Patent License and Non-Assert Agreement, or the Qualcomm Agreement, with QUALCOMM Incorporated, or Qualcomm. As part of the Qualcomm Agreement, each party granted certain rights under its patent portfolio to the other party including, in certain circumstances, under future patents issued within one to four years after April 26, 2009. The term of the Qualcomm Agreement commenced April 26, 2009 and will continue until the expiration of the last to expire of the covered patents. The Qualcomm Agreement also resulted in the parties dismissing with prejudice all outstanding litigation between them, and in Broadcom withdrawing its complaints with foreign competition authorities.
In addition, certain patents were assigned by Broadcom to Qualcomm with Broadcom retaining a royalty-free license under these patents. Also, Qualcomm will make payments to Broadcom totaling $891.2 million, of which $243.2 million has been paid through September 30, 2009. The remaining balance will be paid in fifteen equal and successive quarterly payments of $43.2 million each, continuing in the three months ending December 31, 2009 and concluding in the three months ending June 30, 2013.
We determined the estimated fair values of the individual components of the Qualcomm Agreement and used the relative fair value method to allocate the payment amounts to the individual components of the gain on settlement and revenue from the licensing of our intellectual property. In the nine months ended September 30, 2009 we recorded a gain on settlement of outstanding litigation related to intellectual property of $65.3 million, which represents the estimated relative fair value of the settlement for Qualcomm's past infringement. The fair value of this amount was primarily established based on awards determined by the United States District Court for the Central District of California.
The estimated relative fair value of the licensing revenue as well as the assignment of patents of $825.9 million will be recorded as a single unit of accounting and recognized over the Qualcomm Agreement's performance period of four years. In the three and nine months ended September 30, 2009, we recorded licensing revenue related to the Qualcomm Agreement of $51.7 million and $88.5 million, respectively, and expect to record licensing revenue in equal quarterly amounts of $51.7 million during the quarters ending December 31, 2009 through March 31, 2012, $47.7 million in the three months ending June 30, 2012 and $43.2 million in each of the following four quarters ending June 30, 2013. At September 30, 2009 we had deferred revenue of $89.5 million related to the Qualcomm Agreement.
Separately, we recorded licensing revenue of $30.5 million in the nine months ended September 30, 2009 related to additional payments made by Qualcomm during 2008 for shipments from May 2007 through December 31, 2008, related to a permanent injunction on certain products. These amounts were previously deferred due to continuing litigation appeals, which have been resolved through the Qualcomm Agreement.
Product Cycles. The cycle for test, evaluation and adoption of our products by customers can range from three to more than nine months, with an additional three to more than twelve months before a customer commences volume production of equipment incorporating our products. Due to this lengthy sales cycle, we may experience significant delays from the time we incur expenses for research and development, selling, general and administrative efforts, and investments in inventory, to the time we generate corresponding revenue, if any. The rate of new orders may vary significantly from month to month and quarter to quarter. If anticipated sales or shipments in any quarter do not occur when expected, expenses and inventory levels could be disproportionately high, and our results of operations for that quarter, and potentially for future quarters, would be materially and adversely affected.
Mobile Platforms. The development and introduction of new products often requires substantial research and development resources. During the last five years we have incurred substantial expenditures on the development of new products for the cellular handset market. Currently 20% of our research and development expense is

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attributable to our mobile platforms products. However, this market is characterized by very long product development and sales cycles due to the significant qualification requirements of cellular handset makers and wireless network operators, and accordingly, it is common to experience significant delays from the time research and development efforts commence to the time corresponding revenues are generated. Due to these lengthy product development and sales cycles, our mobile platforms business had a material negative impact on our earnings in 2008, including impairment charges of $169.4 million recorded in the three months ended December 31, 2008 relating to this business, and may continue to do so until we realize significant cellular revenues.
Prior to the three months ended September 30, 2009, most of the revenue that we derived from our mobile platforms business related to the licensing of our intellectual property. Although we are generating additional revenue from our ramp of cellular products, it is possible that our customers may delay further product development plans or that their products will not be commercially successful, which would continue to materially and adversely affect our results of operations.
Acquisition Strategy. An element of our business strategy involves the acquisition of businesses, assets, products or technologies that allow us to reduce the time required to develop new technologies and products and bring them to market, incorporate enhanced functionality into and complement our existing product offerings, augment our engineering workforce, and enhance our technological capabilities. We plan to continue to evaluate strategic opportunities as they arise, including acquisitions and other business combination transactions, strategic relationships, capital infusions and the purchase or sale of assets.
Business Enterprise Segments. Our Chief Executive Officer, who is considered . . .