Avago Technologies LTD (AVGO)

• Initial Public Offering (IPO)
• Avago Technologies LTD (AVGO)

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Georgia

Avago Technologies Ltd. (NASDAQ: AVGO) is a designer and developer of analog semiconductors, custom chips, radio-frequency and microwave components, among other technologies. With a portfolio of over 7,000 products, Avago's technologies are used in a large array of applications such as mobile phones, automotive electronics, consumer electronics, and military and aerospace systems. Avago has recently suffered from the economic recession as well as the downward price pressure in the semiconductor industry. However, Avago continues to compete against various competitors in each of its business segments with its continued leadership in intellectual property strengths.

In the fiscal year ending October 31, 2009, Avago recorded $1.48 billion of net revenue and $1.52 billion for 2010 calendar year to date. Net income was $147 million in FY2009 and $357 million in year to date 2010. Avago has grown to have approximately 40,000 customers worldwide and continued to grow its extensive portfolio of intellectual property, now containing approximately 5,000 patents. Avago employs approximately 2,000 engineers primarily located in San Jose, CA and Singapore.^[1]

Avago started out as part of Hewlett-Packard (HPQ), and continued to operate in the semiconductor division of HP’s spinoff, Agilent Technologies (A). In 2005, Avago was acquired by KKR and Silver Lake Partners. Avago issued 49.6 million shares in an Initial Public Offering (IPO) at $15.00 per share in August 2009. ^[2]

Company Overview

Avago primarily generates revenues by selling products in four key markets: wireless communications, wired infrastructure, industrial and automotive electronics, and consumer and computing peripherals.

Business and Financial Metrics

FY2009 Annual Earnings Summary^[3]

Avago reported revenues of $1.48 billion for the full annual FY2009, down 12.7% from revenue of $1.70 billion in FY2008. The company reported a loss of $0.20 per share, down from earnings of $0.38 per share in FY2008. Avago reported operating income of $48 million, down 70% from operating income of $160 million in FY2008.

In fiscal 2007, 2008, and 2009, Avago acquired five companies with cash consideration of $110 million. These companies were the following: a polymer optical fiber company, two privately-held manufacturers of motion control encoders, a privately-held developer of low-power wireless devices, and producer of signal frequency filters from Infineon Technologies (IFX).

Business Segments

Wireless Communications (42% of net revenue)

^[4] Avago provides the wireless industry with a variety of RF and optoelectronic sensors. RF sensors measure substances that flow such as liquids and powders, and optoelectronic sensors detect and control light. RF products include semiconductor devices used in microwaves. Optoelectronic sensors are used for mobile handset applications.

Wired Infrastructure (26% of net revenue)

^[5] Avago provides transceivers that receive and transmit information along optical fibers, mostly used in the storage and Ethernet networking markets. Avago also provides products integrated into application specific integrated circuits for enterprise networking and server I/O applications.

Industrial and Automotive Electronics (22% of net revenue)

^[6] Avago applies its technology in fiber optics, motion control and LED products for the the general industrial, automotive, and consumer markets.

1. 1. Optocouplers: provides electrical insulation and signal isolation for signaling systems susceptible to electrical noise or interference. These products are used in industrial motors, hybrid engines, power generation and distribution systems, motion sensors, computers and office equipment, plasma displays, and military electronics among other applications.
   2. Optical encoders and integrated circuits (ICs): provides the controller and decoder functions for industrial motors and robotic motion control.
   3. LED assemblies: offers high brightness and stable light output over thousands of hours in order to support traffic signals, commercial signs, and other displays.
   4. Fast Ethernet transceivers: provides products for industrial networking that uses plastic optical fiber that enable quick networking and factory automation.

Consumer and Computing Peripherals (10% of net revenue)

^[7] Avago is a leading supplier of image sensors for optical mice and launched a new line of laser-based mouse products with more sensitive controls for precision. Avago's motion control encoders are also used in printers and other office automation products.

Key Trends and Forces

Avago is Highly Dependent on the Cyclical Semiconductor Industry

The semiconductor industry is highly cyclical, with constant innovation and price erosion, short product life cycles, and large variations in supply and demand. In addition to these cyclical effects, the global semiconductor market has declined significantly since 2001, and further declined 16.3% in 2009 due to the economic recession according to technology research firm Gartner. ^[9] As a result, there has been lower demand for Avago's products. The semiconductor industry is highly competitive based on quality, technical performance, price, product features, product system compatibility, system-level design capability, delivery timing and reliability, new product innovation, among other factors. Avago has remained competitive in each of these factors with the help of its strong portfolio of intellectual property. However, the downturn has further increased competition and put downward price pressure on products.

Avago's Strategy Acquisitions, Dispositions, and Joint Ventures Poses Risks and Opportunities

Avago's strategy emphasizes acquiring complementary businesses and disposing businesses no longer beneficial in its long term growth plan. Its strategy also includes entering into strategic alliances that may augment market share or enhance technological capabilities. In the past four years, Avago acquired five companies that helped it further its motion control encoder technology and optical fiber technology among other benefits. Avago sold Printer ASICs Business to Marvell Technology Group (MRVL) and Image Sensor to Micron Technology in 2006, which allowed Avago to focus on strengthening its remaining businesses.

Avago Relies on Intellectual Property Strengths

Having a strong portfolio of intellectual property is a key to maintaining and growing market share in the semiconductor industry. Avago currently has a strong portfolio of over 5,000 patents. To maintain financial strength Avago must continue to innovate and gain new intellectual property grants in the form of patents, mask works, copyrights, trademarks, service marks, and trade secrets.

Competition

Avago competes with integrated device manufacturers, fabless semiconductor companies, and internal resources of large OEMs. There is a general trend of consolidation within the industry, and many competitors have merged with or been acquired by other competitors, or have begun collaborating with each other. However, no single company competes with Avago in all of its target markets.

• Analog Devices (ADI) , a major competitor in the Industrial and Automotive Electronics market, recently announced that it developed the first fully differential attenuating precision amplifier which solves a common problem in industrial, instrumentation and medical applications.
• Finisar (FNSR) , a major competitor with Avago in the Wired Infrastructure market, specifically in the fiber optic network equipment market, has been investing to increase market share in China.
• Hittite Microwave (HITT), a major competitor in the Wireless Communications market, recently announced its creation of a technology that expands the range of applications of bands used in radio, military subsystems, fiber optics, scientific instruments and sensor applications up to 25 GHz.

Each target market has different standards of competition.

• In the wireless communications market, Avago competes based on its expertise in amplifier design, FBAR technology and module integration.
• In the wired infrastructure market, Avago competes based on the strength of its high speed proprietary design expertise, customer relationships, proprietary process technology and product portfolio offerings.
• In the industrial and automotive electronics target market, Avago competes based on design expertise and reputation.
• In the consumer and computing peripherals target market, Avago competes on its history of innovation and market leadership as well as its design expertise.

Regarding these competitive aspects, Avago holds strong market share because it has a significant intellectual property portfolio with over 5000 patents, strong customer relationships with over 40,000 customers worldwide, an efficient operating model with margins of 24.6%^[10], and diversity across products in its four business markets.

The following table lists the primary competitors for each of Avago's target markets.

Data from company FY 2009 annual reports, Hoovers, and Google Finance.

References

1. ↑ Avago Investor Presentation September 2010
2. ↑ "KKR scores with Avago IPO"
3. ↑ Avago 2009 Annual Report
4. ↑ Avago 2009 Annual Report
5. ↑ Avago 2009 Annual Report
6. ↑ Avago 2009 Annual Report
7. ↑ Avago 2009 Annual Report
8. ↑ Avago 2009 Annual Report
9. ↑ [1] "Gartner Says In 2009 Semiconductor Industry Will Experience Consecutive Years of Declining Revenue for the First Time in Its History"
10. ↑ Google Finance