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Broadcom 10-K 2007 Documents found in this filing:Table of Contents
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Commission file number
000-23993
16215 Alton Parkway
Irvine, California
92618-3616
(Address of Principal Executive
Offices) (Zip Code)
Registrant’s telephone
number, including area code:
(949) 926-5000
Securities registered pursuant
to Section 12(b) of the Act: None
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes o No þ
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act. Yes o No þ
Indicate by check mark whether the registrant: (1) has
filed all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past
90 days. Yes þ No o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
(§ 229.405 of this chapter) is not contained herein,
and will not be contained, to the best of registrant’s
knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this
Form 10-K
or any amendment to this
Form 10-K. þ
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, or a non-accelerated
filer. See definition of “accelerated filer and large
accelerated filer” in
Rule 12b-2
of the Exchange Act. (Check one):
Indicate by check mark whether the registrant is a shell company
(as defined in Exchange Act
Rule 12b-2). Yes o No þ
The aggregate market value of the registrant’s common
stock, $0.0001 par value per share, held by non-affiliates
of the registrant on June 30, 2006, the last business day
of the registrant’s most recently completed second fiscal
quarter, was approximately $14.4 billion (based on the
closing sales price of the registrant’s common stock on
that date). Shares of the registrant’s common stock held by
each officer and director and each person known to the
registrant to own 10% or more of the outstanding voting power of
the registrant have been excluded in that such persons may be
deemed to be affiliates. This determination of affiliate status
is not a determination for other purposes.
The registrant has two classes of common stock authorized,
Class A common stock and Class B common stock. The
rights, preferences and privileges of each class of common stock
are substantially identical except for voting rights. Shares of
Class B common stock are not publicly traded but are
convertible at any time into shares of Class A common stock
on a
one-for-one
basis. As of December 31, 2006 there were
473.5 million shares of Class A common stock and
74.8 million shares of Class B common stock
outstanding.
Part III incorporates by reference certain information from
the registrant’s definitive proxy statement (the
“Proxy Statement”) for the 2007 Annual Meeting of
Shareholders to be filed on or before April 2, 2007.
Table of Contents
Broadcom®,
the pulse logo,
54g®,
Air
Force®,
Blutonium®,
BroadVoice®,
CryptoNetX®,
NetLink®,
NetXtreme®,
QAMLink®,
QuadSquad®,
SiByte®,
StrataSwitch®,
StrataXGS®,
V-thernet®,
Videocore®,
125 High Speed
Modetm,
BladeRunnertm,
BroadRangetm,
CableCheckertm,
CellAiritytm,
FirePathtm,
InConcerttm,
Intensi-fitm,
LoopDTechtm,
NetXtreme
IItm,
ROBOSwitchtm,
ROBOswitch-plustm,
ROBO-HStm,
SecureEasySetuptm,
StrataSwitch IItm,
StrataXGS IIItm,
SystemI/Otm
and
WebSuperSmarttm
are among the trademarks of Broadcom Corporation
and/or its
affiliates in the United States, certain other countries
and/or the
EU. Any other trademarks or trade names mentioned are the
property of their respective owners.
©2007
Broadcom Corporation. All rights reserved.
BROADCOM
CORPORATION
ANNUAL
REPORT ON
FORM 10-K
FOR THE
FISCAL YEAR ENDED DECEMBER 31, 2006
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All statements included or incorporated by reference in this
Annual Report on
Form 10-K,
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 net revenue, costs and expenses and gross
margin; our accounting estimates, assumptions and judgments; the
impact of the January 2007 restatement of our historical
financial statements and new accounting rules related to the
expensing of stock options on our future reported results; our
success in pending litigation; the demand for our products; the
effect that 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 for a substantial portion of our revenue; our ability
to scale our 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 prospective needs for
additional capital; inventory and accounts receivable levels;
and the level of accrued rebates. These forward-looking
statements are based on our current expectations, estimates,
approximations 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
“Risk Factors” in 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 for any reason, except as
otherwise required by law.
PART I
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;
SystemI/Otm
server solutions; broadband network and security processors;
wireless and personal area networking; cellular communications;
mobile multimedia and applications processors; mobile power
management; and Voice over Internet Protocol (VoIP) gateway and
telephony systems.
Broadcom was incorporated in California in August 1991. Our
principal executive offices are located at 16215 Alton
Parkway, Irvine, California
92618-3616,
and our telephone number at that location is 949.926.5000. Our
Internet address is www.broadcom.com. Our annual reports
on
Form 10-K,
quarterly reports on
Form 10-Q,
current reports on
Form 8-K,
amendments to those reports and other SEC filings are available
free of charge through our website as soon as reasonably
practicable after such reports are electronically filed with, or
furnished to, the SEC. Please note that financial information
included in our reports on
Form 10-K,
Form 10-Q
and
Form 8-K,
the related opinions of our independent registered public
accounting firm, and all earnings press releases and similar
communications issued by us, for all periods ended on or before
March 31, 2006 should not be relied upon and have been
superseded in their entirety by the information in our amended
Annual Report on
Form 10-K/A
for the year ended December 31, 2005, or the 2005
Form 10-K/A,
and our amended Quarterly Report on
Form 10-Q/A
for the three months ended March 31, 2006, each filed
January 23, 2007. All references
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in this Report to financial information for the year 2005 or
prior years are to the information contained in the 2005
Form 10-K/A.
Our Class A common stock trades on the Nasdaq Global Select
Marketsm
under the symbol BRCM. The inclusion of our website address in
this Report does not include or incorporate by reference into
this Report any information on our website.
Over the past two decades communications technologies have
evolved dramatically in response to the proliferation of the
Internet, ubiquitous wireless and mobile networks, and the
emergence of new data-intensive computing and communications
applications. These applications include, among others,
high-speed Internet web browsing, wireless networking, high
definition television and DVD players,
VoIP-enabled
products, sophisticated Gigabit Ethernet corporate networks,
portable media players that are able to play both audio and
video, cellular handsets that act as a camera or camcorder,
handle email and surf the Internet, and mobile TV and game
platforms and other wireless-enabled consumer electronics and
peripherals. This evolution has also changed the ways in which
we communicate. Consumers and businesses continue to seek
faster, more cost-effective ways to receive and transmit voice,
video, data and multimedia to and throughout the home, the
office and the mobile environment. We can now access and
communicate information via wired and wireless networks through
a variety of electronic devices, including personal desktop and
laptop computers, digital cable and satellite set-top boxes,
high definition televisions, handheld computing devices such as
personal digital assistants, or PDAs, and cellular phones. These
applications and devices require increasingly higher processing
speeds and information transfer rates within the computing
systems and the data storage devices that support them and
across the network communication infrastructures that serve them.
This evolution has inspired equipment manufacturers and service
providers to develop and expand existing wired and wireless
communications markets, and has created the need for new
generations of integrated circuits. Integrated circuits, or
chips, are made using semiconductor wafers imprinted with a
network of electronic components. They are designed to perform
various functions such as processing electronic signals,
controlling electronic system functions, and processing and
storing data. Today all electronic products use integrated
circuits, which are essential components of personal computers,
wired and wireless voice and data communications devices,
networking products and home entertainment equipment.
The broadband transmission of digital information over existing
wired and wireless infrastructures requires very sophisticated
semiconductor solutions to perform critical systems functions
such as complex signal processing, converting digital data to
and from analog signals, and switching and routing of packets of
information over Internet Protocol, or IP, -based networks.
Solutions that are based on multiple discrete analog and digital
chips generally cannot achieve the cost-effectiveness,
performance and reliability required by today’s
communications markets. These requirements are best addressed by
new generations of highly integrated mixed-signal devices that
combine complex analog, digital, and in many cases, radio
frequency functions onto a single integrated circuit, and can be
manufactured in high volumes using cost-effective process
technologies.
We design, develop and supply a diverse portfolio of products
targeted to a variety of wired and wireless communications
markets. Our semiconductor and software solutions are
ubiquitous, embedded in cable and DSL modems and digital set-top
boxes, digital televisions, high definition DVD players,
networking equipment, wireless-enabled laptop and desktop
computers, and advanced PDAs and cellular phones, among other
wired and wireless equipment.
The following is a brief description of each of our target
markets and the
system-on-a-chip
and software solutions that we provide for each market.
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Broadband
Communications
Broadcom offers manufacturers a range of broadband
communications and consumer electronics
systems-on-a-chip
that enable voice, video and data services over residential
wired and wireless networks. These highly integrated silicon
solutions continue to enable advanced system solutions, which
include broadband modems and residential gateways, digital
cable, satellite and IP set-top boxes and media servers, high
definition and digital televisions, and high definition DVD
players and personal video recording devices.
Unlike traditional
dial-up
modems that provide online access through the telephone system,
cable modems provide users high-speed Internet access through a
cable television network. Although cable networks were
originally established to deliver television programming to
subscribers’ homes, cable television operators have
generally upgraded their systems to support two-way
communications, high-speed Internet access and telecommuting
through the use of cable modems. These modems are designed to
achieve downstream transmission speeds of up to 43 megabits per
second, or Mbps (North American standard), or 56 Mbps
(international standard), and upstream transmission to the
network at speeds of up to 30 Mbps. The speeds achieved by
cable modems are nearly 1,000 times faster than the fastest
analog telephone modems, which transmit downstream at up to 56
kilobits per second, or Kbps, and upstream at up to
28.8 Kbps. Cable modems typically connect to a user’s
PC through a standard 10/100BASE-T Ethernet card or Universal
Serial Bus, also known as a USB, connection. A device called a
cable modem termination system, or CMTS, located at a local
cable operator’s network hub, communicates through
television channels to cable modems in subscribers’ homes
and controls access to cable modems on the network.
The cable industry’s adoption of an open standard, the Data
Over Cable Service Interface Specification, commonly known as
DOCSIS®,
has made possible interoperability among various
manufacturers’ cable modems and CMTS equipment used by
different cable networks. The first specification, DOCSIS 1.0,
was adopted in 1997 and enabled the cost-effective deployment of
cable modems. In 1998 the DOCSIS 1.1 specification was
announced. This specification enhanced DOCSIS 1.0 to include
support for cable telephony using VoIP technology, streaming
video and managed data services. In 2002 DOCSIS 2.0 was
approved. DOCSIS 2.0 adds support for higher upstream
transmission speeds of up to 30 Mbps and more symmetric IP
services, and provides extra capacity for cable telephony. The
recently released DOCSIS 3.0 specification, which is currently
under development, provides enhanced data rates and security,
while maintaining backwards compatibility with prior standards.
The high speeds of today’s cable modems can enable an
entirely new generation of multimedia-rich content over the
Internet and allow cable operators to expand their traditional
video product offerings to include data and telephone services.
The adoption of cable modem services and the continued
proliferation of homes with multiple PCs have also generated the
need for residential networking. Cable television operators have
recognized the opportunity to include this feature in the
equipment they utilize for cable modem services through either
home telephone line or wireless solutions, and the cable
industry has created a specification called
CableHometm
that defines how a home intranet interoperates with a cable
operator’s Internet service.
We offer integrated semiconductor solutions for cable modems and
cable modem termination systems. We currently have a leading
market position in both equipment areas, with an extensive
product offering for the high-speed, two-way transmission of
voice, video and data services to residential customers. We
offer a complete system-level solution that not only includes
integrated circuits, but also reference design hardware and a
full software suite to support our customers’ needs and
accelerate their time to market.
Cable Modem Solutions. All of our cable modem
chips are built around our
QAMLink®
DOCSIS-compliant transceiver and media access controller, or
MAC, technologies. These technologies enable downstream data
rates up to 56 Mbps and upstream data rates up to
30 Mbps and are compliant with DOCSIS versions 1.0, 1.1 and
2.0. These devices provide a complete DOCSIS system solution in
silicon, enabling quality of service to support constant bit
rate services like VoIP and video streaming.
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Residential Broadband Gateway Solutions. The
levels of integration and performance that we continue to
achieve in our cable modem chips are reducing the cost and size
of cable modems while providing consumers with easy to use
features and seamless integration to other transmission media.
As a result, cable modem functionality is evolving into a small
silicon core that can be incorporated into other consumer
devices for broader distribution of
IP-based
services throughout the home. Broadcom offers residential
broadband gateway solutions that bring together a range of
capabilities, including those for cable modems, digital set-top
boxes, home networking, VoIP and Ethernet connectivity. These
products allow cable operators worldwide to provide residential
broadband gateways capable of delivering digital telephone
service via the
PacketCabletm
specification, IP video, and cable modem Internet services, as
well as data over in-home Ethernet or wireless networks.
CMTS Solutions. We have a complete
end-to-end
DOCSIS 1.0, 1.1, 2.0 and 3.0 compliant cable modem semiconductor
solution for both head-end and subscriber locations. Our CMTS
chipset consists of downstream and upstream physical layer, or
PHY, devices and a DOCSIS MAC. This cable modem termination
system enables the exchange of information to and from the
subscriber location, making it a key element in the delivery of
broadband access over cable.
Digital subscriber line technologies, commonly known as DSL,
represent a family of broadband technologies that use a greater
range of frequencies over existing telephone lines than
traditional telephone services. This provides greater bandwidth
to send and receive information. DSL speeds range from
128 Kbps to 52 Mbps depending upon the particular DSL
standard and the distance between the central office and the
subscriber. These data rates allow local exchange carriers to
provide, and end users to receive, a wide range of new broadband
services.
DSL technology has a number of standards or line codes used
worldwide. We support all standards-based line codes, such as
asymmetric DSL, or ADSL, ADSL2, ADSL2+ and very-high-speed DSL,
or VDSL, including the standard Annexes used in North America,
Europe, Japan and China. In addition, we provide
end-to-end
technology, with solutions designed for both customer premises
equipment, or CPE, and central office applications. Our DSL
technologies enable local exchange carriers and enterprise
networking vendors to deliver bundled broadband services, such
as digital video, high-speed Internet access, VoIP, video
teleconferencing and IP data business services, over existing
telephone lines.
DSL Modem and Residential Gateway
Solutions. For DSL CPE applications, we provide
products that address the wide variety of local area network, or
LAN, connectivity options, including Ethernet, USB-powered
solutions,
VoIP-enabled
access devices and IEEE 802.11 wireless access points with
multiple Ethernet ports. These solutions also provide a fully
scalable architecture to address emerging value-added services
such as in-home voice and video distribution. Wide area network
connectivity is provided using integrated, standards-compliant
PHY technology.
DSL Central Office Solutions. We also provide
highly integrated semiconductor solutions for DSL central office
applications. Our
BladeRunnertm
high-density central office DSL chipset supports all worldwide
DSL standards using our proprietary
Firepathtm 64-bit
digital signal processor. We believe these solutions will enable
equipment manufacturers of digital subscriber line access
multiplexers, or DSLAMs, and next generation digital loop
carriers to offer a significant increase in the number of DSL
connections that can be supported within telecommunication
companies’ tight heat, power and space constraints. We also
provide the
inter-networking
software that is enabling DSLAM technology to transition from
Asynchronous Transfer Mode to Internet Protocol.
VDSL Solutions. For VDSL applications, we
offer our QAM-based
V-thernet®
product family, which supports Ethernet transport over standard
telephone wires and is instrumental in developing standards and
products for next-generation VDSL2 applications.
The last decade has seen rapid growth in the quantity and
diversity of television programming. Despite ongoing efforts to
upgrade the existing cable infrastructure, an inadequate number
of channels exists to provide the content demanded by consumers.
In an effort to increase the number of channels and provide
higher picture
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quality, cable service providers began offering digital
programming in 1996 through the use of new digital cable set-top
boxes. These digital cable set-top boxes facilitate high-speed
digital communications between a subscriber’s television
and the cable network. Digital cable set-top boxes are currently
able to support downstream transmission speeds to the subscriber
up to 43 Mbps (North American standard) or 56 Mbps
(international standard), and several hundred MPEG-2 or MPEG-4
advanced video coding compressed digital television channels.
Direct broadcast satellite, or DBS, is the primary alternative
to cable for providing digital television programming. DBS
broadcasts video and audio data from satellites directly to
digital set-top boxes in the home via dish antennas. Due to the
ability of DBS to provide television programming where no cable
infrastructure is in place, we believe that the global market
for DBS set-top boxes will outpace the market for cable set-top
boxes.
The Federal Communications Commission has stated that
traditional terrestrial broadcast stations will be required to
broadcast in digital format. Currently, the FCC is targeting
2009 for this mandated digital conversion. This conversion will
ultimately require all television sets that are 13 inches
or larger, DVD players and video cassette recorders to
incorporate an HDTV receiver. We believe this conversion to
digital broadcasting will create demand for new digital cable
and satellite set-top boxes and digital television receivers. In
addition, manufacturers continue to develop and introduce new
generations of digital cable and satellite set-top boxes that
incorporate enhanced functionalities, such as Internet access,
personal video recording, or PVR, video on demand, interactive
television, HDTV,
3-D gaming,
audio players and various forms of home networking.
TV manufacturers also plan to incorporate digital cable-ready
capability into television sets for the North American market by
integrating today’s cable set-top box functionality
directly into TV sets. The manufacturers of TVs, through their
trade association, the Consumer Electronics Association, and in
cooperation with North American cable operators, have created an
industry specification called the “plug-n-play”
agreement. This agreement and its associated specification
define how to design digital cable-ready TVs for connection into
the North American cable infrastructure.
Cable-TV
Set-Top Box Solutions. We offer a complete
silicon platform for the digital
cable-TV
set-top box market. These highly integrated chips give
manufacturers a broad range of features and capabilities for
building standard digital
cable-TV
set-top boxes for digital video broadcasting, as well as
high-end interactive set-top boxes. These high-end set-top boxes
merge high-speed cable modem functionality with studio-quality
graphics, text and video for both standard definition
television, or SDTV, and HDTV formats.
Our cable-TV
set-top box silicon consists of front-end transceivers with
downstream, upstream and MAC functions, single-chip cable
modems, advanced 2D/3D video-graphics encoders and decoders,
radio frequency television tuners based on complementary metal
oxide semiconductor, or CMOS, process technology, and digital
visual interface chipsets. These
cable-TV
set-top box chips support most industry transmission and
television standards, enabling universal interoperability and
easy retail channel distribution. Peripheral modules
incorporated into front-end devices also provide support for
common set-top box peripheral devices, such as infrared remotes
and keyboards, LED displays and keypads.
Our chips provide a comprehensive silicon platform for high-end
interactive set-top boxes, supporting the simultaneous viewing
of television programming with Internet content capability in
either HDTV or SDTV format. This capability offers consumers a
true interactive environment, allowing them to access Internet
content while watching television. By adding our home networking
and VoIP technologies, these set-top boxes can also support the
functions of a residential broadband gateway for receiving and
distributing digital voice and data services throughout the home
over Ethernet or wireless networks. In addition, our set-top box
semiconductor solutions incorporate PVR functionality. This
allows viewers to watch and record multiple programs and enables
additional features such as selective viewing, fast forward,
fast reverse, skip forward, skip back, and slow motion and
frame-by-frame
viewing.
DBS Solutions. By leveraging our extensive
investment and expertise in the
cable-TV
set-top box market, we have also developed comprehensive DBS
solutions. These products include an advanced, high definition
video graphics subsystem, which drives the audio, video and
graphic interfaces in DBS set-top boxes and provides
multi-stream control to support PVR capabilities; a CMOS
satellite tuner, which allows our customers to provide
additional channel offerings; front-end receiver chips for
set-top boxes, including an advanced modulation system
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to increase satellite capacity; and a digital visual interface
transmitter. In addition, we offer a complete
end-to-end
chipset for receiving and displaying HDTV. This chipset provides
television and set-top box manufacturers with a high performance
vestigial side band receiver and a 2D/3D video-graphics
subsystem for SDTV and HDTV displays.
To meet the needs of the expanding broadband satellite market,
we have also developed a complete satellite system solution that
enables DBS providers to cost effectively deploy two-way
broadband satellite services, enabling Internet access via
satellite. This solution includes an advanced modulation digital
satellite receiver, a digital satellite tuner/receiver and a
high-performance broadband gateway modem, combining the
functionality of a satellite modem, a firewall router and home
networking into a single chip.
IP Set-Top Box Solutions. In 2005
Broadcom also introduced a new family of next generation
advanced video compression, high definition
system-on-a-chip
solutions for IP set-top boxes. These solutions include high
definition video decoder/audio processor chips and a dual
channel high definition and personal video recorder chip.
Digital TV Solutions. We were an early
developer of advanced television systems committee, or ATSC,
demodulators used for the reception of terrestrial HDTV signals
broadcast in North America. Capitalizing on the FCC HDTV mandate
and the “plug-n-play” agreement, as well as on our
extensive
cable-TV
set-top box technology portfolio, we have developed a highly
integrated digital TV
system-on-a-chip
solution. This digital TV solution, when combined with our
existing satellite, cable or terrestrial demodulators, forms a
complete semiconductor solution for HDTV delivery platforms,
including satellite, cable or terrestrial set-top boxes and
integrated high definition televisions. Our integrated HDTV
solution will allow television manufacturers to develop digital
cable-ready televisions that connect directly to the North
American cable infrastructure without the need for an external
set-top box.
The DVD player market is currently undergoing a transition as a
result of the increased adoption of HDTV sets by consumers and
the advent of advanced video compression technologies, such as
H.264 (also known as MPEG-4 Part 10/advanced video coding
(AVC)) and VC-1 (SMPTE 421M), the SMPTE standard based on
Microsoft®
Windows
Media®
Video 9. These trends have led television broadcasters and movie
studios to begin offering more high definition video content. In
turn, consumer electronics manufacturers have begun offering
high definition DVD players and recorders, with substantially
greater storage capacity and the ability to effectively handle
the significantly higher bit rates associated with high
resolution HDTV content. However, similar to the battle between
VHS versus Betamax in the 1970’s and 1980’s, two
competing optical disc formats have emerged: the Blu-ray
Disctm
and HD
DVDtm
formats. Both Blu-ray and HD DVD disc formats offer
significantly greater storage capacity than the current DVD
standard, but they differ in the depth of the recording layer
inside the disc; like a standard DVD, the recoding layer in an
HD DVD is midway through the disc, while in a Blu-ray disc it
can be found much closer to the surface. This difference makes
the two formats incompatible.
Broadcom entered the high definition DVD player market through
our acquisition of Sand Video, a developer of advanced video
compression technology, in April 2004. Our initial product for
this market is a high definition video decoder/audio processor
chip that is fully compliant with both the Blu-ray and HD DVD
disc formats. This single-chip solution also provides backwards
compatibility for current DVD video titles as well as new HD DVD
titles that may be authored in an MPEG-2 format. In addition, we
offer a reference design for the development of Blu-ray and HD
DVD media players that includes our HD audio/video decoder chip,
as well as an HD digital video system chip and a software
platform that afford our customers a wide range of integration
options. In 2006 we introduced a universal optical disc platform
that has an advanced feature set and a flexible optical disc
software stack that is compliant with both Blu-ray and HD DVD
specifications, providing customers with a complete platform for
next generation media players that support both disc formats, as
well as other home entertainment and network applications. The
new platform incorporates the decoding, processing and memory
functions for both Blu-ray and HD DVD media players, eliminating
the need for manufacturers to build two hardware platforms. The
platform supports a wide variety of mandatory audio and video
compression standards
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required for Blu-ray and HD DVD optical disc formats, and also
provides full backwards compatibility for current DVD video
titles as well as DVD-R, DVD-VR and audio CDs.
Enterprise
Networking
Broadcom designs and develops semiconductor solutions for PC,
server and network equipment makers that provide products to
handle the flow of information within
small-to-medium-
sized businesses, large enterprises and service provider
networks. Our solutions enable these networks to offer higher
capacity, faster, more cost-efficient transport and management
of voice, data and video traffic across wired and wireless
networks. For desktop computers and servers, we supply
high-speed controllers, server I/O chipsets and RAID storage
controllers. On the infrastructure side, Broadcom produces
end-to-end
networking products including Ethernet physical layer and
switching devices, optical networking components, embedded
processors, security processors and serializers/deserializers.
Local area networks, or LANs, consist of various types of
equipment, such as servers, workstations and desktop and laptop
computers, interconnected by copper, fiber or coaxial cables
utilizing a common networking protocol, generally the Ethernet
protocol. Ethernet scales in speed from 10 Mbps to 10
gigabits per second, or Gbps, providing both the bandwidth and
scalability required in today’s dynamic networking
environment. As the volume and complexity of network traffic
continues to increase, communications bottlenecks have developed
in corporate LANs. As a result, new technologies such as Gigabit
Ethernet, a networking standard that supports data transfer
rates of up to one Gbps, and the 10 Gigabit Ethernet standard,
which supports data transfer rates of up to 10 Gbps, are
replacing older technologies such as Fast Ethernet, which
supports data transfer rates of up to 100 Mbps, and
10BASE-T Ethernet, which supports data transfer rates of
10 Mbps.
Gigabit Ethernet is emerging as the predominant networking
technology for desktop and laptop computers. As Gigabit Ethernet
is deployed to desktop and laptop computers, we expect server
and backbone connections to continue to migrate to the new 10
Gigabit Ethernet standard. We further expect the continued use
of switch connections in place of legacy repeater connections.
Switches not only have the ability to provide dedicated
bandwidth to each connection, but also provide routing
functionality and possess the capability to deal with
differentiated traffic such as voice, video and data. We
anticipate that a significant portion of the installed base of
10/100BASE-T Ethernet switches as well as network interface
cards, or NICs, will be upgraded to faster technologies.
Our 10/100 Mbps Ethernet and Gigabit Ethernet transceivers,
controllers and switches are integrated, low-power semiconductor
solutions for servers, workstations, desktop and laptop
computers, VoIP phones and wireless access points that enable
the high-speed transmission of voice, video and data services
over the Category 5 unshielded twisted-pair copper wiring widely
deployed in enterprise and small office networks. We also offer
10 Gigabit Ethernet transceivers for network infrastructure
products. These high-speed connections are enabling users to
share Internet access, exchange graphics and video
presentations, receive VoIP and video conferencing services, and
share peripheral equipment, such as printers and scanners. In
addition, we incorporate intelligent networking functionality
into our devices, enabling system vendors to deploy enhanced
classes of services and applications, typically found only in
the core of the network, to every corporate desktop.
Digital Signal Processing Communication
Architecture. Our complex Ethernet transceivers
are built upon a proprietary digital signal processing, or DSP,
communication architecture optimized for high-speed enterprise
network connections. Our DSP silicon core enables
interoperability and robust performance over a wide range of
cable lengths and operating conditions, and delivers performance
of greater than 250 billion operations per second. This
proprietary DSP architecture facilitates the migration path to
smaller process geometries and minimizes the development
schedule and cost of our transceivers. It has been successfully
implemented in .35, .25, .18 and .13 micron CMOS processes,
and in chips with one, four, six and eight ports.
Fast Ethernet and Gigabit Ethernet
Transceivers. Our 10/100 Ethernet transceiver
product line ranges from single-chip 10/100 Ethernet
transceivers to single-chip octal 10/100 Ethernet transceivers.
These devices allow information to travel over standard Category
5 copper cable at rates of 10 Mbps and 100 Mbps. Our
Gigabit
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Ethernet transceivers are enabling manufacturers to make
equipment that delivers data at Gigabit speeds over existing
Category 5 cabling. We believe this equipment can significantly
upgrade the performance of existing networks without the need to
rewire the network infrastructure with fiber or enhanced copper
cabling. Additionally, we have developed a family of
semiconductor solutions incorporating four transceivers in a
single chip, which is optimized for high-port-density Gigabit
Ethernet switches and routers. Our
QuadSquad®
transceivers greatly reduce system costs by simplifying typical
high-density board designs, further facilitating the deployment
of Gigabit Ethernet bandwidth to the desktop.
Our Gigabit transceivers are driving the market toward lower
power, smaller footprint solutions, making it easier and less
expensive to build 10/100/1000 Ethernet NICs, switches, hubs and
routers and to put networking chips directly on computer
motherboards in LAN on motherboard, or LOM, configurations. We
plan to continue to incorporate additional functionality into
all of our transceivers, providing customers with advanced
networking features, on-chip and cable diagnostic capabilities
and higher performance capabilities.
10 Gigabit Ethernet Transceivers. We have
developed a family of 10 Gigabit Ethernet CMOS transceivers.
When combined with serial 10 Gigabit optics, these devices can
simultaneously transmit and receive at 10 Gbps data rates over
100 kilometers of existing single mode optical fiber. A 10
Gigabit Ethernet link over such distances extends the reach of
Ethernet into local, regional and metropolitan fiber optic
networks. We believe that significant cost, performance and
latency advantages can be realized when the Ethernet protocol
and other associated quality of service capabilities are
available in these network domains. We anticipate that
convergence around 10 Gigabit Ethernet will allow massive data
flow from remote storage sites across the country over the
metropolitan area network, or MAN, and into the corporate LAN,
without unnecessary delays, costly buffering for speed
mismatches or latency, or breaks in the quality of service
protocol.
SerDes Technology and Products. We have
developed an extensive library of serializer/deserializer, or
SerDes, cores for Ethernet, storage and telecommunications
network infrastructures. The technology is available in stand-
alone SerDes devices or integrated with our standard and custom
products. New generations of SerDes architectures provide
advanced on-chip diagnostic intelligence to allow system
designers to monitor, test and control high-speed serial links
for signal integrity and bit error rate performance to reduce
development cycles and costly field maintenance support.
Gigabit Ethernet Controllers. Built upon five
generations of Gigabit Ethernet MAC technology, our
NetXtreme®
family of Gigabit Ethernet controllers supports peripheral
component interconnect, or
PCI®,
PCI-X®
and PCI
Express®
local bus interfaces for use in NICs and LOM implementations.
The NetXtreme family includes comprehensive solutions for
servers, workstations, and desktop and laptop computers. These
devices incorporate an integrated Gigabit Ethernet PHY
transceiver and are provided with an advanced software suite
available for a variety of operating systems. The NetXtreme
architecture also features a processor-based design that enables
advanced management software to run in firmware so it can be
remotely upgraded through simple downloads. Our
NetXtreme IItm
family of Ethernet controllers consists of converged network
interface controllers that are designed to improve server
performance by integrating a TCP/IP offload engine, remote
direct memory access, iSCSI storage and remote management.
NetXtreme II controllers simultaneously perform storage
networking, high-performance clustering, accelerated data
networking and remote system management pass-through functions.
In 2005 Broadcom added new security features to our NetXtreme
controllers, including integrated Trusted Platform Module 1.2
functionality, to enable PC manufacturers to offer
hardware-based security as a standard feature on enterprise
client personal computers. The entire NetXtreme product family
is fabricated in a .13 micron or .18 micron CMOS process.
In 2005 Broadcom introduced its
NetLink®
family of Gigabit Ethernet controllers, which are based on the
PCI Express bus architecture and optimized for
small-to-medium-sized
businesses. Designed for use in personal computers, NetLink
controllers enable applications such as video editing and file
transfer, LAN gaming, video conferencing, multimedia data
sharing and desktop management, while at the same time offering
very low power consumption.
Ethernet Switches. We offer a broad
switch-on-a-chip
product line ranging from low-cost, unmanaged and managed, OSI
Layer 2 eight port switch chips to high-end managed, Layer 3
through Layer 7 enterprise class switch chips.
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Our
ROBOswitch-plustm
product family consists of Layer 2+ switch chips supporting
five, eight, 16 and 24 port 10/100 Ethernet switches, and
our
ROBO-HStm
product family supports single-chip networking solutions for
Layer 2+ Gigabit Ethernet configurations of four, five, eight,
16 and 24 ports. We believe our switch chips make it economical
for the remote office/business office and small office/home
office network markets to have the same high-speed local
connectivity as the large corporate office market. Our highly
integrated family of switch products combines the switching
fabric, MACs, 10/100 and Gigabit Ethernet transceivers, media
independent interface and packet buffer memory in single-chip
solutions. These chips give manufacturers multiple switch design
options that combine plug and play
ease-of-use,
scalability, network management features and non-blocking
switching performance at optimal price points for the remote
office and branch office user. In 2005 we incorporated two new
technologies into our
ROBOSwitchtm
products,
CableCheckertm
technology, which finds the location of wiring faults without
disrupting live network traffic, and
LoopDTechtm
technology, which provides an immediate warning when a loop is
introduced in the network, allowing the problem to be identified
and remedied quickly. In 2006 we introduced a new family of
ROBOswitch Gigabit Ethernet products, ranging from 16 to
48 Gigabit Ethernet ports, that features an integrated
MIPS®
processor, which reduces overall system cost, and
WebSuperSmarttm
software, an easy to use, web-based network configuration tool.
The ROBOswitch family includes products for unmanaged, smart and
managed solutions.
Our family of high-end
StrataSwitch®
products consists of wire-speed, multi-layer chips that combine
multiservice provisioning capabilities with switching, routing
and traffic classification functionality in single-chip
solutions. Replacing as many as 10 chips with one, our
StrataSwitch IItm
family of chips incorporates 24 Fast Ethernet and two Gigabit
Ethernet ports with advanced Layer 3 switching and multi-layer
packet classification.
Our
StrataXGS®
product family provides the multi-layer switching capabilities
of our StrataSwitch II technology with wire-speed Gigabit
and 10 Gigabit Ethernet switching performance for enterprise
business networks. These devices, in combination with our quad
and octal Gigabit Ethernet transceivers, enable system vendors
to build 12, 24 and 48 port multi-layer Gigabit Ethernet
stackable switches, supporting systems with up to 1,536 Gigabit
Ethernet ports. These multi-layer switches are capable of
receiving, prioritizing and forwarding packets of voice, video
and data at high speeds over existing corporate networks. The
StrataXGS family also enables advanced network management
capabilities in the switching infrastructure to track data flows
and monitor or control bandwidth on any one of these flows. This
results in a more intelligent use of network resources and
enables a whole new set of network service applications that
require high bandwidth, reliable data transmission, low latency
and advanced quality service features such as streaming video
and VoIP. In addition, our
StrataXGS IIItm
product family, introduced in 2005, incorporates advanced
features such as IPv6 routing, unified wired and wireless switch
management, advanced security and intrusion detection features,
sophisticated traffic management, and scalable buffer and
routing tables for high end applications.
With the proliferation of data being accessed and sorted by the
Internet and corporate intranets, the demand for servers has
increased substantially. As integral pieces of the overall
communications infrastructure, servers are multiprocessor-based
computers that are used to support users’ PCs over networks
and to perform data intensive PC functions such as accessing,
maintaining and updating databases.
Unlike mobile and desktop PCs, which are dominated by central
processing units, or CPUs, server, storage and workstation
platforms require highly-tuned core logic to provide high
bandwidth, high performance and the reliability, availability
and scalability that customers demand. The Internet has created
a new market for servers, storage and workstation platforms as
users access data and entertainment stored on servers from their
PCs, handheld computers and wireless handsets.
Our SystemI/O semiconductor solutions act as the essential
conduits for delivering high-bandwidth data in and out of
servers, and coordinating all input/output, or I/O, transactions
within server, storage and workstation platforms, including
among external I/O devices, the main system memory and multiple
CPUs.
We provide core logic technology that manages the flow of data
to and from a system’s processors, memory and peripheral
I/O devices. Our SystemI/O products are used to design low-end
and mid-range servers with two to four CPUs, as well as storage,
workstation, blades and networking platforms. These products
also provide
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reliability, availability and serviceability features. In 2005
we introduced a
HyperTransporttm-based
server I/O controller that incorporates PCI Express, PCI-X,
HyperTransport tunnel and Gigabit Ethernet interfaces. Our
current generation of SystemI/O products supports the AMD
Opteron®
product line and IBM PowerPC processors.
To address the increasing volume of data traffic emanating from
the growing number of broadband connections in homes and
businesses, MANs and wide area networks, or WANs, will have to
evolve at both the transport and switching layers. We believe
that the CMOS fabrication process will be a key technology in
this evolution by enabling the development of smaller optical
modules and system components that cost less, consume less power
and integrate greater functionality.
Electronic components for optical communications are a natural
extension of our large portfolio of high-speed LAN chips, one
that will allow us to provide
end-to-end
semiconductor solutions across the WAN, MAN and LAN that
increase the performance, intelligence and cost-effectiveness of
broadband communications networks.
We offer a portfolio of CMOS OC-48 and OC-192 transceiver and
forward error correction solutions, chips for Synchronous
Optical Networks and dense wave division multiplexing, or DWDM,
applications, as well as a serial CMOS transceiver for 10
Gigabit Ethernet applications. Our use of the CMOS process
allows substantially higher levels of integration and lower
power consumption than competitive gallium arsenide, bipolar or
silicon germanium solutions. Our DWDM transport processor
combines an OC-192 transceiver, forward error correction,
performance monitoring logic and G.709 digital wrapper into a
single CMOS chip solution, occupying less than one half the
space and consuming one-third the power of non-integrated
solutions.
In addition, our latest generation of switch devices is designed
for the Metro access and edge markets. These devices feature
support for IPv4 and IPv6, MPLS, Ethernet over MPLS, advanced
quality of service, and sophisticated packet classification and
traffic management. They are also scalable to large systems with
external memory.
The economies of scale derived from the Ethernet protocol have
created emerging markets for Ethernet applications.
Broadcom’s advanced switch products are being used in
second and third generation cellular infrastructures, IP DSLAM,
Metro Ethernet, blade servers in data centers, passive optical
networks and residential Ethernet applications. In addition, our
Ethernet transceivers are now being integrated into printers,
gaming consoles, LAN on motherboard applications, audiovisual
equipment and a number of other consumer devices.
Most corporations use the Internet for the transmission of data
among corporate offices and remote sites and for a variety of
e-commerce
and
business-to-business
applications. To secure corporate networks from intrusive
attacks and provide for secure communications among corporate
sites and remote users, an increasing amount of networking
equipment will include technology to establish virtual private
networks, or VPNs, which use the Internet Protocol security, or
IPSec, protocol. In addition to VPNs, secure socket layer,
commonly referred to as SSL, is used to secure sensitive
information among users and service providers for
e-commerce
applications. Personal authentication has also become a part of
daily life — people present “credentials” to
prove their identity and gain access to a place or thing, such
as a corporate network, or to engage in financial transactions.
Our identities have increasingly become a collection of
electronic bits. While enabling unprecedented levels of
convenience, digital transactions inherently expose individuals
and companies to a greater risk of identity theft and invasion
of privacy.
Our SSL family of
CryptoNetX®
high-speed security processors and adapters for enterprise
networks is enabling companies to guard against Internet attacks
without compromising the speed and performance of their
networks. Our PCI 2.2-compliant adapters provide a range of
performance from 800 to 10,000 SSL transactions per second. Our
current generation of CryptoNetX processors, introduced in 2005,
combine IP security, SSL
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protocol processing, cryptographic acceleration and
hardware-based identity management and authentication into a
single-chip. These processors are built upon a proprietary,
scalable silicon architecture that performs standards-compliant
cryptographic functions at data rates ranging from a few Mbps to
10 Gbps full duplex. This architecture is being deployed across
all of our product lines, addressing the entire broadband
security network spectrum from residential applications to
enterprise networking equipment. This scalable architecture
allows us to develop standalone security products for very
high-speed networking applications and to integrate the IP
security processor core into lower speed solutions for consumer
products, such as cable and DSL modem applications.
In 2006 Broadcom introduced a secure applications processor with
integrated radio frequency identification technology that is
designed to facilitate secure personal authentication
transactions associated with physical access, logical access
(into a PC or network) and contactless payment applications.
Broadband processors are high performance devices enabling
high-speed computations that help identify, optimize and control
the flow of data within the broadband network. The continued
growth of IP traffic, coupled with the increasing demand for new
and improved services and applications such as security,
high-speed access and quality of service, is placing additional
processing demands on next-generation networking and
communications infrastructures. From the enterprise to access
network to the service provider edge, networking equipment must
be able to deliver wire-speed performance from the OC-3
standard, which transmits data at 155 Mbps, through the
OC-192
standard, which transmits data at 10 Gbps, as well as the
scalability and flexibility required to support next-generation
services and features. In the enterprise and data center
markets, server and storage applications require high
computational performance to support complex protocol
conversions, and services such as virtualization. With the
migration from second generation cellular mobile systems, or 2G,
to the third generation cellular mobile systems, or 3G, networks
and mobile infrastructure equipment must be able to support
higher bandwidth rates utilizing low power resource levels.
Leveraging our expertise in high-performance, low-power very
large scale integration design, we have developed a family of
high performance, low power processor solutions designed
specifically to meet the needs of next-generation networks. Our
SiByte®
family of processors delivers four key features essential for
today’s embedded broadband network processors: very high
performance, low power dissipation, high integration of
network-centric functions, and programmability based on an
industry-standard instruction set architecture. At the heart of
the SiByte family of processors is the SB-1 core, a MIPS 64-bit
superscalar CPU capable of operating at frequencies of
400 MHz to 1.2 GHz. These processors provide customers
with a solution for high-speed network processing, including
packet classification, queuing, forwarding and exception
processing for wired and wireless networks. They enable complex
applications such as deep content switching, routing and load
balancing to be performed at wire speed. Our devices are also
being designed for utilization in the fast growing network
storage market, including network attached storage, storage area
networking and RAID applications. Our general purpose processors
are ideal for the complex protocol conversions, virtualization
and proxy computations that storage applications require.
Custom silicon products are devices for applications that
customers are able to semi-customize by integrating their own
intellectual property with our proprietary intellectual property
cores. We have successfully deployed such devices into the LAN,
WAN and PC markets. Our typical semi-custom devices are complex
mixed-signal designs that leverage our advanced design processes.
Mobile &
Wireless Networking
Broadcom’s mobile and wireless products allow manufacturers
to develop leading edge mobile devices, enabling
end-to-end
wireless opportunities for the home, business and mobile
markets. Products in this area include solutions in every major
wireless market segment, including wireless local area, cellular
and wide area, and personal area networking, as well as a
comprehensive range of emerging next generation mobile
technologies. Our portfolio of mobile and wireless products is
enabling a new generation of portable devices including cellular
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handsets, mobile TV and game platforms and other
wireless-enabled consumer electronics and peripherals, such as
home gateways, printers, VoIP phones, PC cards and notebook
computers.
Wireless local area networking, also known as wireless LAN or
Wi-Fi®
networking, allows equipment on a local area network to connect
without the use of any cables or wires. Wireless local area
networking adds the convenience of mobility to the powerful
utility provided by high-speed data networks, and is a natural
extension of broadband connectivity in the home and office.
The first widely adopted standard for Wi-Fi technology was the
IEEE 802.11b specification, which is the wireless equivalent of
10 Mbps Ethernet, allowing transfer speeds up to
11 Mbps and spanning distances of up to 100 meters.
However, the 802.11g specification, which provides almost five
times the data rate of 802.11b networks, has replaced 802.11b as
the mainstream wireless technology for both business and
consumer applications. The 802.11a standard applies to wireless
LANs that operate in the 5 GHz frequency range with a
maximum data rate of 54 Mbps. In early 2008, we believe a
fourth Wi-Fi standard, 802.11n, will be ratified. However,
Broadcom is already developing products based on a draft version
of that standard. 802.11n will deliver up to eight times the
throughput and four times the range of 802.11g.
Wi-Fi technology was first utilized in applications such as
computers and routers, and is now being embedded into a number
of other electronic devices such as printers, digital cameras,
gaming devices, PDAs, cellular phones and broadband modems. Our
54g®
chipsets represent our implementation of the IEEE 802.11g
wireless LAN standard that preserves full interoperability with
802.11b but provides connectivity at speeds of up to
54 Mbps. We offer a family of low power 54g chipsets that
are specifically designed to allow PDAs, portable music players,
cellular phones, and handheld games to connect to wireless home
or enterprise networks using 802.11b, 802.11g or 802.11a/g
dual-band technology. Our
Intensi-fitm
chipsets, introduced in 2006, are built to support the
draft 802.11n standard, and are backward compatible to all
previous WLAN standards: 802.11a, 802.11b, and 802.11g. These
chipsets enable us to serve a new demand for video distribution
in the home.
Continuous software and hardware performance enhancements have
refined our wireless LAN product family, which now includes
125 High Speed
Modetm
technology, which increases the speed of wireless transmissions,
BroadRangetm
technology, which extends Wi-Fi coverage range, and
SecureEasySetuptm,
a software wizard that enables simple setup of a secure wireless
network. All of our
AirForce®
products also offer advanced security features, including
certified support for Wi-Fi Protected
Accesstm,
or WPA (versions 1 and 2), the Cisco Compatible Extensions, and
hardware accelerated Advanced Encryption Standard, or AES,
encryption. Our entire family of wireless LAN chips consists of
all-CMOS solutions that are capable of self-calibrating based on
usage temperature and other environmental conditions.
The cellular handset market is transitioning from pure voice to
broadband multimedia and data, transforming the traditional
cellular phone from a voice-only device into a multimedia
gateway. Products emerging from this transition will allow
end-users to wirelessly download
e-mail, view
web pages, stream audio and video, and conduct videoconferences
with cellular phones, PDAs, laptops and other mobile devices.
The international Global System for Mobile Communication, or
GSM, is currently the dominant standard for cellular mobile
communications. Enhanced data communications standards derived
from GSM include General Packet Radio Services, or GPRS,
Enhanced Data Rates for GSM Evolution, or EDGE, and Universal
Mobile Telecommunications System, or UMTS. UMTS technologies,
including Wideband Code Division Multiple Access (WCDMA),
High Speed Downlink Packet Access (HSDPA) and High Speed Uplink
Packet Access (HSUPA), are typically referred to as 3G
technologies. These standards have extended GSM to enable
packet-based “always on” Internet applications and
more efficient data transport with higher transmission rates for
a new generation of data services such as Internet browsing,
3-D gaming
and multimedia messaging with rich graphics and audio content.
We develop and market GSM, GPRS, EDGE and UMTS chipsets and
reference designs with complete software and terminal solutions
for use in cellular phones, cellular modem cards and wireless
PDAs. Our
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CellAiritytm
cellular products, introduced in 2006, include baseband
processor solutions, which integrate both mixed signal and
digital functions on a single chip, a cellular software suite
that includes enhanced communications and multimedia
functionality, and pre-integrated cellular phone reference
designs that assist our customers in achieving easier and faster
transitions from initial prototype designs to final production
releases. We also provide a range of handset and cellular modem
engineering design services to select customers, encompassing
printed circuit board, RF and handset hardware design, software
development and integration, product verification and
certification, and manufacturing support.
The
Bluetooth®
short-range wireless networking standard is a low-cost
wire-replacement technology that enables connectivity among a
wide variety of mainstream consumer electronic devices including
PCs, mobile phones, PDAs, headsets and automotive electronics.
Bluetooth short-range wireless connectivity enables personal
area networking, or PAN, at speeds up to three Mbps, and can
cover distances up to 30 feet. Bluetooth technology allows
devices to automatically synchronize and exchange data with
other Bluetooth-enabled devices without the need for wires, and
enables wireless headset connections to cellular phones and
wireless mouse and keyboard applications.
Our
Blutonium®
family of single-chip Bluetooth devices and software profiles
and stacks provides a complete solution that enables
manufacturers to add Bluetooth functionality to almost any
electronic device with a minimal amount of development time and
resources. Our Bluetooth solutions, all of which have been
qualified by the Bluetooth Qualification Board to meet version
1.2 or 2.0 of the Bluetooth specification, are incorporated in
PCs, PDAs, wireless mouse and keyboard applications,
GSM/GPRS/UMTS and CDMA mobile phones, and other end products.
Our Bluetooth solutions offer the industry’s highest levels
of performance and integration with designs in standard CMOS,
allowing them to be highly reliable while reducing manufacturing
costs. In addition, we have developed
InConcerttm
coexistence technology to allow products enabled with our
AirForce Wi-Fi and Blutonium Bluetooth chips to collaboratively
coexist within the same radio frequency.
During 2006 Broadcom added several new, enhanced products to its
Bluetooth product line, including a new device that integrates a
complete Bluetooth radio and baseband with a high performance FM
stereo radio receiver into a single chip, and a fully integrated
Bluetooth smartphone software that provides Windows-based mobile
smartphone devices with industry leading Bluetooth functionality
that was only previously available in desktop and notebook
computers.
Multimedia is becoming increasingly prevalent in handheld
devices such as cellular phones. To support new multimedia
features including imaging, graphics, camera image capture,
audio capture, music playback, music streaming, video streaming,
video capture, gaming, mobile TV, and more, Broadcom offers a
line of video and multimedia processors based on a low power,
high performance architecture referred to as
Videocore®.
Unlike hard-wired processor cores, Videocore devices are built
to provide customers the benefit of total software flexibility
and programmability. Videocore supports a wide variety of
standard and non-standard software and codecs including, but not
limited to, extremely low power implementations of MPEG-4 and
H.264 for video, MP3 and AAC for audio, and MIDI. Providing the
base codecs to our key customers allows them to rapidly develop
next-generation products while maintaining backward
compatibility of applications software. Because the fully
programmable architecture of our mobile multimedia processors
enables a complete range of multimedia functions to be executed
in software, the system designer can quickly move to production
without the costly overhead and
time-to-market
uncertainty of hardware accelerators. The scalability of the
architecture allows features or new industry standard codecs to
be added shortly before product release or through firmware
upgrades in the field.
Our Videocore processors can be used either as standalone
multimedia processors or as co-processors in conjunction with a
host processor such as a GSM, EDGE or UMTS baseband.
Videocore-enabled video and
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multimedia processors for advanced handheld multimedia products
are designed and optimized for video record/playback, mobile TV
and 3D mobile gaming. Videocore technology is designed to create
power efficient, high performance processors focused on
multimedia for cellular handsets, but we are also deploying
Videocore processors into a number of other portable
applications, where battery life and performance are important.
The increasing popularity of multimedia features in cellular
phones and other portable devices, such as mobile televisions
and portable audio, video and gaming devices, is generating a
demand for high-end applications optimized to work with video
and camera capabilities at prices affordable to consumers. In
2006 we introduced a family of mobile application processors,
which integrate our Videocore multimedia processor and an
ARM11®
applications processor, software, and reference designs, to
enable an array of multimedia features, including support for an
8 mega-pixel digital camera, MPEG-4/H.264 VGA video decoding at
30 frames per second, video encoding at 30 frames per second,
and NTSC/PAL TV signal output via composite, component and
S-video connections, and to support advanced mobile device
applications such as email, web browsing, file management and
graphical user interfaces.
As cellular networks evolve to so-called 2.5G and 3G
technologies, increasingly sophisticated functionality and
applications are becoming available in new cellular handsets and
other portable devices. The convergence of complex multimedia
functionality, including high-resolution digital still camera
capabilities, mobile gaming, MP3 and video playback, Internet
access, Global Positioning System receivers, and mobile
television, is becoming standard on many portable devices.
However, each of these applications adds to the power management
complexity of the overall system, creating a need for more
sophisticated battery charging, monitoring, and system power
management. Portable device makers are seeking advanced power
management solutions that reduce total system cost, occupy very
little board space and are flexible and scalable enough to
manage even the most demanding power requirements. Broadcom
provides a family of power management devices, introduced in
2006, that intelligently manage power consumption in mobile
devices to optimize system operation and maximize battery life
in cellular phones, MP3 players, portable navigation products,
portable media and game players and security applications.
Mobile digital TV refers to a series of new broadcast technology
standards targeted specifically at mobile platforms. As
incorporation of video into mobile devices becomes more
prevalent, broadcast technologies offer improved viewing quality
and lower network loading as compared to video over 3G IP
transfers. Of these standards, the Digital Video
Broadcasting – Handheld (DVB-H) standard currently
offers broad geographic coverage worldwide. DVB-H is based on
the DVB-T standard with lower power features.
In 2006 we introduced our first tuner that supports both the
DVB-T and DVB-H standards. This tuner can be combined with
off-the-shelf
demodulators from third parties to provide a complete mobile
digital TV solution for DVB-H and DVB-T.
Voice over Internet Protocol refers to the transmission of voice
over any IP packet-based network. VoIP is stimulating dramatic
changes in the traditional public switched and enterprise
telephone networks. Packet-based networks provide significant
economic advantages over traditional circuit-switched voice
networks. The trend to IP networks for voice has been
driven by the significant build out of the Internet and
deregulation of long distance and local phone service.
The enterprise equipment market is being radically affected by
the convergence of corporate data networks and voice
communications. A host of new enterprise services can be enabled
when a LAN-based Ethernet switching infrastructure is used to
carry both data and voice. We provide both silicon and software
to enable our enterprise equipment customers to provide
cost-effective IP phones.
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Within residential markets, VoIP is gaining momentum as a viable
alternative to traditional public telephone networks. In
addition to enabling cost savings for long-distance calls, VoIP
creates a number of consumer product opportunities and
applications for equipment vendors and service providers.
IP Phone Processors. Our IP phone silicon and
software solutions integrate packet processing, voice processing
and switching technologies to provide the quality of service,
high fidelity and reliability necessary for enterprise telephony
applications. Our processors have enabled the development of new
XML-based IP phones that can perform a wide variety of functions
that traditional phones cannot support. Originally focused on
Fast Ethernet, these processors now include support for Gigabit
Ethernet as well to support the growing deployment of Gigabit
Ethernet throughout enterprises.
Residential Terminal Adapter Processors. Our
terminal adapter VoIP solutions enable existing analog phones to
be connected to broadband modems via Ethernet. These products
support residential VoIP services that are now being offered by
a variety of broadband service providers.
Wi-Fi Phone Processors. In 2004 we introduced
our first Wi-Fi phone processor that enables the development of
next generation, cordless phone replacement devices. These Wi-Fi
phones are beginning to be deployed in both enterprises and
homes as the use of broadband and Wi-Fi applications increases
in these markets.
All of our VoIP processors support our
BroadVoice®
technology, which features a wideband high fidelity mode that
significantly improves the clarity and quality of telephony
voice service.
We also develop reference platforms designed around our
integrated circuit products that represent example system-level
applications for incorporation into our customers’
equipment. These reference platforms generally include a fairly
extensive suite of software drivers as well as protocol and
application layer software to assist our customers in developing
their own end products. By providing these reference platforms,
we can assist our customers in achieving easier and faster
transitions from initial prototype designs to final production
releases. These reference platforms enhance the customer’s
confidence that our products will meet its market requirements
and product introduction schedules.
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 several markets.
Customers currently shipping wired and wireless communications
equipment incorporating our products include Alcatel, Apple,
Askey, Cisco, D-Link, Dell, EchoStar, Hewlett-Packard, IBM, LG,
Motorola, Netgear, Nintendo, Nortel Networks, Samsung, and
Thomson CE, among others. To meet the current and future
technical needs in our target markets, we have also established
strategic relationships with multiservice operators that provide
wired and wireless communications services to consumers and
businesses.
A small number of customers have historically accounted for a
substantial portion of our net revenue. Sales to our five
largest customers represented 46.5%, 48.5% and 53.0% of our net
revenue in 2006, 2005 and 2004, respectively. See Note 12
of Notes to Consolidated Financial Statements, included in
Part IV, Item 15 of this Report.
We expect that our key customers will continue to account for a
substantial portion of our net revenue in 2007 and in the
foreseeable future. These customers and their respective
contributions to our net revenue have varied and will likely
continue to vary from period to period. We typically sell
products pursuant to purchase orders that customers can
generally cancel or defer on short notice without incurring a
significant penalty, and currently do not have agreements with
any of our key customers that contain long-term commitments to
purchase specified volumes of our products.
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Using proprietary technologies and advanced design
methodologies, we design, develop and supply complete
system-on-a-chip
solutions and related hardware and software applications for our
target markets. Our proven
system-on-a-chip
design methodology has enabled us to be first to market with
advanced chips that are highly integrated and cost-effective,
and that facilitate the easy integration of our customers’
intellectual property. Our design methodology leverages
industry-standard,
state-of-the-art
electronic design automation tools, and generally migrates
easily to new silicon processes and technology platforms. It
also allows for the easy integration of acquired or licensed
technology, providing customers with a broad range of silicon
options with differentiated networking and performance features.
We believe our key competitive advantages include superior
engineering execution and our broad base of core technologies
encompassing the complete design space from systems to silicon.
We have developed and continue to build on the following
technology foundations:
We have assembled a large team of experienced engineers and
technologists, many of whom are leaders in their particular
field or discipline. As of December 31, 2006 we had 3,808
research and development employees, the majority of whom hold
advanced degrees, including 439 employees with Ph.Ds. These key
employees are involved in advancing our core technologies, as
well as applying them to our product development activities.
Because the
system-on-a-chip
solutions for many of our target markets benefit from the same
underlying core technologies, we are able to address a wide
range of wired and wireless communications markets with a
relatively focused investment in research and development.
We believe that the achievement of higher levels of integration
and the timely introduction of new products in our target
markets is essential to our growth. Our current plans are to
maintain our significant research and development staffing
levels in 2007 and for the foreseeable future. In addition to
our principal design facilities in Irvine, California and
Santa Clara County, California, we have design centers in
Tempe, Arizona; San Diego County, California; Colorado
Springs, Fort Collins, and Longmont, Colorado; Duluth,
Georgia; Germantown, Maryland; Andover, Massachusetts; Matawan,
New Jersey; Austin, Texas and Seattle, Washington, among other
locations. Internationally, we also have design facilities in
Belgium, Canada, China, Denmark, France, Greece, India, Israel,
Japan, Korea, the Netherlands, Singapore, Taiwan and the United
Kingdom, among other locations. We anticipate establishing
additional design centers in the United States and in other
countries.
Our research and development expense was $1.117 billion,
$681.0 million and $598.7 million in 2006, 2005 and
2004, respectively. These amounts included stock-based
compensation expense for employees engaged in research and
development of $307.1 million, $68.6 million and
$102.3 million in 2006, 2005 and 2004, respectively.
We manufacture our products using standard CMOS process
techniques. The standard nature of these processes permits us to
engage independent silicon foundries to fabricate our integrated
circuits. By subcontracting our manufacturing requirements, we
are able to focus our resources on design and test applications
where we
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believe we have greater competitive advantages. This strategy
also eliminates the high cost of owning and operating
semiconductor wafer fabrication facilities.
Our operations and quality engineering teams closely manage the
interface between manufacturing and design engineering. While
our design methodology typically creates a smaller than average
die for a given function, it also generates full-custom
integrated circuit designs. As a result, we are responsible for
the complete functional and parametric performance testing of
our devices, including quality. We employ a fully staffed
operations and quality organization similar to that of a
vertically integrated semiconductor manufacturer. We also
arrange with our foundries to have online
work-in-progress
control. Our approach makes the manufacturing subcontracting
process transparent to our customers.
We depend on five independent foundry subcontractors located in
Asia to manufacture substantially all of our products. Our key
silicon foundries are Taiwan Semiconductor Manufacturing
Corporation in Taiwan, Chartered Semiconductor Manufacturing in
Singapore, Semiconductor Manufacturing International Corporation
in China, Silterra Malaysia Sdn. Bhd. in Malaysia and United
Microelectronics Corporation in Singapore and Taiwan, several of
which maintain multiple fabrication facilities in various
locations. Any inability of one of our five independent foundry
subcontractors to provide the necessary capacity or output for
our products could result in significant production delays and
could materially and adversely affect our business, financial
condition and results of operations. While we currently believe
we have adequate capacity to support our current sales levels,
we continue to work with our existing foundries to obtain more
production capacity, and we intend to qualify new foundries to
provide additional production capacity. It is possible that from
time to time adequate foundry capacity may not be available on
acceptable terms, if at all. In the event a foundry experiences
financial difficulties, or if a foundry suffers any damage to or
destruction of its facilities, or in the event of any other
disruption of foundry capacity, we may not be able to qualify
alternative manufacturing sources for existing or new products
in a timely manner.
Our products are currently fabricated with .35 micron, quad
layer metal; .22 micron, five layer metal; .18 micron,
five and six layer metal; .13 micron, six and seven layer
metal; and 90 nanometer, six and seven layer metal structures.
We continuously evaluate the benefits, on a
product-by-product
basis, of migrating to smaller geometry process technologies,
and are designing most new products in 65 nanometer process
technology, seven to eight layer metal, feature sizes. Although
our experience to date with the migration of products to smaller
processes geometries has been predominantly favorable, the
transition to 65 nanometer geometry process technology has
resulted in significantly higher mask and prototyping costs, as
well as additional expenditures for engineering design tools and
related computer hardware. We may face similar expenses and
difficulties or delays as we continue to transition our products
to smaller geometry processes. Other companies in our industry
have experienced difficulty transitioning to new manufacturing
processes and, consequently, have suffered reduced yields or
delays in product deliveries. We believe that the transition of
our products to smaller geometries will be important for us to
remain competitive. Our business, financial condition and
results of operations could be materially and adversely affected
if any such transition is substantially delayed or inefficiently
implemented.
Our wafer probe testing is conducted by either our independent
foundries or independent wafer probe test subcontractors.
Following completion of the wafer probe tests, the die are
assembled into packages and the finished products are tested by
one of our eight key subcontractors: Advanced Semiconductor
Engineering (previously Global Advance Packaging &
Test) in China; Amkor in Korea, Philippines and China; ASAT in
Hong Kong; EEMS Test Singapore in Singapore; Signetics in Korea;
Siliconware Precision in Taiwan; STATSChipac in Singapore,
Korea, Malaysia and China; and United Test and Assembly Center
in Singapore. While we have not experienced material disruptions
in supply from assembly subcontractors to date, we and others in
our industry have experienced shortages in the supply of
packaging materials from time to time, and we could experience
shortages or assembly problems in the future. The availability
of assembly and testing services from these subcontractors could
be materially and adversely affected in the event a
subcontractor experiences financial difficulties, or if a
subcontractor suffers any damage to or destruction of its
facilities, or in the event of any other disruption of assembly
and testing capacity.
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Manufacturers of wired and wireless communications equipment
demand high quality and reliable semiconductors for
incorporation into their products. We focus on product
reliability from the initial stage of the design cycle through
each specific design process, including layout and production
test design. In addition, we subject our designs to in-depth
circuit simulation at temperature, voltage and processing
extremes before initiating the manufacturing process.
We prequalify each assembly and foundry subcontractor. This
prequalification process consists of a series of industry
standard environmental product stress tests, as well as an audit
and analysis of the subcontractor’s quality system and
manufacturing capability. We also participate in quality and
reliability monitoring through each stage of the production
cycle by reviewing electrical and parametric data from our wafer
foundry and assembly subcontractors. We closely monitor wafer
foundry production to ensure consistent overall quality,
reliability and yield levels. In cases where we purchase wafers
on a fixed price-basis, any improvement in yields can reduce our
cost per chip.
As part of our total quality program, we received ISO 9002
certification, a comprehensive International Standards
Organization specified quality system acknowledgement, for our
Singapore facility. All of our principal independent foundries
and package assembly facilities are currently ISO 9001 certified.
While every effort is made to monitor and meet the quality
requirements of our customers, including the use of industry
standard procedures and other methods, it is possible that an
unanticipated quality problem may result in interruptions or
delays in product shipments. In that event, our reputation may
be damaged and customers may be reluctant to buy our products,
and we may be required to apply significant capital and other
resources to remedy any quality problem with our products.
We are also focusing on managing the environmental impact of our
products. Our manufacturing flow is registered to ISO 14000, the
international standard related to environmental management, by
our subcontractors. Due to environmental concerns, the need for
lead-free solutions in electronic components and systems is
receiving increasing attention within the semiconductor industry
and many companies are moving towards becoming compliant with
the Restriction of Hazardous Substances Directive, the European
legislation that restricts the use of a number of substances,
including lead, effective July 2006. We believe that our
products are compliant with the RoHS Directive and that
materials will be available to meet these emerging regulations.
However, it is possible that unanticipated supply shortages or
delays may occur as a result of these new regulations.
Initially we distributed products to our customers through an
operations and distribution center located in Irvine,
California. In 1999 we established an international distribution
center in Singapore. This facility put us closer to our
suppliers and many key customers and improved our ability to
meet customers’ needs. Our Irvine facility continues to
ship products to U.S. destinations, while our Singapore
facility distributes products to international destinations. Net
revenue derived from actual shipments to international
destinations, primarily in Asia (including foreign subsidiaries
or manufacturing subcontractors of customers that are
headquartered in the United States), represented 86.5%, 84.5%
and 79.0% of our net revenue in 2006, 2005 and 2004,
respectively.
Our sales and marketing strategy is to achieve design wins with
technology leaders in each of our targeted wired and wireless
communications markets by providing quality,
state-of-the-art
products, superior engineering execution and superior sales,
field application and engineering support. We market and sell
our products in the United States through a direct sales force,
distributors and manufacturers’ representatives. The
majority of our sales occur through our direct sales force,
which is based in offices located in California, Colorado,
Florida, Georgia, Illinois, Maine, Maryland, Massachusetts,
Michigan, New York, New Jersey, North Carolina, Ohio, Texas and
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Virginia. We have also engaged independent distributors, Arrow
Electronics and Avnet, Inc., to service the North American and
South American markets.
We market and sell our products internationally through regional
offices located in Canada, China, Finland, France, Germany,
Japan, Korea, the Netherlands, Singapore, Sweden, Taiwan and the
United Kingdom, among other locations, as well as through a
network of independent distributors and representatives in
Australia, Canada, Germany, Hong Kong, India, Israel, Japan,
Korea, Singapore and Taiwan. We select these independent
entities based on their ability to provide effective field
sales, marketing communications and technical support to our
customers. All international sales to date have been denominated
in U.S. dollars. For information regarding revenue from
independent customers by geographic area, see Note 12 of
Notes to Consolidated Financial Statements, included in
Part IV, Item 15 of this Report.
We dedicate sales managers to principal customers to promote
close cooperation and communication. We also provide our
customers with reference platform designs for most products. We
believe this enables our customers to achieve easier and faster
transitions from the initial prototype designs through final
production releases. We believe these reference platform designs
also significantly enhance customers’ confidence that our
products will meet their market requirements and product
introduction schedules.
Our sales are made primarily pursuant to standard purchase
orders for delivery of products. Due to industry practice that
allows customers to cancel or change orders with limited advance
notice prior to shipment, we do not believe that backlog is a
reliable indicator of future revenue levels.
Wired and wireless communications markets and the semiconductor
industry are intensely competitive and are characterized by
rapid change, evolving standards, short product life cycles and
price erosion. We believe that the principal factors of
competition for integrated circuit providers in our target
markets include:
We believe that we compete favorably with respect to each of
these factors.
We compete with a number of major domestic and international
suppliers of integrated circuits and related applications in our
target markets. We also compete with suppliers of system-level
and motherboard-level solutions incorporating integrated
circuits that are proprietary or sourced from manufacturers
other than Broadcom. This competition has resulted and will
continue to result in declining average selling prices for our
products. In all of our target markets, we also may face
competition from newly established competitors, suppliers of
products based on new or emerging technologies, and customers
that choose to develop their own silicon solutions. We also
expect to encounter further consolidation in the markets in
which we compete.
Many of our competitors operate their own fabrication facilities
and have longer operating histories and presence in key markets,
greater name recognition, larger customer bases and
significantly greater financial, sales and marketing,
manufacturing, distribution, technical and other resources than
we do. As a result, these
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competitors may be able to adapt more quickly to new or emerging
technologies and changes in customer requirements or to devote
greater resources to the promotion and sale of their products.
Current and potential competitors have established or may
establish financial or strategic relationships among themselves
or with existing or potential customers, resellers or other
third parties, and may refuse to provide us with information
necessary to permit the interoperability of our products with
theirs. Accordingly, it is possible that new competitors or
alliances among competitors could emerge and rapidly acquire
significant market share. In addition, competitors may develop
technologies that more effectively address our markets with
products that offer enhanced features, lower power requirements
or lower costs. Increased competition could result in pricing
pressures, decreased gross margins and loss of market share and
may materially and adversely affect our business, financial
condition and results of operations.
Our success and future revenue growth depend, in part, on our
ability to protect our intellectual property. We rely primarily
on patent, copyright, trademark and trade secret laws, as well
as nondisclosure agreements and other methods, to protect our
proprietary technologies and processes. However, these measures
may not provide meaningful protection for our intellectual
property.
We currently hold over 1,950 U.S. and 750 foreign patents
and have filed more than 5,900 additional U.S. and foreign
patent applications. We may not receive any additional patents
as a result of these applications or future applications. Even
if additional patents are issued, any claims allowed may not be
sufficiently broad to protect our technology. In addition, any
existing or future patents could be challenged, invalidated or
circumvented, and any rights granted under such patents may not
provide us with meaningful protection. We may not have foreign
patents or pending applications corresponding to our
U.S. patents and applications. Even if foreign patents are
granted, effective enforcement in foreign countries may not be
available. The failure of any patents to adequately protect our
technology would make it easier for our competitors to offer
similar products. In connection with our participation in the
development of various industry standards, we may be required to
license certain of our patents to other parties, including
competitors, that develop products based upon the adopted
industry standards.
We also generally enter into confidentiality agreements with our
employees and strategic partners, and typically control access
to and distribution of our documentation and other proprietary
information. Despite these precautions, it may be possible for a
third party to copy or otherwise obtain and use our products,
services or technology without authorization, to develop similar
technology independently, or to design around our patents. In
addition, effective copyright, trademark and trade secret
protection may not be available or may be limited in certain
foreign countries. We have also entered into agreements with
certain of our customers and granted these customers the right
to use our proprietary technology in the event we default in our
contractual obligations, including product supply obligations,
and fail to cure the default within a specified time period. In
addition, we often incorporate the intellectual property of our
strategic customers into our designs, and therefore have certain
obligations with respect to the non-use and non-disclosure of
their intellectual property. It is possible that the steps taken
by us to prevent misappropriation or infringement of our
intellectual property or our customers’ intellectual
property may not be successful. Moreover, we are currently
engaged in litigation and may need to engage in additional
litigation to enforce our intellectual property rights or the
rights of our customers, to protect our trade secrets, or to
determine the validity and scope of proprietary rights of
others, including our customers. Such litigation will result in
substantial costs and diversion of our resources and could
materially and adversely affect our business, financial
condition and results of operations.
Companies in the semiconductor industry often aggressively
protect and pursue their intellectual property rights. From time
to time, we have received, and may continue to receive, notices
that claim we have infringed upon, misappropriated or misused
other parties’ proprietary rights. Moreover, we have in the
past and continue to be engaged in litigation with parties who
claim that we have infringed their patents or misappropriated or
misused their trade secrets. We may also be sued by parties who
may seek to invalidate one or more of our patents. Any
intellectual property claims may materially and adversely affect
our business, financial condition and results of operations. For
example, in a patent or trade secret action, a court could issue
a preliminary or permanent injunction that would require us to
withdraw or recall certain products from the market or to
redesign certain
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products offered for sale or under development. In addition, we
may be liable for damages for past infringement and royalties
for future use of the technology. We may also have to indemnify
certain customers and strategic partners under our agreements
with such parties if a third party alleges or if a court finds
that our products or activities have infringed upon,
misappropriated or misused another party’s proprietary
rights. Even if claims against us are not valid or successfully
asserted, the defense of these claims could result in
significant costs and a diversion of management and personnel
resources. In any of these events, our business, financial
condition and results of operations may be materially and
adversely affected. Additionally, we have sought and may in the
future seek to obtain a license under a third party’s
intellectual property rights and have granted and may grant a
license to certain of our intellectual property rights to a
third party in connection with a cross-license agreement or a
settlement of claims or actions asserted against us. However, we
may not be able to obtain a license on commercially reasonable
terms, if at all.
As of December 31, 2006 we had 5,233 full-time,
contract and temporary employees, including 3,808 individuals
engaged in research and development, 555 engaged in sales and
marketing, 364 engaged in manufacturing operations, and 506
engaged in finance, legal and general administrative activities.
Our employees are not represented by any collective bargaining
agreement, and we have never experienced a work stoppage. We
believe our employee relations are good.
Before deciding to purchase, hold or sell our common stock,
you should carefully consider the risks described below in
addition to the other cautionary statements and risks described
elsewhere, and the other information contained, in this Report
and in our other filings with the SEC, including our amended and
subsequent reports on
Forms 10-K/A,
10-Q/A,
10-Q and
8-K. The
risks and uncertainties described below are not the only ones we
face. Additional risks and uncertainties not presently known to
us or that we currently deem immaterial may also affect our
business. If any of these known or unknown risks or
uncertainties actually occurs with material adverse effects on
Broadcom, our business, financial condition, results of
operations
and/or
liquidity could be seriously harmed. In that event, the market
price for our Class A common stock will likely decline, and
you may lose all or part of your investment.
Our
operating results for 2006 and prior periods have been
materially and adversely impacted by the results of the
voluntary review of our past equity award practices. Any related
action by a governmental agency could result in civil or
criminal sanctions against certain of our former officers,
directors
and/or
employees and might result in such sanctions against us
and/or
certain of our current officers, directors
and/or
employees. Such matters and civil litigation relating to our
past equity award practices or the January 2007 restatement of
our financial statements for periods ended on or before
March 31, 2006 could result in significant costs and the
diversion of attention of our management and other key
employees.
In connection with our recent equity award review, we restated
our financial statements for each of the years ended
December 31, 1998 through December 31, 2005, and for
the first quarter of 2006. Accordingly, you should not rely on
financial information included in the reports on
Form 10-K,
Form 10-Q
and
Form 8-K
previously filed by Broadcom, the related opinions of our
independent registered public accounting firm, earnings press
releases and similar communications issued by us, for periods
ended on or before March 31, 2006, all of which have been
superseded in their entirety by the information contained in our
2005 Form 10-K/A
and our amended Quarterly Report on
Form 10-Q/A
for the three months ended March 31, 2006, each filed
January 23, 2007.
Based on the results of the equity award review, the Audit
Committee of our Board of Directors concluded that, pursuant to
Accounting Principles Board Opinion No. 25, Accounting
for Stock Issued to Employees, or APB 25, and related
interpretations, the accounting measurement dates for most of
the stock option grants awarded between June 1998 and May 2003,
covering options to purchase 232.9 million shares of our
Class A or Class B common stock, differed from the
measurement dates previously used for such awards. As a result,
revised measurement dates were applied to the affected option
grants and Broadcom recorded a total of $2.259 billion in
additional stock-based compensation expense for the years 1998
through 2005. After related tax adjustments of
$38.7 million, the restatement resulted in total net
adjustments of $2.220 billion for the years 1998 through
2005. This amount was
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net of forfeitures related to employee terminations. The
additional stock-based compensation expense was amortized over
the service period relating to each option, typically four
years, with approximately 95% of the total expense recorded in
years prior to 2004. In addition, $17.2 million of net
adjustments were recorded in connection with our equity award
review in the three months ended March 31, 2006.
These expenses had the effect of decreasing income from
operations, net income, and net income per share (basic and
diluted) in affected periods in which we reported a profit, and
increasing loss from operations, net loss, and net loss per
share in affected periods in which we reported a loss.
Information regarding the effect of the restatement on our
financial statements for various periods is provided in
“Management’s Discussion and Analysis of Financial
Condition and Results of Operations” included in
Part II, Item 7 of this Report.
In June 2006 we received an informal request for information
from the staff of the Los Angeles regional office of the
Securities and Exchange Commission regarding our option granting
practices. In December 2006 we were informed that the SEC issued
a formal order of investigation in the matter. We are
cooperating with the SEC investigation, but do not know when or
how it will be resolved or what, if any, actions the SEC may
require us to take as part of the resolution of that matter.
Broadcom has also been informally contacted by the
U.S. Attorney’s Office for the Central District of
California and has been asked to produce on a voluntary basis
documents, many of which we previously provided to the SEC. We
are cooperating with this request. Any action by the SEC, the
U.S. Attorney’s Office or other governmental agency
could result in civil or criminal sanctions against certain of
our former officers, directors
and/or
employees and might result in such sanctions against us
and/or
certain of our current officers, directors
and/or
employees.
Additionally, as discussed in Note 11 of Notes to
Consolidated Financial Statements, included in Part IV,
Item 15 of this Report, we currently are engaged in civil
litigation with parties that claim, among other allegations,
that certain of our current and former directors and officers
improperly dated stock option grants to enhance their own
profits on the exercise of such options or for other improper
purposes. Although we and the other defendants intend to defend
these claims vigorously, there are many uncertainties associated
with any litigation, and we cannot assure you that these actions
will be resolved without substantial costs
and/or
settlement charges. We have entered into indemnification
agreements with each of our present and former directors and
officers. Under those agreements, Broadcom is required to
indemnify each such director or officer against expenses,
including attorneys’ fees, judgments, fines and
settlements, paid by such individual in connection with the
pending litigation (other than indemnified liabilities arising
from willful misconduct or conduct that is knowingly fraudulent
or deliberately dishonest).
The resolution of the pending investigations by the SEC and
U.S. Attorney’s Office, the defense of our pending
civil litigation, and the defense of any additional litigation
relating to our past equity award practices or the January 2007
restatement of our prior financial statements could result in
significant costs and diversion of the attention of management
and other key employees.
We adopted Statement of Financial Accounting Standards, or SFAS,
No. 123 (revised 2004), Share-Based Payment, or
SFAS 123R, effective January 1, 2006. SFAS 123R
requires all share-based payment awards to employees, including
grants of stock options, restricted stock units and employee
stock purchase rights, to be recognized in our financial
statements based on their respective grant date fair values and
does not allow the previously permitted pro forma
disclosure-only method as an alternative to financial statement
recognition.
The adoption of SFAS 123R will have a significant adverse
impact on our reported results of operations because the
stock-based compensation expense is charged directly against our
reported earnings. Stock-based compensation expense and unearned
stock-based compensation will increase to the extent that we
increase our work force, grant additional equity awards to
employees or assume unvested equity awards in connection with
acquisitions.
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Any other subsequent changes in the accounting rules applicable
to Broadcom may also have an adverse effect on our results of
operations.
We had a
material weakness in internal control over financial reporting
and cannot assure you that additional material weaknesses will
not be identified in the future. If our internal control over
financial reporting or disclosure controls and procedures are
not effective, there may be errors in our financial statements
that could require a restatement or our filings may not be
timely and investors may lose confidence in our reported
financial information, which could lead to a decline in our
stock price.
Section 404 of the Sarbanes-Oxley Act of 2002 requires us
to evaluate the effectiveness of our internal control over
financial reporting as of the end of each year, and to include a
management report assessing the effectiveness of our internal
control over financial reporting in each Annual Report on
Form 10-K.
Section 404 also requires our independent registered public
accounting firm to attest to, and report on, management’s
assessment of Broadcom’s internal control over financial
reporting.
In assessing the findings of the voluntary equity award review
as well as the restatement of our consolidated financial
statements for periods ended on or before March 31, 2006,
our management concluded that there was a material weakness, as
defined in Public Company Accounting Oversight Board Auditing
Standard No. 2, in our internal control over financial
reporting as of December 31, 2005. Management believes this
material weakness was remediated September 19, 2006 and,
accordingly, no longer exists as of the date of this filing. See
the discussion included in Part II, Item 9A of this
Report for additional information regarding our internal control
over financial reporting.
Our management, including our Chief Executive Officer and Acting
Chief Financial Officer, does not expect that our internal
control over financial reporting will prevent all error and all
fraud. A control system, no matter how well designed and
operated, can provide only reasonable, not absolute, assurance
that the control system’s objectives will be met. Further,
the design of a control system must reflect the fact that there
are resource constraints, and the benefits of controls must be
considered relative to their costs. Controls can be circumvented
by the individual acts of some persons, by collusion of two or
more people, or by management override of the controls. Over
time, controls may become inadequate because changes in
conditions or deterioration in the degree of compliance with
policies or procedures may occur. Because of the inherent
limitations in a cost-effective control system, misstatements
due to error or fraud may occur and not be detected.
As a result, we cannot assure you that significant deficiencies
or material weaknesses in our internal control over financial
reporting will not be identified in the future. Any failure to
maintain or implement required new or improved controls, or any
difficulties we encounter in their implementation, could result
in significant deficiencies or material weaknesses, cause us to
fail to timely meet our periodic reporting obligations, or
result in material misstatements in our financial statements.
Any such failure could also adversely affect the results of
periodic management evaluations and annual auditor attestation
reports regarding disclosure controls and the effectiveness of
our internal control over financial reporting required under
Section 404 of the Sarbanes-Oxley Act of 2002 and the rules
promulgated thereunder. The existence of a material weakness
could result in errors in our financial statements that could
result in a restatement of financial statements, cause us to
fail to timely meet our reporting obligations and cause
investors to lose confidence in our reported financial
information, leading to a decline in our stock price.
Our
quarterly operating results may fluctuate significantly. As a
result, we may fail to meet the expectations of securities
analysts and investors, which could cause our stock price to
decline.
Our quarterly net revenue and operating results have fluctuated
significantly in the past and are likely to continue to vary
from quarter to quarter due to a number of factors, many of
which are not within our control. If our operating results do
not meet the expectations of securities analysts or investors,
who may derive their expectations by extrapolating data from
recent historical operating results, the market price of our
Class A common
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stock will likely decline. Fluctuations in our operating results
may be due to a number of factors, including, but not limited
to, those listed below and those identified throughout this
“Risk Factors” section:
We expect new product lines to continue to account for a high
percentage of our future sales. Some of these markets are
immature
and/or
unpredictable or are new markets for Broadcom, and we cannot
assure you that these markets will develop into significant
opportunities or that we will continue to derive significant
revenue from these markets. Based on the limited amount of
historical data available to us, it is difficult to anticipate
our future revenue streams from, and the sustainability of, such
newer markets.
Additionally, as an increasing number of our chips are being
incorporated into consumer products, such as desktop and
notebook computers, cellular phones and other mobile
communication devices, other wireless-enabled consumer
electronics, and satellite and digital cable set-top boxes, we
anticipate greater seasonality and fluctuations in the demand
for our products, which may result in greater variations in our
quarterly operating results.
We are
subject to order and shipment uncertainties, and if we are
unable to accurately predict customer demand, we may hold excess
or obsolete inventory, which would reduce our profit margin.
Conversely, we may have insufficient inventory, which would
result in lost revenue opportunities and potentially in loss of
market share and damaged customer relationships.
We typically sell products pursuant to purchase orders rather
than long-term purchase commitments. Customers can generally
cancel or defer purchase orders on short notice without
incurring a significant penalty. In the recent past, some of our
customers have developed excess inventories of their own
products and have, as a consequence, deferred purchase orders
for our products. We currently do not have the ability to
accurately predict
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what or how many products our customers will need in the future.
Anticipating demand is difficult because our customers face
volatile pricing and unpredictable demand for their own
products, are increasingly focused more on cash preservation and
tighter inventory management, and may be involved in legal
proceedings that could affect their ability to buy our products.
Our ability to accurately forecast customer demand may also be
impaired by the delays inherent in our lengthy sales cycle.
After we have developed and delivered a product to a customer,
the customer will usually test and evaluate our product prior to
designing its own equipment to incorporate our product. Our
customers may need three to more than six months to test,
evaluate and adopt our product and an additional three to more
than nine months to begin volume production of equipment that
incorporates our product. Due to this lengthy sales cycle, we
may experience significant delays from the time we increase our
operating expenses and make investments in inventory until the
time that we generate revenue from these products. It is
possible that we may never generate any revenue from these
products after incurring such expenditures. Even if a customer
selects our product to incorporate into its equipment, we have
no assurance that the customer will ultimately market and sell
its equipment or that such efforts by our customer will be
successful. The delays inherent in our lengthy sales cycle
increase the risk that a customer will decide to cancel or
curtail, reduce or delay its product plans. If we incur
significant marketing expenses and investments in inventory in
the future that we are not able to recover, and we are not able
to compensate for those expenses, our operating results could be
adversely affected. In addition, as an increasing number of our
chips are being incorporated into consumer products, we
anticipate greater fluctuations in demand for our products,
which makes it even more difficult to forecast customer demand.
We place orders with our suppliers based on forecasts of
customer demand and, in some instances, may establish buffer
inventories to accommodate anticipated demand. Our forecasts are
based on multiple assumptions, each of which may introduce error
into our estimates. If we overestimate customer demand, we may
allocate resources to manufacturing products that we may not be
able to sell when we expect to, if at all. As a result, we would
hold excess or obsolete inventory, which would reduce our profit
margins and adversely affect our financial results. Conversely,
if we underestimate customer demand or if insufficient
manufacturing capacity is available, we would forego revenue
opportunities and potentially lose market share and damage our
customer relationships. In addition, any future significant
cancellations or deferrals of product orders or the return of
previously sold products could materially and adversely affect
our profit margins, increase product obsolescence and restrict
our ability to fund our operations. Furthermore, we generally
recognize revenue upon shipment of products to a customer. If a
customer refuses to accept shipped products or does not timely
pay for these products, we could incur significant charges
against our income. We have also recently entered into consigned
or customer managed inventory arrangements with certain of our
customers, although we have not shipped a significant amount of
product under those arrangements as of December 31, 2006.
Pursuant to these arrangements we deliver products to a
warehouse of the customer or a designated third party 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. If a customer does not take product under such
an arrangement in accordance with the schedule it originally
provided us, our predicted future revenue stream could vary
substantially from our forecasts and our results of operations
could be materially and adversely affected.
Our
operating results may be adversely impacted by worldwide
political and economic uncertainties and specific conditions in
the markets we address, including the cyclical nature of and
volatility in the semiconductor industry. As a result, the
market price of our Class A common stock may
decline.
We operate primarily in the semiconductor industry, which is
cyclical and subject to rapid change and evolving industry
standards. From time to time, the semiconductor industry has
experienced significant downturns. These downturns are
characterized by decreases in product demand, excess customer
inventories, and accelerated erosion of prices. These factors
could cause substantial fluctuations in our revenue and in our
results of operations. Any downturns in the semiconductor
industry may be severe and prolonged, and any failure of the
industry or wired and wireless communications markets to fully
recover from downturns could seriously impact our revenue and
harm our business, financial condition and results of
operations. The semiconductor industry also periodically
experiences increased demand and production capacity
constraints, which may affect our ability to ship products.
Accordingly, our operating results may vary significantly as a
result of the general conditions in the semiconductor industry,
which could cause large fluctuations in our stock price.
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Additionally, in the last four years, general worldwide economic
conditions have experienced a downturn due to slower economic
activity, concerns about inflation and deflation, increased
energy costs, decreased consumer confidence, reduced corporate
profits and capital spending, adverse business conditions and
liquidity concerns in the wired and wireless communications
markets, the ongoing effects of the war in Iraq, recent
international conflicts and terrorist and military activity, and
the impact of natural disasters and public health emergencies.
These conditions make it extremely difficult for our customers,
our vendors and us to accurately forecast and plan future
business activities, and they could cause U.S. and foreign
businesses to slow spending on our products and services, which
would delay and lengthen sales cycles. We experienced slowdowns
in orders in the third quarter of 2006 and in the fourth quarter
of 2004 that we believe were attributable in substantial part to
excess inventory held by certain of our customers, and we may
experience a similar slowdown in the future. We cannot predict
the timing, strength or duration of any economic recovery,
worldwide, or in the wired and wireless communications markets.
If the economy or the wired and wireless communications markets
in which we operate do not continue at their present levels, our
business, financial condition and results of operations will
likely be materially and adversely affected.
Intellectual
property risks and third party claims of infringement,
misappropriation of proprietary rights or other claims against
us could adversely affect our ability to market our products,
require us to redesign our products or seek licenses from third
parties, and seriously harm our operating results. In addition,
the defense of such claims could result in significant costs and
divert the attention of our management or other key
employees.
Companies in and related to the semiconductor industry often
aggressively protect and pursue their intellectual property
rights. There are often intellectual property risks associated
with developing and producing new products and entering new
markets, and we may not be able to obtain, at reasonable cost
and upon commercially reasonable terms, licenses to intellectual
property of others that is alleged to read on such new or
existing products. From time to time, we have received, and may
continue to receive, notices that claim we have infringed upon,
misappropriated or misused other parties’ proprietary
rights. Moreover, in the past we have been and we currently are
engaged in litigation with parties that claim that we infringed
their patents or misappropriated or misused their trade secrets.
In addition, we or our customers may be sued by other parties
that claim that our products have infringed their patents or
misappropriated or misused their trade secrets, or which may
seek to invalidate one or more of our patents. An adverse
determination in any of these types of disputes could prevent us
from manufacturing or selling some of our products, limit or
restrict the type of work that employees involved in such
litigation may perform for Broadcom, increase our costs of
revenue and expose us to significant liability. Any of these
claims may materially and adversely affect our business,
financial condition and results of operations. For example, in a
patent or trade secret action, a court could issue a preliminary
or permanent injunction that would require us to withdraw or
recall certain products from the market, redesign certain
products offered for sale or under development, or restrict
employees from performing work in their areas of expertise. We
may also be liable for damages for past infringement and
royalties for future use of the technology, and we may be liable
for treble damages if infringement is found to have been
willful. In addition, governmental agencies may commence
investigations or criminal proceedings against our employees,
former employees
and/or the
company relating to claims of misappropriation or misuse of
another party’s proprietary rights. We may also have to
indemnify some customers and strategic partners under our
agreements with such parties if a third party alleges or if a
court finds that our products or activities have infringed upon,
misappropriated or misused another party’s proprietary
rights. We have received requests from certain customers and
strategic partners to include increasingly broad indemnification
provisions in our agreements with them. These indemnification
provisions may, in some circumstances, extend our liability
beyond the products we provide to include liability for
combinations of components or system level designs and for
consequential damages
and/or lost
profits. Even if claims against us are not valid or successfully
asserted, these claims could result in significant costs and
diversion of the attention of management and other key employees
to defend. Additionally, we have sought and may in the future
seek to obtain a license under a third party’s intellectual
property rights and have granted and may in the future grant a
license to certain of our intellectual property rights to a
third party in connection with a cross-license agreement or a
settlement of claims or actions asserted against us. However, we
may not be able to obtain a license under a third party’s
intellectual property rights on commercially reasonable terms,
if at all.
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Our products may contain technology provided to us by other
parties such as contractors, suppliers or customers. We may have
little or no ability to determine in advance whether such
technology infringes the intellectual property rights of a third
party. Our contractors, suppliers and licensors may not be
required to indemnify us in the event that a claim of
infringement is asserted against us, or they may be required to
indemnify us only up to a maximum amount, above which we would
be responsible for any further costs or damages. In addition, we
may have little or no ability to correct errors in the
technology provided by such contractors, suppliers and
licensors, or to continue to develop new generations of such
technology. Accordingly, we may be dependent on their ability
and willingness to do so. In the event of a problem with such
technology, or in the event that our rights to use such
technology become impaired, we may be unable to ship our
products containing such technology, and may be unable to
replace the technology with a suitable alternative within the
time frame needed by our customers.
Our success and future revenue growth will depend, in part, on
our ability to protect our intellectual property. We primarily
rely on patent, copyright, trademark and trade secret laws, as
well as nondisclosure agreements and other methods, to protect
our proprietary technologies and processes. Despite our efforts
to protect our proprietary technologies and processes, it is
possible that competitors or other unauthorized third parties
may obtain, copy, use or disclose our technologies and
processes. We currently hold over 1,950 U.S. and 750
foreign patents and have filed more than 5,900 additional U.S.
and foreign patent applications. However, we cannot assure you
that any additional patents will be issued. Even if a new patent
is issued, the claims allowed may not be sufficiently broad to
protect our technology. In addition, any of our existing or
future patents may be challenged, invalidated or circumvented.
As such, any rights granted under these patents may not provide
us with meaningful protection. We may not have foreign patents
or pending applications corresponding to our U.S. patents
and patent applications. Even if foreign patents are granted,
effective enforcement in foreign countries may not be available.
If our patents do not adequately protect our technology, our
competitors may be able to offer products similar to ours. Our
competitors may also be able to develop similar technology
independently or design around our patents. Some or all of our
patents have in the past been licensed and likely will in the
future be licensed to certain of our competitors through
cross-license agreements. Moreover, because we have participated
in developing various industry standards, we may be required to
license some of our patents to others, including competitors,
who develop products based on those standards.
Certain of our software (as well as that of our customers) may
be derived from so-called “open source” software that
is generally made available to the public by its authors
and/or other
third parties. Such open source software is often made available
to us under licenses, such as the GNU General Public License, or
GPL, which impose certain obligations on us in the event we were
to distribute derivative works of the open source software.
These obligations may require us to make source code for the
derivative works available to the public,
and/or
license such derivative works under a particular type of
license, rather than the forms of license customarily used to
protect our intellectual property. In addition, there is little
or no legal precedent for interpreting the terms of certain of
these open source licenses, including the determination of which
works are subject to the terms of such licenses. While we
believe we have complied with our obligations under the various
applicable licenses for open source software, in the event that
the copyright holder of any open source software were to
successfully establish in court that we had not complied with
the terms of a license for a particular work, we could be
required to release the source code of that work to the public
and/or stop
distribution of that work. With respect to our proprietary
software, we generally license such software under terms that
prohibit combining it with open source software as described
above. Despite these restrictions, parties may combine Broadcom
proprietary software with open source software without our
authorization, in which case we might nonetheless be required to
release the source code of our proprietary software.
We generally enter into confidentiality agreements with our
employees, consultants and strategic partners. We also try to
control access to and distribution of our technologies,
documentation and other proprietary information. Despite these
efforts, internal or external parties may attempt to copy,
disclose, obtain or use our products, services or technology
without our authorization. Also, current or former employees may
seek employment with our
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business partners, customers or competitors, and we cannot
assure you that the confidential nature of our proprietary
information will be maintained in the course of such future
employment. Additionally, current, departing or former employees
or third parties could attempt to penetrate our computer systems
and networks to misappropriate our proprietary information and
technology or interrupt our business. Because the techniques
used by computer hackers and others to access or sabotage
networks change frequently and generally are not recognized
until launched against a target, we may be unable to anticipate,
counter or ameliorate these techniques. As a result, our
technologies and processes may be misappropriated, particularly
in countries where laws may not protect our proprietary rights
as fully as in the United States.
In addition, some of our customers have entered into agreements
with us that grant them the right to use our proprietary
technology if we fail to fulfill our obligations, including
product supply obligations, under those agreements, and if we do
not correct the failure within a specified time period.
Moreover, we often incorporate the intellectual property of
strategic customers into our own designs, and have certain
obligations not to use or disclose their intellectual property
without their authorization.
We cannot assure you that our efforts to prevent the
misappropriation or infringement of our intellectual property or
the intellectual property of our customers will succeed. We have
in the past been and currently are engaged in litigation to
enforce or defend our intellectual property rights, protect our
trade secrets, or determine the validity and scope of the
proprietary rights of others, including our customers. Such
litigation (and the settlement thereof) has been and will likely
continue to be very expensive and time consuming. Additionally,
any litigation can divert the attention of management and other
key employees from the operation of the business, which could
negatively impact our business and results of operations.
To remain competitive, we expect to continue to transition our
semiconductor products to increasingly smaller line width
geometries. This transition requires us to modify the
manufacturing processes for our products and to redesign some
products as well as standard cells and other integrated circuit
designs that we may use in multiple products. We periodically
evaluate the benefits, on a
product-by-product
basis, of migrating to smaller geometry process technologies to
reduce our costs. Currently most of our products are
manufactured in .35 micron, .22 micron,
.18 micron, .13 micron and 90 nanometer geometry
processes. We are now designing most new products in
65 nanometer process technology. In the past, we have
experienced some difficulties in shifting to smaller geometry
process technologies or new manufacturing processes, which
resulted in reduced manufacturing yields, delays in product
deliveries and increased expenses. The transition to
65 nanometer geometry process technology has resulted in
significantly higher mask and prototyping costs, as well as
additional expenditures for engineering design tools and related
computer hardware. We may face similar difficulties, delays and
expenses as we continue to transition our products to smaller
geometry processes. We are dependent on our relationships with
our foundry subcontractors to transition to smaller geometry
processes successfully. We cannot assure you that the foundries
that we use will be able to effectively manage the transition in
a timely manner, or at all, or that we will be able to maintain
our existing foundry relationships or develop new ones. If any
of our foundry subcontractors or we experience significant
delays in this transition or fail to efficiently implement this
transition, we could experience reduced manufacturing yields,
delays in product deliveries and increased expenses, all of
which could harm our relationships with our customers and our
results of operations. As smaller geometry processes become more
prevalent, we expect to continue to integrate greater levels of
functionality, as well as customer and third party intellectual
property, into our products. However, we may not be able to
achieve higher levels of design integration or deliver new
integrated products on a timely basis, if at all. Moreover, even
if we are able to achieve higher levels of design integration,
such integration may have a short-term adverse impact on our
operating results, as a result of increasing costs and
expenditures as described above as well as the risk that we may
reduce our revenue by integrating the functionality of multiple
chips into a single chip.
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Because
we depend on a few significant customers for a substantial
portion of our revenue, the loss of a key customer could
seriously impact our revenue and harm our business. In addition,
if we are unable to continue to sell existing and new products
to our key customers in significant quantities or to attract new
significant customers, our future operating results could be
adversely affected.
We have derived a substantial portion of our past revenue from
sales to a relatively small number of customers. As a result,
the loss of any significant customer could materially and
adversely affect our financial condition and results of
operations.
Sales to our five largest customers represented 46.5%, 48.5% and
53.0% of our net revenue in 2006, 2005 and 2004, respectively.
See Note 12 of Notes to Consolidated Financial Statements,
included in Part IV, Item 15 of this Report. We expect
that our largest customers will continue to account for a
substantial portion of our net revenue in 2007 and for the
foreseeable future. The identities of our largest customers and
their respective contributions to our net revenue have varied
and will likely continue to vary from period to period.
We may not be able to maintain or increase sales to certain of
our key customers for a variety of reasons, including the
following:
These relationships often require us to develop new products
that may involve significant technological challenges. Our
customers frequently place considerable pressure on us to meet
their tight development schedules. Accordingly, we may have to
devote a substantial amount of our resources to our strategic
relationships, which could detract from or delay our completion
of other important development projects. Delays in development
could impair our relationships with strategic customers and
negatively impact sales of the products under development.
In addition, our longstanding relationships with some larger
customers may also deter other potential customers who compete
with these customers from buying our products. To attract new
customers or retain existing customers, we may offer certain
customers favorable prices on our products. We may have to offer
the same lower prices to certain of our customers who have
contractual “most favored nation” pricing
arrangements. In that event, our average selling prices and
gross margins would decline. The loss of a key customer, a
reduction in sales to any key customer, or our inability to
attract new significant customers could seriously impact our
revenue and materially and adversely affect our results of
operations.
To achieve our business objectives, we anticipate that we will
need to continue to expand. We have experienced a period of
rapid growth and expansion in the past. Through internal growth
and acquisitions, we significantly increased the scope of our
operations and expanded our workforce from 2,580 full-time,
contract and temporary employees as of December 31, 2002 to
5,233 full-time, contract and temporary employees as of
December 31, 2006. Nonetheless, we may not be able to
expand our workforce and operations in a sufficiently timely
manner to respond effectively to changes in demand for our
existing products and services or to the demand for new products
requested by our customers. In that event, we may be unable to
meet competitive challenges or exploit potential market
opportunities, and our current or future business could be
materially and adversely affected.
Conversely, if we expand our operations and workforce too
rapidly in anticipation of increased demand for our products,
and such demand does not materialize at the pace at which we
expect, the rate of increase in our
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operating expenses may exceed the rate of increase, if any, in
our revenue. Moreover, if we experience another slowdown in the
broadband communications markets in which we operate, we may not
be able to scale back our operating expenses in a sufficiently
timely or effective manner. In that event, our business,
financial condition and results of operations would be
materially and adversely affected.
Our past growth has placed, and any future growth is expected to
continue to place, a significant strain on our management
personnel, systems and resources. To implement our current
business and product plans, we will need to continue to expand,
train, manage and motivate our workforce. All of these endeavors
will require substantial management effort. In the past we have
implemented an enterprise resource planning, or ERP, system to
help us improve our planning and management processes and a new
human resources management, or HRM, system. More recently we
have implemented a new equity administration system to support
our more complex equity programs as well as the adoption of
SFAS 123R. We anticipate that we will also need to continue
to implement a variety of new and upgraded operational and
financial systems, as well as additional procedures and other
internal management systems. In general, the accuracy of
information delivered by these systems may be subject to
inherent programming quality. In addition, to support our
growth, in December 2004 we signed a $183.0 million lease
agreement under which we will relocate our headquarters and
Irvine operations to new, larger facilities that will enable us
to centralize all of our Irvine employees and operations on one
campus. This relocation is currently anticipated to occur in the
first half of 2007. We may also engage in other relocations of
our employees or operations from time to time. Such relocations
could result in temporary disruptions of our operations or a
diversion of our management’s attention and resources. If
we are unable to effectively manage our expanding operations, we
may be unable to scale our business quickly enough to meet
competitive challenges or exploit potential market
opportunities, or conversely, we may scale our business too
quickly and the rate of increase in our expenses may exceed the
rate of increase in our revenue, either of which would
materially and adversely affect our current or future business.
Our future success depends to a significant extent upon the
continued service of our key senior management personnel,
including our co-founder, Chairman of the Board and Chief
Technical Officer, Henry Samueli, Ph.D., our Chief
Executive Officer, Scott A. McGregor, and other senior
executives. We have an employment agreement with
Mr. McGregor; however it does not govern the length of his
service. We do not have employment agreements with any other
executives, or any other key employees, although we do have
limited retention arrangements in place with certain executives.
The loss of the services of Dr. Samueli, Mr. McGregor
or certain other key senior management or technical personnel
could materially and adversely affect our business, financial
condition and results of operations. For instance, if any of
these individuals were to leave our company unexpectedly, we
could face substantial difficulty in hiring qualified successors
and could experience a loss in productivity during the search
for and while any such successor is integrated into our business
and operations.
Furthermore, our future success depends on our ability to
continue to attract, retain and motivate senior management and
qualified technical personnel, particularly software engineers,
digital circuit designers, RF and mixed-signal circuit designers
and systems applications engineers. Competition for these
employees is intense. If we are unable to attract, retain and
motivate such personnel in sufficient numbers and on a timely
basis, we will experience difficulty in implementing our current
business and product plans. In that event, we may be unable to
successfully meet competitive challenges or to exploit potential
market opportunities, which could adversely affect our business
and results of operations.
Equity awards generally comprise a significant portion of our
compensation packages for all employees. In 2003 we conducted a
stock option exchange offer to address the substantial decline
in the price of our Class A common stock over the preceding
two years and to improve our ability to retain key employees.
During the time that periodic filings with the SEC were not
current, as a result of our recent voluntary review of our
equity award practices, we were not able to issue shares of our
common stock pursuant to equity awards. We cannot be certain
that we will be able to continue to attract, retain and motivate
employees if we are unable to issue shares of our common stock
pursuant to equity awards for a sustained period or if our
Class A common stock experiences another substantial price
decline.
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We have also modified our compensation policies by increasing
cash compensation to certain employees and instituting awards of
restricted stock units, while simultaneously reducing awards of
stock options. This modification of our compensation policies
and the applicability of the SFAS 123R requirement to
expense the fair value of stock options awarded to employees
will increase our operating expenses. We cannot be certain that
the changes in our compensation policies will improve our
ability to attract, retain and motivate employees. Our inability
to attract and retain additional key employees and the increase
in stock-based compensation expense could each have an adverse
effect on our business, financial condition and results of
operations.
Our future success is dependent upon our ability to develop new
semiconductor solutions for existing and new markets, introduce
these products in a cost-effective and timely manner, and
convince leading equipment manufacturers to select these
products for design into their own new products. Our products
are generally incorporated into our customers’ products at
the design stage. We often incur significant expenditures on the
development of a new product without any assurance that an
equipment manufacturer will select our product for design into
its own product. Once an equipment manufacturer designs a
competitor’s product into its product offering, it becomes
significantly more difficult for us to sell our products to that
customer because changing suppliers involves significant cost,
time, effort and risk for the customer. Even if an equipment
manufacturer designs one of our products into its product
offering, we have no assurances that its product will be
commercially successful or that we will receive any revenue from
sales of that product. Sales of our products largely depend on
the commercial success of our customers’ products. Our
customers are typically not obligated to purchase our products
and can choose at any time to stop using our products if their
own products are not commercially successful or for any other
reason.
Our historical results have been, and we expect that our future
results will continue to be, dependent on the introduction of a
relatively small number of new products and the timely
completion and delivery of those products to customers. The
development of new silicon devices is highly complex, and from
time to time we have experienced delays in completing the
development and introduction of new products and lower than
anticipated manufacturing yields in the early production of such
products. If we were to experience any similar delays in the
successful completion of a new product or similar reductions in
our manufacturing yields for a new product in the future, our
customer relationships, reputation and business could be
seriously harmed.
Our ability to develop and deliver new products successfully
will depend on various factors, including our ability to:
In some of our businesses, our ability to develop and deliver
next-generation products successfully and in a timely manner may
depend in part on access to information, or licenses of
technology or intellectual property rights, from companies that
are our competitors. We cannot assure you that such information
or licenses will be made available to us on a timely basis, if
at all, or at reasonable cost and on commercially reasonable
terms.
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If we are not able to develop and introduce new products
successfully and in a cost-effective and timely manner, we will
be unable to attract new customers or to retain our existing
customers, as these customers may transition to other companies
that can meet their product development needs, which would
materially and adversely affect our results of operations.
Our future success will depend on our ability to anticipate and
adapt to changes in technology and industry standards and our
customers’ changing demands. We sell products in markets
that are characterized by rapid technological change, evolving
industry standards, frequent new product introductions, short
product life cycles and increasing demand for higher levels of
integration and smaller process geometries. Our past sales and
profitability have resulted, to a large extent, from our ability
to anticipate changes in technology and industry standards and
to develop and introduce new and enhanced products incorporating
the new standards and technologies. Our ability to adapt to
these changes and to anticipate future standards, and the rate
of adoption and acceptance of those standards, will be a
significant factor in maintaining or improving our competitive
position and prospects for growth. If new industry standards
emerge, our products or our customers’ products could
become unmarketable or obsolete, and we could lose market share.
We may also have to incur substantial unanticipated costs to
comply with these new standards. In addition, our target markets
continue to undergo rapid growth and consolidation. A
significant slowdown in any of these wired and wireless
communications markets could materially and adversely affect our
business, financial condition and results of operations. These
rapid technological changes and evolving industry standards make
it difficult to formulate a long-term growth strategy because
the semiconductor industry and wired and wireless communications
markets may not continue to develop to the extent or in the time
periods that we anticipate. We have invested substantial
resources in emerging technologies that did not achieve the
market acceptance that we had expected. If new markets do not
develop as we anticipate, or if our products do not gain
widespread acceptance in these markets, our business, financial
condition and results of operations could be materially and
adversely affected.
Highly complex products such as the products that we offer
frequently contain defects and bugs when they are first
introduced or as new versions are released. Our products have
previously experienced, and may in the future experience, these
defects and bugs. If any of our products contains defects or
bugs, or has reliability, quality or compatibility problems, our
reputation may be damaged and customers may be reluctant to buy
our products, which could materially and adversely affect our
ability to retain existing customers and attract new customers.
In addition, these defects or bugs could interrupt or delay
sales or shipment of our products to our customers. To alleviate
these problems, we may have to invest significant capital and
other resources. Although our products are tested by us, our
subcontractors, suppliers and customers, it is possible that our
new products will contain defects or bugs. If any of these
problems are not found until after we have commenced commercial
production of a new product, we may be required to incur
additional development costs and product recall, repair or field
replacement costs. These problems may divert our technical and
other resources from other development efforts and could result
in claims against us by our customers or others, including
possible claims for consequential damages
and/or lost
profits. In addition, system and handset providers that purchase
components may require that we assume liability for defects
associated with products produced by their manufacturing
subcontractors and require that we provide a warranty for
defects or other problems which may arise at the system level.
Moreover, we would likely lose, or experience a delay in, market
acceptance of the affected product or products, and we could
lose credibility with our current and prospective customers.
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Our
acquisition strategy may be dilutive to existing shareholders,
result in unanticipated accounting charges or otherwise
adversely affect our results of operations, and result in
difficulties in assimilating and integrating the operations,
personnel, technologies, products and information systems of
acquired companies or businesses.
A key element of our business strategy involves expansion
through the acquisitions of businesses, assets, products or
technologies that allow us to complement our existing product
offerings, expand our market coverage, increase our engineering
workforce or enhance our technological capabilities. Between
January 1, 1999 and December 31, 2006, we acquired
34 companies and certain assets of one other business. We
continually evaluate and explore strategic opportunities as they
arise, including business combination transactions, strategic
partnerships, and the purchase or sale of assets, including
tangible and intangible assets such as intellectual property.
Acquisitions may require significant capital infusions,
typically entail many risks, and could result in difficulties in
assimilating and integrating the operations, personnel,
technologies, products and information systems of acquired
companies or businesses. We have in the past and may in the
future experience delays in the timing and successful
integration of an acquired company’s technologies and
product development through volume production, unanticipated
costs and expenditures, changing relationships with customers,
suppliers and strategic partners, or contractual, intellectual
property or employment issues. In addition, key personnel of an
acquired company may decide not to work for us. The acquisition
of another company or its products and technologies may also
require us to enter into a geographic or business market in
which we have little or no prior experience. These challenges
could disrupt our ongoing business, distract our management and
employees, harm our reputation and increase our expenses. These
challenges are magnified as the size of the acquisition
increases. Furthermore, these challenges would be even greater
if we acquired a business or entered into a business combination
transaction with a company that was larger and more difficult to
integrate than the companies we have historically acquired.
Acquisitions may require large one-time charges and can result
in increased debt or contingent liabilities, adverse tax
consequences, deferred compensation charges, and the recording
and later amortization of amounts related to deferred
compensation and certain purchased intangible assets, any of
which items could negatively impact our results of operations.
In addition, we may record goodwill in connection with an
acquisition and incur goodwill impairment charges in the future.
Any of these charges could cause the price of our Class A
common stock to decline.
Acquisitions or asset purchases made entirely or partially for
cash may reduce our cash reserves. We may seek to obtain
additional cash to fund an acquisition by selling equity or debt
securities. Any issuance of equity or convertible debt
securities may be dilutive to our existing shareholders. In
addition, the equity or debt securities that we may issue could
have rights, preferences or privileges senior to those of our
common stock. For example, as a consequence of the prior
pooling-of-interests
accounting rules, the securities issued in nine of our
acquisitions were shares of Class B common stock, which
have voting rights superior to those of our publicly traded
Class A common stock.
We cannot assure you that we will be able to consummate any
pending or future acquisitions or that we will realize any
anticipated benefits from these acquisitions. We may not be able
to find suitable acquisition opportunities that are available at
attractive valuations, if at all. Even if we do find suitable
acquisition opportunities, we may not be able to consummate the
acquisitions on commercially acceptable terms, and any decline
in the price of our Class A common stock may make it
significantly more difficult and expensive to initiate or
consummate additional acquisitions.
We currently obtain substantially all of our manufacturing,
assembly and testing services from suppliers located outside the
United States. In addition, 28.2% of our 2006 net revenue
was derived from sales to independent customers outside the
United States, excluding foreign subsidiaries or manufacturing
subcontractors of customers that are headquartered in the United
States. We also frequently ship products to our domestic
customers’ international manufacturing divisions and
subcontractors. Products shipped to international destinations,
primarily in Asia, represented 86.5% of our net revenue in 2006.
We also undertake design and development activities in
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Belgium, Canada, China, Denmark, France, Greece, India, Israel,
Japan, Korea, the Netherlands, Taiwan and the United Kingdom,
among other locations. In addition, we undertake various sales
and marketing activities through regional offices in a number of
countries. We intend to continue to expand our international
business activities and to open other design and operational
centers abroad. The continuing effects of the war in Iraq and
terrorist attacks in the United States and abroad, the resulting
heightened security, and the increasing risk of extended
international military conflicts may adversely impact our
international sales and could make our international operations
more expensive. International operations are subject to many
other inherent risks, including but not limited to:
Any of the factors described above may have a material adverse
effect on our ability to increase or maintain our foreign sales.
We currently operate under tax holidays and favorable tax
incentives in certain foreign jurisdictions. For instance, in
Singapore we operate under tax holidays that reduce our taxes in
that country on certain non-investment income. Such tax holidays
and incentives often require us to meet specified employment and
investment criteria in such jurisdictions. However, we cannot
assure you that we will continue to meet such criteria or enjoy
such tax holidays and incentives, or realize any net tax
benefits from tax holidays or incentives. If any of our tax
holidays or incentives are terminated, our results of operations
may be materially and adversely affected.
The economic conditions in our primary overseas markets,
particularly in Asia, may negatively impact the demand for our
products abroad. All of our international sales to date have
been denominated in U.S. dollars. Accordingly, an increase
in the value of the U.S. dollar relative to foreign
currencies could make our products less competitive in
international markets or require us to assume the risk of
denominating certain sales in foreign currencies. We anticipate
that these factors will impact our business to a greater degree
as we further expand our international business activities.
The semiconductor industry and the wired and wireless
communications markets are intensely competitive. We expect
competition to continue to increase as industry standards become
well known and as other competitors enter our target markets. We
currently compete with a number of major domestic and
international suppliers of integrated circuits and related
applications in our target markets. We also compete with
suppliers of system-level and motherboard-level solutions
incorporating integrated circuits that are proprietary or
sourced from manufacturers other than Broadcom. In all of our
target markets we also may face competition from newly
established competitors, suppliers of products based on new or
emerging technologies, and customers who choose to develop their
own semiconductor solutions. We expect to encounter further
consolidation in the markets in which we compete.
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Many of our competitors operate their own fabrication facilities
and have longer operating histories and presence in key markets,
greater name recognition, larger customer bases, and
significantly greater financial, sales and marketing,
manufacturing, distribution, technical and other resources than
we do. These competitors may be able to adapt more quickly to
new or emerging technologies and changes in customer
requirements. They may also be able to devote greater resources
to the promotion and sale of their products. In addition,
current and potential competitors have established or may
establish financial or strategic relationships among themselves
or with existing or potential customers, resellers or other
third parties. Accordingly, new competitors or alliances among
competitors could emerge and rapidly acquire significant market
share. Existing or new competitors may also develop technologies
that more effectively address our markets with products that
offer enhanced features and functionality, lower power
requirements, greater levels of integration or lower cost.
Increased competition has resulted in and is likely to continue
to result in declining average selling prices, reduced gross
margins and loss of market share in certain markets. We cannot
assure you that we will be able to continue to compete
successfully against current or new competitors. If we do not
compete successfully, we may lose market share in our existing
markets and our revenues may fail to increase or may decline.
We do not own or operate a fabrication facility. Five
third-party foundry subcontractors located in Asia manufacture
substantially all of our semiconductor devices in current
production. Availability of foundry capacity has at times in the
past been reduced due to strong demand. In addition, a
recurrence of severe acute respiratory syndrome, or SARS, the
occurrence of a significant outbreak of avian influenza among
humans, or another public health emergency in Asia could further
affect the production capabilities of our manufacturers by
resulting in quarantines or closures. If we are unable to secure
sufficient capacity at our existing foundries, or in the event
of a quarantine or closure at any of these foundries, our
revenues, cost of revenues and results of operations would be
negatively impacted.
In September 1999 two of our foundries’ principal
facilities were affected by a significant earthquake in Taiwan.
As a consequence of this earthquake, they suffered power outages
and equipment damage that impaired their wafer deliveries,
which, together with strong demand, resulted in wafer shortages
and higher wafer pricing industrywide. If any of our foundries
experiences a shortage in capacity, suffers any damage to its
facilities, experiences power outages, suffers an adverse
outcome in pending or future litigation, or encounters financial
difficulties or any other disruption of foundry capacity, we may
encounter supply delays or disruptions, and we may need to
qualify an alternative foundry. Even our current foundries need
to have new manufacturing processes qualified if there is a
disruption in an existing process. We typically require several
months to qualify a new foundry or process before we can begin
shipping products from it. If we cannot accomplish this
qualification in a timely manner, we may experience a
significant interruption in supply of the affected products.
Because we rely on outside foundries with limited capacity, we
face several significant risks, including:
In addition, the manufacture of integrated circuits is a highly
complex and technologically demanding process. Although we work
closely with our foundries to minimize the likelihood of reduced
manufacturing yields, our foundries have from time to time
experienced lower than anticipated manufacturing yields. This
often occurs during the production of new products or the
installation and
start-up of
new process technologies. Poor yields from our foundries could
result in product shortages or delays in product shipments,
which could seriously harm our relationships with our customers
and materially and adversely affect our results of operations.
The ability of each foundry to provide us with semiconductor
devices is limited by its available capacity and existing
obligations. Although we have entered into contractual
commitments to supply specified levels of products to some of
our customers, we do not have a long-term volume purchase
agreement or a significant guaranteed level of production
capacity with any of our foundries. Foundry capacity may not be
available when we need it or at
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reasonable prices. Availability of foundry capacity has in the
recent past been reduced from time to time due to strong demand.
Foundries can allocate capacity to the production of other
companies’ products and reduce deliveries to us on short
notice. It is possible that foundry customers that are larger
and better financed than we are, or that have long-term
agreements with our main foundries, may induce our foundries to
reallocate capacity to them. This reallocation could impair our
ability to secure the supply of components that we need.
Although we use five independent foundries to manufacture
substantially all of our semiconductor products, each component
is typically manufactured at only one or two foundries at any
given time, and if any of our foundries is unable to provide us
with components as needed, we could experience significant
delays in securing sufficient supplies of those components.
Also, our third party foundries typically migrate capacity to
newer,
state-of-the-art
manufacturing processes on a regular basis, which may create
capacity shortages for our products designed to be manufactured
on an older process. We cannot assure you that any of our
existing or new foundries will be able to produce integrated
circuits with acceptable manufacturing yields, or that our
foundries will be able to deliver enough semiconductor devices
to us on a timely basis, or at reasonable prices. These and
other related factors could impair our ability to meet our
customers’ needs and have a material and adverse effect on
our operating results.
Although we may utilize new foundries for other products in the
future, in using new foundries we will be subject to all of the
risks described in the foregoing paragraphs with respect to our
current foundries.
We depend
on third-party subcontractors to assemble, obtain packaging
materials for, and test substantially all of our current
products. If we lose the services of any of our subcontractors
or if these subcontractors are unable to obtain sufficient
packaging materials, shipments of our products may be disrupted,
which could harm our customer relationships and adversely affect
our net sales.
We do not own or operate an assembly or test facility. Eight
third-party subcontractors located in Asia assemble, obtain
packaging materials for, and test substantially all of our
current products. Because we rely on third-party subcontractors
to perform these functions, we cannot directly control our
product delivery schedules and quality assurance. This lack of
control has resulted, and could in the future result, in product
shortages or quality assurance problems that could delay
shipments of our products or increase our manufacturing,
assembly or testing costs.
In the past we and others in our industry experienced a shortage
in the supply of packaging substrates that we use for our
products. If our third-party subcontractors are unable to obtain
sufficient packaging materials for our products in a timely
manner, we may experience a significant product shortage or
delay in product shipments, which could seriously harm our
customer relationships and materially and adversely affect our
net sales.
We do not have long-term agreements with any of our assembly or
test subcontractors and typically procure services from these
suppliers on a per order basis. If any of these subcontractors
experiences capacity constraints or financial difficulties,
suffers any damage to its facilities, experiences power outages
or any other disruption of assembly or testing capacity, we may
not be able to obtain alternative assembly and testing services
in a timely manner. Due to the amount of time that it usually
takes us to qualify assemblers and testers, we could experience
significant delays in product shipments if we are required to
find alternative assemblers or testers for our components. Any
problems that we may encounter with the delivery, quality or
cost of our products could damage our customer relationships and
materially and adversely affect our results of operations. We
are continuing to develop relationships with additional
third-party subcontractors to assemble and test our products.
However, even if we use these new subcontractors, we will
continue to be subject to all of the risks described above.
The market price of our Class A common stock has fluctuated
substantially in the past and is likely to continue to be highly
volatile and subject to wide fluctuations. Since January 1,
2002 our Class A common stock has traded at prices as low
as $6.35 and as high as $50.00 per share. Fluctuations have
occurred and may continue to occur in response to various
factors, many of which we cannot control, including:
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In addition, the market prices of securities of
Internet-related, semiconductor and other technology companies
have been volatile. This volatility has significantly affected
the market prices of securities of many technology companies for
reasons frequently unrelated to the operating performance of the
specific companies. Accordingly, you may not be able to resell
your shares of common stock at or above the price you paid. In
the past, we and other companies that have experienced
volatility in the market price of their securities have been,
and in the future we may be, the subject of securities class
action litigation.
Two of the five third-party foundries upon which we rely to
manufacture substantially all of our semiconductor devices are
located in Taiwan. Taiwan has experienced significant
earthquakes in the past and could be subject to additional
earthquakes. Any earthquake or other natural disaster, such as a
tsunami, in a country in which any of our foundries is located
could significantly disrupt our foundries’ production
capabilities and could result in our experiencing a significant
delay in delivery, or substantial shortage, of wafers and
possibly in higher wafer prices.
Our California facilities, including our principal executive
offices and major design centers, are located near major
earthquake fault lines. Our international distribution center is
located in Singapore, which could also be subject to an
earthquake, tsunami or other natural disaster. If there is a
major earthquake or any other natural disaster in a region where
one or more of our facilities are located, our operations could
be significantly disrupted. Although we have established
business interruption plans to prepare for any such event, we
cannot guarantee that we will be able to effectively address all
interruptions that such an event could cause.
Any supply disruption or business interruption could materially
and adversely affect our business, financial condition and
results of operations.
Changes in current laws or regulations or the imposition of new
laws and regulations in the United States or elsewhere could
materially and adversely affect our business.
The effects of regulation on our customers or the industries in
which they operate may materially and adversely impact our
business. For example, the Federal Communications Commission has
broad jurisdiction over each of our target markets in the United
States. Although current FCC regulations and the laws and
regulations of other federal or state agencies are not directly
applicable to our products, they do apply to much of the
equipment into which our products are incorporated. FCC
regulatory policies that affect the ability of cable or
satellite operators or telephone companies to offer certain
services to their customers or other aspects of their business
may impede sales of our products in the United States. For
example, in the past we have experienced delays when products
incorporating our chips failed to comply with FCC emissions
specifications.
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In addition, we and our customers are subject to various import
and export regulations of the United States government. Changes
in or violations of such regulations could materially and
adversely affect our business, financial condition and results
of operations. Additionally, various government export
regulations apply to the encryption or other features contained
in some of our products. We have made numerous filings and
applied for and received a number of export licenses under these
regulations. However, if we fail to continue to receive licenses
or otherwise comply with these regulations, we may be unable to
manufacture the affected products at our foreign foundries or to
ship these products to certain customers located outside of the
United States.
We and our customers may also be subject to regulation by
countries other than the United States. Foreign governments may
impose tariffs, duties and other import restrictions on
components that we obtain from non-domestic suppliers and may
impose export restrictions on products that we sell
internationally. These tariffs, duties or restrictions could
materially and adversely affect our business, financial
condition and results of operations.
Due to environmental concerns, the use of lead and other
hazardous substances in electronic components and systems is
receiving increased attention. In response, the European Union
passed the Restriction on Hazardous Substances, or RoHS,
Directive, legislation that limits the use of lead and other
hazardous substances in electrical equipment. The RoHS Directive
became effective July 1, 2006. We believe that, absent any
unforeseen delays, our current product designs and material
supply chains will allow production to continue in compliance
with the RoHS Directive and without interruption. However, it is
possible that unanticipated supply shortages or delays may occur
as a result of these new regulations.
As of December 31, 2006 our co-founders, directors,
executive officers and their respective affiliates beneficially
owned 14.1% of our outstanding common stock and held 59.9% of
the total voting power held by our shareholders. Accordingly,
these shareholders currently have enough voting power to control
the outcome of matters that require the approval of our
shareholders. These matters include the election of our Board of
Directors, the issuance of additional shares of Class B
common stock, and the approval of most significant corporate
transactions, including certain mergers and consolidations and
the sale of substantially all of our assets. In particular, as
of December 31, 2006 our two founders, Dr. Henry T.
Nicholas III, who is no longer an officer or director of
Broadcom, and Dr. Henry Samueli, our Chairman of the Board
and Chief Technical Officer, beneficially owned a total of 13.3%
of our outstanding common stock and held 59.4% of the total
voting power held by our shareholders. Because of their
significant voting stock ownership, we will not be able to
engage in certain transactions, and our shareholders will not be
able to effect certain actions or transactions, without the
approval of one or both of these shareholders. These actions and
transactions include changes in the composition of our Board of
Directors, certain mergers, and the sale of control of our
company by means of a tender offer, open market purchases or
other purchases of our Class A common stock, or otherwise.
Repurchases of shares of our Class A common stock under our
share repurchase program will result in an increase in the total
voting power of our co-founders, directors, executive officers
and their affiliates, as well as other continuing shareholders.
Our articles of incorporation and bylaws contain provisions that
may prevent or discourage a third party from acquiring us, even
if the acquisition would be beneficial to our shareholders. In
addition, we have in the past issued and may in the future issue
shares of Class B common stock in connection with certain
acquisitions, upon exercise of certain stock options, and for
other purposes. Class B shares have superior voting rights
entitling the holder to ten votes for each share held on matters
that we submit to a shareholder vote (as compared to one vote
per share in the case of our Class A common stock) as well
as the right to vote separately as a class (i) as required
by law and (ii) in the case of a proposed issuance of
additional shares of Class B common stock, unless such
issuance is approved by at least two-thirds of the members of
the Board of Directors then in office. Our Board of Directors
also has the authority to fix the rights and preferences of
shares of our preferred stock and to issue shares of
common or preferred stock without a shareholder vote. It is
possible that the provisions in our charter
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documents, the exercise of supervoting rights by holders of our
Class B common stock, our co-founders’,
directors’ and officers’ ownership of a majority of
the Class B common stock, or the ability of our Board of
Directors to issue preferred stock or additional shares of
Class B common stock may prevent or discourage third
parties from acquiring us, even if the acquisition would be
beneficial to our shareholders. In addition, these factors may
discourage third parties from bidding for our Class A
common stock at a premium over the market price for our stock.
These factors may also materially and adversely affect voting
and other rights of the holders of our common stock and the
market price of our Class A common stock.
None
We lease facilities in Irvine (our corporate headquarters) and
Santa Clara County, California. Each of these facilities
includes administration, sales and marketing, research and
development and operations functions. In addition to our
principal design facilities in Irvine and Santa Clara
County, we lease additional design facilities in Tempe, Arizona;
San Diego County, California; Colorado Springs,
Fort Collins, and Longmont, Colorado; Duluth, Georgia;
Germantown, Maryland; Andover, Massachusetts; Matawan, New
Jersey; Austin, Texas and Seattle, Washington, among other
locations.
Internationally, we lease a distribution center that includes
engineering design and administrative facilities in Singapore as
well as engineering design and administrative facilities in
Belgium, Canada, China, Denmark, France, Greece, India, Israel,
Japan, Korea, the Netherlands, Taiwan and the United Kingdom,
among other locations.
In addition, we lease various sales and marketing facilities in
the United States and several other countries.
The leased facilities comprise an aggregate of approximately
1.9 million square feet. Our principal facilities have
lease terms that expire at various dates through 2014. In
December 2004 we entered into a lease agreement under which our
corporate headquarters will move from our present location to a
new, larger facility in Irvine, which will consist of eight
buildings with an aggregate of approximately 0.7 million
square feet. The lease term is a period of ten years and two
months beginning after the completion of the first two buildings
and related tenant improvements, which is anticipated to occur
in the first half of 2007.
We believe that the facilities under lease will be adequate for
at least the next 12 months. For additional information
regarding our obligations under property leases, see Note 6
of Notes to Consolidated Financial Statements, included in
Part IV, Item 15 of this Report.
The information set forth under Note 11 of Notes to
Consolidated Financial Statements, included in Part IV,
Item 15 of this Report, is incorporated herein by
reference. For an additional discussion of certain risks
associated with legal proceedings, see the section entitled
“Risk Factors” in Item 1A of this Report.
No matters were submitted to a vote of security holders in the
three months ended December 31, 2006.
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Our Class A common stock is traded on the Nasdaq Global
Select Market (previously the Nasdaq National Market) under the
symbol BRCM. The following table sets forth, for the periods
indicated, the high and low sale prices for our Class A
common stock on the Nasdaq Global Select Market:
As of December 31, 2006 and 2005 there were 1,448 and 1,725
record holders of our Class A common stock and 213 and 263
record holders of our Class B common stock, respectively.
On February 16, 2007 the last reported sale price of our
Class A common stock on the Nasdaq Global Select Market was
$35.25 per share.
Our Class B common stock is not publicly traded. Each share
of Class B common stock is convertible at any time at the
option of the holder into one share of Class A common stock
and in most instances automatically converts upon sale or other
transfer.
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The graphs below show a comparison of the cumulative total
shareholder return on our Class A common stock with the
cumulative total return on the S&P 500 Index, the NASDAQ
Stock Market (U.S.) Index and the Philadelphia Semiconductor
Index over the five year period ended December 31, 2006
and, consistent with prior presentations in our proxy
statements, for the period from April 17, 1998 (the first
trading date of our Class A common stock) through
December 31, 2006. Each graph assumes $100 invested at the
indicated starting date in our Class A common stock and in
each of the market indices, with the reinvestment of all
dividends. We have not paid or declared any cash dividends on
our Class A common stock and do not anticipate paying any
cash dividends in the foreseeable future. Shareholder returns
over the indicated periods should not be considered indicative
of future stock prices or shareholder returns.
COMPARISON
OF CUMULATIVE TOTAL RETURN FOR
THE FIVE YEAR PERIOD ENDED DECEMBER 31, 2006 
COMPARISON
OF CUMULATIVE TOTAL RETURN FOR THE PERIOD
APRIL 17, 1998 THROUGH DECEMBER 31, 2006 
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We have never declared or paid cash dividends on shares of our
capital stock. We currently intend to retain all of our
earnings, if any, for use in our business and in acquisitions of
other businesses, assets, products or technologies, and for
purchases of our common stock from time to time. We do not
anticipate paying any cash dividends in the foreseeable future.
The information under the caption “Equity Compensation Plan
Information,” appearing in the Proxy Statement, is hereby
incorporated by reference. For additional information on our
stock incentive plans and activity, see Note 8 of Notes to
Consolidated Financial Statements, included in Part IV,
Item 15 of this Report.
In the three months ended December 31, 2006, we issued an
aggregate of 0.1 million shares of our Class A common
stock upon conversion of a like number of shares of our
Class B common stock. The offers and sales of those
securities were effected without registration in reliance on the
exemption from registration provided by Section 3(a)(9) of
the Securities Act.
In February 2005 our Board of Directors authorized a program to
repurchase shares of our Class A common stock. The Board
approved the repurchase of shares having an aggregate value of
up to $250 million from time to time over a period of one
year, depending on market conditions and other factors. In
January 2006 the Board approved an amendment to the share
repurchase program extending the program through
January 26, 2007 and authorizing the repurchase of
additional shares of our Class A common stock having a
total market value of up to $500 million. On July 24,
2006 the Board decided to suspend purchasing shares of our
Class A common stock under the share repurchase program as
a result of the
then-pending
voluntary review of our equity award practices. From the time
the program was first implemented through December 31,
2006, we repurchased a total of 12.8 million shares of
Class A common stock at a weighted average price of
$33.47 per share.
In February 2007 the Board authorized a new program to
repurchase shares of our Class A common stock. The Board
approved the repurchase of shares having an aggregate market
value of up to $1.0 billion, depending on market conditions
and other factors. Repurchases under the program may be made at
any time and from time to time during the 12 to 18 month
period that commenced February 12, 2007.
Repurchases under our share repurchase programs were and will be
made in open market or privately negotiated transactions in
compliance with
Rule 10b-18
under the Securities Exchange Act of 1934, as amended, or the
Exchange Act.
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The following table presents details of the total stock-based
compensation expense that is included in each functional
line item in the consolidated statements of operations data
above:
The tables above set forth our selected consolidated financial
data. We prepared this information using the consolidated
financial statements of Broadcom for the five years ended
December 31, 2006. Certain amounts in the selected
consolidated financial data above have been reclassified to
conform to the 2006 presentation. The consolidated financial
statements include the results of operations of acquisitions
commencing on their respective acquisition dates. See
Note 3 of Notes to Consolidated Financial Statements,
included in Part IV, Item 15 of this Report.
You should read this selected consolidated financial data
together with the Consolidated Financial Statements and related
Notes contained in this Report and in our 2005
Form 10-K/A
and in our subsequent reports filed with the SEC, as well as the
section of this Report and our other reports entitled
“Management’s Discussion and Analysis of Financial
Condition and Results of Operations.”
Share and per share information presented in this Report has
been adjusted to reflect all splits and dividends of our common
stock subsequent to April 16, 1998, including the
three-for-two
stock split effected February 21, 2006 through the payment
of a stock dividend.
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You should read the following discussion and analysis in
conjunction with our Consolidated Financial Statements and
related Notes thereto included in Part IV, Item 15 of
this Report and the “Risk Factors” included in
Part I, Item 1A of this Report, as well as other
cautionary statements and risks described elsewhere in this
Report, before deciding to purchase, hold or sell our common
stock.
We recently completed a voluntary review of our equity award
practices. The voluntary review, which commenced in May 2006 and
covered all grants of options and other equity awards made since
our initial public offering in April 1998, was directed by the
Audit Committee of our Board of Directors. Based on the results
of the equity award review, the Audit Committee concluded that,
pursuant to APB 25 and related interpretations, the
accounting measurement dates for most of the stock option grants
awarded between June 1998 and May 2003, covering options to
purchase 232.9 million shares of our Class A or
Class B common stock, differed from the measurement dates
previously used for such awards. As a result, revised
measurement dates were applied to the affected option grants and
Broadcom recorded a total of $2.259 billion in additional
stock-based compensation expense for the years 1998 through
2005. After related tax adjustments of $38.7 million, the
restatement resulted in total net adjustments of
$2.220 billion for the years 1998 through 2005. This amount
was net of forfeitures related to employee terminations. The
additional stock-based compensation expense was amortized over
the service period relating to each option, typically four
years, with approximately 95% of the total expense recorded in
years prior to 2004. In addition, $17.2 million of net
adjustments were recorded in connection with our equity award
review in the three months ended March 31, 2006.
None of the grants requiring measurement date adjustment was
made to our co-founders or to any current or former member of
our Board of Directors.
As a consequence of these adjustments, our audited consolidated
financial statements and related disclosures for the three years
ended December 31, 2005 and our consolidated statements of
operations and consolidated balance sheet data for the five
years ended December 31, 2005, included in “Selected
Consolidated Financial Data” in Part II, Item 6
of our 2005
Form 10-K/A
were restated. We also restated the stock-based compensation
expense footnote information calculated under SFAS 123 and
SFAS No. 148, Accounting for Stock-Based
Compensation — Transition and Disclosure, under
the disclosure-only alternatives of those pronouncements for the
years 2003 through 2005.
The adjustments did not affect Broadcom’s
previously-reported revenue, cash, cash equivalents or
marketable securities balances in any of the restated periods.
Financial information included in the reports on
Form 10-K,
Form 10-Q
and
Form 8-K
previously filed by Broadcom, and the related opinions of our
independent registered public accounting firm, and all earnings
press releases and similar communications issued by us, for all
periods ended on or before March 31, 2006, should not be
relied upon and have been superseded in their entirety by the
information contained in our 2005
Form 10-K/A
and our amended Quarterly Report on
Form 10-Q/A
for the three months ended March 31, 2006, each filed
January 23, 2007.
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; SystemI/O
server solutions; broadband network and security processors;
wireless and personal
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area networking; cellular communications; mobile multimedia and
applications processors; mobile power management; and Voice over
Internet Protocol (VoIP) gateway and telephony systems.
Net Revenue. 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 to manufacture all of our
semiconductor products.
Our net revenue is generated principally by sales of our
semiconductor products. Such sales represented 99.4%, 99.1% and
99.0% of our total net revenue in 2006, 2005 and 2004,
respectively. We derive the remainder of our net revenue
predominantly from software licenses, development agreements,
support and maintenance agreements and cancellation fees.
The majority of our sales occur through the efforts of our
direct sales force. Sales made through distributors represented
14.9%, 15.6% and 9.6% of our total net revenue in 2006, 2005 and
2004, respectively.
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:
For these and other reasons, our net revenue and results of
operations in 2006 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 increasing volume of Broadcom solutions that
are incorporated into consumer products, sales of which are
typically subject to greater seasonality and greater volume
fluctuations than non-consumer OEM products.
Sales to our significant customers, including sales to their
manufacturing subcontractors, as a percentage of net revenue
were as follows:
We expect that our largest customers will continue to account
for a substantial portion of our net revenue in 2007 and for the
foreseeable future. The identities of our largest customers and
their respective contributions to our net revenue have varied
and will likely continue to vary from period to period.
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Net 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, as a percentage of total net revenue was
as follows:
Net revenue derived from shipments to international
destinations, primarily to Asia (including foreign subsidiaries
or manufacturing subcontractors of customers that are
headquartered in the United States), represented 86.5%, 84.5%
and 79.0% of our net revenue in 2006, 2005 and 2004,
respectively.
All of our revenue to date has been denominated in
U.S. dollars.
Gross Margin. Our gross margin, or gross
profit as a percentage of net 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:
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:
In 2006 our net income was $379.0 million as compared to
$367.1 million in 2005, a difference of $11.9 million.
Although our net revenue increased by $997.0 million or
37.3% to $3.668 billion, our gross margin decreased by
1.5 percentage point and our operating expenses increased
$517.8 million. The increase in operating expenses included
an increase of $366.3 million in stock-based compensation
expense as a direct result of the adoption of SFAS 123R and
higher employee related costs due to increased headcount,
partially offset by the fact that the company incurred no
settlement costs and lower IPR&D costs and experienced an
increase in interest income of $67.8 million in 2006.
Product Cycles. The cycle for test, evaluation
and adoption of our products by customers can range from three
to more than six months, with an additional three to more than
nine months before a customer commences
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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.
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/or
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.
In 2006, 2005 and 2004 we completed 12 acquisitions for original
total equity consideration of $296.6 million and cash
consideration of $277.5 million. In 2006 we acquired
Sandburst Corporation, a fabless semiconductor company
specializing in the design and development of packet switching
and routing
systems-on-a-chip
that are deployed in enterprise core and metropolitan Ethernet
networks, and Encentrus Systems, Inc., a developer of media
center technology. In 2005 we acquired Alliant Networks, Inc., a
developer of WLAN embedded software; Zeevo, Inc., a developer of
Bluetooth headset chipsets; Siliquent Technologies Inc., a
developer of 10 Gigabit Ethernet server controllers; and Athena
Semiconductors, Inc., a developer of mobile digital television
tuner and low power Wi-Fi technology. In 2004 we acquired
RAIDCore, Inc., a developer of redundant array of inexpensive
disks, or RAID, and virtualization software; Sand Video, Inc., a
developer of advanced video compression semiconductor
technology; M-Stream, Inc., a developer of technology for
signal-to-noise
ratio performance improvements in cellular handsets; WIDCOMM,
Inc., a provider of software solutions for Bluetooth wireless
products; Zyray Wireless Inc., a developer of baseband
co-processors addressing UMTS mobile devices; and Alphamosaic
Limited, a developer of advanced mobile imaging, multimedia and
3D graphics technology optimized for use in cellular phones and
other mobile devices. Because each of these acquisitions was
accounted for as a purchase transaction, the accompanying
consolidated financial statements include the results of
operations of the acquired companies commencing on their
respective acquisition dates. See Note 3 of Notes to
Consolidated Financial Statements.
Business Enterprise Segments. We operate in
one reportable operating segment, wired and wireless broadband
communications. SFAS No. 131, Disclosures about
Segments of an Enterprise and Related Information, or
SFAS 131, establishes standards for the way public business
enterprises report information about operating segments in
annual consolidated financial statements and requires that those
enterprises report selected information about operating segments
in interim financial reports. SFAS 131 also establishes
standards for related disclosures about products and services,
geographic areas and major customers. Although we had four
operating segments at December 31, 2006, under the
aggregation criteria set forth in SFAS 131 we operate in
only one reportable operating segment, wired and wireless
broadband communications.
Under SFAS 131, two or more operating segments may be
aggregated into a single operating segment for financial
reporting purposes if aggregation is consistent with the
objective and basic principles of SFAS 131, if the segments
have similar economic characteristics, and if the segments are
similar in each of the following areas:
We meet each of the aggregation criteria for the following
reasons:
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All of our operating segments share similar economic
characteristics as they have a similar long term business model,
operate at similar gross margins, and have similar research and
development expenses and similar selling, general and
administrative expenses. The causes for variation among each of
our operating segments are the same and include factors such as
(i) life cycle and price and cost fluctuations,
(ii) number of competitors, (iii) product
differentiation and (iv) size of market opportunity.
Additionally, each operating segment is subject to the overall
cyclical nature of the semiconductor industry. The number and
composition of employees and the amounts and types of tools and
materials required are similar for each operating segment.
Finally, even though we periodically reorganize our operating
segments based upon changes in customers, end markets or
products, acquisitions, long- term growth strategies, and the
experience and bandwidth of the senior executives in charge, the
common financial goals for each operating segment remain
constant.
Because we meet each of the criteria set forth in SFAS 131
and our four operating segments as of December 31,
2006 share similar economic characteristics, we aggregate
our results of operations into one reportable operating segment.
Critical
Accounting Policies and Estimates
The preparation of financial statements in accordance with
U.S. generally accepted accounting principles requires us
to make estimates and assumptions that affect the reported
amounts of assets and liabilities at the date of the financial
statements and the reported amounts of net revenue and expenses
in the reporting period. We regularly evaluate our estimates and
assumptions related to allowances for doubtful accounts, sales
returns and allowances, warranty reserves, inventory reserves,
stock-based compensation expense, goodwill and purchased
intangible asset valuations, strategic investments, deferred
income tax asset valuation allowances, restructuring costs,
litigation and other loss contingencies. We base our estimates
and assumptions on current facts, historical experience and
various other factors that we believe to be reasonable under the
circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities
and the accrual of costs and expenses that are not readily
apparent from other sources. The actual results experienced by
us may differ materially and adversely from our estimates. To
the extent there are material differences between our estimates
and the actual results, our future results of operations will be
affected.
We believe the following critical accounting policies require us
to make significant judgments and estimates in the preparation
of our consolidated financial statements:
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Results
of Operations
The following table sets forth certain Consolidated Statements
of Income data expressed as a percentage of net revenue for the
periods indicated:
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Years
Ended December 31, 2006 and 2005
Net
Revenue, Cost of Revenue and Gross Profit
The following table presents net revenue, cost of revenue and
gross profit for 2006 and 2005:
Net Revenue. Our revenue is generated
principally by sales of our semiconductor products. Net revenue
is revenue less reductions for rebates and provisions for
returns and allowances. The following table presents net revenue
from each of our major target markets and their respective
contributions to the increase in net revenue in 2006 as compared
to 2005:
The 2006 increase in net revenue from our broadband
communications target market resulted primarily from an increase
in net revenue from solutions for broadband modems and digital
set-top boxes. The 2006 increase in net revenue from our
enterprise networking target market was attributable to our
enterprise Ethernet and controller products. The 2006 increase
in net revenue from our mobile and wireless target market
resulted primarily from strength in our Bluetooth, wireless LAN
and mobile multimedia product offerings.
Our broadband communications products include solutions for
cable modems, DSL applications, digital cable, direct broadcast
satellite and IP set-top boxes, digital TVs and high definition
DVD and personal video recording devices. Our enterprise
networking products include Ethernet transceivers, controllers,
switches, broadband network and security processors and server
chipsets. Our mobile and wireless products include wireless LAN,
cellular, Bluetooth, mobile multimedia and applications
processors, mobile power management and VoIP solutions.
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The following table presents net revenue from each of our major
target markets and their respective contributions to the
increase in net revenue in the fourth quarter of 2006 as
compared to the third quarter of 2006:
The decrease in net revenue from our broadband communications
target market resulted primarily from a decrease in net revenue
from solutions for digital set-top boxes, as a major customer
purposefully
built-up its
inventory in the third quarter of 2006 due to a manufacturing
transition, as well as a mix shift to lower end set-top boxes.
This decrease was partially offset by an increase in net revenue
in cable modems. The increase in net revenue from our mobile and
wireless target market resulted primarily from strength in our
Bluetooth and wireless LAN product offerings for games, handsets
and PC applications, as well as our mobile communications and
mobile multimedia product offerings. The decrease in net revenue
from our enterprise networking target market was due to softness
of sales of our controller products due to excess customer
inventories and a shift from server or enterprise-related
products to consumer-oriented products, offset by an increase in
net revenue from our switch products.
We currently anticipate that total net revenue in the first
quarter of 2007 will be approximately $890.0 million to
$900.0 million, as compared to $923.5 million achieved
in the fourth quarter of 2006.
We recorded rebates to certain customers of $244.1 million
and $220.8 million in 2006 and 2005, respectively. We
account for rebates in accordance with Financial Accounting
Standards Board, or FASB, Emerging Issues Task Force, or EITF,
Issue
No. 01-9,
Accounting for Consideration Given by a Vendor to a Customer
(Including a Reseller of the Vendor’s Products), and,
accordingly, record reductions to revenue for rebates in the
same period that the related revenue is recorded. The amount of
these reductions is based upon the terms included in our various
rebate agreements. Historically, reversals of rebate accruals
have not been material. We anticipate that accrued rebates will
vary in future periods based on the level of overall sales to
customers that participate in our rebate programs and as
specific rebate programs contractually end and unclaimed rebates
are no longer subject to payment. However, we do not expect
rebates to impact our gross margin as our prices to these
customers and corresponding revenue and margins are already net
of such rebates.
Cost of Revenue and Gross Profit. Cost of
revenue includes the cost of purchasing finished silicon wafers
manufactured by independent foundries, costs associated with our
purchase of assembly, test and quality assurance services and
packaging materials for semiconductor products, amortization of
purchased technology, and manufacturing overhead, including
costs of personnel and equipment associated with manufacturing
support, product warranty costs, provisions for excess or
obsolete inventories, and stock-based compensation expense for
personnel engaged in manufacturing support.
The 2006 increase in gross profit resulted primarily from the
37.3% increase in net revenue. Gross margin decreased from 52.5%
in 2005 to 51.0% in 2006. The primary factors that contributed
to this 1.5 percentage point decrease were
(i) increases in product costs and (ii) increases in
stock-based compensation expense resulting from the adoption of
SFAS 123R, partially offset by (iii) improvements as a
percentage of revenue of manufacturing overhead due to our
significant growth.
Gross margin has been and will likely continue to be impacted by
competitive pricing programs, fluctuations in silicon wafer
costs and assembly, packaging and testing costs, competitive
pricing requirements, product warranty costs, provisions for
excess and obsolete inventories, possible future changes in
product mix, and the introduction
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of products with lower margins, among other factors. We
anticipate that our gross margin in the first quarter of 2007
will be relatively flat or increase slightly as compared to the
fourth quarter of 2006. Our gross margin may also be impacted by
additional stock-based compensation expense and changes therein,
as discussed below, and the amortization of purchased intangible
assets related to future acquisitions.
The following table presents research and development and
selling, general and administrative expenses for 2006 and 2005:
Research and Development Expense. Research and
development expense consists primarily of salaries and related
costs of employees engaged in research, design and development
activities, including stock-based compensation expense, costs
related to engineering design tools and computer hardware, mask
and prototyping costs, subcontracting costs and facilities
expenses.
The 2006 increase in research and development expense resulted
primarily from an increase of $238.5 million in stock-based
compensation expense, an increase of $116.1 million in
personnel-related expenses, and $23.6 million related to
estimated payments we have decided to make to or on behalf of
certain current and former employees related to consequences of
the equity award review. These increases are primarily
attributable to (i) our adoption of SFAS 123R,
(ii) an increase in the number of employees engaged in
research and development activities in 2006, resulting from both
direct hiring and acquisitions and (iii) an increase in
cash compensation levels. For a further discussion of the
increase in stock-based compensation, see “Stock-Based
Compensation Expense,” below.
Based upon past experience, we anticipate that research and
development expense will continue to increase over the long term
as a result of the growth and diversification of the markets we
serve, new product opportunities, changes in our compensation
policies and any expansion into new markets and technologies. We
anticipate that research and development expense in the first
quarter of 2007 will increase from $312.7 million incurred
in the fourth quarter of 2006 due to the continued investment in
new products and 65 nanometer process technology.
We remain committed to significant research and development
efforts to extend our technology leadership in the wired and
wireless communications markets in which we operate. We
currently hold over 1,950 U.S. and 750 foreign patents, and
we maintain an active program of filing for and acquiring
additional U.S. and foreign patents in wired and wireless
communications and other fields.
Selling, General and Administrative
Expense. Selling, general and administrative
expense consists primarily of personnel-related expenses,
including stock-based compensation expense, legal and other
professional fees, facilities expenses and communications
expenses.
The 2006 increase in selling, general and administrative expense
resulted primarily from an increase of $107.4 million in
stock-based compensation expense, an increase of
$54.5 million in legal fees, an increase of
$21.5 million in personnel-related expenses and
$23.8 million related to estimated payments we have decided
to make to or on behalf of certain current and former employees
related to consequences of the voluntary review of our equity
award practices. In addition, we incurred legal and accounting
fees associated with the review of $11.6 million primarily
in the second half of 2006. These increases are primarily
attributable to (i) our adoption of SFAS 123R,
(ii) the cost of ongoing litigation, (iii) an increase
in the number of employees engaged in selling,
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general and administrative activities in 2006 and (iv) an
increase in cash compensation levels. For a further discussion
of the increase in stock-based compensation, see
“Stock-Based Compensation Expense,” below. For further
discussion of litigation matters, see Note 11 of Notes to
Consolidated Financial Statements.
Based upon past experience, we anticipate that selling, general
and administrative expense will continue to increase over the
long term resulting from any expansion of our operations through
periodic changes in our infrastructure, changes in our
compensation policies, acquisition and integration activities,
international operations, and current and future litigation. We
anticipate that selling, general and administrative expense in
the first quarter of 2007 will be relatively flat as compared to
the $143.9 million incurred in the fourth quarter of 2006.
The following table presents details of the total stock-based
compensation expense that is included in each functional
line item in our consolidated statements of income:
The adoption of SFAS 123R will continue to have a
significant adverse impact on our reported results of
operations, although it should not have a material impact on our
overall financial position. The amount of unearned stock-based
compensation currently estimated to be expensed in the period
2007 through 2011 related to unvested share-based payment awards
at December 31, 2006 is $829.9 million. Of this
amount, $383.4 million, $255.1 million,
$160.3 million and $31.1 million are currently
estimated to be recorded in 2007, 2008, 2009 and thereafter,
respectively. The weighted average period over which the
unearned stock-based compensation is expected to be recognized
is approximately 1.4 years. Approximately 96% of the total
unearned stock-based compensation at December 31, 2006 will
be expensed by the end of 2009. If there are any modifications
or cancellations of the underlying unvested securities, we may
be required to accelerate, increase or cancel any remaining
unearned stock-based compensation expense. Future stock-based
compensation expense and unearned stock-based compensation will
increase to the extent that we grant additional equity awards to
employees or assume unvested equity awards in connection with
acquisitions.
We recorded total charges of $61.5 million in 2006 in
connection with estimated payments we have decided to make to or
on behalf of certain current and former employees related to
consequences of the voluntary review of our equity award
practices, as well as non-cash stock-based compensation expense
we incurred related to the extension of the post-service stock
option exercise period for certain former employees. The
payments are to remunerate participants in our employee stock
purchase plan who were unable to purchase shares thereunder
during the period in which we were not current in our SEC
reporting obligations, to remediate adverse tax consequences, if
any, to individuals that may result from the review, and to
compensate individuals for the value of stock options that
expired or would have expired during the period in which we were
not current in our SEC reporting obligations. A total of
$2.5 million, $30.1 million and $28.9 million is
included in cost of revenue, research and development
expense and selling, general and administrative expense,
respectively, for such charges, of which $6.5 million and
$5.1 million in research and development expense and
selling, general and administrative expense, respectively, is
stock-based compensation expense.
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The following table presents details of the amortization of
purchased intangible assets by expense category:
At December 31, 2006 the unamortized balance of purchased
intangible assets that will be amortized to future cost of
revenue and other operating expense was $26.0 million and
$3.0 million, respectively. These amounts will be amortized
ratably through 2011. If we acquire additional purchased
intangible assets in the future, our cost of revenue or other
operating expenses will increase by the amortization of those
assets.
IPR&D totaled $5.2 million and $43.5 million for
acquisitions completed in 2006 and 2005, respectively. The
amounts allocated to IPR&D were determined through
established valuation techniques used in the high technology
industry and were expensed upon acquisition as it was determined
that the underlying projects had not reached technological
feasibility and no alternative future uses existed. In
accordance with SFAS No. 2, Accounting for Research
and Development Costs, as clarified by FASB Interpretation,
or FIN, No. 4, Applicability of FASB Statement
No. 2 to Business Combinations Accounted for by the
Purchase Method — an Interpretation of FASB Statement
No. 2, amounts assigned to IPR&D meeting the
above-stated criteria were charged to expense as part of the
allocation of purchase price.
The fair value of the IPR&D for each of the acquisitions was
determined using the income approach. Under the income approach,
the expected future cash flows from each project under
development are estimated and discounted to their net present
values at an appropriate risk-adjusted rate of return.
Significant factors considered in the calculation of the rate of
return are the weighted average cost of capital and return on
assets, as well as the risks inherent in the development
process, including the likelihood of achieving technological
success and market acceptance. Each project was analyzed to
determine the unique technological innovations, the existence
and reliance on core technology, the existence of any
alternative future use or current technological feasibility, and
the complexity, cost and time to complete the remaining
development. Future cash flows for each project were estimated
based on forecasted revenue and costs, taking into account
product life cycles and market penetration and growth rates.
The IPR&D charges include only the fair value of IPR&D
performed as of the respective acquisition dates. The fair value
of developed technology is included in identifiable purchased
intangible assets. We believe the amounts recorded as IPR&D,
as well as developed technology, represent the fair values and
approximate the amounts an independent party would pay for these
projects at the dates of the respective acquisitions.
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The following table summarizes the significant assumptions at
the acquisition dates underlying the valuations of IPR&D for
our acquisitions completed in 2006 and 2005:
We completed the development projects related to the Zeevo
acquisition in 2005 and the Siliquent and Athena acquisitions in
2006. At December 31, 2006 the Sandburst development
projects were still in process.
Actual results to date have been consistent, in all material
respects, with our assumptions at the time of the acquisitions.
The assumptions consist primarily of expected completion dates
for the IPR&D projects, estimated costs to complete the
projects, and revenue and expense projections for the products
once they have entered the market.
As of the respective acquisition dates of the 2006 and 2005
acquisitions, certain ongoing development projects were in
process. Research and development costs to bring the products of
the acquired companies to technological feasibility are not
expected to have a material impact on our results of operations
or financial condition.
We recorded $110.0 million in settlement costs in 2005
primarily related to the settlement of securities class action
litigation against us and certain of our current and former
officers and directors. For a more detailed discussion of our
settled and outstanding litigation, see Note 11 of Notes to
Consolidated Financial Statements.
For a discussion of activity and liability balances related to
our past restructuring plans, see Note 2 of Notes to
Consolidated Financial Statements.
We performed annual impairment assessments of the carrying value
of goodwill recorded in connection with various acquisitions as
required under SFAS No. 142, Goodwill and Other
Intangible Assets, or SFAS 142, in October 2006 and
2005. Upon completion of the 2006 and 2005 annual impairment
assessments, we determined no impairment was indicated as the
estimated fair value of each of our four reporting units,
determined and identified in accordance with SFAS 142,
exceeded its respective carrying value.
We estimated the fair values of our reporting units primarily
using the income approach valuation methodology that includes
the discounted cash flow method, taking into consideration the
market approach and certain market multiples as verification of
the values derived using the discounted cash flow methodology.
The discounted cash flows for each reporting unit were based on
discrete four year financial forecasts developed by management
for planning purposes and consistent with those distributed to
our Board of Directors. Cash flows beyond the four year discrete
forecasts were estimated using a terminal value calculation,
which incorporated historical and forecasted financial trends
for each identified reporting unit and considered long-term
earnings growth rates for publicly traded peer companies. Future
cash flows were discounted to present value by incorporating the
present value techniques discussed in FASB Concepts
Statement 7, Using Cash Flow Information and Present
Value in Accounting Measurements, or Concepts
Statement 7. Specifically, the income approach valuations
included reporting unit cash flow discount rates ranging from
13% to 19%, and terminal value growth
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rates ranging from 5% to 10%. Publicly available information
regarding the market capitalization of our company was also
considered in assessing the reasonableness of the cumulative
fair values of our reporting units estimated using the
discounted cash flow methodology.
The following table presents interest and other income, net, for
2006 and 2005:
Interest income, net, reflects interest earned on cash and cash
equivalents and marketable securities balances. The increase in
interest income, net, was the result of an overall increase in
our cash and marketable securities balances and an increase in
market interest rates. Our cash and marketable securities
balances increased from $1.876 billion at December 31,
2005 to $2.802 billion at December 31, 2006. The
average interest rates earned for 2006 and 2005 were 4.91% and
3.48%, respectively.
The following table presents the income tax benefit for 2006 and
2005:
The federal statutory rate was 35% for 2006 and 2005. We had
income tax benefits which resulted in negative effective tax
rates of 3.4% and 5.8% for 2006 and 2005, respectively. The
differences between our effective tax rates and the federal
statutory tax rate primarily relate to foreign earnings taxed at
rates differing from the federal tax rate and domestic tax
losses recorded without tax benefits. In addition, we realized
tax benefits resulting from the reversal of certain prior period
tax accruals of $29.8 million and $28.3 million in
2006 and 2005, respectively, primarily due to the expiration of
the statutes of limitations for the assessment of taxes related
to prior periods.
We utilize the liability method of accounting for income taxes
as set forth in SFAS No. 109, Accounting for Income
Taxes, or SFAS 109. We record net deferred tax assets
to the extent we believe these assets will more likely than not
be realized. In making such determination, we consider all
available positive and negative evidence, including scheduled
reversals of deferred tax liabilities, projected future taxable
income, tax planning strategies and recent financial
performance. SFAS 109 states that forming a conclusion
that a valuation allowance is not required is difficult when
there is negative evidence such as cumulative losses in recent
years. As a result our recent cumulative losses in the U.S. and
certain foreign jurisdictions, and the full utilization of our
loss carryback opportunities, we have concluded that a full
valuation allowance should be recorded in such jurisdictions. In
certain other foreign jurisdictions where we do not have
cumulative losses, we had net deferred tax assets of
$1.8 million and $1.4 million in 2006 and 2005,
respectively. See Note 5 of Notes to Consolidated Financial
Statements.
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Years
Ended December 31, 2005 and 2004
Net
Revenue, Cost of Revenue and Gross Profit
The following table presents net revenue, cost of revenue and
gross profit for 2005 and 2004:
Net Revenue. The following table presents net
revenue from each of our major target markets and their
respective contributions to the increase in net revenue in 2005
as compared to 2004:
The 2005 decrease in net revenue from our enterprise networking
target market resulted primarily from the previously anticipated
decline in shipments of our Intel processor-based server
chipsets, which resulted in a $206.8 million decrease in
net revenue for those products, offset by an increase in net
revenue for our enterprise Ethernet and controller products. The
2005 increase in net revenue from our broadband communications
target market resulted primarily from an increase in net revenue
from solutions for broadband modems. The 2005 increase in net
revenue from our mobile and wireless target market resulted
primarily from strength in our Bluetooth and mobile multimedia
product offerings, partially offset by weakness in our cellular
handset and wireless LAN businesses in the first half of 2005.
We recorded rebates to certain customers of $220.8 million
and $263.6 million in 2005 and 2004, respectively.
Cost of Revenue and Gross Profit. The 2005
increase in gross profit resulted primarily from the 11.3%
increase in net revenue. Gross margin increased from 50.1% in
2004 to 52.5% in 2005. The primary factors that contributed to
this 2.4 percentage point improvement were improvements in
product margin due to (i) changes in product mix,
(ii) benefits from the favorable foundry pricing we were
able to negotiate at the beginning of 2005 and (iii) other
product cost savings, particularly in the area of yield
improvements. In addition, gross margin increased due to a
decrease in provisions for excess and obsolete inventory and
warranty costs as compared to 2004.
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The following table presents research and development and
selling, general and administrative expenses for 2005 and 2004:
The 2005 increase in research and development expense resulted
primarily from an increase of $81.2 million in
personnel-related expenses offset in part by a decrease in
stock-based compensation expense. The increase in
personnel-related expenses is attributable to an increase in the
number of employees engaged in research and development
activities in 2005, resulting from both direct hiring and
acquisitions, as well as increased cash compensation levels. For
a further discussion of the decrease in stock-based compensation
expense, see “Stock-Based Compensation Expense,” below.
The 2005 increase in selling, general and administrative expense
resulted primarily from an increase of $28.1 million in
personnel-related expenses. This increase in personnel-related
expenses is attributable to an increase in the number of
employees engaged in selling, general and administrative
activities in 2005, resulting from both direct hiring and
acquisitions, as well as increased cash compensation levels. For
a further discussion of stock-based compensation, see
“Stock-Based Compensation Expense,” below.
The following table presents details of the total stock-based
compensation expense that is included in each functional
line item in our consolidated statements of income:
The decrease in research and development stock-based
compensation expense in 2005 related primarily to a reduction in
the amortization of deferred compensation resulting from stock
options we issued or assumed in acquisitions becoming fully
vested, partially offset by the amortization of deferred
compensation resulting from the issuance of restricted stock
units in 2005.
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The following table presents details of the amortization of
purchased intangible assets by expense category:
We recorded $110.0 million in settlement costs in 2005
primarily related to the settlement of securities class action
litigation against us and certain of our current and former
officers and directors. We recorded $68.7 million in
settlement costs in 2004. Of that amount $60.0 million was
related to the settlement of various litigation matters, and the
remaining $8.7 million reflected settlement costs related
to a claim arising from an acquisition and certain
indemnification costs. For a more detailed discussion of our
settled and outstanding litigation, see Note 11 of Notes to
Consolidated Financial Statements.
IPR&D totaled $43.5 million and $63.8 million for
acquisitions completed in 2005 and 2004, respectively. For a
description of the 2005 IPR&D projects, including the
valuation techniques used and significant assumptions at the
acquisition dates underlying the valuations, as well as an
update on the status of such projects as of December 31,
2006, see the discussion included under “Years Ended
December 31, 2006 and 2005,” above.
The following table summarizes the significant assumptions at
the acquisition dates underlying the valuations of IPR&D for
our acquisitions completed in 2004:
We completed the development projects related to all of our 2004
acquisitions, except for Sand Video. In the case of Sand Video,
we reallocated the resources to focus on semiconductor products
that we believe are a higher priority. At December 31, 2005
all other 2005 development projects were still in process.
Except for the Sand Video project, actual results to date have
been consistent, in all material respects, with our assumptions
at the time of the acquisitions. The assumptions consist
primarily of expected completion dates for the IPR&D
projects, estimated costs to complete the projects, and revenue
and expense projections for the products once they have entered
the market.
As of the respective acquisition dates of the 2004 acquisitions,
certain ongoing development projects were in process. Research
and development costs to bring the products of the acquired
companies to technological feasibility are not expected to have
a material impact on our results of operations or financial
condition.
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The following table presents impairment of goodwill and other
intangible assets for 2005 and 2004:
We performed annual impairment assessments of the carrying value
of goodwill recorded in connection with various acquisitions as
required under SFAS 142 in October 2005 and 2004. Upon
completion of the 2005 and 2004 annual impairment assessments,
we determined no impairment was indicated as the estimated fair
values of our four reporting units, determined and identified in
accordance with SFAS 142, exceeded their respective
carrying values.
In November 2005 we acquired an issued U.S. patent, with
various foreign counterparts, related to integrated circuit
package testing for $0.5 million. In January 2004 we
acquired approximately 80 patents and patent applications
related to the read channel and hard disk controller market for
$18.0 million. The immediate purpose for acquiring these
patent portfolios was to assist us in the defense and settlement
of then ongoing and future intellectual property litigation. As
a result, we were unable to estimate any future cash flows from
the patents. We also did not have any plans to resell the
patents to a third party. Due to our intended use for these
assets, we concluded that indicators of impairment existed upon
acquisition of the patents because the carrying value of the
patents might not be recoverable. Upon determining that
indicators of impairment existed, we performed recoverability
tests in accordance with SFAS No. 144, Accounting
for the Impairment or Disposal of Long-Lived Assets, or
SFAS 144. Estimates of future cash flows used to test the
recoverability of long-lived assets should include only the
future cash flows that are directly associated with, and that
are expected to arise as a direct result of the use and eventual
disposition of the asset. The only cash flows expected to arise
as a direct result of the use of the patents are the cash
savings expected to result from reduced but undeterminable
litigation expenses over the next several years. Due to the
unpredictable nature of legal disputes, it is not possible to
reasonably: (i) determine if our strategy with respect to
the patents will be successful, (ii) forecast litigation
expenses that would have been incurred if the patent portfolio
had not been acquired, or (iii) forecast cash flows
generated as a result of acquiring the patents. As a result, no
reasonable analysis could be prepared to support future cash
flows associated with the patents. Accordingly, pursuant to
SFAS 144 the patents were determined to be fully impaired
at their respective dates of acquisition. The impairment charge
for the patent portfolio was classified as an impairment of
goodwill and other intangible assets in the consolidated
statements of income in 2004.
See Notes 1 and 9 of Notes to Consolidated Financial
Statements for a further discussion of impairment of goodwill
and other intangible assets.
For a discussion of activity and liability balances related to
our past restructuring plans, see Note 2 of Notes to
Consolidated Financial Statements.
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The following table presents interest and other income, net, for
2005 and 2004:
Interest income, net, reflects interest earned on cash and cash
equivalents and marketable securities balances. The increase in
interest income, net, was the result of an overall increase in
our cash and marketable securities balances and an increase in
market interest rates. Our cash and marketable securities
balances increased to $1.876 billion at December 31,
2005 from $1.276 billion at December 31, 2004. The
average interest rates earned for 2005 and 2004 were 3.48% and
1.73%, respectively.
Other income, net, primarily includes recorded gains and losses
on strategic investments as well as gains and losses on foreign
currency transactions and dispositions of property and
equipment. We recognized gains from sales of strategic
investments in the amounts of $1.2 million and
$5.2 million in 2005 and 2004, respectively.
The following table presents the provision (benefit) for income
taxes for 2005 and 2004:
The federal statutory rate was 35% for 2005 and 2004. For 2005
we recorded no tax benefits for our domestic tax losses. Other
differences between our effective tax rates for 2005 and 2004
resulted primarily from a favorable geographic mix of income and
reduced foreign tax rates in 2005. In addition, we realized tax
benefits resulting from the reversal of certain prior period tax
accruals of $28.3 million and $21.3 million in 2005
and 2004, respectively, related to foreign subsidiaries
primarily due to the expiration of the statute of limitations
for the assessment of taxes related to the prior periods.
In certain other foreign jurisdictions where we do not have
cumulative losses, we recorded net deferred tax assets of
$1.4 million in 2005 in accordance with SFAS 109. See
Note 5 of Notes to Consolidated Financial Statements.
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The following table presents our quarterly financial data. In
our opinion, this information has been prepared on a basis
consistent with that of our audited consolidated financial
statements and all necessary material adjustments, consisting of
normal recurring accruals and adjustments, have been included to
present fairly the quarterly financial data. Our quarterly
results of operations for these periods are not necessarily
indicative of future results of operations.
In February 2007 our Board of Directors authorized a new program
to repurchase shares of our Class A common stock. The Board
approved the repurchase of shares having an aggregate market
value of up to $1.0 billion, depending on market conditions
and other factors. Repurchases under the program may be made at
any time and from time to time during the 12 to 18 month
period that commenced February 12, 2007. Repurchases under
the program will be made in open market or privately negotiated
transactions in compliance with Rule 10b-18 under the
Exchange Act.
In January 2007 we completed the acquisition of LVL7 Systems,
Inc., a privately-held provider of production-ready networking
software that enables networking original equipment
manufacturers and original design manufacturers to reduce
development expenses and compress development timelines. In
connection with the acquisition, Broadcom paid total
consideration of approximately $62 million in cash to
acquire outstanding shares of capital stock and vested stock
options of LVL7 and to liquidate outstanding LVL7 debt. A
portion of the cash consideration payable to the stockholders
was placed into escrow pursuant to the terms of the acquisition
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agreement. We may record a one-time charge for purchased
IPR&D expenses related to this acquisition in the first
quarter of 2007. The amount of that charge, if any, has not yet
been determined.
In July 2006 the FASB issued FIN 48, Accounting for
Uncertainty in Income Taxes — An Interpretation of
FASB Statement No. 109, or FIN 48. FIN 48
provides detailed guidance for the financial statement
recognition, measurement and disclosure of uncertain tax
positions recognized in an enterprise’s financial
statements in accordance with SFAS 109. Tax positions must
meet a more-likely-than-not recognition threshold at the
effective date to be recognized upon the adoption of FIN 48
and in subsequent periods. FIN 48 will be effective for
fiscal years beginning after December 15, 2006, and the
provisions of FIN 48 will be applied to all tax positions
upon its initial adoption. The cumulative effect of applying the
provisions of FIN 48 will be reported as an adjustment to
the opening balance of retained earnings for that fiscal year.
We are currently evaluating the application of FIN 48 to
our financial statements and have not yet determined its impact.
Liquidity
and Capital Resources
Working Capital and Cash and Marketable
Securities. The following table presents working
capital and cash and marketable securities:
Our working capital increased in 2006 primarily due to cash
provided by operations and cash proceeds received from issuances
of common stock in connection with the exercise of employee
stock options and pursuant to our employee stock purchase plan,
offset in part by the purchase of long-term marketable
securities and property and equipment, acquisitions, and
repurchases of shares of our Class A common stock.
Cash Provided and Used in 2006 and 2005. Cash
and cash equivalents increased to $2.158 billion at
December 31, 2006 from $1.437 billion at
December 31, 2005 as a result of cash provided by operating
and financing activities, offset in part by cash used in
investing activities.
In 2006 our operating activities provided $891.7 million in
cash. This was primarily the result of $379.0 million in
net income and $532.9 million in net non-cash operating
expenses, offset in part by net cash used of $20.2 million
in changes in operating assets and liabilities. Non-cash items
included in net income include depreciation and amortization,
stock-based compensation expense, amortization of purchased
intangible assets, IPR&D and gains on strategic investments.
In 2005 our operating activities provided $446.7 million in
cash. This was primarily the result of $367.1 million in
net income and $213.3 million in net non-cash operating
expenses, offset in part by net cash used of $133.7 million
in changes in operating assets and liabilities. Non-cash items
included in net income include depreciation and amortization,
stock-based compensation expense, amortization of purchased
intangible assets, IPR&D, impairment of intangible assets
and gains on strategic investments.
Accounts receivable increased $75.4 million from
$307.4 million in 2005 to $382.8 million in 2006. The
increase in accounts receivable was primarily the result of the
$102.9 million increase in net revenue in the fourth
quarter of 2006 to $923.5 million, as compared with
$820.6 million in the fourth quarter of 2005. We typically
bill customers on an open account basis subject to our standard
net thirty day payment terms. If, in the longer term, our
revenue continues to increase as it has in the most recent past,
it is likely that our accounts receivable
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balance will also increase. Our accounts receivable could also
increase if customers delay their payments or if we grant
extended payment terms to customers.
Inventories increased $8.2 million, from
$194.6 million in 2005 to $202.8 million in 2006. In
the future, our inventory levels will continue to be determined
based on the level of purchase orders received as well as the
stage at which our products are in their respective product life
cycles and competitive situations in the marketplace. Such
considerations are balanced against the risk of obsolescence or
potentially excess inventory levels.
Investing activities used cash of $369.8 million in 2006,
which was primarily the result of $70.1 million net cash
paid in acquisitions, the purchase of $92.5 million of
capital equipment to support our operations and the build out
and relocation of our corporate headquarters from its present
location to new facilities in Irvine, California,
$205.2 million used in the net purchase of marketable
securities and the purchase of $2.7 million of strategic
investments, offset by $0.7 million in net proceeds
received from the sale of strategic investments. Investing
activities used cash of $173.1 million in 2005, which was
primarily the result of $111.5 million net cash paid in
acquisitions, the purchase of $41.8 million of capital
equipment to support our operations, $21.3 million used in
the net purchase of marketable securities and the purchase of
$0.5 million of strategic investments, offset by
$1.9 million in net proceeds received from the sale of
strategic investments.
Our financing activities provided $198.9 million in cash in
2006, which was primarily the result of $475.9 million in
net proceeds received from issuances of common stock upon
exercises of stock options and pursuant to our employee stock
purchase plan, offset in part by $275.7 million in
repurchases of our Class A common stock pursuant to our
share repurchase programs implemented in February 2005 and
amended in January 2006 and $4.6 million of repayment of
debt assumed in connection with an acquisition. Our financing
activities provided $305.1 million in cash in 2005, which
was primarily the result of $458.1 million in net proceeds
received from issuances of common stock upon exercises of stock
options and pursuant to our employee stock purchase plan, offset
in part by $153.8 million in repurchases of our
Class A common stock pursuant to our share repurchase
program implemented in February 2005 and $2.5 million of
repayment of debt assumed in connection with an acquisition.
In February 2007 our Board of Directors authorized a new program
to repurchase shares of our Class A common stock. The Board
approved the repurchase of shares having an aggregate market
value of up to $1.0 billion, depending on market conditions
and other factors. Repurchases under the program may be made at
any time and from time to time during the 12 to 18 month
period that commenced February 12, 2007. Repurchases under
the program will be made in open market or privately negotiated
transactions in compliance with Rule 10b-18 under the Exchange
Act.
The timing and number of stock option exercises and the amount
of cash proceeds we receive through those exercises are not
within our control, and in the future we may not generate as
much cash from the exercise of stock options as we have in the
past. Moreover, it is now our practice to issue a combination of
restricted stock units and stock options to employees, which
will reduce future growth in the number of stock options
available for exercise. Unlike the exercise of stock options,
the issuance of shares upon vesting of restricted stock units
does not result in any cash proceeds to Broadcom and requires
the use of cash as we determined to allow employees to elect to
have a portion of the shares issuable upon vesting of restricted
stock units during 2005 and 2006 withheld to satisfy withholding
taxes and to make corresponding cash payments to the appropriate
tax authorities on each employee’s behalf.
The restatement of our consolidated financial statements, as a
result of the findings of our equity award review, did not
materially or adversely affect our liquidity or capital
resources.
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Obligations and Commitments. The following
table summarizes our contractual payment obligations and
commitments as of December 31, 2006:
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