broadcom corporation vs texas instruments, inc

Morrison University

Broadcom Corporation vs. Texas Instruments, Inc. Financial Comparison of two companies: Broadcom Corporation vs. Texas Instruments, Inc.

Bhavin Gandhi

6/1/2009

Broadcom Corporation vs. Texas Instruments, Inc. 2

Morrison University | Author: Bhavin Gandhi

Abstract

The performance evaluation and ranking of modern enterprises is a complex process, in

which multiple financial ratios are required to be considered simultaneously. The purpose of this

paper is to apply the framework of multi-criteria analysis on two semiconductor giants,

Broadcom Corporation and Texas Instruments, Inc. An effective approach based on various

financial ratios is developed to rank these companies in terms of their overall performance. This

paper also compares Broadcom Corporation and Texas Instruments on the basis of their current

product lines, existing marketing strategies and chances of future growth. To ensure that the

evaluation results are not affected by the inter-dependence of the financial ratios, objective

weights (common-sized statements) are used. As a result, the comparison process is conducted

on a commonly accepted basis and is independent of subjective preferences of various

stakeholders.



Table of Contents

1. Broadcom Corporation ............................................................................................................... 5

1.1. Company Information ................................................................................................................. 5

1.2. Broadcom’s Products .................................................................................................................. 6

1.3. Broadcom’s Revenue Distribution by Products ............................................................................ 7

1.4. Broadcom’s Revenue Distribution by Regions ............................................................................. 8

1.5. Broadcom’s revenue, income and assets .................................................................................. 10

1.6. Broadcom’s competitive edge ................................................................................................... 11

1.7. Broadcom's Balance Sheet ........................................................................................................ 13

1.8. Broadcom's Income Statement ................................................................................................. 14

1.9. Broadcom's Cash Flow .............................................................................................................. 14

2. Texas Instruments, Inc. ............................................................................................................ 15

2.1. Company Information ............................................................................................................... 15

2.2. Texas Instruments’ Products ..................................................................................................... 16

2.3. TI’s Revenue Distribution by Products ....................................................................................... 18

2.4. TI’s Revenue Distribution by Regions......................................................................................... 19

2.5. TI’s revenue, income and assets ............................................................................................... 20

2.6. TI’s competitive edge ............................................................................................................... 22

2.7. TI's Balance Sheet ..................................................................................................................... 24

2.8. TI's Income Statement .............................................................................................................. 25

2.9. TI's Cash Flow ........................................................................................................................... 25



3. Financial Comparison ............................................................................................................... 26

3.1. Financial Statement Analysis of Broadcom Corporation ............................................................ 26

3.2. Broadcom's Common-sized Income Statement ......................................................................... 28

3.3. Broadcom's Common-sized Balance Sheet ................................................................................ 29

3.4. Financial Statement Analysis of Texas Instruments.................................................................... 30

3.5. TI's Common-sized Income Statement ...................................................................................... 32

3.6. TI's Common-sized Balance Sheet ............................................................................................. 33

3.7. Liquidity Ratios ......................................................................................................................... 34

3.8. Working Capital Management Ratio ......................................................................................... 36

3.9. Measures of Profitability .......................................................................................................... 39

3.10. Financial Leverage Ratios ......................................................................................................... 42

3.11. Market Value Ratio .................................................................................................................. 43

4. Conclusion ................................................................................................................................ 45

5. References ............................................................................................................................... 46



Broadcom Corporation

Broadcom's principal activity is to provide wired and wireless broadband

communications semiconductors which enable high-speed data, high definition video, voice and

audio. It manufactures computing and networking equipment, digital entertainment and

broadband access products and mobile devices with complete system-on-a-chip and software

solutions. Broadcom's products provide solutions to digital cable, satellite and Internet Protocol

(IP) set-top boxes; high definition television (HDTV); cable and DSL modems and residential

gateways; switching for local, wide area and storage networking, wireless networking, cellular

and terrestrial wireless communications, Voice over Internet Protocol(VoIP) gateway and

telephony systems, broadband network and security processors.

1.1. Company Information

Address: 5300 California Avenue, Irvine, CA 92617, USA

Telephone: +1 949 926-5000

Fax: +1 949 450-8710

URL: http://www.broadcom.com

E-mail: [email protected]

Founded: August, 1991

Ticker: BRCM

Industry: Semiconductors

SIC Codes: 3674 - Semiconductors and related devices

5065 - Electronic parts and equipment

Employees: 7,402

Competitors: Texas Instruments, AMD, Analog Devices, Qualcomm, Samsung Electronics,

IBM Microelectronics, Intel Corporation, etc.

http://www.broadcom.com/

mailto:[email protected]



1.2. Broadcom’s Products

Broadcom designs, develops and supplies a diverse portfolio of products. Their

semiconductor and software solutions are used globally by leading manufacturers and are

embedded in an array of products for three primary target markets, as reflected below:

1.2.1. Broadband Communications

Broadcom offers its manufacturers a range of broadband communications and

consumer electronics SoC solutions that enable voice, video, data and multimedia

services over residential wired and wireless networks. These highly integrated silicon

solutions continue to enable the most advanced system solutions, which include

broadband modems and residential gateways, digital cable, satellite and IP set-top boxes,

or STBs, and media servers, high definition digital television, Blu-ray Disc players and

recorders, and personal video recorders.

1.2.2. Enterprise Networking

Broadcom designs and develops complete silicon and software solutions for

service provider, data center, enterprise and small-to-medium business, or SMB,

networks. Our solutions leverage industry-proven Ethernet technology to promote faster,

„greener‟ and more cost-efficient transport and processing of voice, video, data and

multimedia across both wired and wireless networks. Broadcom solutions enable a

network infrastructure that is scalable, secure and easy to manage. Their products are

found in a wide variety of networking equipment including Ethernet switches, routers and

gateways, security appliances, DSLAMs, 3G/4G wireless backhaul equipment, cable and

VoIP hardware, desktop and notebook computers, servers and storage appliances, and

network-attached printers.



1.2.3. Mobile & Wireless

Broadcom‟s mobile and wireless products allow manufacturers to develop

leading-edge devices that enable end-to-end wireless connectivity at home, at work and

on-the-go. Products in this area include solutions in every major wireless market segment

including wireless local area networking, personal area networking, location

technologies, and a comprehensive range of mobile technologies. This portfolio of

mobile and wireless products enables a broad range of portable devices including cellular

handsets, personal navigation devices, mobile TV products, portable media players,

gaming platforms and other wireless-enabled consumer electronics and peripherals, such

as home gateways, printers, VoIP phones, home entertainment systems and notebook

computers.

1.3. Broadcom’s Revenue Distribution by Products

Now, let‟s have a look at Broadcom‟s revenue distribution based on its products,

to further analyze Broadcom‟s financial strength. Table 1.3.1 shows Broadcom‟s revenue

distribution based on its products from 2006 to 2008, while figure 1.3.2 shows pie chart

representation of Broadcom‟s revenue for 2008.

From the Table 1.3.1, we can clearly say that Broadcom‟s primary source of

revenue is Broadband Communication, which provides them approximately 40% of their

revenue each year. Also, their secondary source of revenue is Mobile and Wireless

devices. Business due to mobile devices grew around 20% in last 3 years, which shows

their competitive edge in this emerging technological era.

1.3.1. Broadcom’s Revenue Distribution Based on Products [2006 – 2008]

Revenue distribution (% of net revenue) 2008 2007 2006

Broadband Communication 37.00% 37.40% 37.80%

Enterprise Networking 27.00% 30.20% 32.20%

Mobile and Wireless 36.00% 32.40% 30.00% Table 1: Broadcom‟s revenue distribution based on products over past 3 years [1]



1.3.2. Broadcom’s Revenue Distribution Based on Products [2008]

Figure 1: Broadcom‟s revenue distribution based on products for 2008 [1]

1.4. Broadcom’s Revenue Distribution by Regions

Let‟s have a look at Broadcom‟s revenue distribution based on various regions.

Table 1.4.1 shows Broadcom‟s revenue distribution based on different regions from 2006

to 2008, while figure 1.4.2 shows pie chart representation of Broadcom‟s revenue for

2008.

From the Table 1.4.1, we can clearly say that Broadcom‟s primary region of

business is United States, which provides them approximately 60% of their revenue each

year. We can also see a sharp decrease in their revenue obtained from United States from

2006 to 2008. But that doesn‟t mean that they are running out of business. It might even

mean that they are in the process of expanding their market base. After all, Broadcom‟s

revenue obtained from Asia within last 3 years, increased over 51%. Market expansion

means future growth and increase in revenue for Broadcom. But at the same time,

Broadcom‟s revenue will have high dependency on currency exchange rate. For example:

If Broadcom is making $5 million through its sales in India and if dollar falls down

against Indian Rupee (INR) by 10% then Broadcom will suffer revenue loss of $500,000

on the book.

37%

27%

36%

2008 - Broadcom's Product-wise Revenue Distribution

Broadband Communication

Enterprise Networking

Mobile and Wireless



1.4.1. Broadcom’s Revenue Distribution Based on Regions [2006 – 2008]

Revenue by regions 2008 2007 2006

Asia 29.50% 26.50% 19.50%

Europe 10.50% 8.50% 8.40%

USA 59.50% 64.50% 71.80%

Others 0.50% 0.50% 0.30% Table 2: Broadcom‟s revenue distribution based on regions over past 3 years [1]

1.4.2. Broadcom’s Revenue Distribution Based on Regions [2008]

Figure 2: Broadcom‟s revenue distribution based on regions for 2008 [1]

30%

11%60%

1%

2008 - Broadcom's Region-wise Revenue Distribution

Asia

Europe

USA

Others



1.5. Broadcom’s revenue, income and assets

We have looked at Broadcom‟s revenue distribution products-wise as well as

region-wise. Now, it‟s time to look at Broadcom‟s other financial information over past

few years. This will give us better idea about how did this company emerge through its

bad times as well as how well did it perform during its good times. Figure 1.5.1 shows

graphical representation of Broadcom‟s revenue, net income as well as total assets over

10 years time span.

1.5.1. Broadcom’s Revenue, income and assets comparison [1999-2008]

Figure 3: Broadcom‟s sales, assets and net income comparison over past 10 years [8]

2008 2007 2006 2005 2004 2003 2002 2001 2000 1999

Sales 4658.1 3776.4 3667.8 2670.8 2400.6 1610.1 1083 961.82 1096.2 521.23

Assets 4393.3 4838.2 4876.8 3752.2 2885.8 2017.6 2216.2 3631.4 4677.8 609.75

Net Income 214.79 213.34 379.04 367.09 173.19 -1294 -2237 -2742 -687.8 72.47

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From first look, we will realize that Broadcom‟s sales increased by approximately

800% over 10 years, while its assets increased by 620% within the same time period.

Now, you might ask, if there is a steady growth in sales then why Broadcom‟s net income

is negative from 2000 to 2003. Answer is very simple. Did you ever hear about dot com

burst? A combination of rapidly increasing stock prices in I.T. industries, individual

speculation in stocks, and widely available venture capital created an exuberant

environment during 1995 – 2001, in which many of I.T. businesses dismissed standard

business models, focusing on increasing market share at the expense of the bottom line

which occurred in 2001. Semiconductor industry is widely dependent on I.T. industry and

hence Broadcom has encountered net income loss during 2000 to 2003. But that is not the

only reason for Broadcom‟s decrease in net income. If you look at the graph, you will

realize that there is steep rise in Broadcom‟s assets from 1999 to 2000. This shows that

some of the Broadcom‟s revenue might be utilized in acquiring those assets due to which

its net income is in negative numbers.

Other five years from 2003 - 2008 were a period of tremendous growth for the

semiconductor materials industry. The increase in production of laptops and computers

swelled the need for semiconductors, as did the significant increase in semiconductor

orders from the communications industry, various consumer products manufacturers, and

the automotive industry. This phenomenon in semiconductor market easily explains

Broadcom‟s increase in net income after 2003.

1.6. Broadcom’s competitive edge

Semiconductor industry features a number of distinct characteristics that position

it uniquely in the economy and in the global competitive arena. One of the leading

characteristics, which can depict company‟s position in competitive market, is intensity

of research & development and the required level of capital expenditures in

semiconductor plants or fabs. If we go by industry standards then Broadcom is suppose to

invest 20% of its annual revenue in research & development and 25% of its annual

revenue in development of semiconductor plants, to stay competitive. Figure 1.6.1 shows

graphical representation of Broadcom‟s expenditure in Research & Development over

past 5 years. This clearly demonstrates why Broadcom is successful in maintaining its

competitive edge in semiconductor industry.



1.6.1. Broadcom’s Revenue and R&D comparison [2004 -2008]

Figure 4: Broadcom‟s revenue and R&D expense comparison over past 5 years [8]

2008 2007 2006 2005 2004

Revenue 4658.13 3776.4 3667.82 2670.79 2400.61

R&D 1497.67 1348.51 1117.01 681.05 598.7

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1.7. Balance Sheet

2008 2007 2006 2005 2004

Current assets

Cash 1,898.12 2,328.30 2,680.45 1,732.68 1,182.63

Account receivable 372.31 369.00 382.82 307.36 205.14

Inventory 366.11 231.31 202.79 194.57 128.29

Other current assets 114.67 125.66 85.72 101.27 68.38

Total 2,751.21 3,054.27 3,351.78 2,335.88 1,584.44

Fixed assets

Net plant and equipment 234.69 241.80 164.70 96.44 107.16

Net intangible assets 1,341.20 1,423.33 1,214.18 1,156.93 1,079.26

Other long term assets 66.16 118.78 146.11 162.95 114.98

Total assets 4,393.26 4,838.18 4,876.77 3,752.20 2,885.84

Current liabilities

Accounts payable 310.49 313.62 307.97 289.07 171.25

Accrued expense 378.35 390.17 322.97 240.05 230.07

Other current liabilities 28.26 26.78 47.76 70.37 98.03

Total 717.10 730.57 678.70 599.49 499.35

Long-term debt 69.10 71.48 6.40 12.14 22.75

Total liabilities 786.20 802.05 685.10 611.63 522.10

Owner's equity

Common stock and paid-in surplus 10,930.37 11,576.09 11,948.97 11,470.03 10,967.10

Retained earnings -7,324.33 -7,539.12 -7,757.20 -8,136.24 -8,503.33

Other equity 1.03 -0.82 -0.10 -193.22 -100.02

Total 3,607.07 4,036.15 4,191.67 3,140.57 2,363.75

Total liabilities and owners' equity 4,393.27 4,838.20 4,876.77 3,752.20 2,885.85

Total Shares Outstanding 489.02 537.26 548.31 524.32 495.76

Table 3: Simplified Broadcom‟s balance sheet for past 5 years [8]



1.8. Income Statement

2008 2007 2006 2005 2004

Sales 4,658.13 3,776.40 3,667.82 2,670.79 2,400.61

Cost of goods sold 2,213.02 1,832.18 1,795.57 1,267.80 1,196.77

Depreciation 3.39 1.03 2.35 4.03 3.70

Other expenses 2,219.40 1,723.73 1,503.26 1,052.09 970.87

Earnings before interest and taxes 222.32 219.46 366.64 346.87 229.27

Taxes 7.52 6.11 -12.4 -20.22 56.08

Net income 214.79 213.34 379.04 367.09 173.19 Table 4: Simplified Broadcom‟s income statement for past 5 years [8]

1.9. Cash Flow

2008 2007 2006 2005 2004

Operating activities

Net income 214.79 213.34 379.04 367.09 173.19

Depreciation 78.24 64.08 43.33 53.41 75.17

Non-cash items 729.41 538.43 472.86 144.80 276.73

Changes in working capital -122.08 -5.05 -20.25 -133.71 -39.77

Other operational expenses 19.25 14.51 12.40 15.11 16.52

Net cash from operating income 919.61 825.31 887.38 446.70 501.84

Investment activities

Capital expenditure -82.81 -150.43 -92.48 -41.77 -49.93

Other investments and cashflow -662.57 204.83 -273.00 -131.31 -406.09

Net cash from investment activities -745.38 54.40 -365.48 -173.08 -456.02

Financing activities

Other financing cash flow -58.06 -69.68 -25.43 3.21 2.99

Issuance (Retirement) of Stock, Net -1,112.10 -781.58 228.99 304.33 253.32

Issuance (Retirement) of Debt, Net 0.00 0.00 -4.63 -2.48 -2.20

Net cash from financing activities -1,170.16 -851.26 198.93 305.06 254.11

Foreign Exchange Effects 0.00 0.00 0.00 0.00 0.00

Net Change in Cash -995.93 28.46 720.83 578.68 299.92

Net Cash - Beginning Balance 2,186.57 2,158.11 1,437.28 858.59 558.67

Net Cash - Ending Balance 1,190.65 2,186.57 2,158.11 1,437.28 858.59 Table 5: Simplified Broadcom‟s cash flow statement for past 5 years [8]



Texas Instruments, Inc.

Texas Instruments Incorporated was incorporated in Delaware and began operations in

1930. The Company designs and makes semiconductors that it sells to electronics designers and

manufacturers all over the world. Semiconductors are electronic components that serve as the

building blocks inside modern electronic systems and equipment. The Company's

semiconductors are used to accomplish many different things, such as converting and amplifying

signals, interfacing with other devices, managing and distributing power, processing data,

canceling noise and improving signal resolution. It sells two general categories of semiconductor

products: custom and standard.

2.1. Company Information

Address: 12500 Texas Instruments Boulevard, Dallas, TX 75266, USA

Telephone: +1 972 995-3773

Fax: +1 972 995-4360

URL: www.ti.com

E-mail: [email protected]

Founded: 1972

Ticker: TXN

Industry: Semiconductors

SIC Codes: 3674 - Semiconductors and related devices

3578 - Calculating and accounting equipment

Employees: 29,537

Competitors: Broadcom Corporation, Analog Devices, Atmel, Canon, Hewlett-Packard,

Marvell Technology, Toshiba Semiconductor, Intel Corporation, National

Semiconductor, NVIDIA, etc.

http://www.ti.com/

mailto:[email protected]



2.2. Texas Instruments’ Products

Semiconductors are electronic components that serve as the building blocks inside

modern electronic systems and equipment. Semiconductors come in two basic forms:

individual transistors and integrated circuits (generally known as “chips”) that combine

different transistors on a single piece of material to form a complete electronic circuit.

TI's (Texas Instruments) semiconductors are used to accomplish many different things,

such as converting and amplifying signals, interfacing with other devices, managing and

distributing power, processing data, canceling noise and improving signal resolution. TI's

portfolio includes products that are integral to almost all electronic equipment.

TI sells two general categories of semiconductor products: custom and standard.

A custom product is designed for a specific customer for a specific application, is sold

only to that customer and is typically sold directly to the customer. A standard product is

designed for use by many customers and/or many applications and is generally sold

through both distribution and direct channels. Standard products include both proprietary

and commodity products. Additional information regarding each segment‟s products

follows.

2.2.1. Communications

TI offers its customers a range of broadband communication products, which have

applications over Cell phones to infrastructure equipments (wireless). TI communication

products provide mobile connectivity solutions including wireless LAN, global

positioning systems, Bluetooth, high-speed wireless home networking, cable modem,

High-frequency radio, telecom accessories, etc.

2.2.2. Industrial

TI has various semiconductor devices which can be very useful in industrial

world. Their applications can be summarized as follows:

Digital power controls: Switch mode power supplies and uninterruptible power supplies

Motor controls: Heating/ventilation/air conditioning, industrial control motor drives,

power tools, printers/copiers, etc.



Security: Biometrics (fingerprint identification and authentication), intelligent sensing

(smoke and glass-breakage detection), Video analytics (surveillance), etc.

2.2.3. Consumer Electronics

TI's semiconductors are useful for creating consumer electronics such as

biophysical monitoring system, digital hearing aids, personal and portable medical

devices, digital cameras, digital audio players, portable media players, car audio, DVD

players and recorders, home theater systems, high-definition televisions, etc.

2.2.4. Computing

TI product‟s computing applications include printers, hard disk drives, monitors,

projectors, notebook and desktop personal computers.

2.2.5. Automotive

TI plays very important role as far as semiconductor devices related to auto

industries. Its applications in automobile industry include body systems, chassis systems

processing, driver information, entertainment, power train, safety systems, security

systems, etc.

2.2.6. Education

TI‟s education product-line includes handheld graphing and scientific calculators,

educational software, etc.



2.3. TI’s Revenue Distribution by Products

Now, let‟s have a look at TI‟s revenue distribution based on its products, to

further analyze TI‟s financial strength. Table 2.3.1 shows TI‟s revenue distribution based

on its products for year of 2008, while figure 2.3.2 shows its pie chart representation for

the same.

From the Table 2.3.1, we can clearly say that TI‟s primary source of revenue is

Communication, which provides them approximately 48% of their revenue each year.

But if we look in to further detail then we will realize that TI‟s portfolio of products is

more diversified as compared to Broadcom Corporation. Since it‟s a mainly

semiconductor based industry, it is not unusual for a company to make its 50% of

revenue through communication based products.

2.3.1. TI’s Revenue Distribution Based on Products [2008]

Revenue distribution 2008 Description

Communications 48.00% LAN card, GPS, Bluetooth, Cable modem

Computing 22.00% Printers, hard disk, monitors, projectors

Industrial 10.00% Switch, fingerprint reader, surveillance

Consumer 10.00% Digital Camera, DVD players, Home theater system

Automotive 6.00% Entertainment, Power train, Safety system

Education 4.00% Graphic calculators, education software Table 6: TI‟s revenue distribution based on products for 2008 [5]



2.3.2. TI’s Revenue Distribution Based on Products [2008]

Figure 5: TI‟s product-wise revenue distribution for 2008 [5]

2.4. TI’s Revenue Distribution by Regions

Let‟s have a look at TI‟s revenue distribution based on various regions. Table

2.4.1 shows TI‟s revenue distribution based on different regions from 2006 to 2008,

while figure 2.4.2 shows pie chart representation of TI‟s revenue for 2008.

From the Table 2.4.1, we can clearly say that TI‟s primary region of business is

Asia, which provides them approximately 60% of their revenue each year. Hence, TI‟s

revenue is more dependent on foreign currencies as compared to Broadcom Corporation.

48%

22%

10%

10%

6% 4%

2008 - TI's Product-wise Revenue Distribution

Communications

Computing

Industrial

Consumer

Automotive

Education



2.4.1. TI’s Revenue Distribution Based on Regions [2006 – 2008]

Revenue by regions 2008 2007 2006

Asia 59.09% 57.92% 53.09%

Europe 15.00% 16.32% 16.04%

USA 12.41% 12.71% 13.10%

Japan 10.14% 10.29% 14.09%

Others 3.36% 2.77% 3.68% Table 7: TI‟s revenue distribution based on regions [5]

2.4.2. TI’s Revenue Distribution Based on Regions [2008]

Figure 6: TI‟s region-wise revenue distribution for 2008 [5]

2.5. TI’s revenue, income and assets

We have looked at TI‟s revenue distribution products-wise as well as region-wise.

Now, it‟s time to look at its other financial information over past few years. This will

give us better idea about how did this company emerge through its bad times as well as

how well did it perform during its good times. Figure 2.5.1 shows graphical

representation of TI‟s revenue, net income as well as total assets over 10 years time span.

59%15%

13%

10% 3%

2008 - TI's Region-wise Revenue Distribution

Asia

Europe

USA

Japan

Others



2.5.1. TI’s Revenue, income and assets comparison [1999-2008]

Figure 7: TI‟s sales, assets and net income comparison over past 10 years [9]

From first look, we will realize that TI‟s sales increased by only 30% as compared

to Broadcom‟s sales which rose by 700%. But if you look at the quantity of sales, it

would be clear that TI sales volume is 4 times as compared to Broadcom. And for a

company with larger magnitude, growth rate is kind of stable over longer period. We can

clearly see that during dot com downturn (2000 – 2003), when Broadcom‟s net income

was in negative numbers from 2000 – 2003, TI survived with minimal effect during those

times. On further look at figure 2.5.1, we can see that line patterns of revenue and net

income are similar. This restates the fact that TI‟s growth is stable over 10 years.

2008 2007 2006 2005 2004 2003 2002 2001 2000 1999

Sales 12501 13835 14255 12335 11552 8911 7509 7331 11875 9759

Assets 11923 12667 13930 15063 16299 15510 14679 15779 17720 15427

Net Income 1920 2641 2582 2173 1583 1065 -475 -297 3087 1451

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Next question that might come in to your mind may be why TI‟s sales are in

increasing and decreasing pattern over time? Answer to this question is very simple. Do

you remember our discussion in section 1.4 about effect of currency exchange rate on

revenue? Well, TI‟s primary markets are Asia and Europe. TI collects its 60% of revenue

from these two continents combined. And the exchange rate difference really impacted

their sales volume over time. Not only that but it looks like that they might reach a

saturation point in those markets, so if they want to be competitive then they need to

expand their markets.

After all, there is always a need for high degrees of flexibility and innovation in

semiconductor industry to constantly adjust to the rapid pace of change in the market.

Many products embedding semiconductor devices often have a very short life cycle. At

the same time, the rate of constant price-performance improvement in the semiconductor

industry is staggering. As a consequence, changes in the semiconductor market not only

occur extremely rapidly but also anticipate changes in industries evolving at a slower

pace. Yet another consequence of this rapid pace is that established market strongholds

can be displaced all too quickly. And that‟s what might have happened with TI, in this

case.

2.6. TI’s competitive edge

The role of the semiconductor industry is to become a technology enabler. The

semiconductor industry is widely recognized as a key driver for economic growth in its

role as a multiple lever and technology enabler for the whole electronics value chain.

Semiconductor industry features a number of distinct characteristics that position it

uniquely in the economy and in the global competitive arena. So, now we are going to

have a look at Texas Instruments‟ R&D (Research and Development) spending to look at

its long term growth.

Figure 2.6.1 shows graphical representation of TI‟s expenditure in

Research & Development over past 5 years. This clearly demonstrates why TI is

successful in maintaining its competitive edge in semiconductor industry.



Semiconductor Industry's results of operations depend in part upon their ability to

successfully develop, manufacture and market innovative products in a rapidly changing

technological environment. They require significant capital to develop new technologies

and products to meet changing customer demands that, in turn, may result in shortened

product life cycles. Moreover, expenditures for technology and product development are

generally made before the commercial viability for such developments can be assured. As

a result, there can be no assurance that they will successfully develop and market these

new products. There also is no assurance that the products they do develop and market

will be well received by customers, or that they will realize a return on the capital

expended to develop such products.

You can clearly see that TI is aware of these risks and that might be the only

reason why their spending on R&D is kind of constant overtime unlike Broadcom. But at

the same time they might be at the risk of losing their competitive edge in the market by

not coming up with new technological solutions every time. But with approximately 20%

of their total revenue invested in R&D, I don‟t think that they should have any problems

as far as competitive edge is concerned.

2.6.1. TI’s Revenue and R&D comparison [2004 -2008]

Figure 8: TI‟s revenue and R&D expenses over past 5 years [9]

2008 2007 2006 2005 2004

Revenue 12501 13835 14255 12335 11552

R&D 1940 2140 2195 1986 1946

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2.7. Balance Sheet

2008 2007 2006 2005 2004

Current assets

Cash 2,540.00 2,924.00 3,717.00 5,330.00 6,353.00

Account receivable 913.00 1,742.00 1,774.00 1,648.00 1,545.00

Inventory 1,375.00 1,418.00 1,437.00 1,185.00 1,170.00

Other current assets 962.00 834.00 926.00 1,249.00 1,239.00

Total 5,790.00 6,918.00 7,854.00 9,412.00 10,307.00

Fixed assets

Net plant and equipment 3,304.00 3,609.00 3,950.00 3,730.00 3,794.00

Net intangible assets 1,113.00 1,180.00 1,098.00 980.00 1,090.00

Other long term assets 1,716.00 960.00 1,028.00 941.00 1,108.00

Total assets 11,923.00 12,667.00 13,930.00 15,063.00 16,299.00

Current liabilities

Accounts payable 324.00 657.00 560.00 702.00 518.00

Accrued expense 1,168.00 1,315.00 1,191.00 1,069.00 1,087.00

Other current liabilities 40.00 53.00 327.00 606.00 329.00

Total 1,532.00 2,025.00 2,078.00 2,377.00 1,934.00

Long-term debt 1,065.00 667.00 492.00 749.00 1,302.00

Total liabilities 2,597.00 2,692.00 2,570.00 3,126.00 3,236.00

Owner's equity

Common stock and paid-in surplus 2,762.00 2,671.00 2,624.00 2,481.00 2,488.00

Retained earnings 21,168.00 19,788.00 17,529.00 13,394.00 11,242.00

Other equity -

14,604.00 -12,484.00 -8,793.00 -3,938.00 -667.00

Total 9,326.00 9,975.00 11,360.00 11,937.00 13,063.00

Total liabilities and owners' equity 11,923.00 12,667.00 13,930.00 15,063.00 16,299.00

Total Shares Outstanding 1,277.90 1,343.21 1,450.03 1,596.59 1,718.12 Table 8: Simplified TI‟s balance sheet [9]




2008 2007 2006 2005 2004

Sales 12,501.00 13,835.00 14,255.00 12,335.00 11,552.00

Cost of goods sold 6,256.00 6,466.00 6,996.00 6,319.00 6,295.00

Other expenses 3,764.00 3,677.00 3,690.00 3,261.00 3,193.00

Earnings before interest and taxes 2,481.00 3,692.00 3,569.00 2,755.00 2,064.00

Taxes 561.00 1,051.00 987.00 582.00 481.00

Net income 1,920.00 2,657.00 4,285.00 2,324.00 1,753.00

Dividends 537.00 425.00 199.00 173.00 154.00 Table 9: Simplified TI‟s income statement [9]

2.9. Cash Flow

2008 2007 2006 2005 2004

Operating activities

Net income 1,920.00 2,657.00 4,341.00 2,324.00 1,861.00

Depreciation 1,022.00 1,022.00 1,052.00 1,346.00 1,449.00

Non-cash items 219.00 225.00 -1,364.00 161.00 22.00

Changes in working capital 314.00 420.00 -1,425.00 -46.00 -445.00

Other operational expenses -145.00 82.00 -141.00 -13.00 258.00

Net cash from operating income 3,330.00 4,406.00 2,463.00 3,772.00 3,145.00

Investment activities

Capital expenditure -763.00 -686.00 -1,272.00 -1,288.00 -1,260.00

Other investments and cashflow -419.00 901.00 4,347.00 -399.00 99.00

Net cash from investment activities -1,182.00 215.00 3,075.00 -1,687.00 -1,161.00

Financing activities

Other financing cash flow 19.00 116.00 100.00 59.00 0.00

Total dividents paid -537.00 -425.00 -199.00 -173.00 -154.00

Issuance (Retirement) of Stock, Net -1,912.00 -4,125.00 -4,884.00 -3,690.00 -561.00

Issuance (Retirement) of Debt, Net 0.00 -43.00 -586.00 264.00 -435.00

Net cash from financing activities -2,430.00 -4,477.00 -5,569.00 -3,540.00 -1,150.00

Foreign Exchange Effects 0.00 1.00 0.00 6.00 15.00

Net Change in Cash -282.00 145.00 -31.00 -1,449.00 850.00 Table 10: Simplified TI‟s cash flow statement [9]



Financial Comparison

We have seen basic business and functionalities of both the companies, now it‟s time for

us to compare them using their financial standing in the market. We are going to use common

sized financial statements and various financial ratios to accomplish this task. After all, common

sized financial statements and ratios are mathematical calculations that the company can use to

evaluate its performance. They help the companies to determine whether trends are improving or

deteriorating.

3.1. Financial Statement Analysis of Broadcom Corporation

Broadcom‟s common-size statements are presented below. My approach here is

simple. Firstly, we will conduct a common-size analysis to review both the common-size

income statements and common-size balance sheets to look for changes and trends that

warrant further review. Once the trends are identified, explanations will be sought. I have

took most of the information from management‟s discussion of financial performance

and the financial statement footnotes and then I tried to balance it using external sources

such as industry reports, economic data, peer company financial statements and news

reports.

3.1.1. Initial Assessment

Broadcom's common-size income statement is presented in the given table. It

shows that Broadcom's cost of revenue decreased 1.01% in 2008 and 1.45% cumulatively

between 2006 and 2008. Also, Broadcom's research and development‟s expense

decreased by 3.56% in 2008 while there is a slight increase in R&D expense by 1.70% if

we consider cumulative change between 2006 and 2008. If we look at Broadcom‟s

common-size balance sheet then we will realize that Broadcom's current assets decreased

by 0.51% in 2008 and by 6.11% cumulatively between 2006 and 2008. At the same time

total liability grew 1.32% in 2008 and 3.85% cumulatively.



3.1.2. Common-sized Balance Sheet’s Assessment

Broadcom's current assets decreased by 0.51% in 2008 and decreased by 6.11%

cumulatively between 2006 and 2008. Total liabilities increased by 1.32% in 2008 and

increased 3.85% cumulatively between 2006 and 2008. When reviewing common-size

balance sheets, particular attention should be paid to individual items that are not in line

with this trend.

Broadcom‟s other long term assets as a percentage of total assets decreased to

1.51% from 2.46% in 2008. The main driver of the overall decrease was due to reduction

in assets. In 2008, Broadcom disposed its property and equipment with a net book value

of $3.8 million. In addition, they wrote down property and equipment included in their

mobile platforms business group in the amount of $19.8 million in connection with their

SFAS 144 review in 2008.

Looking at F-23 in the 10K, we find that Broadcom's goodwill increased by $10.0

million and $10.2 million in 2008 and 2007, respectively, upon the satisfaction of certain

performance goals related to their Global Locate acquisition, which resulted in a

corresponding increase of intangible assets.

On a close look at balance sheet, we see a strong increase in outstanding shares in

2007. The main reason for this change was a share split. In 2006 Broadcom's Board of

Directors approved a three-for-two split of their common stock, which was effected in the

form of a stock dividend. Holders of record of their Class A and Class B common stock

as of the record date received one additional share of Class A or Class B common stock,

as applicable, for every two shares of such class held on the record date.

3.1.3. Common-sized Income Statement’s Assessment

An examination of Broadcom‟s common-size income statement shows that the

company was profitable the entire time but still net income declined steadily from

10.33% in 2006 to 5.65%in 2007 and just 4.61% in 2008. Investors will want to know if

this trend is more likely to continue or to reverse. To do this analysis we will analyze

various components of the income statement.



We can clearly note that taxes increased steadily throughout the period, which

decreased net income available to the company. Actually, on January 1, 2007 Broadcom

adopted the provisions of FIN 48. As a result of applying the provisions of FIN 48, they

recognized a decrease of $3.9 million in the liability for unrecognized tax benefits, and a

$4.7 million reduction in accumulated deficit as of January 1, 2007. In addition they

reclassified certain tax liabilities for unrecognized tax benefits, as well as related

potential penalties and interest, from current liabilities to long-term liabilities. Also, at

December 31, 2008 they had federal, state, United Kingdom and Israel net operating loss

carry forwards of approximately $1.720 billion, $1.422 billion, $44.4 million and $9.4

million, respectively.

If we look at R&D cost then we can see that it increased 1.7% cumulatively

between 2006 and 2008, while there was approximately 5% increase in 2007 alone.

Fundamental reason for this change was due to changes made in accounting principles. In

June 2007 the FASB ratified EITF Issue No. 07-3, Accounting for Nonrefundable

Advance Payments for Goods or Services Received for Use in Future Research and

Development Activities, or EITF 07-3. EITF 07-3 requires nonrefundable advance

payments for goods or services to be used in future research and development activities to

be recorded as an asset and the payments to be expensed when the research and

development activities are performed.


2006 2007 Change 2008 Cumulative

Change

Revenue 100.00% 100.00% 0.00% 100.00% 0.00%

Cost of Revenue, Total 48.95% 48.52% -1.01% 47.51% -1.45%

Gross Profit 51.05% 51.48% 1.01% 52.49% 1.45%

Selling/Administrative Expenses, Total 13.74% 13.05% -1.39% 11.66% -2.08%

Research & Development 30.45% 35.71% -3.56% 32.15% 1.70%

Depreciation/Amortization 0.06% 0.03% 0.05% 0.07% 0.01%

Unusual Expense (Income) 0.14% 0.45% 4.46% 4.91% 4.77%

Operating Income 6.64% 2.25% 1.44% 3.70% -2.95%

Income Before Tax 10.00% 5.81% -1.04% 4.77% -5.22%

Income Tax - Total -0.34% 0.16% 0.00% 0.16% 0.50%

Net Income 10.33% 5.65% -1.04% 4.61% -5.72% Table 11: Simplified Broadcom‟s common-sized income statement for past 3 years [8]



3.3. Balance Sheet


Change

Current assets

Cash 54.96% 48.12% -4.92% 43.21% -11.76%

Account receivable 7.85% 7.63% 0.85% 8.47% 0.62%

Inventory 4.16% 4.78% 3.55% 8.33% 4.18%

Other current assets 1.76% 2.60% 0.01% 2.61% 0.85%

Total 68.73% 63.13% -0.51% 62.62% -6.11%

Fixed assets

Net plant and equipment 3.38% 5.00% 0.34% 5.34% 1.96%

Net intangible assets 24.90% 29.42% 1.11% 30.53% 5.63%

Other long term assets 3.00% 2.46% -0.95% 1.51% -1.49%

Total assets 100.00% 100.00% 0.00% 100.00% 0.00%

Current liabilities

Accounts payable 6.32% 6.48% 0.59% 7.07% 0.75%

Accrued expense 6.62% 8.06% 0.55% 8.61% 1.99%

Other current liabilities 0.98% 0.55% 0.09% 0.64% -0.34%

Total 13.92% 15.10% 1.22% 16.32% 2.41%

Long-term debt 0.13% 1.48% 0.10% 1.57% 1.44%

Total liabilities 14.05% 16.58% 1.32% 17.90% 3.85%

Owner's equity

Common stock and paid-in surplus 245.02% 239.27% 9.53% 248.80% 3.78%

Retained earnings -159.06% -155.83% -10.89% -166.72% -7.65%

Other equity 0.00% -0.02% 0.04% 0.02% 0.03%

Total 85.95% 83.42% -1.32% 82.10% -3.85%

Total liabilities and owners' equity 100.00% 100.00% 0.00% 100.00% 0.00%

Total Shares Outstanding 489.02 537.26 548.31

Table 12: Simplified Broadcom‟s common sized balance sheet for past 3 years [8]



3.4. Financial Statement Analysis of Texas Instruments

TI‟s common-size statements are presented below. We will follow the same

approach that we have followed for Broadcom. Firstly, we will conduct a common-size

analysis to review both the common-size income statements and common-size balance

sheets to look for changes and trends that warrant further review. Once the trends are

identified, explanations will be sought. I have took most of the information from

management‟s discussion of financial performance and the financial statement footnotes

and then I tried to balance it using external sources such as industry reports, economic

data, peer company financial statements and news reports.

3.4.1. Initial Assessment

TI's common-size income statement is presented in the given table. It shows that

TI's cost of revenue increased 3.31% in 2008 and 0.97% cumulatively between 2006 and

2008. Also, TI's research and development‟s expense increased by 0.05% in 2008 while

there is a slight increase in R&D expense by 0.12% if we consider cumulative change

between 2006 and 2008. If we look at its common-size balance sheet then we will realize

that TI's current assets decreased by 6.05% in 2008 and by 7.82% cumulatively between

2006 and 2008. At the same time total liability grew 0.53% in 2008 and 3.33%

cumulatively.

3.4.2. Common-sized Balance Sheet’s Assessment

TI's other long-term assets increased by 6.81% in 2008 and 7.01% cumulatively

between 2006 and 2008. While total liabilities increased by 0.53% in 2008 and increased

3.33% cumulatively between 2006 and 2008.

TI's long-term investments include auction-rate securities, which are debt

instruments with variable interest rates that historically would periodically reset through

an auction process. Since mid-February 2008, conditions in global credit markets have

caused the failure of auctions for most auction-rate securities, including those they hold,

because the amount of securities submitted for sale in those auctions exceeded the

amount of bids. When auctions are not successful, the interest rate moves to a maximum

rate defined for each security, and is generally reset periodically at a level higher than

defined short-term interest benchmarks.



Also, if we have a closer look at the balance sheet then we will find that TI's

intangible assets hardly changed during 2008. Primary reason for that was associated

with acquisitions that they have made during the year 2008 and 2007, of $13 million and

$45 million, respectively, primarily for developed technology, to be amortized over three

to five years.

The year 2008 was marked by a dramatic decrease in global demand for

semiconductors in the second half, a decline that accelerated in the fourth quarter. Given

this significant change in the economy, they are reducing costs and realigning their

expenses and inventory so that their financial performance will remain solid even in a

period of prolonged economic weakness. They have focused most of their cost reductions

in their non-core product areas and internal support functions. They will continue to

invest aggressively in Analog and Embedded Processing and in customer support, which

will drive their future growth. In January 2009, they are reducing their 12 percent work

force, through 1,800 layoffs and 1,600 voluntary retirements and departures. Charges for

these employment reductions will be about $300 million, a portion of which was

recognized in the fourth quarter of 2008. And hence there is increase in TI's total

liabilities despite of decrease in cash.

3.4.3. Common-sized Income Statement’s Assessment

An examination of TI‟s common-size income statement shows that the company

was profitable but its net income declined steadily from 30.06% in 2006 to 19.20%in

2007 and just 15.36% in 2008. It would be interesting to know why there is steady

decrease in net revenue. Is it due to industry trend? Or is it due to other internal factors.

To figure out the driving force, we will analyze various components of the income

statement.



In January 2007, TI announced plans to change how they develop advanced

digital manufacturing process technology. Instead of separately creating their own core

process technology, they will work collaboratively with their foundry partners to specify

and drive the next generations of digital process technology. Additionally, they stopped

production at an older digital factory. These actions are complete and as a result, about

300 jobs were eliminated by year-end 2007. Operating profit for 2007 included a charge

of $52 million related to these actions, which consisted of severance and benefits costs of

$31 million and acceleration of depreciation on the impacted facilities‟ assets of $21

million. These amounts have been reclassified from cost of revenue ($37 million), R&D

($14 million) and SG&A ($1 million) to the restructuring expense line on the income

statement. Due to this restructuring process we see increase in operating income in year

2007 while there is a steep decrease of operating income in 2008 by 5.78%.


2006 2007 Change 2008 Cumulative Change

Revenue 100.00% 100.00% 0.00% 100.00% 0.00%

Cost of Revenue, Total 49.08% 46.74% 3.31% 50.04% 0.97%

Gross Profit 50.92% 53.26% -3.31% 49.96% -0.97%

Selling/ Administrative Expenses, Total 11.90% 12.14% 0.77% 12.91% 1.01%

Research & Development 15.40% 15.47% 0.05% 15.52% 0.12%

Depreciation/Amortization 0.00% 0.00% 0.00% 0.00% 0.00%

Unusual Expense (Income) 0.20% 0.38% 1.66% 2.03% 1.84%

Operating Income 23.42% 25.28% -5.78% 19.49% -3.93%

Income Before Tax 25.04% 26.69% -6.84% 19.85% -5.19%

Income Tax - Total 6.92% 7.60% -3.11% 4.49% -2.44%

Net Income 30.06% 19.20% -3.85% 15.36% -14.70% Table 13: Simplified TI‟s common-sized income statement for past 3 years [8]



3.6. Balance Sheet


Change

Current assets

Cash 26.68% 23.08% -1.78% 21.30% -5.38%

Account receivable 12.74% 13.75% -6.09% 7.66% -5.08%

Inventory 10.32% 11.19% 0.34% 11.53% 1.22%

Other current assets 6.65% 6.58% 1.48% 8.07% 1.42%

Total 56.38% 54.61% -6.05% 48.56% -7.82%

Fixed assets

Net plant and equipment 28.36% 28.49% -0.78% 27.71% -0.64%

Net intangible assets 7.88% 9.32% 0.02% 9.33% 1.45%

Other long term assets 7.38% 7.58% 6.81% 14.39% 7.01%

Total assets 100.00% 100.00% 0.00% 100.00% 0.00%

Current liabilities

Accounts payable 4.02% 5.19% -2.47% 2.72% -1.30%

Accrued expense 8.55% 10.38% -0.59% 9.80% 1.25%

Other current liabilities 2.35% 0.42% -0.08% 0.34% -2.01%

Total 14.92% 15.99% -3.14% 12.85% -2.07%

Long-term debt 3.53% 5.27% 3.67% 8.93% 5.40%

Total liabilities 18.45% 21.25% 0.53% 21.78% 3.33%

Owner's equity

Common stock and paid-in surplus 18.84% 21.09% 2.08% 23.17% 4.33%

Retained earnings 125.84% 156.22% 21.32% 177.54% 51.70%

Other equity -63.12% -98.56% -23.93% -122.49% -59.36%

Total 81.55% 78.75% -0.53% 78.22% -3.33%

Total liabilities and owners' equity 100.00% 100.00% 0.00% 100.00% 0.00%

Total Shares Outstanding 1,450.03 1,343.21 1,277.90

Table 14: Simplified TI‟s common sized balance sheet for past 3 years [8]



Now, we will try to evaluate various ratios within their context. Not only that, we will try

to identify value of statistical indicators, business and environmental factors and current

company trends based on these ratios. There are several financial ratios with which we can

compare two companies, but we will stick to the basics and try to compare Broadcom and TI on

the basis of following groups of ratios:

Liquidity ratios

Working capital management ratios

Measures of profitability

Financial leverage ratios

Market Value Ratio

3.7. Liquidity Ratios

Liquidity measures are used to evaluate a company‟s ability to pay its bills on a

regular week-to-week or month-to-month basis. There are two commonly used ratios that

help to evaluate this, the current ratio and the quick ratio.

3.7.1. Quick Ratio

Sometimes inventories are not necessarily worth the amount they are on the books

for. This is particularly true in retail, where you routinely see close-out sales with 60% to

80% markdowns. It is even worse when a company going out of business is forced to

liquidate its inventory, sometimes for pennies on the dollar. And if a company has much

of its liquid assets tied up in inventory, it will be very dependent on the sale of that

inventory to finance operations. If the company is not growing sales very quickly, this

can turn into an albatross that forces the company to issue stock or take on debt. Because

of all of this, it pays to check the quick ratio.



Figure 9: Quick ratio comparison between Broadcom and TI over 5 years [8, 9]

According to SEC (U.S. Securities and Exchange Commission) industry wide

quick ratio for semiconductor industry varied from 2.9 to 3.8 over past 5 years. If we look

at the figure then we can say that Broadcom was successful in maintaining its quick ratio

in comparison with the industry range. But at the same time, too high value of quick ratio

suggests that Broadcom‟s financial assets are not used efficiently. Since, TI‟s quick ratio

is approximately constant over time as well as near to industry standards; we can say that

TI is using its assets efficiently. Let us look at their current ratio to further analyze our

statement.

3.7.2. Current Ratio

As a general rule, a current ratio of 1.5 or greater can meet near-term operating

needs sufficiently. But if we look at the graph of current ratio comparison, then it gets

clear that Broadcom has high current ratio throughout past 5 years. This suggests that

Broadcom is hoarding its assets instead of using them to grow the business. It is not the

worst thing in the world, but it's something that could affect long-term returns. After all,

Broadcom is not one of the automaker where it has to maintain a high current ratio to

make sure that in this recession, it doesn‟t go bankrupt. Hence, I think that TI has

efficiently maintained its financial standing in semiconductor market, as far as liquidity is

concern.

2008 2007 2006 2005 2004

Broadcom 3.17 3.69 4.51 3.40 2.78

Texas Instruments 2.25 2.30 2.64 2.94 4.08

0.000.501.001.502.002.503.003.504.004.505.00

Qu

ick

Rat

io

Quick ratio comparison



Figure 10: Current ratio comparison between Broadcom and TI over 5 years [8, 9]

3.8. Working Capital Management Ratio

These ratios and measures will assist us in evaluating company‟s performance

regarding the management of the credit function, as reflected in accounts receivable, and

also the management of inventory.

3.8.1. Days’ Sales Outstanding

Let us have a quick look at the following diagram which shows graphical

representation of DSO (Days‟ Sales Outstanding). It is clear that historically TI used to

give their customers credit, for as long as one and half months. I think this would have

helped TI to increase their sales. After all, when a company extends credit, it gives its

customers the opportunity to pay the company later rather than paying upon receipt of the

company‟s products or services. Credit terms are provided because giving credit helps to

sell product. Extending credit gives the company a competitive advantage (and not doing

so would probably put it at a competitive disadvantage).

2008 2007 2006 2005 2004

Broadcom 3.84 4.18 4.94 3.90 3.17


0.00

1.00

2.00

3.00

4.00

5.00

6.00C

urr

en

t Rat

io

Current ratio comparison



On the other hand, due to the high importance of cash in running a business, it is

in a company's best interest to collect outstanding receivables as quickly as possible. By

quickly turning sales into cash, a company has the chance to put the cash to use again -

ideally, to reinvest and make more sales.

Figure 11: DSO comparison between Broadcom and TI over 5 years [8, 9]

Reducing accounts receivable without jeopardizing sales volume is a very

difficult but effective way for a company to improve its cash flow. And that‟s why most

of the companies set their DSO close to their industry average. According to SEC,

average days required to receive payments for semiconductor industry is around one

month. We can say that Broadcom is following industry average, but at the same time it

might be losing some business by not giving its customer extended credit.

2008 2007 2006 2005 2004

Broadcom 29.17 35.66 38.10 42.00 31.19


0.00

10.00

20.00

30.00

40.00

50.00

60.00

DSO

Days’ sales outstanding (DSO) comparison



3.8.2. Days Sales of Inventory

This ratio is used to give us good idea of how long it takes a company to turn its

inventory into sales. Generally, the lower (shorter) the DSI (Days sales of inventory) the

better, but average DSI depends on industry. Let‟s have a look at the following diagram

to further compare Broadcom and TI.

We can clearly see that Broadcom is holding its inventory for shorter amount of

time as compared to TI. By doing so Broadcom is reducing its expenses on inventory by

not paying for insurance, personal property taxes, warehouse overhead, labor expense,

computer and related expenses, interest expense, etc. But at the same time by holding

inventory for shorter period, Broadcom is making itself vulnerable to risks such as

making their customers unhappy, losing their market share, purchasing small quantities at

short notice and paying extra for accelerated transportation. But these are not enough

reasons for TI to hold its inventory for approximately one month more than Broadcom.

Hence, I think TI is not using its inventories efficiently.

Figure 12: DSI comparison between Broadcom and TI over 5 years [8, 9]

2008 2007 2006 2005 2004

Broadcom 60.38 46.08 41.22 56.02 39.13


0.0010.0020.0030.0040.0050.0060.0070.0080.0090.00

DSI

Days sales of inventory (DSI) comparison



3.9. Measures of Profitability

Let us get to the business now. Most of the stockholders are worried about

whether the company is profitable or not, instead of looking at its liquidity ratios or

inventory turnover. So, now we will have look at various profitability of these companies.

These ratios will assist us in the evaluation of the company‟s achievements. Main focus

of these ratios would be profitability achieved by the management team, assets invested

in the business, revenue achieved by the business, rate of return for owner's investments,

etc.

3.9.1. Return on Assets

Return on assets (ROA) measures the profitability of the company relative to the

total amount of assets the company has invested in the business. These assets include

both working capital (cash, marketable securities, accounts receivable, and inventory)

and fixed assets (capital equipment and land/buildings). This will give us better ideas

about which of these companies are investing their money wisely on their assets. More

importantly, in semiconductor industry most of the companies make their revenue from

their patents, so this ratio would be of real help in comparing these companies.

But if we look at the pictorial representation of these companies in following

diagram then we can clearly say that TI ruled Broadcom in past 5 years as far as return on

assets is concerned. Hence, we can say that TI is investing its money wisely in its assets

acquisition.

Figure 13: ROA comparison between Broadcom and TI over 5 years [8, 9]

2008 2007 2006 2005 2004

Broadcom 4.89 4.41 7.77 9.78 6.00


0.005.00

10.0015.0020.0025.0030.0035.00

Per

cen

tage

Return on assets comparison



3.9.2. Return on Equity

Return on equity (ROE) measures the company‟s ability to use borrowed funds as well as

the owners‟ money effectively. Without debt, a company‟s ROA and ROE will be the

same. The more debt is used to expand the business, the greater will be the improvement

in return on equity compared with return on assets. However, excessive reliance on

borrowed funds involves considerable risks.

Figure 14: ROE comparison between Broadcom and TI over 5 years [8, 9]

By looking at above diagram, it is needless to say that TI is generating more profit

with the money invested by shareholders. In general, some industries have high ROE

because they require no assets, such as consulting firms. But Broadcom as well as TI are

in semiconductor industry, which requires large amount of investments on their

equipments and plants. It might happen sometimes that these companies require large

infrastructure builds before they generate a penny of profit. And that's the reason why

Broadcom's ROE might be less as compared to TI.

2008 2007 2006 2005 2004

Broadcom 5.95 5.29 9.04 11.69 7.33


0.00

5.00

10.00

15.00

20.00

25.00

30.00

35.00

40.00

Per

cen

tage

Return on equity comparison



Let us look these statistics from other direction. We know that high-ROE firms

with small asset bases have lower barriers to entry. Thus, such firms face more business

risk because competitors can replicate their success without having to obtain much

outside funding. But if we look closely on TI's balance sheet, it becomes clear that TI's

assets decreased to considerable amount within last 5 years while Broadcom's assets kept

on increasing during the same time period. Hence, I think TI might be facing more

business risks in future if they don't take any proactive action to change this trend.

3.9.3. Return on Sales

Return on sales (ROS) shows how efficiently management uses the sales income,

thus reflecting its ability to manage costs and overhead and operate efficiently. ROS can

be calculated using either operating profit before subtracting interest and taxes or using

after-tax income. But we are going to use after-tax income for both of these companies.

Figure 15: ROS comparison between Broadcom and TI over 5 years [8, 9]

2008 2007 2006 2005 2004

Broadcom 4.61 5.65 10.33 13.74 7.21


0.00

5.00

10.00

15.00

20.00

25.00

30.00

35.00

RO

S in

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Return on sales comparison



What else we could have compared in current economic situations, other than

ROS. As ROS indicates a firm's ability to withstand adverse conditions such as falling

prices, rising costs, or declining sales. We can see from above figure that ROS of TI is

way higher than ROS value of Broadcom. The higher the figure, the better a company is

able to endure price wars and falling prices. So, it is more likely for TI to emerge as

market leader than Broadcom, in these tough times.

3.10. Financial Leverage Ratios

Borrowing funds to finance expansion or modernization is a very positive strategy

if the terms of the loan are not too burdensome. We certainly don‟t want the interest rate

to be too high. Perhaps more important, we want the benefits of the investments to be

achieved before the debt becomes due. And that's our next topic of discussion. Now we

will try to compare Broadcom and TI on its financial flexibility.

3.10.1. Debt to equity ratio

Figure 16: Debt to equity ratio comparison between Broadcom and TI over 5 years [8, 9]

2008 2007 2006 2005 2004

Broadcom 0.22 0.20 0.16 0.19 0.22


0.00

0.05

0.10

0.15

0.20

0.25

0.30

D/E

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tio

Debt to equity ratio comparison



The debt/equity ratio measures risk from the perspective of both the company and

existing and potential lenders. The primary risk to the company is that both principal and

interest payments on debt are fixed costs. They must be paid even if the company‟s

business and its cash flow decline.

For a given level of earnings before interest and taxes, the more debt the company

takes on in its capitalization structure, the greater the return on equity will be. However if

debt to equity ratio is higher then there is a greater possibility that a downturn in earnings

will leave the company unable to meet its interest payment obligations. From the diagram

it feels like TI has higher debt to equity ratio over 5 years and hence Broadcom is

superior over TI. But if you look closely then you will realize that this statement doesn't

stay true. Let us consider an example where TI has a severe earnings downturn in near

future. Of course due to this issue there will be extreme unhappiness among management

(and probably shareholders). But the company will still continue in business as EBIT

(Earnings before Interest and Taxes) of TI is much higher than Broadcom. And that's the

reason why TI's business was hardly affected as compared to Broadcom, during dot com

bubble burst (refer to 2.5.1 for more detail information).

3.11. Market Value Ratio

The market value ratio of a company is a significant focus for management in

many companies and industries. This is because management is primarily paid with their

company's stock (a form of payment that is supposed to align the interests of

management with the interests of other stock holders), in order to increase the stock price.

The stock price can increase in one of two ways: either through improved earnings or

through an improved multiple that the market assigns to those earnings. Hence, a higher

price to earnings ratio is the result of a sustainable advantage that allows a company to

grow earnings over time (i.e., investors are paying for their peace of mind). Efforts by

management to convince investors that their companies do have a sustainable advantage

have had profound effects on business.



3.11.1. Earnings per share

Broadcom's decrease in EPS between 2000 and 2003 is due to dot com bubble

burst. Also, the development and introduction of new products often requires substantial

research and development resources. During the last five years Broadcom has incurred

substantial expenditures on the development of new products for the cellular handset

market. Approximately 25% of the $1.498 billion in research and development expense

for 2008 was attributable to their mobile platforms business. However, semiconductor's

market is characterized by very long product development and sales cycles due to the

significant qualification requirements of cellular handset makers and wireless network

operators, and accordingly, it is common to experience significant delays from the time

research and development efforts commence to the time corresponding revenues are

generated. Due to these lengthy product development and sales cycles, their mobile

platforms business had a material negative impact on their earnings/share within past 4

years. On the other hand, if we look at the EPS figure for TI then it is clear that TI is the

market leader in semiconductor industry and hence there is comparatively less effect on

its EPS.

Figure 17: Earning per share comparison between Broadcom and TI over 10 years [8, 9]

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Broadcom 0.21 -2.08 -7.2 -5.56 -2.95 0.33 0.66 0.64 0.37 0.41

Texas Instruments 0.83 1.73 -0.17 -0.27 0.6 0.9 1.3 1.66 1.83 1.45

-8-7-6-5-4-3-2-10123

Am

ou

nt i

n d

olla

rs

Earnings per share (EPS) comparison



Conclusion

The semiconductor industry has become inflated with hundreds of vendors competing in

a crowded marketplace. Broadcom as well as TI are facing issues such as increase in device

integration (Moore's Law), increase in scale and size of manufacturing, etc. Increasing costs and

complexity of design, increased system content and greater flexibility means fewer vendors will

have the capability to supply chips in the future. And if Broadcom as well as TI are competing

for the same market then it is highly likely that TI will win over Broadcom, in this race.

The second concerns for Broadcom is the increasing costs and increasing scale of

semiconductor manufacturing. Fabrication plants are becoming extremely expensive, and next

generation "fabs" will inevitably become too expensive for companies like Broadcom (as

compared to TI). If Broadcom wants to survive in this market then they will require high

volumes of chip production, preferably standard chips that can be produced in a standardized

environment with large batch sizes. These standard chips will then be customized after

manufacturing for its specific application. By doing this, Broadcom can reduce their expenses on

acquiring new plants and at the same time it can deliver optimum results.

The third concern for Broadcom is the growing importance of consumer markets. Like

TI, Broadcom didn't have large roots in consumer market. If Broadcom wants to be the leader of

semiconductor industry then it needs to expand its roots in consumer market. Consumer markets

are normally high volume and the overall market size is large. However, margins on consumer

products are very low and the value of individual product categories can be surprisingly small

but long term benefits are way high. Look at Apple, 5 years back no one knew that Apple will

reach this height but a small innovation named "iPod" really changed the world. After all, new

technologies have driven the semiconductor industry from the beginning, and new technologies

will continue to drive the industry for years to come.



References

1. Broadcom Corporation 2008 Annual Report (2009). Irwin, CA: Securities and Exchange

Commission.

2. David Whitehurst (2003) - Fundamentals of Corporate Finance. Irwin, CA: The

McGraw−Hill Companies, Inc.

3. Edward Fields (2002) - The Essentials of Finance and Accounting for Nonfinancial

Managers. New York, NY: American Management Association.

4. Martin Fridson, Fernando Alvarez (2002) - Financial Statement analysis A Practitioner’s

Guide. Danvers, MA: John Wiley & Sons, Inc.

5. Texas Instruments, Inc. Form 10-K (2009). Dallas, TX: EDGAR Online, Inc.

6. http://www.lexisnexis.com/

7. http://www.sec.gov/

8. http://www.broadcom.com/

9. http://www.ti.com/

http://www.lexisnexis.com/

http://www.sec.gov/

http://www.broadcom.com/

http://www.ti.com/

broadcom corporation vs texas instruments, inc

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