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.

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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.

Morrison University | Author: Bhavin Gandhi

Broadcom Corporation vs. Texas Instruments, Inc.

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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

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Broadcom Corporation vs. Texas Instruments, Inc. 3.

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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

Morrison University | Author: Bhavin Gandhi

Broadcom Corporation vs. Texas Instruments, Inc.

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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. Morrison University | Author: Bhavin Gandhi

Broadcom Corporation vs. Texas Instruments, Inc. 1.2.

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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.

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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) Broadband Communication Enterprise Networking Mobile and Wireless

2008 37.00% 27.00% 36.00%

2007 37.40% 30.20% 32.40%

2006 37.80% 32.20% 30.00%

Table 1: Broadcom‟s revenue distribution based on products over past 3 years [1]

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

2008 - Broadcom's Product-wise Revenue Distribution

36%

37%

Broadband Communication

Enterprise Networking 27%

Mobile and Wireless

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. Morrison University | Author: Bhavin Gandhi

Broadcom Corporation vs. Texas Instruments, Inc. 1.4.1. Broadcom’s Revenue Distribution Based on Regions [2006 – 2008]

Revenue by regions Asia Europe USA Others

2008 29.50% 10.50% 59.50% 0.50%

2007 26.50% 8.50% 64.50% 0.50%

2006 19.50% 8.40% 71.80% 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]

2008 - Broadcom's Region-wise Revenue Distribution 1% 30% Asia 60%

Europe

11%

USA Others

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

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Broadcom Corporation vs. Texas Instruments, Inc. 1.5.

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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]

Amount in Millions

Broadcom's Sales, Assets and Net Income comparison 6000 5000 4000 3000 2000 1000 0 -1000 -2000 -3000 -4000

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

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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.

Morrison University | Author: Bhavin Gandhi

Broadcom Corporation vs. Texas Instruments, Inc. 1.6.1. Broadcom’s Revenue and R&D comparison [2004 -2008]

Broadcom's Revenue and R&D expenses Amount in Millions

5000 4000 3000 2000 1000 0

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

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

Morrison University | Author: Bhavin Gandhi

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Broadcom Corporation vs. Texas Instruments, Inc. 1.7.

Balance Sheet

Current assets Cash Account receivable Inventory Other current assets Total Fixed assets Net plant and equipment Net intangible assets Other long term assets Total assets Current liabilities Accounts payable Accrued expense Other current liabilities Total Long-term debt Total liabilities Owner's equity Common stock and paid-in surplus Retained earnings Other equity Total Total liabilities and owners' equity Total Shares Outstanding

2008

2007

2006

2005

2004

1,898.12 372.31 366.11 114.67 2,751.21

2,328.30 369.00 231.31 125.66 3,054.27

2,680.45 382.82 202.79 85.72 3,351.78

1,732.68 307.36 194.57 101.27 2,335.88

1,182.63 205.14 128.29 68.38 1,584.44

234.69 1,341.20 66.16 4,393.26

241.80 1,423.33 118.78 4,838.18

164.70 1,214.18 146.11 4,876.77

96.44 1,156.93 162.95 3,752.20

107.16 1,079.26 114.98 2,885.84

310.49 378.35 28.26 717.10 69.10 786.20

313.62 390.17 26.78 730.57 71.48 802.05

307.97 322.97 47.76 678.70 6.40 685.10

289.07 240.05 70.37 599.49 12.14 611.63

171.25 230.07 98.03 499.35 22.75 522.10

10,930.37 11,576.09 11,948.97 11,470.03 10,967.10 -7,324.33 -7,539.12 -7,757.20 -8,136.24 -8,503.33 1.03 -0.82 -0.10 -193.22 -100.02 3,607.07 4,036.15 4,191.67 3,140.57 2,363.75 4,393.27 4,838.20 4,876.77 3,752.20 2,885.85 489.02

537.26

548.31

524.32

495.76

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

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Broadcom Corporation vs. Texas Instruments, Inc. 1.8.

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Income Statement

Sales Cost of goods sold Depreciation Other expenses Earnings before interest and taxes Taxes Net income

2008 2007 2006 2005 2004 4,658.13 3,776.40 3,667.82 2,670.79 2,400.61 2,213.02 1,832.18 1,795.57 1,267.80 1,196.77 3.39 1.03 2.35 4.03 3.70 2,219.40 1,723.73 1,503.26 1,052.09 970.87 222.32 219.46 366.64 346.87 229.27 7.52 6.11 -12.4 -20.22 56.08 214.79 213.34 379.04 367.09 173.19

Table 4: Simplified Broadcom‟s income statement for past 5 years [8]

1.9.

Cash Flow

Operating activities Net income Depreciation Non-cash items Changes in working capital Other operational expenses Net cash from operating income Investment activities Capital expenditure Other investments and cashflow Net cash from investment activities Financing activities Other financing cash flow Issuance (Retirement) of Stock, Net Issuance (Retirement) of Debt, Net Net cash from financing activities Foreign Exchange Effects Net Change in Cash Net Cash - Beginning Balance Net Cash - Ending Balance

2008

2007

2006

2005

2004

214.79 78.24 729.41 -122.08 19.25 919.61

213.34 64.08 538.43 -5.05 14.51 825.31

379.04 43.33 472.86 -20.25 12.40 887.38

367.09 53.41 144.80 -133.71 15.11 446.70

173.19 75.17 276.73 -39.77 16.52 501.84

-82.81 -662.57 -745.38

-150.43 204.83 54.40

-92.48 -273.00 -365.48

-41.77 -131.31 -173.08

-49.93 -406.09 -456.02

-58.06 -69.68 -25.43 3.21 -1,112.10 -781.58 228.99 304.33 0.00 0.00 -4.63 -2.48 -1,170.16 -851.26 198.93 305.06 0.00 0.00 0.00 0.00 -995.93 28.46 720.83 578.68 2,186.57 2,158.11 1,437.28 858.59 1,190.65 2,186.57 2,158.11 1,437.28

2.99 253.32 -2.20 254.11 0.00 299.92 558.67 858.59

Table 5: Simplified Broadcom‟s cash flow statement for past 5 years [8]

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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. Morrison University | Author: Bhavin Gandhi

Broadcom Corporation vs. Texas Instruments, Inc. 2.2.

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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.

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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.

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Broadcom Corporation vs. Texas Instruments, Inc. 2.3.

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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 Communications Computing Industrial Consumer Automotive Education

2008 48.00% 22.00% 10.00% 10.00% 6.00% 4.00%

Description LAN card, GPS, Bluetooth, Cable modem Printers, hard disk, monitors, projectors Switch, fingerprint reader, surveillance Digital Camera, DVD players, Home theater system Entertainment, Power train, Safety system Graphic calculators, education software

Table 6: TI‟s revenue distribution based on products for 2008 [5]

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

2008 - TI's Product-wise Revenue Distribution 6%

4% Communications

10% 48%

10%

Computing Industrial Consumer

22%

Automotive Education

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.

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

Revenue by regions Asia Europe USA Japan Others

2008 59.09% 15.00% 12.41% 10.14% 3.36%

2007 57.92% 16.32% 12.71% 10.29% 2.77%

2006 53.09% 16.04% 13.10% 14.09% 3.68%

Table 7: TI‟s revenue distribution based on regions [5]

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

2008 - TI's Region-wise Revenue Distribution 10%

3% Asia

13%

Europe 59%

15%

USA Japan Others

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.

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

Amount in Millions

TI's Sales, Assets and Net Income comparison 20000 15000 10000 5000 0 -5000

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

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.

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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.

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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]

Amount in Millions

TI's Revenue and R&D expenses 16000 14000 12000 10000 8000 6000 4000 2000 0

2008

2007

2006

2005

2004

Revenue

12501

13835

14255

12335

11552

R&D

1940

2140

2195

1986

1946

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

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Broadcom Corporation vs. Texas Instruments, Inc. 2.7.

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Balance Sheet

Current assets Cash Account receivable Inventory Other current assets Total Fixed assets Net plant and equipment Net intangible assets Other long term assets Total assets

2007

2006

2005

2004

2,540.00 913.00 1,375.00 962.00 5,790.00

2,924.00 1,742.00 1,418.00 834.00 6,918.00

3,717.00 1,774.00 1,437.00 926.00 7,854.00

5,330.00 1,648.00 1,185.00 1,249.00 9,412.00

6,353.00 1,545.00 1,170.00 1,239.00 10,307.00

3,609.00 3,950.00 1,180.00 1,098.00 960.00 1,028.00 12,667.00 13,930.00

3,730.00 980.00 941.00 15,063.00

3,794.00 1,090.00 1,108.00 16,299.00

560.00 1,191.00 327.00 2,078.00 492.00 2,570.00

702.00 1,069.00 606.00 2,377.00 749.00 3,126.00

518.00 1,087.00 329.00 1,934.00 1,302.00 3,236.00

2,671.00 2,624.00 19,788.00 17,529.00

2,481.00 13,394.00

2,488.00 11,242.00

-12,484.00 -8,793.00 9,975.00 11,360.00 12,667.00 13,930.00

-3,938.00 11,937.00 15,063.00

-667.00 13,063.00 16,299.00

1,596.59

1,718.12

3,304.00 1,113.00 1,716.00 11,923.00

Current liabilities Accounts payable Accrued expense Other current liabilities Total Long-term debt Total liabilities

324.00 1,168.00 40.00 1,532.00 1,065.00 2,597.00

Owner's equity Common stock and paid-in surplus Retained earnings Other equity Total Total liabilities and owners' equity Total Shares Outstanding

2008

2,762.00 21,168.00 14,604.00 9,326.00 11,923.00 1,277.90

657.00 1,315.00 53.00 2,025.00 667.00 2,692.00

1,343.21

1,450.03

Table 8: Simplified TI‟s balance sheet [9]

Morrison University | Author: Bhavin Gandhi

Broadcom Corporation vs. Texas Instruments, Inc. 2.8.

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Income Statement

Sales Cost of goods sold Other expenses Earnings before interest and taxes Taxes Net income Dividends

2008 2007 2006 2005 2004 12,501.00 13,835.00 14,255.00 12,335.00 11,552.00 6,256.00 6,466.00 6,996.00 6,319.00 6,295.00 3,764.00 3,677.00 3,690.00 3,261.00 3,193.00 2,481.00 3,692.00 3,569.00 2,755.00 2,064.00 561.00 1,051.00 987.00 582.00 481.00 1,920.00 2,657.00 4,285.00 2,324.00 1,753.00 537.00 425.00 199.00 173.00 154.00

Table 9: Simplified TI‟s income statement [9]

2.9.

Cash Flow

Operating activities Net income Depreciation Non-cash items Changes in working capital Other operational expenses Net cash from operating income Investment activities Capital expenditure Other investments and cashflow Net cash from investment activities Financing activities Other financing cash flow Total dividents paid Issuance (Retirement) of Stock, Net Issuance (Retirement) of Debt, Net Net cash from financing activities Foreign Exchange Effects Net Change in Cash

2008

2007

2006

2005

2004

1,920.00 1,022.00 219.00 314.00 -145.00 3,330.00

2,657.00 1,022.00 225.00 420.00 82.00 4,406.00

4,341.00 1,052.00 -1,364.00 -1,425.00 -141.00 2,463.00

2,324.00 1,346.00 161.00 -46.00 -13.00 3,772.00

1,861.00 1,449.00 22.00 -445.00 258.00 3,145.00

-763.00 -419.00 -1,182.00

-686.00 901.00 215.00

-1,272.00 4,347.00 3,075.00

-1,288.00 -399.00 -1,687.00

-1,260.00 99.00 -1,161.00

19.00 -537.00 -1,912.00 0.00 -2,430.00 0.00 -282.00

116.00 -425.00 -4,125.00 -43.00 -4,477.00 1.00 145.00

100.00 -199.00 -4,884.00 -586.00 -5,569.00 0.00 -31.00

59.00 -173.00 -3,690.00 264.00 -3,540.00 6.00 -1,449.00

0.00 -154.00 -561.00 -435.00 -1,150.00 15.00 850.00

Table 10: Simplified TI‟s cash flow statement [9]

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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.

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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.

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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.

3.2.

Income Statement

Revenue Cost of Revenue, Total Gross Profit Selling/Administrative Expenses, Total Research & Development Depreciation/Amortization Unusual Expense (Income) Operating Income Income Before Tax Income Tax - Total Net Income

2006 100.00% 48.95% 51.05% 13.74% 30.45% 0.06% 0.14% 6.64% 10.00% -0.34% 10.33%

2007 100.00% 48.52% 51.48% 13.05% 35.71% 0.03% 0.45% 2.25% 5.81% 0.16% 5.65%

Change 0.00% -1.01% 1.01% -1.39% -3.56% 0.05% 4.46% 1.44% -1.04% 0.00% -1.04%

2008 100.00% 47.51% 52.49% 11.66% 32.15% 0.07% 4.91% 3.70% 4.77% 0.16% 4.61%

Cumulative Change 0.00% -1.45% 1.45% -2.08% 1.70% 0.01% 4.77% -2.95% -5.22% 0.50% -5.72%

Table 11: Simplified Broadcom‟s common-sized income statement for past 3 years [8]

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Balance Sheet

Current assets Cash Account receivable Inventory Other current assets Total Fixed assets Net plant and equipment Net intangible assets Other long term assets Total assets Current liabilities Accounts payable Accrued expense Other current liabilities Total Long-term debt Total liabilities Owner's equity Common stock and paid-in surplus Retained earnings Other equity Total Total liabilities and owners' equity Total Shares Outstanding

2006

2007

Change

2008

Cumulative Change

54.96% 7.85% 4.16% 1.76% 68.73%

48.12% 7.63% 4.78% 2.60% 63.13%

-4.92% 0.85% 3.55% 0.01% -0.51%

43.21% 8.47% 8.33% 2.61% 62.62%

-11.76% 0.62% 4.18% 0.85% -6.11%

3.38% 24.90% 3.00% 100.00%

5.00% 29.42% 2.46% 100.00%

0.34% 1.11% -0.95% 0.00%

5.34% 30.53% 1.51% 100.00%

1.96% 5.63% -1.49% 0.00%

6.32% 6.62% 0.98% 13.92% 0.13% 14.05%

6.48% 8.06% 0.55% 15.10% 1.48% 16.58%

0.59% 0.55% 0.09% 1.22% 0.10% 1.32%

7.07% 8.61% 0.64% 16.32% 1.57% 17.90%

0.75% 1.99% -0.34% 2.41% 1.44% 3.85%

245.02% -159.06% 0.00% 85.95% 100.00%

239.27% -155.83% -0.02% 83.42% 100.00%

9.53% -10.89% 0.04% -1.32% 0.00%

248.80% -166.72% 0.02% 82.10% 100.00%

3.78% -7.65% 0.03% -3.85% 0.00%

489.02

537.26

548.31

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

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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.

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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.

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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%.

3.5.

Income Statement

Revenue Cost of Revenue, Total Gross Profit Selling/ Administrative Expenses, Total Research & Development Depreciation/Amortization Unusual Expense (Income) Operating Income Income Before Tax Income Tax - Total Net Income

2006 100.00% 49.08% 50.92% 11.90% 15.40% 0.00% 0.20% 23.42% 25.04% 6.92% 30.06%

2007 100.00% 46.74% 53.26% 12.14% 15.47% 0.00% 0.38% 25.28% 26.69% 7.60% 19.20%

Change 0.00% 3.31% -3.31% 0.77% 0.05% 0.00% 1.66% -5.78% -6.84% -3.11% -3.85%

2008 100.00% 50.04% 49.96% 12.91% 15.52% 0.00% 2.03% 19.49% 19.85% 4.49% 15.36%

Table 13: Simplified TI‟s common-sized income statement for past 3 years [8]

Morrison University | Author: Bhavin Gandhi

Cumulativ e Change 0.00% 0.97% -0.97% 1.01% 0.12% 0.00% 1.84% -3.93% -5.19% -2.44% -14.70%

Broadcom Corporation vs. Texas Instruments, Inc. 3.6.

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Balance Sheet

2006

2007

Change

2008

Cumulative Change

26.68% 12.74% 10.32% 6.65% 56.38%

23.08% 13.75% 11.19% 6.58% 54.61%

-1.78% -6.09% 0.34% 1.48% -6.05%

21.30% 7.66% 11.53% 8.07% 48.56%

-5.38% -5.08% 1.22% 1.42% -7.82%

28.36% 7.88% 7.38% 100.00%

28.49% 9.32% 7.58% 100.00%

-0.78% 0.02% 6.81% 0.00%

27.71% 9.33% 14.39% 100.00%

-0.64% 1.45% 7.01% 0.00%

4.02% 8.55% 2.35% 14.92% 3.53% 18.45%

5.19% 10.38% 0.42% 15.99% 5.27% 21.25%

-2.47% -0.59% -0.08% -3.14% 3.67% 0.53%

2.72% 9.80% 0.34% 12.85% 8.93% 21.78%

-1.30% 1.25% -2.01% -2.07% 5.40% 3.33%

Owner's equity Common stock and paid-in surplus Retained earnings Other equity Total Total liabilities and owners' equity

18.84% 125.84% -63.12% 81.55% 100.00%

21.09% 156.22% -98.56% 78.75% 100.00%

2.08% 21.32% -23.93% -0.53% 0.00%

23.17% 177.54% -122.49% 78.22% 100.00%

4.33% 51.70% -59.36% -3.33% 0.00%

Total Shares Outstanding

1,450.03

1,343.21

Current assets Cash Account receivable Inventory Other current assets Total Fixed assets Net plant and equipment Net intangible assets Other long term assets Total assets Current liabilities Accounts payable Accrued expense Other current liabilities Total Long-term debt Total liabilities

1,277.90

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

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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.

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Quick ratio comparison

Quick Ratio

5.00 4.50 4.00 3.50 3.00 2.50 2.00 1.50 1.00 0.50 0.00

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

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.

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Current ratio comparison 6.00

Current Ratio

5.00 4.00

3.00 2.00 1.00 0.00

2008

2007

2006

2005

2004

Broadcom

3.84

4.18

4.94

3.90

3.17

Texas Instruments

3.78

3.42

3.78

3.96

5.33

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).

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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.

Days’ sales outstanding (DSO) comparison 60.00 50.00 DSO

40.00 30.00 20.00 10.00 0.00

2008

2007

2006

2005

2004

Broadcom

29.17

35.66

38.10

42.00

31.19

Texas Instruments

26.66

45.96

45.42

48.77

48.82

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.

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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.

Days sales of inventory (DSI) comparison

DSI

90.00 80.00 70.00 60.00 50.00 40.00 30.00 20.00 10.00 0.00

2008

2007

2006

2005

2004

Broadcom

60.38

46.08

41.22

56.02

39.13

Texas Instruments

80.22

80.04

74.97

68.45

67.84

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

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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.

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.

Return on assets comparison 35.00 30.00 25.00 20.00 15.00 10.00 5.00 0.00

Percentage

3.9.1.

2008

2007

2006

2005

2004

Broadcom

4.89

4.41

7.77

9.78

6.00

Texas Instruments

16.10

20.98

30.76

15.43

10.76

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

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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.

Return on equity comparison

Percentage

40.00 35.00 30.00 25.00 20.00 15.00 10.00 5.00 0.00

2008

2007

2006

2005

2004

Broadcom

5.95

5.29

9.04

11.69

7.33

Texas Instruments

20.59

26.64

37.72

19.47

13.42

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.

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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.

Return on sales comparison 35.00 ROS in percentage

30.00 25.00 20.00 15.00 10.00 5.00 0.00

2008

2007

2006

2005

2004

Broadcom

4.61

5.65

10.33

13.74

7.21

Texas Instruments

15.36

19.20

30.06

18.84

15.17

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

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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

Debt to equity ratio comparison 0.30 0.25 D/E - ratio

0.20 0.15 0.10

0.05 0.00

2008

2007

2006

2005

2004

Broadcom

0.22

0.20

0.16

0.19

0.22

Texas Instruments

0.28

0.27

0.23

0.26

0.25

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

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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.

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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.

Earnings per share (EPS) comparison Amount in dollars

3 2 1 0 -1 -2 -3 -4 -5 -6 -7 -8 Broadcom

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 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

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

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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.

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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/

Morrison University | Author: Bhavin Gandhi