Broadcom Initiating Coverage

INITIATINGCOVERAGEREPORT

WilliamC.DunkelbergOwlFundOctober30,2016

Sector Outperform Recommendation: BUY Key Statistics: values in mm except per share Price $169.35 52 Week Low $114.25

Return 20.68% 52 Week High $179.42

Shares O/S 397.3 Yield 1.18%

Market Cap $67,288 Enterprise Value $82,073

Three-Year Price Graph

Earnings/Revenue Surprise History:

Quarters EPS Revenue Price

4Q15 5.55% 2.45% 9.51%

1Q16 5.19% (1.02%) 6.36%

2Q16 6.39% (1.52%) 4.94%

3Q16 3.96% 1.03% (2.25%)

Earnings Projections:

Fiscal Year Q1 Q2 Q3 Q4 Total

2015 $2.09 $2.13 $2.24 $2.51 $8.97

2016 $2.41 $2.53 $2.89 $3.36e $11.19

2017e $3.19 $3.15 $3.39 $3.73 $13.46

2018e $3.51 $3.38 $3.60 $3.88 $14.37

All prices current at end of previous trading sessions from date of report. Data is sourced from local exchanges via FactSet, Bloomberg and other vendors. The William C. Dunkelberg Owl fund does and seeks to do business with companies covered in its research reports.

Lead Analyst Anthony Merola [email protected]

Associate Analysts Daniel Wimer [email protected] Noah Herman [email protected] Flo Benhayoun [email protected]

COMPANY OVERVIEW Broadcom Limited was formed after the acquisition of the US based company Broadcom by the Singapore based Avago for $35 billion in 2015. Broadcom is among the Top 10 semiconductor vendors by revenue, and employs approximately 11,750 people worldwide, in more than 15 countries. The company’s products cover a wide range of semiconductors. The products include chips for wireless and wired communications as well as optoelectronics, radio frequency and microwave components, power amplifiers, and application-specific integrated circuits (custom chips). The company's products are used in a wide range of applications, including mobile phones, data networking and telecommunications equipment, consumer appliances, networking gear, etc. Broadcom designs, manufactures, and sells products for four basic end markets: Wired Infrastructure (54.4% of revenue in Q3 2016), Wireless Communications (26.6%), Enterprise Storage (13.9%), and Industrial & Other (5.1%). The company reports Q4 2016 earnings on November 30, 2016.

INVESTMENT THESIS

Broadcom is currently trading at a 3.2% discount to its 3-year average forward P/E of 15.46x. Broadcom and other iPhone suppliers have been devalued throughout CY 2016 due to fears that end-market demand was slowing and that Apple would push margin pressure through its supply chain by using its pricing power to reduce the price that it pay for components. Broadcom is the best positioned iPhone supplier since it has been able to maintain its pricing power due to its advanced technology that is needed in newer generation smartphones in order to function efficiently. The company is also not dependent on iPhone success like many of its competitors due to the diversification of its businesses. The Broadcom/Avago merger has the company well positioned in diversified end markets and will lead to over $750 million in synergies to be realized over the next 12 months. Further penetration of the company’s Tomahawk and Jericho products, as well favorable data center spending trends will allow AVGO to continue to extract value out of its Wired Infrastructure segment. Broadcom’s 3-year average forward P/E multiple of 15.46x, we calculated fair value to be $202.37. This represents 20.7% upside to current share prices after factoring in the company’s dividend.

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Broadcom Ltd. Exchange:NASDAQTicker:AVGOTargetPrice:$202.37

Fall 2016

T h e W i l l i a m C D u n k e l b e r g O w l F u n d Page2

SEGMENT OVERVIEW

Wired Infrastructure (54.4% of Q3 2016 revenue) The wired infrastructures generate revenues by supplying high speed Serializers/Deserializers (SerDes), fiber optics options, and other ASICs products that serve Ethernet switching, high-performance computing, and carrier-routing functions, predominantly supporting storage and the Ethernet networking market. Wired Infrastructure includes the manufacturing and production of set-top boxes, or cable modems that are types of Network Bridges, and modems that deliver bi-directional data communication (upload, and download). Cable modems are primarily used to deliver broadband Internet access in the form of cable Internet, taking advantage of the high speed of a HFC (Hybrid Fiber Coaxial) or a RFoG (Radio Frequency over Glass) network. The cable modem sub-segment has great potential to grow in the future with only 50% of the world population having access to high speed internet. The segment also includes the production of SerDes, which are pairs of functional blocks commonly used in high-speed communications to compensate for limited input/output. They are used to facilitate the transmission of data between two points. They translate and convert parallel 10 GB of data, that cannot be analyzed by computers, into serial 64 bits of data. The ASSP (Application Specific Standard Product), and ASIC (Application Specific Integrated Circuit) are also two important products of the wired infrastructure segment. ASSP is an integrated circuit that implements a specific function that appeals to a wide market. Conversely, ASICs combine a collection of functions and are designed by or for one customer. ASSP are used in all industries, from automotive to communications. Wireless Communications (26.6%) The Wireless Communications segment offers a wide range of RF (Radio Frequency) and wireless solutions for smartphones, tablets, and wireless infrastructure designed for LTE/Wi-Fi, GPS, military, test & measurement. Since the acquisition by Avago, Broadcom Limited has benefited from its expertise within this domain that has been able to provide the wireless industry with a variety of RF and optoelectronic sensors. Radio frequency signals are used in small electronic device to transmit and/or receive radio signals between two devices. The company’s main RF products are amplifiers and filters. As such, Broadcom Limited uses RF signals in phones, tablets, computers, to let our devices communicate with each other through wireless connectivity, such as GPS, Wi-Fi, Bluetooth, etc. Enterprise Storage (13.9%) The segment accounts for 13.9% of the company’s revenue and was created as a result of the acquisitions of companies LSI and PLX Technology. The segment offers storage products such as HDD (hard disk-drive), server storage, PCIe (peripheral component interconnect express), switches, and bridges. The company also produces flash memory controllers that can be designed to operate in a low cycle environment such as SD cards, USB keys, digital cameras, and PDAs. The company also has products designed to operate in a higher cycle environment such as in SSDs for personal computers and data centers. At a higher level, such memory controllers are designed to sustain the memory of enterprise servers and storage arrays. Industrials & Other (5.1%) Broadcom applies its technology in fiber optics, motion control and LED products for the general industrial, automotive, and consumer markets that offer high brightness and stable light output over thousands of hours. These products are able to support traffic signals, commercial signs, and other displays. The company also produces optical isolators that provide electrical insulation and signal isolation for signaling systems susceptible to electrical noise or interference. These products are used in industrial motors, hybrid engines, power generation and distribution systems, motion sensors, computers and office equipment, plasma displays, and military electronics among other applications.

Fall 2016


INDUSTRY OVERVIEW

Wireless Communications

Since the introduction of smartphones almost a decade ago, constant technological advancements have caused dramatic changes within the wireless communications industry. From a competition standpoint, the evolution of the industry has driven many once-dominate players to become irrelevant and companies like Apple and Samsung have risen to the top due to their leading technologies and innovation. It is no longer just smartphones but tablets as well that have been widely adopted as wireless technologies continue to provide convenience and productivity for consumers. Wi-Fi, Bluetooth, and GPS capabilities have become the norm across all smartphones and tablets, as well as the ability to effectively run applications offered by third-party developers. Because of all the features wireless communication devices are offering, consumer demand for faster, stronger, more capable cellular connection is driving the industry.

The latest wireless communication technology introduced in 2011 and successor to 3G technology is known as 4G LTE. However, it should be noted that LTE does not meet the technical requirements to be considered a 4G wireless service. Due to the technological advancement of wireless devices and a growing consumer demand for cellular connection to support these devices as stated above; LTE is seeing rapid, widespread adoption across the globe. Subscriptions now account for about 17% of all mobile connections worldwide with ~1.25 billion subscribers. This number is expected to reach ~2.3 billion by 2019 and account for around 28% of mobile connections worldwide. LTE is being adopted at 2x the rate 3G was to this point after it was first introduced in 2003. The main reason for its success is the combination of speed and efficiency it provides to users. However, the other reason LTE has seen much faster adoption rates is because of the availability of LTE-enabled handsets. What gives a handset LTE capabilities are unique filters, switches, power amplifiers and other miniscule parts that lie within. These different technologies are produced by semiconductor companies that are positioned to take full advantage of widespread LTE adoption.

High-end filters are the critical piece towards enabling LTE connection within a handset. There are two types of filters: SAW (Surface Acoustic Wave) and BAW (Bulk Acoustic Wave), the latter considered to be the superior, high-end filter. Broadcom has already established itself as the industry leader within filters, especially for BAW filters given it is one of the few companies producing the high-end filters. However, considering the potential revenue up for grabs, competition is expected to increase for production of BAW filters. Many semiconductor companies like Skyworks and Qualcomm have made it clear they want to move on from producing SAW filters and build their high-end filter business. With a strong outlook for LTE adoption worldwide, the industry is identifying high-end filters as a strong potential revenue driver moving forward.

Wired Infrastructure

Within wired infrastructure there is an industry-wide transition to cloud-computing for data centers. Cloud services offer faster delivery of data, enhanced application performance and improved operational efficiencies. With demand for more data continuing to drive the market, cloud computing is offering superior performance that companies are not willing to pass up. Estimates are that by 83% of all data center traffic will be cloud traffic by 2019; up 39% from today. Additionally, worldwide revenues from cloud services is expected to reach nearly $200 billion by 2020, up 207% from the forecasted $96.5 billion in revenues for 2016. Adoption of cloud computing is presenting network equipment companies as well as semiconductors with growth opportunities moving forward. This industry-wide transition is as positively disruptive and healthy for semiconductors as the switch to smartphones was within wireless. It is providing opportunities for companies to improve technologies and bring new products to the market. However, database architectures are dramatically altering the semiconductor value chain and are presenting new market opportunities for competitors. Hardware is what drives the cloud ecosystem. Therefore, companies that are able to provide stronger, more efficient products will benefit tremendously from this industry trend.

Fall 2016


CATALYSTS

Next-Generation Networking Expanding Lifecycles Positioning Within Data Centers In Q3 2016, 54% of Broadcom’s revenue was generated from its Wired Infrastructure segment. The company will see further growth within this segment due to tailwinds from its Ethernet switch silicon components that are set to generate revenue growth through FY 2018. The ASSP product family and switches comprised about 33% of wired infrastructure revenue, which is 18% of the company’s total revenue. The company’s main products are from the XGS & DNX Family. Since their release they have begun to penetrate the hyper scale data center market, and still have a huge market to exploit. The recent industry trend that will provide a tailwind for this segment is the adoption of hyper scale data centers from traditional data centers. Traditional data centers include 10GbE per silicon port or below, which make up the majority of data centers. However, they are becoming more obsolete due to the rise in the scale of cloud computing and big data. This is forcing administrators within data centers to re-calibrate capacity requirements while remaining cost-efficient. The market size for hyper scale data centers is projected to grow to $71.2 billion, representing a CAGR of 20.7% through 2022. Hyper scale data centers, which are mainly implemented by 100% cloud-based businesses like Facebook, Amazon, & Google, are designed to keep initial investments as low as possible while perpetually expanding the infrastructures capacity. This is one of the fastest growing technologies in IT infrastructure by which Broadcom will be able to exploit due to the increased Ethernet demand within this industry. The industry is becoming more reliant on 25/50/100GbE per silicon ports rather than the traditional 10GbE per silicon port. Broadcom will appreciate in value based on its industry leading Ethernet and router component products that will experience tailwinds through FY 2018.

Tomahawk & Jericho - XGS & DNX The Tomahawk 1 is an Ethernet switch component used in cloud-scale networking. It is the first of its type to offer 128 ports of 25 Gbps SerDes in support of 25/50/100 Gbe, 32 ports of 100 Gbps, and offer a switching capacity of 3.2 Tps. The product was announced in FY 2014 and began sampling to major customers soon after, with the goal being to meet the dilemmas of big data. Near term, there are tailwinds driven by Tomahawk, which is currently being used in the product refresh of its customers. Currently, the company has the highest market share amongst its three closest competitors in the Ethernet space, driven by the use of Tomahawks by the main Ethernet switching vendors; Cisco (62% market share in Ethernet switching), HP (12%), Juniper (3%), & Arista (3%). As of now, adoption of Tomahawk 1 is estimated to be 33%. We expect adoption to accelerate as cloud data center spending ramps up in 2h 2016 and early FY 2017. Ethernet switching spending above 10GbE has grown about 60% YoY while sales of worldwide Ethernet switches has increased 5.5% YoY to $6.30B This is mainly attributed to the Tomahawk 1 switch. The Tomahawk 1 recently went through an upgrade cycle to produce the Tomahawk 2, which is currently undergoing sampling and is the most advanced Ethernet switch that has been developed. It can deliver 50 GbE per port and has a switching capacity of 6.4 Tps, doubling the bandwidth of the Tomahawk 1. Ramp up is expected to occur in late FY 2017 and early FY 2018 once further integration of the Tomahawk 1 has occurred. Companies are beginning to break the threshold for capacity and efficiency requirements that can only be met with upgrades in Ethernet switch chips, especially in cloud-scale networking. The Tomahawk reduces cabling costs within a rack by 75%, consumes less power than bit of a standard 10GbE, and improves operating expenses for operators. Tomahawk’s Broadview feature decreases operating expenses for cloud-scale network operators by enhancing network visibility and monitoring traffic load balancing. After acquiring Dune networks in FY 2009 for $180 million, Broadcom developed the Jericho packet processor, a silicon input used in routers, in early FY 2015. In the company’s most recent earnings call, management mentioned that supply constraints for the rest of its Dune products are to ease by the end of this quarter. This will allow a ramp up in production of the Jericho product over the next few quarters. Although the routing market declined by 2% from Q2 2015 ($3.74 billion) to Q2 2016 ($3.67 billion), Broadcom saw increased demand for its Jericho silicon product due to operators of data centers, especially cloud and service providers, upgrading their infrastructures. The Jericho 1 currently has an adoption rate of 20% so there is still high market potential with this product. Total spending on cloud IT infrastructure products is estimated to increase to $37.1B, which is a 15.6% in FY 2016 YoY. Both the Tomahawk and Jericho silicon components will benefit from a cloud/hyper scale refresh cycle moving into FY 2018 as we witness increased spending on IT infrastructure.

Fall 2016


Continued Growth in Wireless Segment Relationship with Apple 13% of Broadcom’s revenue is generated from the supply to its largest customer, Apple. The company is able to generate revenue in its Wireless segment by supplying high-end FBAR filters (Legacy Avago Business) and connectivity chips (Legacy Broadcom Business) that are integrated in the company’s handset products. A filter is a circuit input that converts an input signal to an output signal based on frequency. From Q2 2016 to Q3 2016, sales of FBAR increased by 32% to Apple due to increased supply for iPhone 7/7 Plus. Recently this year, Broadcom and Apple signed a three-year agreement deal, by which AVGO will supply RF components and modules to Apple. This gives Broadcom a clear path to ramp up production for FBAR filters (55% of Wireless revenue) and prevents its competitors from gaining market share within iPhones as Apple moves towards the production of next generation iPhones. Currently, Broadcom produces the most advanced BAW filter in the marketplace compared to its competitors that specifically create SAW filters. FBARs are more advanced because they improve cell coverage, real-world data rates, provide lower insertion loss, and improve battery life and talk time. Although iPhone sales fell 5% YoY in Q4 2016, Broadcom increased its FBAR filter content within the iPhone 6S from $6 to $8. The $8 amount of FBAR filter content will still be included in the iPhone 7/7 Plus. We believe that the supply of iPhone 7/7 Plus will increase in the near future based on iPhone 7/7 Plus demand currently outpacing supply. In terms of connectivity chips (45% of Wireless revenue), Broadcom has not seen substantial content increase in Wi-Fi relative to driving 802.11ac generation. However, this will change and AVGO will see content increase in FY 2017. As of now, 802.11ac is the current industry standard for 5th generation Wi-Fi. Increased demand in capacity will lead to an upgrade cycle for the next wave of 802.11ax. This will improve functionality, higher performance, and multi bands, for smartphones, tablets, etc. The main purpose is to increase capacity for data transfers through Wi-Fi connections. 802.11ax is projected to be 4x-10x the bandwidth compared to 802.11ac. Broadcom will see tailwinds from the Wi-Fi upgrade that is projected to unfold in mid-FY 2017, that will lead to increased demand for its components.

LTE Global Adoption LTE is the 4G wireless data format that is becoming the primary wireless network to be released by carriers as 2G and 3G become obsolete by every major carrier (by 2020). The rapid transition to LTE will drive exponential growth for FBAR filter shipments (40-50 filters per 4G device). Filters ensure that the multiple transmissions and receptions of voice and data streams do not interfere with each other. FBAR filters are the best suited in the marketplace to work at frequencies above 2 GHz since SAW filters are not compatible and are the only ones in mass production. Currently, Broadcom has 72% of the FBAR filter market share and is the only company to provide this technology on a mass scale. Global 4G LTE subscribers are projected to grow 135% from 1.7B in FY 2016 to 4B in FY 2020, representing a 18.66% CAGR. China is the largest market for 4G LTE adoption. LTE adoption has reached 77% in China. In FY 2015, Apple had the largest market share (16.8%) of mobile devices being used, however saw a 30% decrease in sales in Q4 2016 compared to Q4 2015. Regardless, Apple’s management explained that they believe iPhone sales in the December quarter will increase, especially in China, which gives us reassurance that Broadcom’s components will be used increasingly in Apple’s iPhone. India is the second largest market for 4G LTE adoption, which has reached 49%. iPhone sales in India increased by 50% from Q2 2015 - Q2 2016 representing an increase in market share for Apple (1.6% to 2.4%). Management has stated that India is the primary target market moving forward for iPhone sales. An example of this is Apple's partnership with Indian network player Reliance Jio, which is boosting the country's 4G mobile internet infrastructure coverage to 18,000 cities and 200,000 villages providing a free year of services to customers. Broadcom will benefit from Apple’s increasing initiative to enter into markets outside of the U.S. where LTE adoption is rapidly increasing.

Fall 2016


Broadband Developments Broadcom creates chips for set-top boxes (cable boxes), which convert video content to TV signals. This comprises about 40% of the Wired Infrastructure revenue and 22% of total revenue. The current market for set-top boxes is $21 billion. Broadcom currently has a little over 60% of total market share in this segment competing against the second leader, STMicro, which recently this year stated it is leaving the set-top boxes chip market. The only other competitor in this area is Intel, with a market share of about 15%. A main growth driver for this sub-segment is the adoption of 4K video and Ultra HD, specifically in China. As we have mentioned, Apple has underperformed in China this quarter, however Broadcom is set to generate revenue from set-top boxes that its China partners are rolling out extensively FY 2016 and going into FY 2017. By 2020, China is projected to have 320M pay-tv subscribers and Broadcom is already on its way to take advantage of this trend. In mid-FY 2015, Broadcom established partnerships with Chinese based companies in this industry: H3C Technologies, Inspur, and StarTimes. Rollout of chips for set-top boxes began in FY 2016. In the company's most recent earnings, management stated that they experienced supply constraints that prevented them from meeting demand for its chips. The supply constraints will be resolved by the end of 4Q 2016 and the company has stated it will be able to meet the demand that it had not initially expected.

Avago/Broadcom Merger Broadcom has guided that they will capture $750 million in synergies within the first 18 months of the acquisitions closure (closed in February 2016). The completion of the Avago and Broadcom merger has made Broadcom Limited a company with unmatched scale and further capabilities that other competitors don’t have. We will specifically see this in the wired segment, which increased by 454% from Q2 2015 to Q2 2016. This has increased Broadcom’s broadband sub-segment the most, which are chips for set-top boxes. Broadband accounts for 40% of revenue from Broadcom’s wired segment. This is forcing other players in the industry to react, which will result in further compliance. Broadcom has been able to diversify its capabilities that stretch to segments most semiconductor companies don’t compete in, specifically in data centers and broadband solutions. Broadcom has already been able to demonstrate efficiency data center solutions it provides to leaders in terms of market share and is the leader in broadband solutions currently. As other companies, like Qualcomm, begin to configure solutions with other companies, Broadcom will be investing in R&D to further develop its products.

MOATS Pricing Power: Broadcom has established a competitive advantage through its pricing power within the semiconductor industry. It has a host of proprietary chip designs throughout a variety of industries as a product of its research and development efforts. It has successfully integrated various types of functionality and technology standards onto each piece of silicon which in turn has optimized efficiency. It is able to develop smaller, cheaper devices that pack more features into each product. This has allowed Broadcom to retain pricing power in the highly competitive digital chip industry. RISKS Customer/Product Concentration: While Broadcom has reduced its exposure to wireless as a whole to ~25% of total revenue, Apple and Samsung still account for almost 20% of total revenue. This lack of customer/product diversification comes with significant risk as any problem Apple or Samsung has could have a tremendous impact on top line metrics. AVGO has already begun to see how this customer concentration leads to a certain amount of risk given the current state of Samsung and its mass recall and discontinued production of the Galaxy Note 7 that will have an effect on revenue moving forward. Increased Debt: Broadcom took on a lot of debt after its merger with Avago. Long-term debt now sits upwards of $25 billion and could restrict the company moving forward. While debt is not expected to affect day-to-day operations, it could have many negative implications including but not limited to: dedicating cash flow towards paying off debt instead of Capital expenditures and R&D; limited planning and reaction to the semiconductor industry; and the inability to take on more debt in order to fund growth, M&A, and long-term investments.

Fall 2016


FINANCIALS

Revenue Broadcom derives revenue from four segments: Wired Infrastructure, Wireless Communications, Enterprise Storage, and Industrials & Other. Legacy Avago, has grown revenue at a CAGR of 27.0% since FY 2010, while legacy Broadcom grew revenue at a CAGR of 5.44%. In FY 2015 Broadcom saw revenue grow to $6.9 billion (60.3% growth YoY), driven by substantial growth in each of its segments: Wired Infrastructure (28.5% YoY), Wireless Communications (50.1% YoY), Enterprise Storage (151.4%), and Industrial & Other (11.9%). AVGO derives revenue geographically through the China (53.9% of FY 2015 revenue), the United States (11.0%), Singapore (3.0%), and other regions (32.0%). Going forward we have forecasted revenue growing 93.9% YoY in FY 2016 and 22.6% YoY in FY 2017. The substantial growth can be primarily attributed to the company realizing revenue from legacy Broadcom’s business.

Wired Infrastructure (54.4% of Q3 2016 revenue) Wired Infrastructure saw revenue grow 28.5% in FY 2015 to $1.5 billion. The Broadcom/Avago merger greatly increases the company’s exposure in this segment and we have forecasted that revenue will grow to $6.8 billion in FY 2016. Revenue is generated through the storages and Ethernet networking markets where AVGO supplies bandwidth applications, optic transceivers, and application specific integrated circuits. This segment will benefit going forward due to increased spending in data centers (19% CAGR through 2018) due to the company’s positioning within that market as well as the companies refresh in its Tomahawk and Jericho products. Going forward we have forecasted revenue growing 28.4% in FY 2017 and 6.8% in FY 2018 to $9.2 billion.

Wireless Communications (26.6%) In FY 2015 revenue in the Wireless Communications segment grew 50.1% YoY to $2.5 billion. Revenue in this segment is generated by supplying components to smartphones and base stations. AVGO’s RF amplifiers and filter will continue to benefit as more mobile carriers shift toward using LTE, since it requires smartphones to operate more efficiently. Apple is the primary customer in this segment and revenue generation is largely dependent on Broadcom’s dollar content within the iPhone. Broadcom has been able to grow its iPhone content to $8 per phone within the new iPhone 7. Broadcom has been able to maintain its pricing power due the advancements in its technology. Overall, our sector forecasts revenue growing at 42.2% in FY 2016, 33.4% in FY 2017, and 20.0% in FY 2018 when it will reach $5.8 billion in revenue.

Enterprise Storage (13.9%) Enterprise Storage revenue is generated by Broadcom providing channel-based SoCs and preamplifiers to hardware companies in the HDD market and custom flash controllers to the SSD market. There is seasonality associated with revenue generation within this segment as AVGO sees higher revenue growth when customers have new product launches, typically toward the end of the calendar year. We have forecasted revenue growing 1.4% in FY 2016 and then falling -7.8% in FY 2017 due to decreased end-market demand within HDDs.

Industrials & Other (5.1%) In FY 2015, revenue grew 11.9% YoY to $629 million. Revenue in this segment is derived predominantly from optical isolators that provide electrical insulation within signaling systems within industrial motors, automotive systems, motion sensors, and military electronics. This segment also includes revenue generated from IP licensing, which has been a significant growth driver over the past couple years. Broadcom has approximately 14,700 patents Worldwide. Going forward we have forecasted revenue to grow 7.0% YoY in FY 2016 and 6.2% in FY 2017.

Fall 2016


Margins From FY 2013 to FY 2015 gross margin has expanded from 47.6% to 52.8%, operating margin has expanded from 30.0% to 41.9% and net income margin has expanded from 22.4% to 24.0%. Broadcom’s smallest segment, Industrial & Other (49.3% operating margin in FY 2015), had the highest operating margin of all of the segments, followed by Wireless Communications (47.4%), Enterprise Storage (39.2%), and Wired Infrastructure (32.3%). Margins will expand going forward led by synergistic benefits from the merger between legacy Broadcom and legacy Avago. Within the Wireless Communications segment, operating margin has expanded from 27.6% in FY 2013 to 47.4% in FY 2015. Margin expansion can be attributed to the company experiencing higher content growth within smartphones, specifically within the company’s radio frequency products. Smartphones that contain AVGO’s components saw historically high increases in unit sales over this time. Going forward we believe margins should continue to expand even further in this segment due to the company’s gains in iPhone content and continued strong end-market demand for smartphones. Broadcom has seen growing dollar content within iPhones due to advancements in it components. This has given Broadcom pricing power that has prevented smartphone manufacturers like Apple and Samsung, from demanding components at a lower price like they have to other suppliers. Within the Wired Infrastructure segment, operating margin has expanded from 21.5% in FY 2013 to 32.3% in FY 2015. The company has seen higher adoption of its fiber optic products that has allowed for top-line growth. There has also been a favorable spending environment within data centers that has boosted sales for AVGO’s high bandwidth application components within Ethernet networking. This top-line growth, coupled with a stabilized research & development expense has allowed AVGO to expand margins within this segment. This is similarly the case with in the Enterprise Storage segment as well. AVGO has seen market share gains within HDD and SSD devices but has been able to do so without ramping up R&D. Within the Industrial & Other segment, margins have remained high as the company has been able to realize higher IP licensing revenue. Going forward our sector has forecasted gross margin to expand to 57.4% by FY 2017, operating margin to expand to 26.7% by FY 2017, and net income margin to expand to 24.1% by FY 2017. Earnings Broadcom has consistently been able to deliver earnings beats as the company has beat earnings estimates in every quarter since 2010 with the exception of Q1 2014. Over this time period, AVGO has had an average earnings surprise of 8.1%, which has led to an average share price appreciation of 4.98%. The company has seen EPS grow at a CAGR of 32.6% since 2010. Over that time horizon adjusted EPS has grown from $2.19 to $8.98 in FY 2015. Broadcom will be see margin expansion resulting from the acquisition, as well as from the company’s growing end market demand, which will allow the company to see significant bottom-line growth as AVGO continues to see high top-line growth. The combined entity of Broadcom will shift the company’s business to be predominantly servicing its Wired Infrastructure segment and allow the company to be less dependent on Apple than its competitors. We have forecasted EPS growing at an 11.0% CAGR through 2020. Broadcom has shown the ability to consistently grow earnings and we are bullish that the company will continue to do so going forward due to its positioning in high growth areas within each of its segments.

Fall 2016


Cash Flows/Capital Expenditures Cash flow from operations in FY 2015 came in at a gain of $2.32 billion, a YoY increase of 97% from the $1.2 billion it generated in FY 2014. This extreme increase in cash provided by operating activities was mainly driven by a YoY net income increase of 518% from $263 million in FY 2014 to $1.36 billion in FY 2015. Moving forward, operating cash flow is expected to increase by 171% to a gain of $4 billion for FY 2016 and continue to grow at a 27.4% CAGR through 2019. Cash used in financing activities came in at -$1.86 billion in FY 2015 compared to the $5.33 billion provided in FY 2014. The cash used in FY 2015 was principally due to debt repayments of $1.82 billion and $408 million in dividend payments to shareholders. The cash provided in FY 2014 was mainly due to $4.6 billion received in Term Loans under the 2014 credit agreement. Cash used in investing activities came in at -$241 million in FY 2015 compared to the $5.89 billion provided in FY 2014. The cash used in FY 2015 was driven by net PP&E expenses of $483 million and $394 for the acquisition of Emulex. These expenses were partially offset by cash proceeds of $650 million from the sale of the Axxia businesses. The cash used in FY 2014 was mainly due to the $5.66 billion it took to acquire Line Systems Incorporated. Broadcom spent $593 million in capital expenditures during FY 2015, up 44.99% from the $409 million it spent in FY 2014. Capital expenditures is expected to see a YoY increase of 42.6% to $846 million in FY 2016 and grow at a 4.3% CAGR through 2019. Broadcom is expected to see a large increase in capital expenditure spending through 2017 (+76.6%) that is driven by two factors: its campus expansion strategy and a shift in the operations of its testers. In both cases Broadcom is choosing to move away from leasing buildings and testers and turning towards owning/buying them. The campus expansion strategy will be the main driver in capital expenditure spending. Debt Broadcom reported total debt of $5.9 billion in FY 2015, down 18.90% YOY from FY 2014 total debt of 7.2 billion dollars. However, compared to FY 2013, the total amount of debt taken on by the company has significantly increased due to Avago’s multiple acquisition. In Q2 2016, the total debt of Broadcom rose to $26.6 billion, due to financing from the AVGO/BRCM merger. However, the debt to asset ratio of the company stays constant over time (0.55) due to the significant increase of assets driven by goodwill and intangible assets. AVGO plans to pay down $1.3B in debt in the Q3 2016 with additional debt payments likely to continue in the coming quarters in order to reduce its Debt/EBITDA ratio to 2.0x (currently around 2.5x). Research & Development Broadcom invests significant resources in R&D in order to develop innovative and sustainable product platforms, focusing on markets where it believes its innovation and reputation will allow it to earn attractive margins by developing high-value products. It also invests in process development and fabrication capabilities to optimize processes for devices that are manufactured internally. Broadcom makes a point to place its field and design engineers in the same locations as its top customers. This enhances its customer reach and allows it to have increased visibility into new product opportunities and allows it to support customers through all stages of production and manufacturing. This allows Broadcom to leverage its existing technologies and develop customized products for its top customers. Its main goal for R&D is to continue to invest in product development with a focus on rapidly introducing new products. Because the semiconductor industry is characterized by constant technological advancement and ever-changing customer requirements, it forces producers to invest heavily in R&D in order to develop new and enhanced technologies and products. In FY 2015 Broadcom spent $1.1 billion on R&D at 15.4% of net sales, up 51% from the $695 million it spent in FY 2014. Many of Broadcom’s products have grown out of its research and development efforts and has led to a competitive advantage within certain target markets. Management expects R&D expenses to continue to increase YoY for the foreseeable future due to the number of, and complexity of, new products it plans to develop. Shareholder Returns Broadcom has historically authorized stock repurchases with multiple programs. The last stock repurchase program authorized by the board of director was in November of the year 2014, with the repurchased of 10.4 million outstanding class A shares at a weighted average price of $44.40 per share, and for a total of 1 billion dollars for a period of nine months ending on September 2015. In connection with the Avago acquisition, the company agreed to discontinue this any future repurchase programs. However, the company keeps creating value to its shareholders, thanks to the distribution of quarterly dividends for an amount of $0.51 per shares outstanding and a dividend yield of 1.18%.

Fall 2016


VALUATION

Peer Group Analysis Skyworks Solutions (SWKS): Headquartered in Massachusetts, Skyworks Solutions produces analog semiconductors for automotive, broadband, energy management, wireless infrastructures, smartphone and tablet applications through one segment: Semiconductor products (100% of FY 2015 revenue). Although Skyworks operates in one reportable segment, revenue can be broken down into three sub-segments: Broad Markets (22% of FY 2015 revenue), Integrated Mobile (52% of FY 2015 revenue), and Power Amplifiers (26% of FY 2015 revenue). Skyworks is a main competitor of Broadcom Limited because of the company’s relationship with Apple and Samsung. The company has more dollar content in Samsung’s Galaxy S7 than Broadcom. Skyworks also is a partner of many China handset makers that compete with Apple and Samsung’s products. The company has not been able to develop BAW filters that Broadcom currently produces and relies heavily on SAW filters. In addition, Skyworks generates 66.8% of its revenue from China, which is where Broadcom derives most of its revenue (52% of FY 2015 revenue).

Qualcomm Incorporated (QCOM): Headquartered in California, QUALCOMM Incorporated is engaged in the development of digital communication technology. The company’s main products are integrated circuits (chips or chipsets) and system software used in mobile devices and wireless networks. The company reports in two reportable segments: Qualcomm CDMA Technology (68% of FY 2015 revenue) and Qualcomm Technology Licensing (32% of FY 2015 revenue). QCOM and Broadcom are mainly competitors in the wireless space due to QCOM’s relationship with Samsung. Samsung uses QCOM’s snapdragon 820 processor, which allows advanced Wi-Fi, faster LTE networking, and a longer battery life. This product competes directly with the FBAR filters Broadcom supplies to its end markets. QCOM, being the second largest chip maker, has recently show interest in acquiring NXP, which would directly increase competition in the chip making space for Broadcom. This would be the largest semiconductor transaction and make QCOM the largest chip maker in the industry. In addition, QCOM derived 51% of its revenue from China in FY 2015, which is Broadcom’s primary market.

Marvell Technology Group (MRVL): Headquartered in Bermuda, Marvell Technology Group is engaged in the design, development, and sale of integrated circuits. The company develops System on a chip (SoC) and System in a package (SiP). Its main products are for data storages, Ethernet switches, wireless connectivity, and multimedia solutions. The company reports in one segment: Integrated Circuits (100% of FY 2015 revenue). The company has invested heavily in R&D in order to gain more market share in the 4G LTE space, specifically in China where it derived 56% of its revenue. Within wireless, MRVL provides connectivity solutions such as Wi-Fi, Bluetooth, and frequency modulation. Broadcom chips are heavily used for both Wi-Fi and Bluetooth applications, specifically for Apple and Samsung. In June, MRVL developed its most advanced Ethernet switch for data centers.

$ in mm except per share; data from Bloomberg Professional

EquityValue

EnterpriseValue

Revenue YoY Growth

EBIT EBIT Margin

Net Income

Profit Margin

ROE ROA ROIC Leverage Ratio

Debt to Equity

Interest Coverage

Marvell 6,012 4,388 2,458 (23.7%) (46) (1.9%) (25) (1.0%) -0.6% (0.5%) (0.8%) 0.0x 0.0% (1161.8x)Qualcomm 76,773 57,505 22,826 (13.9%) 5,832 25.5% 5,167 22.6% 16.2% 10.0% 11.4% 1.6x 34.9% -Skyworks 11,738 10,764 3,334 7.7% 1,124 33.7% 978 29.3% 29.8% 26.2% 27.7% 0.0x 0.0% -

Median 11,738 10,764 3,334 (13.9%) 1,124 25.5% 978 22.6% 16% 10.0% 11.4% 0.0x 0.0% (1161.8x)Average 31,508 24,219 9,540 (10.0%) 2,303 19.1% 2,040 17.0% 15% 11.9% 12.8% 0.5x 11.6% (1161.8x)

Broadcom 64,216 79,001 10,944 66.5% (276) (2.5%) (678) (6.2%) (5.7%) (2.3%) (1.2%) 5.9x 83.8% 9.5x

CurrentPrice

ConsensusPrice Target

DividendYield

EV/ Sales

EV/ EBITDA

NTM EV/ EBITDA

P/E 5 YR Av P/E

NTM P/E

PEG Wacc Cost of Debt

Cost of Equity

Beta

Marvell $13.10 $14.06 1.8% 2.1x 64.4x 11.9x 475.1x - 24.8x 1.7 8.9% 0.0% 8.9% 0.94Qualcomm $68.40 $72.93 3.1% 3.6x 7.9x 9.0x 19.7x 17.5x 14.7x 1.9 9.7% 1.8% 11.0% 1.20Skyworks $75.72 $84.31 1.5% 4.0x 7.9x 8.8x 15.5x 18.7x 12.9x 0.8 13.5% 0.0% 13.5% 1.57

Median 1.8% 3.6x 7.9x 9.0x 19.7x 18.1x 14.7x 1.7 9.7% 0.0% 11.0% 1.20Average 2.1% 3.2x 26.8x 9.9x 170.1x 18.1x 17.5x 1.5 10.7% 0.6% 11.1% 1.24

Broadcom $169.35 $203.17 1.2% 7.5x 34.1x 9.6x 99.3x 24.0x 12.9x 1.0 6.3% 2.9% 7.0% 1.37

Market Valuation LTM Financials Rerun on Investment Leverage Ratio

Price EV Multiples Price Multiple Cost of Capital

Fall 2016


Undervaluation Broadcom is currently trading at a forward P/E multiple of 14.97x, representing a 3.23% discount to its forward 3-year average P/E multiple of 15.46x. Between October 9th - October 14th in 2014, shares of Broadcom fell about 14.76% due to declines in technology stocks. The whole Technology sector was hit hard after Microchip Technology (MCHP) reduced guidance for the September quarter due to lower than expected sales in China. As a result, shares of rival chip makers like AVGO, Intel, and Texas Instruments declined. AVGO and its other semiconductor competitors are heavily exposed to the China end-market, which would explain why investors showed concern. The PHLX Semiconductor index decreased by 6.9% on October 13th, which was its biggest one-day percentage decline since 2009. Heading into May 2015, AVGO announced interest in acquiring Broadcom for about $37B, which the street expressed positivity. AVGO was able to prove through its M&A with LSI Corp in 2014 that it was capable of creating a successful merger with Broadcom that would diversify AVGO’s product line. Shares reached an all-time high over the planned merger with Broadcom. In July, 2015, Morgan Stanley downgraded the entire US IT hardware industry to “Cautious” from “In-Line,” which impacted AVGO since many of the companies downgraded are end-market partners. Cisco, which is one of AVGO’s main partners in its wired infrastructure segment was downgraded. This was due to the outlook that Cisco's current product refresh cycle would be relatively weak, given a shift in IT budget priorities to security and software. Investors began to devalue AVGO in late 2015 - early 2016 due to Apple facing supply chain difficulties for its iPhones. In addition, in Q4 2015 iPhone shipments fell 10% short of consensus estimates. Although a majority of AVGO’s revenue comes from the success of iPhone sales, investors unfairly devalued the company because they didn’t consider the increase of dollar content per iPhone unit that AVGO was able to achieve. AVGO is the only company to have increased dollar content in the iPhone amongst competitors. Recently, Apple told its suppliers that they would have to pay for its declining iPhone sales since competitors in China are able to provide phones at lower prices compared to Apple. AVGO is well-positioned amongst component makers because of how reliant Apple is on AVGO’s BAW FBAR filters that no other supplier has been able to produce on a massive scale. AVGO has shown to benefit regardless of the amount of iPhones sold since its dollar content continues to increase as each new generation iPhone is released.

WACC Calculations The WACC of 8.51% was calculated by first taking the equity and debt weights for the last period. The equity value was calculated at $60.9 billion with a total capital weighting of 92.3%. Net debt value was calculated to be $2.1 billion, implying total capital weight of 7.7%. Cost of equity was calculated to be 8.96% by using the market risk premium of 5.12%, a risk free rate of 1.85%, and a beta of 1.37. After tax cost of debt was found to be 4.3% by tax affecting the pretax cost of debt of 4.6% with an effective tax rate of 7.0%. By adding together, the product of the debt weighting and the cost of debt, and the product of the equity weighting and the cost of equity, we derived a WACC of 8.51%.

MANAGEMENT

On top of annual salary, Broadcom’s management team’s compensation is tied closely to company performance through short and long-term incentives. Compensation is based on 100% achievement of targets and metrics management sets out for itself. Bonuses are given when management exceeds expectations and a portion of payouts may not occur if targets are not met. Compensation is reviewed by the Compensation Committee and is adjusted quarterly. Rewards for management include stock options, equity incentives and long-term incentives. Broadcom exercises two incentive plans; one for executives and one for the senior management team. Options under both the Executive Plan and Senior Management Plan typically vest at 20% annually based on achieving certain performance metrics and continued employment. In 2009, 20 million shares were reserved for issuance under the Equity Incentive Award Plan and were subject to annual increases beginning in 2012. It was determined no more than 90 million shares can be issued in equity awards at any given time. President and CEO Hock E. Tan has held his current position first at Avago and now at Broadcom since 2006. In FY 2015 he received a base salary of $910,461 with $3 million in bonuses. He did not receive any stock options or equity compensation.

Fall 2016


APPENDIX

Exhibit I: Financial Model Forecasts

Forcast Summary for Broadcom

INCOME STATEMENTFiscal year 2013a 2014a 2015a 2016e 2017e 2018e 2019e 2020eFiscal year end date 11/1/13 11/1/14 11/1/15 11/1/16 11/1/17 11/1/18 11/1/19 11/1/20

Wireless Communications 1,219 1,689 2,536 3,607 4,813 5,776 6,238 6,737Enterprise Storage 0 867 2,180 2,210 2,037 2,063 2,084 2,104Wired Infrastructure 744 1,151 1,479 6,741 8,657 9,246 9,764 10,252Industrial & Other 557 562 629 673 715 739 760 782

Revenue 2,520 4,269 6,824 13,231 16,222 17,824 18,845 19,875% growth n/a 69.4% 59.9% 93.9% 22.6% 9.9% 5.7% 5.5%

Gross Profit 1,198 1,877 3,553 7,304 9,295 10,231 10,930 11,567Gross Profit margin 47.5% 44.0% 52.1% 55.2% 57.3% 57.4% 58.0% 58.2%

Operating profit (EBIT) 552 438 1,632 3,334 4,315 4,759 5,145 5,466Operating profit (EBIT) margin 21.9% 10.3% 23.9% 25.2% 26.6% 26.7% 27.3% 27.5%

Net income 552 263 1,364 3,045 3,886 4,302 4,662 4,961Net income margin 21.9% 6.2% 20.0% 23.0% 24.0% 24.1% 24.7% 25.0%

Diluted EPS $2.19 $0.99 $4.85 $10.99 $13.98 $15.43 $16.66 $17.67% growth n/a (55.0%) 392.8% 126.3% 27.2% 10.3% 8.0% 6.1%

EBITDA 731 765 2,093 4,317 5,520 6,082 6,544 6,941EBITDA margin 29.0% 17.9% 30.7% 32.6% 34.0% 34.1% 34.7% 34.9%

BALANCE SHEETFiscal year 2014a 2015a 2016e 2017e 2018e 2019e 2020eFiscal year end date 11/1/14 11/1/15 11/1/16 11/1/17 11/1/18 11/1/19 11/1/20

Cash & equivalents ST & LT market. securities 1,604 1,822 7,035 10,569 14,088 18,345 21,911Accounts receivable 782 1,019 2,211 2,711 2,979 3,150 3,322Inventory 519 524 1,104 1,290 1,415 1,475 1,548Prepaid expenses 628 22 40 49 53 57 0Other current assets 302 388 847 1,038 1,141 1,206 1,272

Total current assets 3,835 3,775 11,237 15,657 19,676 24,232 28,052

Property, plant & equipment 1,158 1,460 1,844 2,314 2,831 3,378 3,954Intangible assets (inc. Goodwill) 5,213 4,951 4,951 4,951 4,951 4,951 4,951Deferred income taxes 0 0 0 0 0 0 0Operating lease vehicles, net 0 0 0 0 0 0 0Other non-current assets 285 406 834 1,022 1,123 1,187 1,252

Total assets 10,491 10,592 18,865 23,944 28,580 33,748 38,209

Accounts payable 515 617 1,196 1,467 1,611 1,704 1,797Accrued liabilities 0 0 0 0 0 0 0Current deferred revenue 0 0 0 0 0 0 0Other current liabilities 206 236 542 665 731 773 815Revolving line of credit 0 0 0 0 0 0 0

Total current liabilities 721 853 1,739 2,132 2,342 2,477 2,612

Long term debt 4,589 3,949 4,045 4,141 4,237 4,333 4,429Deferred revenue 0 0 0 0 0 0 0Resale value guarantee 0 0 0 0 0 0 0Other non-current liabilities 1,938 1,076 5,425 6,327 6,595 7,161 6,757

Total liabilities 7,248 5,878 11,208 12,599 13,174 13,971 13,798

Common stock and additional paid in capital 2,009 2,547 3,206 3,980 4,814 5,688 6,601Treasury stock 0 0 0 0 0 0 0Retained earnings (accumulated deficit) 1,284 2,240 4,524 7,438 10,665 14,162 17,882Other comprehensive income (loss) (50) (73) (73) (73) (73) (73) (73)

Total equity 3,243 4,714 7,657 11,345 15,406 19,777 24,411

Fall 2016


Exhibit II: Three-Year Forward P/E Multiple

Exhibit III: Valuation Summary

ValuationSummaryforBroadcom

$206.04

$232.87

$213.24

$195.83

$261.73

$243.52

$114.25

$223.05

$228.45

$250.68

$226.33

$208.92

$292.09

$273.87

$179.42

$239.56

$100

$120

$140

$160

$180

$200

$220

$240

$260

$280

$300

DCF Perpituity - 0.0%-1.0%

DCF Exit Multiple -10.22x-11.22x

P/E - 16.29x-17.29x NTM P/E - 14.96x-15.96x

EV/EBITDA - 10.00x-11.00x

NTM EV/EBITDA -9.40x-10.40x

52 Week Low/High Median

Bear Base Bull Bear Base BullDCFPerpituity-0.0%-1.0% $206.04 $216.54 $228.45 21.7% 27.9% 34.9%DCFExitMultiple-10.22x-11.22x $232.87 $241.78 $250.68 37.5% 42.8% 48.0%P/E-16.29x-17.29x $213.24 $219.78 $226.33 25.9% 29.8% 33.6%NTMP/E-14.96x-15.96x $195.83 $202.37 $208.92 15.6% 19.5% 23.4%EV/EBITDA-10.00x-11.00x $261.73 $276.91 $292.09 54.5% 63.5% 72.5%NTMEV/EBITDA-9.40x-10.40x $243.52 $258.69 $273.87 43.8% 52.8% 61.7%52WeekLow/High $114.25 $169.35 $179.42Median $223.05 $230.78 $239.56 31.7% 36.3% 41.5%Average $225.54 $236.01 $246.72 33.2% 39.4% 45.7%

Fall 2016


Exhibit IV: Supply Chain

DISCLAIMER

This report is prepared strictly for educational purposes and should not be used as an actual investment guide. The forward-looking statements contained within are simply the author’s opinions. The writer does not own any Broadcom Ltd. (AVGO) stock.

TUIA STATEMENT

Established in honor of Professor William C. Dunkelberg, former Dean of the Fox School of Business, for his tireless dedication to educating students in “real-world” principles of economics and business, the William C. Dunkelberg (WCD) Owl Fund will ensure that future generations of students have exposure to a challenging, practical learning experience. Managed by Fox School of Business graduate and undergraduate students with oversight from its Board of Directors, the WCD Owl Fund’s goals are threefold:

• Provide students with hands-on investment management experience • Enable students to work in a team-based setting in consultation with investment professionals. • Connect student participants with nationally recognized money managers and financial institutions

Earnings from the fund will be reinvested net of fund expenses, which are primarily trading and auditing costs and partial scholarships for student participants.

Documents

Broadcom Initiating Coverage