Broadcom Corporation Vs Texas Instruments, Inc.

Morrison University
Broadcom Corporation vs.

Texas Instruments, Inc.
Financial Comparison of two companies: Broadcom Corporation vs. Texas Instruments, Inc.
Bhavin Gandhi
6/1/2009
Broadcom Corporation vs. Texas Instruments, Inc. 2
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

Table of Contents
1. Broadcom Corporation ............................................................................................................... 5

1.1. Company Information ................................................................................................................. 5
1.2. Broadcom’s Products .................................................................................................................. 6
1.3. Broadcom’s Revenue Distribution by Products ............................................................................ 7
1.4. Broadcom’s Revenue Distribution by Regions ............................................................................. 8
1.5. Broadcom’s revenue, income and assets .................................................................................. 10
1.6. Broadcom’s competitive edge ................................................................................................... 11
1.7. Broadcom's Balance Sheet ........................................................................................................ 13
1.8. Broadcom's Income Statement ................................................................................................. 14
1.9. Broadcom's Cash Flow .............................................................................................................. 14
2. Texas Instruments, Inc. ............................................................................................................ 15

2.1. Company Information ............................................................................................................... 15
2.2. Texas Instruments’ Products ..................................................................................................... 16
2.3. TI’s Revenue Distribution by Products ....................................................................................... 18
2.4. TI’s Revenue Distribution by Regions......................................................................................... 19
2.5. TI’s revenue, income and assets ............................................................................................... 20
2.6. TI’s competitive edge ............................................................................................................... 22
2.7. TI's Balance Sheet ..................................................................................................................... 24
2.8. TI's Income Statement .............................................................................................................. 25
2.9. TI's Cash Flow ........................................................................................................................... 25

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

3.1. Financial Statement Analysis of Broadcom Corporation ............................................................ 26
3.2. Broadcom's Common-sized Income Statement ......................................................................... 28
3.3. Broadcom's Common-sized Balance Sheet ................................................................................ 29
3.4. Financial Statement Analysis of Texas Instruments.................................................................... 30
3.5. TI's Common-sized Income Statement ...................................................................................... 32
3.6. TI's Common-sized Balance Sheet ............................................................................................. 33
3.7. Liquidity Ratios ......................................................................................................................... 34
3.8. Working Capital Management Ratio ......................................................................................... 36
3.9. Measures of Profitability .......................................................................................................... 39

3.10. Financial Leverage Ratios ......................................................................................................... 42
3.11. Market Value Ratio .................................................................................................................. 43
4. Conclusion ................................................................................................................................ 45
5. References ............................................................................................................................... 46

Broadcom Corporation
Broadcom's principal activity is to provide wired and wireless broadband
communications semiconductors which enable high-speed data, high definition video, voice and
audio. It manufactures computing and networking equipment, digital entertainment and
broadband access products and mobile devices with complete system-on-a-chip and software
solutions. Broadcom's products provide solutions to digital cable, satellite and Internet Protocol
(IP) set-top boxes; high definition television (HDTV); cable and DSL modems and residential
gateways; switching for local, wide area and storage networking, wireless networking, cellular
and terrestrial wireless communications, Voice over Internet Protocol(VoIP) gateway and
telephony systems, broadband network and security processors.
1.1. Company Information
Address: 5300 California Avenue, Irvine, CA 92617, USA
Telephone: +1 949 926-5000
Fax: +1 949 450-8710
URL: http://www.broadcom.com
E-mail: andrewtp@broadcom.com
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.

1.2. Broadcom’s Products
Broadcom designs, develops and supplies a diverse portfolio of products. Their

semiconductor and software solutions are used globally by leading manufacturers and are
embedded in an array of products for three primary target markets, as reflected below:
1.2.1. Broadband Communications
Broadcom offers its manufacturers a range of broadband communications and

consumer electronics SoC solutions that enable voice, video, data and multimedia
services over residential wired and wireless networks. These highly integrated silicon
solutions continue to enable the most advanced system solutions, which include
broadband modems and residential gateways, digital cable, satellite and IP set-top boxes,
or STBs, and media servers, high definition digital television, Blu-ray Disc players and
recorders, and personal video recorders.
1.2.2. Enterprise Networking
Broadcom designs and develops complete silicon and software solutions for
service provider, data center, enterprise and small-to-medium business, or SMB,
networks. Our solutions leverage industry-proven Ethernet technology to promote faster,
„greener‟ and more cost-efficient transport and processing of voice, video, data and
multimedia across both wired and wireless networks. Broadcom solutions enable a
network infrastructure that is scalable, secure and easy to manage. Their products are
found in a wide variety of networking equipment including Ethernet switches, routers and
gateways, security appliances, DSLAMs, 3G/4G wireless backhaul equipment, cable and
VoIP hardware, desktop and notebook computers, servers and storage appliances, and
network-attached printers.

1.2.3. Mobile & Wireless
Broadcom‟s mobile and wireless products allow manufacturers to develop

leading-edge devices that enable end-to-end wireless connectivity at home, at work and
on-the-go. Products in this area include solutions in every major wireless market segment
including wireless local area networking, personal area networking, location
technologies, and a comprehensive range of mobile technologies. This portfolio of
mobile and wireless products enables a broad range of portable devices including cellular
handsets, personal navigation devices, mobile TV products, portable media players,
gaming platforms and other wireless-enabled consumer electronics and peripherals, such
as home gateways, printers, VoIP phones, home entertainment systems and notebook
computers.
1.3. Broadcom’s Revenue Distribution by Products
Now, let‟s have a look at Broadcom‟s revenue distribution based on its products,
to further analyze Broadcom‟s financial strength. Table 1.3.1 shows Broadcom‟s revenue
distribution based on its products from 2006 to 2008, while figure 1.3.2 shows pie chart
representation of Broadcom‟s revenue for 2008.
From the Table 1.3.1, we can clearly say that Broadcom‟s primary source of
revenue is Broadband Communication, which provides them approximately 40% of their
revenue each year. Also, their secondary source of revenue is Mobile and Wireless
devices. Business due to mobile devices grew around 20% in last 3 years, which shows
their competitive edge in this emerging technological era.
1.3.1. Broadcom’s Revenue Distribution Based on Products [2006 – 2008]
Revenue distribution (% of net revenue) 2008 2007 2006

Broadband Communication 37.00% 37.40% 37.80%
Enterprise Networking 27.00% 30.20% 32.20%
Mobile and Wireless 36.00% 32.40% 30.00%
Table 1: Broadcom‟s revenue distribution based on products over past 3 years [1]

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

1.4.1. Broadcom’s Revenue Distribution Based on Regions [2006 – 2008]
Revenue by regions 2008 2007 2006

Asia 29.50% 26.50% 19.50%
Europe 10.50% 8.50% 8.40%
USA 59.50% 64.50% 71.80%
Others 0.50% 0.50% 0.30%
Table 2: Broadcom‟s revenue distribution based on regions over past 3 years [1]
1.4.2. Broadcom’s Revenue Distribution Based on Regions [2008]
2008 - Broadcom's Region-wise

Revenue Distribution
1%
30%
Asia
Europe
60%
11% USA
Others
Figure 2: Broadcom‟s revenue distribution based on regions for 2008 [1]

1.5. Broadcom’s revenue, income and assets
We have looked at Broadcom‟s revenue distribution products-wise as well as

region-wise. Now, it‟s time to look at Broadcom‟s other financial information over past
few years. This will give us better idea about how did this company emerge through its
bad times as well as how well did it perform during its good times. Figure 1.5.1 shows
graphical representation of Broadcom‟s revenue, net income as well as total assets over
10 years time span.
1.5.1. Broadcom’s Revenue, income and assets comparison [1999-2008]
Broadcom's Sales, Assets and Net Income

comparison
6000
Amount in Millions
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]

From first look, we will realize that Broadcom‟s sales increased by approximately
800% over 10 years, while its assets increased by 620% within the same time period.
Now, you might ask, if there is a steady growth in sales then why Broadcom‟s net income
is negative from 2000 to 2003. Answer is very simple. Did you ever hear about dot com
burst? A combination of rapidly increasing stock prices in I.T. industries, individual
speculation in stocks, and widely available venture capital created an exuberant
environment during 1995 – 2001, in which many of I.T. businesses dismissed standard
business models, focusing on increasing market share at the expense of the bottom line
which occurred in 2001. Semiconductor industry is widely dependent on I.T. industry and
hence Broadcom has encountered net income loss during 2000 to 2003. But that is not the
only reason for Broadcom‟s decrease in net income. If you look at the graph, you will
realize that there is steep rise in Broadcom‟s assets from 1999 to 2000. This shows that
some of the Broadcom‟s revenue might be utilized in acquiring those assets due to which
its net income is in negative numbers.
Other five years from 2003 - 2008 were a period of tremendous growth for the
semiconductor materials industry. The increase in production of laptops and computers
swelled the need for semiconductors, as did the significant increase in semiconductor
orders from the communications industry, various consumer products manufacturers, and
the automotive industry. This phenomenon in semiconductor market easily explains
Broadcom‟s increase in net income after 2003.
1.6. Broadcom’s competitive edge
Semiconductor industry features a number of distinct characteristics that position

it uniquely in the economy and in the global competitive arena. One of the leading
characteristics, which can depict company‟s position in competitive market, is intensity
of research & development and the required level of capital expenditures in
semiconductor plants or fabs. If we go by industry standards then Broadcom is suppose to
invest 20% of its annual revenue in research & development and 25% of its annual
revenue in development of semiconductor plants, to stay competitive. Figure 1.6.1 shows
graphical representation of Broadcom‟s expenditure in Research & Development over
past 5 years. This clearly demonstrates why Broadcom is successful in maintaining its
competitive edge in semiconductor industry.

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

expenses
5000
Amount in Millions
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]

1.7. Balance Sheet
2008 2007 2006 2005 2004

Current assets
Cash 1,898.12 2,328.30 2,680.45 1,732.68 1,182.63
Account receivable 372.31 369.00 382.82 307.36 205.14
Inventory 366.11 231.31 202.79 194.57 128.29
Other current assets 114.67 125.66 85.72 101.27 68.38
Total 2,751.21 3,054.27 3,351.78 2,335.88 1,584.44
Fixed assets
Net plant and equipment 234.69 241.80 164.70 96.44 107.16
Net intangible assets 1,341.20 1,423.33 1,214.18 1,156.93 1,079.26
Other long term assets 66.16 118.78 146.11 162.95 114.98
Total assets 4,393.26 4,838.18 4,876.77 3,752.20 2,885.84
Current liabilities
Accounts payable 310.49 313.62 307.97 289.07 171.25
Accrued expense 378.35 390.17 322.97 240.05 230.07
Other current liabilities 28.26 26.78 47.76 70.37 98.03
Total 717.10 730.57 678.70 599.49 499.35
Long-term debt 69.10 71.48 6.40 12.14 22.75
Total liabilities 786.20 802.05 685.10 611.63 522.10
Owner's equity
Common stock and paid-in
surplus 10,930.37 11,576.09 11,948.97 11,470.03 10,967.10
Retained earnings -7,324.33 -7,539.12 -7,757.20 -8,136.24 -8,503.33
Other equity 1.03 -0.82 -0.10 -193.22 -100.02
Total 3,607.07 4,036.15 4,191.67 3,140.57 2,363.75
Total liabilities and owners' equity 4,393.27 4,838.20 4,876.77 3,752.20 2,885.85
Total Shares Outstanding 489.02 537.26 548.31 524.32 495.76
Table 3: Simplified Broadcom‟s balance sheet for past 5 years [8]

1.8. Income Statement
2008 2007 2006 2005 2004

Sales 4,658.13 3,776.40 3,667.82 2,670.79 2,400.61
Cost of goods sold 2,213.02 1,832.18 1,795.57 1,267.80 1,196.77
Depreciation 3.39 1.03 2.35 4.03 3.70
Other expenses 2,219.40 1,723.73 1,503.26 1,052.09 970.87
Earnings before interest and taxes 222.32 219.46 366.64 346.87 229.27
Taxes 7.52 6.11 -12.4 -20.22 56.08
Net income 214.79 213.34 379.04 367.09 173.19
Table 4: Simplified Broadcom‟s income statement for past 5 years [8]
1.9. Cash Flow
2008 2007 2006 2005 2004

Operating activities
Net income 214.79 213.34 379.04 367.09 173.19
Depreciation 78.24 64.08 43.33 53.41 75.17
Non-cash items 729.41 538.43 472.86 144.80 276.73
Changes in working capital -122.08 -5.05 -20.25 -133.71 -39.77
Other operational expenses 19.25 14.51 12.40 15.11 16.52
Net cash from operating income 919.61 825.31 887.38 446.70 501.84
Investment activities
Capital expenditure -82.81 -150.43 -92.48 -41.77 -49.93
Other investments and cashflow -662.57 204.83 -273.00 -131.31 -406.09
Net cash from investment activities -745.38 54.40 -365.48 -173.08 -456.02
Financing activities
Other financing cash flow -58.06 -69.68 -25.43 3.21 2.99
Issuance (Retirement) of Stock, Net -1,112.10 -781.58 228.99 304.33 253.32
Issuance (Retirement) of Debt, Net 0.00 0.00 -4.63 -2.48 -2.20
Net cash from financing activities -1,170.16 -851.26 198.93 305.06 254.11
Foreign Exchange Effects 0.00 0.00 0.00 0.00 0.00
Net Change in Cash -995.93 28.46 720.83 578.68 299.92
Net Cash - Beginning Balance 2,186.57 2,158.11 1,437.28 858.59 558.67
Net Cash - Ending Balance 1,190.65 2,186.57 2,158.11 1,437.28 858.59
Table 5: Simplified Broadcom‟s cash flow statement for past 5 years [8]

Texas Instruments, Inc.

Texas Instruments Incorporated was incorporated in Delaware and began operations in
1930. The Company designs and makes semiconductors that it sells to electronics designers and
manufacturers all over the world. Semiconductors are electronic components that serve as the
building blocks inside modern electronic systems and equipment. The Company's
semiconductors are used to accomplish many different things, such as converting and amplifying
signals, interfacing with other devices, managing and distributing power, processing data,
canceling noise and improving signal resolution. It sells two general categories of semiconductor
products: custom and standard.
2.1. Company Information
Address: 12500 Texas Instruments Boulevard, Dallas, TX 75266, USA
Telephone: +1 972 995-3773
Fax: +1 972 995-4360
URL: www.ti.com
E-mail: web.queries@computershare.com
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.

2.2. Texas Instruments’ Products
Semiconductors are electronic components that serve as the building blocks inside
modern electronic systems and equipment. Semiconductors come in two basic forms:
individual transistors and integrated circuits (generally known as “chips”) that combine
different transistors on a single piece of material to form a complete electronic circuit.
TI's (Texas Instruments) semiconductors are used to accomplish many different things,
such as converting and amplifying signals, interfacing with other devices, managing and
distributing power, processing data, canceling noise and improving signal resolution. TI's
portfolio includes products that are integral to almost all electronic equipment.
TI sells two general categories of semiconductor products: custom and standard.

A custom product is designed for a specific customer for a specific application, is sold
only to that customer and is typically sold directly to the customer. A standard product is
designed for use by many customers and/or many applications and is generally sold
through both distribution and direct channels. Standard products include both proprietary
and commodity products. Additional information regarding each segment‟s products
follows.
2.2.1. Communications
TI offers its customers a range of broadband communication products, which have

applications over Cell phones to infrastructure equipments (wireless). TI communication
products provide mobile connectivity solutions including wireless LAN, global
positioning systems, Bluetooth, high-speed wireless home networking, cable modem,
High-frequency radio, telecom accessories, etc.
2.2.2. Industrial
TI has various semiconductor devices which can be very useful in industrial

world. Their applications can be summarized as follows:
Digital power controls: Switch mode power supplies and uninterruptible power supplies
Motor controls: Heating/ventilation/air conditioning, industrial control motor drives,

power tools, printers/copiers, etc.

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

(smoke and glass-breakage detection), Video analytics (surveillance), etc.
2.2.3. Consumer Electronics
TI's semiconductors are useful for creating consumer electronics such as

biophysical monitoring system, digital hearing aids, personal and portable medical
devices, digital cameras, digital audio players, portable media players, car audio, DVD
players and recorders, home theater systems, high-definition televisions, etc.
2.2.4. Computing
TI product‟s computing applications include printers, hard disk drives, monitors,

projectors, notebook and desktop personal computers.
2.2.5. Automotive
TI plays very important role as far as semiconductor devices related to auto

industries. Its applications in automobile industry include body systems, chassis systems
processing, driver information, entertainment, power train, safety systems, security
systems, etc.
2.2.6. Education
TI‟s education product-line includes handheld graphing and scientific calculators,

educational software, etc.

2.3. TI’s Revenue Distribution by Products
Now, let‟s have a look at TI‟s revenue distribution based on its products, to
further analyze TI‟s financial strength. Table 2.3.1 shows TI‟s revenue distribution based
on its products for year of 2008, while figure 2.3.2 shows its pie chart representation for
the same.
From the Table 2.3.1, we can clearly say that TI‟s primary source of revenue is
Communication, which provides them approximately 48% of their revenue each year.
But if we look in to further detail then we will realize that TI‟s portfolio of products is
more diversified as compared to Broadcom Corporation. Since it‟s a mainly
semiconductor based industry, it is not unusual for a company to make its 50% of
revenue through communication based products.
2.3.1. TI’s Revenue Distribution Based on Products [2008]
Revenue distribution 2008 Description

Communications 48.00% LAN card, GPS, Bluetooth, Cable modem
Computing 22.00% Printers, hard disk, monitors, projectors
Industrial 10.00% Switch, fingerprint reader, surveillance
Consumer 10.00% Digital Camera, DVD players, Home theater system
Automotive 6.00% Entertainment, Power train, Safety system
Education 4.00% Graphic calculators, education software
Table 6: TI‟s revenue distribution based on products for 2008 [5]

2.3.2. TI’s Revenue Distribution Based on Products [2008]
2008 - TI's Product-wise Revenue

Distribution
6% 4%
Communications
10%
48% Computing
10%
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.

2.4.1. TI’s Revenue Distribution Based on Regions [2006 – 2008]
Revenue by regions 2008 2007 2006

Asia 59.09% 57.92% 53.09%
Europe 15.00% 16.32% 16.04%
USA 12.41% 12.71% 13.10%
Japan 10.14% 10.29% 14.09%
Others 3.36% 2.77% 3.68%
Table 7: TI‟s revenue distribution based on regions [5]
2.4.2. TI’s Revenue Distribution Based on Regions [2008]
2008 - TI's Region-wise Revenue

Distribution
10% 3%
Asia
13% Europe
15% 59% 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.

2.5.1. TI’s Revenue, income and assets comparison [1999-2008]
TI's Sales, Assets and Net Income

comparison
20000
Amount in Millions
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.

Next question that might come in to your mind may be why TI‟s sales are in
increasing and decreasing pattern over time? Answer to this question is very simple. Do
you remember our discussion in section 1.4 about effect of currency exchange rate on
revenue? Well, TI‟s primary markets are Asia and Europe. TI collects its 60% of revenue
from these two continents combined. And the exchange rate difference really impacted
their sales volume over time. Not only that but it looks like that they might reach a
saturation point in those markets, so if they want to be competitive then they need to
expand their markets.
After all, there is always a need for high degrees of flexibility and innovation in
semiconductor industry to constantly adjust to the rapid pace of change in the market.
Many products embedding semiconductor devices often have a very short life cycle. At
the same time, the rate of constant price-performance improvement in the semiconductor
industry is staggering. As a consequence, changes in the semiconductor market not only
occur extremely rapidly but also anticipate changes in industries evolving at a slower
pace. Yet another consequence of this rapid pace is that established market strongholds
can be displaced all too quickly. And that‟s what might have happened with TI, in this
case.
2.6. TI’s competitive edge

The role of the semiconductor industry is to become a technology enabler. The
semiconductor industry is widely recognized as a key driver for economic growth in its
role as a multiple lever and technology enabler for the whole electronics value chain.
Semiconductor industry features a number of distinct characteristics that position it
uniquely in the economy and in the global competitive arena. So, now we are going to
have a look at Texas Instruments‟ R&D (Research and Development) spending to look at
its long term growth.
Figure 2.6.1 shows graphical representation of TI‟s expenditure in

Research & Development over past 5 years. This clearly demonstrates why TI is
successful in maintaining its competitive edge in semiconductor industry.

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

successfully develop, manufacture and market innovative products in a rapidly changing
technological environment. They require significant capital to develop new technologies
and products to meet changing customer demands that, in turn, may result in shortened
product life cycles. Moreover, expenditures for technology and product development are
generally made before the commercial viability for such developments can be assured. As
a result, there can be no assurance that they will successfully develop and market these
new products. There also is no assurance that the products they do develop and market
will be well received by customers, or that they will realize a return on the capital
expended to develop such products.
You can clearly see that TI is aware of these risks and that might be the only
reason why their spending on R&D is kind of constant overtime unlike Broadcom. But at
the same time they might be at the risk of losing their competitive edge in the market by
not coming up with new technological solutions every time. But with approximately 20%
of their total revenue invested in R&D, I don‟t think that they should have any problems
as far as competitive edge is concerned.
2.6.1. TI’s Revenue and R&D comparison [2004 -2008]
TI's Revenue and R&D expenses

16000
14000
Amount in Millions
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]

2.7. Balance Sheet
2008 2007 2006 2005 2004

Current assets
Cash 2,540.00 2,924.00 3,717.00 5,330.00 6,353.00
Account receivable 913.00 1,742.00 1,774.00 1,648.00 1,545.00
Inventory 1,375.00 1,418.00 1,437.00 1,185.00 1,170.00
Other current assets 962.00 834.00 926.00 1,249.00 1,239.00
Total 5,790.00 6,918.00 7,854.00 9,412.00 10,307.00
Fixed assets
Net plant and equipment 3,304.00 3,609.00 3,950.00 3,730.00 3,794.00
Net intangible assets 1,113.00 1,180.00 1,098.00 980.00 1,090.00
Other long term assets 1,716.00 960.00 1,028.00 941.00 1,108.00
Total assets 11,923.00 12,667.00 13,930.00 15,063.00 16,299.00
Current liabilities
Accounts payable 324.00 657.00 560.00 702.00 518.00
Accrued expense 1,168.00 1,315.00 1,191.00 1,069.00 1,087.00
Other current liabilities 40.00 53.00 327.00 606.00 329.00
Total 1,532.00 2,025.00 2,078.00 2,377.00 1,934.00
Long-term debt 1,065.00 667.00 492.00 749.00 1,302.00
Total liabilities 2,597.00 2,692.00 2,570.00 3,126.00 3,236.00
Owner's equity
surplus 2,762.00 2,671.00 2,624.00 2,481.00 2,488.00
Retained earnings 21,168.00 19,788.00 17,529.00 13,394.00 11,242.00
-
Other equity 14,604.00 -12,484.00 -8,793.00 -3,938.00 -667.00
Total 9,326.00 9,975.00 11,360.00 11,937.00 13,063.00
Total liabilities and owners' equity 11,923.00 12,667.00 13,930.00 15,063.00 16,299.00
Total Shares Outstanding 1,277.90 1,343.21 1,450.03 1,596.59 1,718.12

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

2008 2007 2006 2005 2004

Sales 12,501.00 13,835.00 14,255.00 12,335.00 11,552.00
Cost of goods sold 6,256.00 6,466.00 6,996.00 6,319.00 6,295.00
Other expenses 3,764.00 3,677.00 3,690.00 3,261.00 3,193.00
Earnings before interest and taxes 2,481.00 3,692.00 3,569.00 2,755.00 2,064.00
Taxes 561.00 1,051.00 987.00 582.00 481.00
Net income 1,920.00 2,657.00 4,285.00 2,324.00 1,753.00
Dividends 537.00 425.00 199.00 173.00 154.00
Table 9: Simplified TI‟s income statement [9]
2.9. Cash Flow
2008 2007 2006 2005 2004

Operating activities
Net income 1,920.00 2,657.00 4,341.00 2,324.00 1,861.00
Depreciation 1,022.00 1,022.00 1,052.00 1,346.00 1,449.00
Non-cash items 219.00 225.00 -1,364.00 161.00 22.00
Changes in working capital 314.00 420.00 -1,425.00 -46.00 -445.00
Other operational expenses -145.00 82.00 -141.00 -13.00 258.00
Net cash from operating income 3,330.00 4,406.00 2,463.00 3,772.00 3,145.00
Investment activities
Capital expenditure -763.00 -686.00 -1,272.00 -1,288.00 -1,260.00
Other investments and cashflow -419.00 901.00 4,347.00 -399.00 99.00
Net cash from investment activities -1,182.00 215.00 3,075.00 -1,687.00 -1,161.00
Financing activities
Other financing cash flow 19.00 116.00 100.00 59.00 0.00
Total dividents paid -537.00 -425.00 -199.00 -173.00 -154.00
Issuance (Retirement) of Stock, Net -1,912.00 -4,125.00 -4,884.00 -3,690.00 -561.00
Issuance (Retirement) of Debt, Net 0.00 -43.00 -586.00 264.00 -435.00
Net cash from financing activities -2,430.00 -4,477.00 -5,569.00 -3,540.00 -1,150.00
Foreign Exchange Effects 0.00 1.00 0.00 6.00 15.00
Net Change in Cash -282.00 145.00 -31.00 -1,449.00 850.00
Table 10: Simplified TI‟s cash flow statement [9]

Financial Comparison
We have seen basic business and functionalities of both the companies, now it‟s time for
us to compare them using their financial standing in the market. We are going to use common
sized financial statements and various financial ratios to accomplish this task. After all, common
sized financial statements and ratios are mathematical calculations that the company can use to
evaluate its performance. They help the companies to determine whether trends are improving or
deteriorating.
3.1. Financial Statement Analysis of Broadcom Corporation
Broadcom‟s common-size statements are presented below. My approach here is

simple. Firstly, we will conduct a common-size analysis to review both the common-size
income statements and common-size balance sheets to look for changes and trends that
warrant further review. Once the trends are identified, explanations will be sought. I have
took most of the information from management‟s discussion of financial performance
and the financial statement footnotes and then I tried to balance it using external sources
such as industry reports, economic data, peer company financial statements and news
reports.
3.1.1. Initial Assessment
Broadcom's common-size income statement is presented in the given table. It

shows that Broadcom's cost of revenue decreased 1.01% in 2008 and 1.45% cumulatively
between 2006 and 2008. Also, Broadcom's research and development‟s expense
decreased by 3.56% in 2008 while there is a slight increase in R&D expense by 1.70% if
we consider cumulative change between 2006 and 2008. If we look at Broadcom‟s
common-size balance sheet then we will realize that Broadcom's current assets decreased
by 0.51% in 2008 and by 6.11% cumulatively between 2006 and 2008. At the same time
total liability grew 1.32% in 2008 and 3.85% cumulatively.

3.1.2. Common-sized Balance Sheet’s Assessment
Broadcom's current assets decreased by 0.51% in 2008 and decreased by 6.11%

cumulatively between 2006 and 2008. Total liabilities increased by 1.32% in 2008 and
increased 3.85% cumulatively between 2006 and 2008. When reviewing common-size
balance sheets, particular attention should be paid to individual items that are not in line
with this trend.
Broadcom‟s other long term assets as a percentage of total assets decreased to

1.51% from 2.46% in 2008. The main driver of the overall decrease was due to reduction
in assets. In 2008, Broadcom disposed its property and equipment with a net book value
of $3.8 million. In addition, they wrote down property and equipment included in their
mobile platforms business group in the amount of $19.8 million in connection with their
SFAS 144 review in 2008.
Looking at F-23 in the 10K, we find that Broadcom's goodwill increased by $10.0
million and $10.2 million in 2008 and 2007, respectively, upon the satisfaction of certain
performance goals related to their Global Locate acquisition, which resulted in a
corresponding increase of intangible assets.
On a close look at balance sheet, we see a strong increase in outstanding shares in

2007. The main reason for this change was a share split. In 2006 Broadcom's Board of
Directors approved a three-for-two split of their common stock, which was effected in the
form of a stock dividend. Holders of record of their Class A and Class B common stock
as of the record date received one additional share of Class A or Class B common stock,
as applicable, for every two shares of such class held on the record date.
3.1.3. Common-sized Income Statement’s Assessment
An examination of Broadcom‟s common-size income statement shows that the

company was profitable the entire time but still net income declined steadily from
10.33% in 2006 to 5.65%in 2007 and just 4.61% in 2008. Investors will want to know if
this trend is more likely to continue or to reverse. To do this analysis we will analyze
various components of the income statement.

We can clearly note that taxes increased steadily throughout the period, which
decreased net income available to the company. Actually, on January 1, 2007 Broadcom
adopted the provisions of FIN 48. As a result of applying the provisions of FIN 48, they
recognized a decrease of $3.9 million in the liability for unrecognized tax benefits, and a
$4.7 million reduction in accumulated deficit as of January 1, 2007. In addition they
reclassified certain tax liabilities for unrecognized tax benefits, as well as related
potential penalties and interest, from current liabilities to long-term liabilities. Also, at
December 31, 2008 they had federal, state, United Kingdom and Israel net operating loss
carry forwards of approximately $1.720 billion, $1.422 billion, $44.4 million and $9.4
million, respectively.
If we look at R&D cost then we can see that it increased 1.7% cumulatively
between 2006 and 2008, while there was approximately 5% increase in 2007 alone.
Fundamental reason for this change was due to changes made in accounting principles. In
June 2007 the FASB ratified EITF Issue No. 07-3, Accounting for Nonrefundable
Advance Payments for Goods or Services Received for Use in Future Research and
Development Activities, or EITF 07-3. EITF 07-3 requires nonrefundable advance
payments for goods or services to be used in future research and development activities to
be recorded as an asset and the payments to be expensed when the research and
development activities are performed.
Cumulative
2006 2007 Change 2008 Change
Revenue 100.00% 100.00% 0.00% 100.00% 0.00%
Cost of Revenue, Total 48.95% 48.52% -1.01% 47.51% -1.45%
Gross Profit 51.05% 51.48% 1.01% 52.49% 1.45%
Selling/Administrative Expenses, Total 13.74% 13.05% -1.39% 11.66% -2.08%
Research & Development 30.45% 35.71% -3.56% 32.15% 1.70%
Depreciation/Amortization 0.06% 0.03% 0.05% 0.07% 0.01%
Unusual Expense (Income) 0.14% 0.45% 4.46% 4.91% 4.77%
Operating Income 6.64% 2.25% 1.44% 3.70% -2.95%
Income Before Tax 10.00% 5.81% -1.04% 4.77% -5.22%
Income Tax - Total -0.34% 0.16% 0.00% 0.16% 0.50%
Net Income 10.33% 5.65% -1.04% 4.61% -5.72%
Table 11: Simplified Broadcom‟s common-sized income statement for past 3 years [8]

3.3. Balance Sheet
Cumulative
Current assets
Cash 54.96% 48.12% -4.92% 43.21% -11.76%
Account receivable 7.85% 7.63% 0.85% 8.47% 0.62%
Inventory 4.16% 4.78% 3.55% 8.33% 4.18%
Other current assets 1.76% 2.60% 0.01% 2.61% 0.85%
Total 68.73% 63.13% -0.51% 62.62% -6.11%
Fixed assets
Net plant and equipment 3.38% 5.00% 0.34% 5.34% 1.96%
Net intangible assets 24.90% 29.42% 1.11% 30.53% 5.63%
Other long term assets 3.00% 2.46% -0.95% 1.51% -1.49%
Total assets 100.00% 100.00% 0.00% 100.00% 0.00%
Current liabilities
Accounts payable 6.32% 6.48% 0.59% 7.07% 0.75%
Accrued expense 6.62% 8.06% 0.55% 8.61% 1.99%
Other current liabilities 0.98% 0.55% 0.09% 0.64% -0.34%
Total 13.92% 15.10% 1.22% 16.32% 2.41%
Long-term debt 0.13% 1.48% 0.10% 1.57% 1.44%
Total liabilities 14.05% 16.58% 1.32% 17.90% 3.85%
Owner's equity
surplus 245.02% 239.27% 9.53% 248.80% 3.78%
Retained earnings -159.06% -155.83% -10.89% -166.72% -7.65%
Other equity 0.00% -0.02% 0.04% 0.02% 0.03%
Total 85.95% 83.42% -1.32% 82.10% -3.85%
Total liabilities and owners' equity 100.00% 100.00% 0.00% 100.00% 0.00%
Total Shares Outstanding 489.02 537.26 548.31
Table 12: Simplified Broadcom‟s common sized balance sheet for past 3 years [8]

3.4. Financial Statement Analysis of Texas Instruments
TI‟s common-size statements are presented below. We will follow the same
approach that we have followed for Broadcom. Firstly, we will conduct a common-size
analysis to review both the common-size income statements and common-size balance
sheets to look for changes and trends that warrant further review. Once the trends are
identified, explanations will be sought. I have took most of the information from
management‟s discussion of financial performance and the financial statement footnotes
and then I tried to balance it using external sources such as industry reports, economic
data, peer company financial statements and news reports.
3.4.1. Initial Assessment
TI's common-size income statement is presented in the given table. It shows that
TI's cost of revenue increased 3.31% in 2008 and 0.97% cumulatively between 2006 and
2008. Also, TI's research and development‟s expense increased by 0.05% in 2008 while
there is a slight increase in R&D expense by 0.12% if we consider cumulative change
between 2006 and 2008. If we look at its common-size balance sheet then we will realize
that TI's current assets decreased by 6.05% in 2008 and by 7.82% cumulatively between
2006 and 2008. At the same time total liability grew 0.53% in 2008 and 3.33%
cumulatively.
3.4.2. Common-sized Balance Sheet’s Assessment
TI's other long-term assets increased by 6.81% in 2008 and 7.01% cumulatively
between 2006 and 2008. While total liabilities increased by 0.53% in 2008 and increased
3.33% cumulatively between 2006 and 2008.
TI's long-term investments include auction-rate securities, which are debt

instruments with variable interest rates that historically would periodically reset through
an auction process. Since mid-February 2008, conditions in global credit markets have
caused the failure of auctions for most auction-rate securities, including those they hold,
because the amount of securities submitted for sale in those auctions exceeded the
amount of bids. When auctions are not successful, the interest rate moves to a maximum
rate defined for each security, and is generally reset periodically at a level higher than
defined short-term interest benchmarks.

Also, if we have a closer look at the balance sheet then we will find that TI's
intangible assets hardly changed during 2008. Primary reason for that was associated
with acquisitions that they have made during the year 2008 and 2007, of $13 million and
$45 million, respectively, primarily for developed technology, to be amortized over three
to five years.
The year 2008 was marked by a dramatic decrease in global demand for
semiconductors in the second half, a decline that accelerated in the fourth quarter. Given
this significant change in the economy, they are reducing costs and realigning their
expenses and inventory so that their financial performance will remain solid even in a
period of prolonged economic weakness. They have focused most of their cost reductions
in their non-core product areas and internal support functions. They will continue to
invest aggressively in Analog and Embedded Processing and in customer support, which
will drive their future growth. In January 2009, they are reducing their 12 percent work
force, through 1,800 layoffs and 1,600 voluntary retirements and departures. Charges for
these employment reductions will be about $300 million, a portion of which was
recognized in the fourth quarter of 2008. And hence there is increase in TI's total
liabilities despite of decrease in cash.
3.4.3. Common-sized Income Statement’s Assessment
An examination of TI‟s common-size income statement shows that the company

was profitable but its net income declined steadily from 30.06% in 2006 to 19.20%in
2007 and just 15.36% in 2008. It would be interesting to know why there is steady
decrease in net revenue. Is it due to industry trend? Or is it due to other internal factors.
To figure out the driving force, we will analyze various components of the income
statement.

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

digital manufacturing process technology. Instead of separately creating their own core
process technology, they will work collaboratively with their foundry partners to specify
and drive the next generations of digital process technology. Additionally, they stopped
production at an older digital factory. These actions are complete and as a result, about
300 jobs were eliminated by year-end 2007. Operating profit for 2007 included a charge
of $52 million related to these actions, which consisted of severance and benefits costs of
$31 million and acceleration of depreciation on the impacted facilities‟ assets of $21
million. These amounts have been reclassified from cost of revenue ($37 million), R&D
($14 million) and SG&A ($1 million) to the restructuring expense line on the income
statement. Due to this restructuring process we see increase in operating income in year
2007 while there is a steep decrease of operating income in 2008 by 5.78%.
Cumulativ
2006 2007 Change 2008 e Change
Revenue 100.00% 100.00% 0.00% 100.00% 0.00%
Cost of Revenue, Total 49.08% 46.74% 3.31% 50.04% 0.97%
Gross Profit 50.92% 53.26% -3.31% 49.96% -0.97%
Selling/ Administrative Expenses, Total 11.90% 12.14% 0.77% 12.91% 1.01%
Research & Development 15.40% 15.47% 0.05% 15.52% 0.12%
Depreciation/Amortization 0.00% 0.00% 0.00% 0.00% 0.00%
Unusual Expense (Income) 0.20% 0.38% 1.66% 2.03% 1.84%
Operating Income 23.42% 25.28% -5.78% 19.49% -3.93%
Income Before Tax 25.04% 26.69% -6.84% 19.85% -5.19%
Income Tax - Total 6.92% 7.60% -3.11% 4.49% -2.44%
Net Income 30.06% 19.20% -3.85% 15.36% -14.70%
Table 13: Simplified TI‟s common-sized income statement for past 3 years [8]

3.6. Balance Sheet
Cumulative
Current assets
Cash 26.68% 23.08% -1.78% 21.30% -5.38%
Account receivable 12.74% 13.75% -6.09% 7.66% -5.08%
Inventory 10.32% 11.19% 0.34% 11.53% 1.22%
Other current assets 6.65% 6.58% 1.48% 8.07% 1.42%
Total 56.38% 54.61% -6.05% 48.56% -7.82%
Fixed assets
Net plant and equipment 28.36% 28.49% -0.78% 27.71% -0.64%
Net intangible assets 7.88% 9.32% 0.02% 9.33% 1.45%
Other long term assets 7.38% 7.58% 6.81% 14.39% 7.01%
Total assets 100.00% 100.00% 0.00% 100.00% 0.00%
Current liabilities
Accounts payable 4.02% 5.19% -2.47% 2.72% -1.30%
Accrued expense 8.55% 10.38% -0.59% 9.80% 1.25%
Other current liabilities 2.35% 0.42% -0.08% 0.34% -2.01%
Total 14.92% 15.99% -3.14% 12.85% -2.07%
Long-term debt 3.53% 5.27% 3.67% 8.93% 5.40%
Total liabilities 18.45% 21.25% 0.53% 21.78% 3.33%
Owner's equity
surplus 18.84% 21.09% 2.08% 23.17% 4.33%
Retained earnings 125.84% 156.22% 21.32% 177.54% 51.70%
Other equity -63.12% -98.56% -23.93% -122.49% -59.36%
Total 81.55% 78.75% -0.53% 78.22% -3.33%
Total liabilities and owners' equity 100.00% 100.00% 0.00% 100.00% 0.00%
Total Shares Outstanding 1,450.03 1,343.21 1,277.90
Table 14: Simplified TI‟s common sized balance sheet for past 3 years [8]

Now, we will try to evaluate various ratios within their context. Not only that, we will try
to identify value of statistical indicators, business and environmental factors and current
company trends based on these ratios. There are several financial ratios with which we can
compare two companies, but we will stick to the basics and try to compare Broadcom and TI on
the basis of following groups of ratios:
Liquidity ratios
Working capital management ratios
Measures of profitability
Financial leverage ratios
Market Value Ratio
3.7. Liquidity Ratios
Liquidity measures are used to evaluate a company‟s ability to pay its bills on a
regular week-to-week or month-to-month basis. There are two commonly used ratios that
help to evaluate this, the current ratio and the quick ratio.
3.7.1. Quick Ratio
Sometimes inventories are not necessarily worth the amount they are on the books
for. This is particularly true in retail, where you routinely see close-out sales with 60% to
80% markdowns. It is even worse when a company going out of business is forced to
liquidate its inventory, sometimes for pennies on the dollar. And if a company has much
of its liquid assets tied up in inventory, it will be very dependent on the sale of that
inventory to finance operations. If the company is not growing sales very quickly, this
can turn into an albatross that forces the company to issue stock or take on debt. Because
of all of this, it pays to check the quick ratio.

Quick ratio comparison

5.00
4.50
4.00
3.50
Quick Ratio
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.

Current ratio comparison

6.00
5.00
Current Ratio
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
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).

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
40.00
DSO
30.00
20.00
10.00
0.00
2008 2007 2006 2005 2004
Broadcom 29.17 35.66 38.10 42.00 31.19
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.

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
90.00
80.00
70.00
60.00
50.00
DSI
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
Figure 12: DSI comparison between Broadcom and TI over 5 years [8, 9]

3.9. Measures of Profitability
Let us get to the business now. Most of the stockholders are worried about
whether the company is profitable or not, instead of looking at its liquidity ratios or
inventory turnover. So, now we will have look at various profitability of these companies.
These ratios will assist us in the evaluation of the company‟s achievements. Main focus
of these ratios would be profitability achieved by the management team, assets invested
in the business, revenue achieved by the business, rate of return for owner's investments,
etc.
3.9.1. Return on Assets
Return on assets (ROA) measures the profitability of the company relative to the
total amount of assets the company has invested in the business. These assets include
both working capital (cash, marketable securities, accounts receivable, and inventory)
and fixed assets (capital equipment and land/buildings). This will give us better ideas
about which of these companies are investing their money wisely on their assets. More
importantly, in semiconductor industry most of the companies make their revenue from
their patents, so this ratio would be of real help in comparing these companies.
But if we look at the pictorial representation of these companies in following

diagram then we can clearly say that TI ruled Broadcom in past 5 years as far as return on
assets is concerned. Hence, we can say that TI is investing its money wisely in its assets
acquisition.
Return on assets comparison

35.00
30.00
Percentage
25.00
20.00
15.00
10.00
5.00
0.00
2008 2007 2006 2005 2004
Broadcom 4.89 4.41 7.77 9.78 6.00
Figure 13: ROA comparison between Broadcom and TI over 5 years [8, 9]
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

40.00
35.00
30.00
Percentage
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
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.

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
30.00
ROS in percentage
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
Figure 15: ROS comparison between Broadcom and TI over 5 years [8, 9]

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
0.20
D/E - ratio
0.15
0.10
0.05
0.00
2008 2007 2006 2005 2004
Broadcom 0.22 0.20 0.16 0.19 0.22
Figure 16: Debt to equity ratio comparison between Broadcom and TI over 5 years [8, 9]

The debt/equity ratio measures risk from the perspective of both the company and
existing and potential lenders. The primary risk to the company is that both principal and
interest payments on debt are fixed costs. They must be paid even if the company‟s
business and its cash flow decline.
For a given level of earnings before interest and taxes, the more debt the company
takes on in its capitalization structure, the greater the return on equity will be. However if
debt to equity ratio is higher then there is a greater possibility that a downturn in earnings
will leave the company unable to meet its interest payment obligations. From the diagram
it feels like TI has higher debt to equity ratio over 5 years and hence Broadcom is
superior over TI. But if you look closely then you will realize that this statement doesn't
stay true. Let us consider an example where TI has a severe earnings downturn in near
future. Of course due to this issue there will be extreme unhappiness among management
(and probably shareholders). But the company will still continue in business as EBIT
(Earnings before Interest and Taxes) of TI is much higher than Broadcom. And that's the
reason why TI's business was hardly affected as compared to Broadcom, during dot com
bubble burst (refer to 2.5.1 for more detail information).
3.11. Market Value Ratio
The market value ratio of a company is a significant focus for management in

many companies and industries. This is because management is primarily paid with their
company's stock (a form of payment that is supposed to align the interests of
management with the interests of other stock holders), in order to increase the stock price.
The stock price can increase in one of two ways: either through improved earnings or
through an improved multiple that the market assigns to those earnings. Hence, a higher
price to earnings ratio is the result of a sustainable advantage that allows a company to
grow earnings over time (i.e., investors are paying for their peace of mind). Efforts by
management to convince investors that their companies do have a sustainable advantage
have had profound effects on business.

3.11.1. Earnings per share
Broadcom's decrease in EPS between 2000 and 2003 is due to dot com bubble
burst. Also, the development and introduction of new products often requires substantial
research and development resources. During the last five years Broadcom has incurred
substantial expenditures on the development of new products for the cellular handset
market. Approximately 25% of the $1.498 billion in research and development expense
for 2008 was attributable to their mobile platforms business. However, semiconductor's
market is characterized by very long product development and sales cycles due to the
significant qualification requirements of cellular handset makers and wireless network
operators, and accordingly, it is common to experience significant delays from the time
research and development efforts commence to the time corresponding revenues are
generated. Due to these lengthy product development and sales cycles, their mobile
platforms business had a material negative impact on their earnings/share within past 4
years. On the other hand, if we look at the EPS figure for TI then it is clear that TI is the
market leader in semiconductor industry and hence there is comparatively less effect on
its EPS.
Earnings per share (EPS) comparison

3
2
1
Amount in dollars
0
-1
-2
-3
-4
-5
-6
-7
-8
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
Broadcom 0.21 -2.08 -7.2 -5.56 -2.95 0.33 0.66 0.64 0.37 0.41
Texas Instruments 0.83 1.73 -0.17 -0.27 0.6 0.9 1.3 1.66 1.83 1.45
Figure 17: Earning per share comparison between Broadcom and TI over 10 years [8, 9]

Conclusion
The semiconductor industry has become inflated with hundreds of vendors competing in
a crowded marketplace. Broadcom as well as TI are facing issues such as increase in device
integration (Moore's Law), increase in scale and size of manufacturing, etc. Increasing costs and
complexity of design, increased system content and greater flexibility means fewer vendors will
have the capability to supply chips in the future. And if Broadcom as well as TI are competing
for the same market then it is highly likely that TI will win over Broadcom, in this race.
The second concerns for Broadcom is the increasing costs and increasing scale of
semiconductor manufacturing. Fabrication plants are becoming extremely expensive, and next
generation "fabs" will inevitably become too expensive for companies like Broadcom (as
compared to TI). If Broadcom wants to survive in this market then they will require high
volumes of chip production, preferably standard chips that can be produced in a standardized
environment with large batch sizes. These standard chips will then be customized after
manufacturing for its specific application. By doing this, Broadcom can reduce their expenses on
acquiring new plants and at the same time it can deliver optimum results.
The third concern for Broadcom is the growing importance of consumer markets. Like
TI, Broadcom didn't have large roots in consumer market. If Broadcom wants to be the leader of
semiconductor industry then it needs to expand its roots in consumer market. Consumer markets
are normally high volume and the overall market size is large. However, margins on consumer
products are very low and the value of individual product categories can be surprisingly small
but long term benefits are way high. Look at Apple, 5 years back no one knew that Apple will
reach this height but a small innovation named "iPod" really changed the world. After all, new
technologies have driven the semiconductor industry from the beginning, and new technologies
will continue to drive the industry for years to come.

References
1. Broadcom Corporation 2008 Annual Report (2009). Irwin, CA: Securities and Exchange
Commission.
2. David Whitehurst (2003) - Fundamentals of Corporate Finance. Irwin, CA: The
McGraw−Hill Companies, Inc.
3. Edward Fields (2002) - The Essentials of Finance and Accounting for Nonfinancial
Managers. New York, NY: American Management Association.
4. Martin Fridson, Fernando Alvarez (2002) - Financial Statement analysis A Practitioner’s
Guide. Danvers, MA: John Wiley & Sons, Inc.
5. Texas Instruments, Inc. Form 10-K (2009). Dallas, TX: EDGAR Online, Inc.
6. http://www.lexisnexis.com/
7. http://www.sec.gov/
8. http://www.broadcom.com/
9. http://www.ti.com/

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Broadcom Corporation vs.

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

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

Morrison University | Author: Bhavin Gandhi

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

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

2.2. 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

Morrison University | Author: Bhavin Gandhi

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

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

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

Morrison University | Author: Bhavin Gandhi

1.1. Company Information

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

Telephone: +1 949 926-5000

Fax: +1 949 450-8710

Founded: August, 1991

SIC Codes: 3674 - Semiconductors and related devices

5065 - Electronic parts and equipment

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

Morrison University | Author: Bhavin Gandhi

1.2. Broadcom’s Products

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

1.2.1. Broadband Communications

Broadcom offers its manufacturers a range of broadband communications and

1.2.2. Enterprise Networking

Morrison University | Author: Bhavin Gandhi

1.2.3. Mobile & Wireless

Broadcom‟s mobile and wireless products allow manufacturers to develop

1.3. Broadcom’s Revenue Distribution by Products

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

Revenue distribution (% of net revenue) 2008 2007 2006

Morrison University | Author: Bhavin Gandhi

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

2008 - Broadcom's Product-wise

36% 37% Broadband

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.

Morrison University | Author: Bhavin Gandhi

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