邁威爾科技 (MRVL) 2003 Q3 法說會逐字稿

Welcome to the Marvell Technology Group third quarter fiscal year 2003 conference call.

During the presentation, all participants will be in a listen-only mode.

After the presentation, you will be invited to participate in the question-and-answer session.

This conference call is being recorded on Thursday, November 21, 2002.

I will now turn the conference call over to co-Chairman and Chief Executive Officer of Marvell Technology Group, Dr. Sehat Sutardja.

You may now begin your conference.

Thank you, David.

Welcome, everyone, to our third quarter fiscal year 2003 conference call.

Weili Dai, Vice President of Communications Business Group and George Hervey Vice President of Finance and Chief Financial Officer are joining me on this call.

We are now seeing some hope that the long-awaited economic recovery is actually in progress.

While the recovery's progress is not as fast as we would like to see, we are hopeful that by the middle of next year the general industry will be back to a normal sustainable growth rate.

The main reason the current downturn has been going on for so long is because the previous excesses have been the largest in our history.

On the other hand, those excesses have been primarily driven by over technology investments.

Fortunately technology products become obsolete quickly.

Many of the past technology investments including the Y2K investments are rapidly becoming out of date we believe we will benefit substantially over the next several years as the end users replace their infrastructures with more advanced equipment.

Meanwhile, we're even more optimistic about our prospects in the coming year as many of the products that we have developed over the last three to four years for existing as well as new markets are starting to be deployed and rapidly gaining acceptance into the marketplace.

Whether we are right or wrong about our projections on the recovery by the middle of next year, we believe we can continue to grow rapidly next year as we enter new markets for our semiconductor solutions.

In fact, we are quite bullish on our future.

Therefore, we have continued to rapidly expand our engineering team over the last several quarters to meet the increasing demands our customers.

Many of our customers are cutting back on their R&D investments and, instead, are relying on us to provide them with the technology that they need for the future.

As it becomes increasingly evident that it is more cost-effective to outsource complex semiconductors from us.

In some cases, we have a head start to begin with as we started these investments more than three or four years ago.

Because the trend in outsourcing is growing stronger, we believe the investments that we have put into place over the last several years will pay off handsomely when the infrastructure market returns back to normal.

Before I move on to the specifics, George would give you our Safe Harbor statement and the review of our Q3 financials.

George.

Thank you, Sehat.

Good afternoon, ladies and gentlemen.

I'd like to remind all participants that the following dialogue will contain predictions, estimates, and other forward-looking statements covering subjects such as data storage and communications market trends, competition, customers, suppliers, products in demand, revenue growth, gross margin expectations, operating expenses, other income, accounts receivable, and inventory.

Such statements will be preceded by the words like, expects, anticipates, believes, should, will, may, or words with similar import.

The following factors among others could cause actual results to differ materially from those described in the forward-looking statements.

They include the inability to further identify, develop and achieve success for new products, services and technologies, increased competition an its effect on pricing, spending, third party relationships and revenues, as well as the inability to establish and maintain relationships with commerce, advertising, marketing and technology providers.

We direct your attention to our annual report on Form 10-K recent quarterly reports on Form 10-Q, recent current reports on forms 8-K and other Securities and Exchange Commission filings.

All of which discuss other important risk factors that may affect our business, results of operations, and financial condition.

Please be reminded that we undertake no obligation to revise or update publicly any forward-looking statements for any reason.

Now, moving to the Q3 financials, today we reported that net revenue for the third quarter of fiscal 2003 was a record $135.9 million, an increase of 86 percent over the $73.1 million reported for the comparable quarter in fiscal 2002.

At a sequential increase of 14 percent from the second quarter of fiscal 2003.

Pro forma net income which excludes the effect of acquisition-related expenses, amortization of stock-based compensation and a special charge related to facilities consolidation, was $17.6 million, or 14 cents per share diluted, for the third quarter of fiscal 2003.

Compared with pro forma net income of $3.4 million, or 3 cents per share diluted, for the third quarter of fiscal 2002.

Shares used in computing pro forma earnings per share diluted for the third quarter of fiscal 2003 were $127.6 million, compared to $127.2 million shares for the third quarter of fiscal 2002.

Now I'd like to turn the call back to Sehat for comments on our business outlook.

Thank you, George.

At this time, I would like to first review our progress in the 802.11 wireless LAN market.

Which is the latest new market entry for Marvell.

As you are aware, the wireless LAN market is one of the very few growth sectors in our industry over the previous year.

While last year this market was driven by the laptop PC market, we believe it is becoming increasingly clear that next year, the whole market as well as the access point will be the driving growth factor.

Eventually over the long run, the wireless LAN market will be even many times bigger than the PC market as cell phones and consumer devices adopt wireless LAN technology to provide almost for free wireless communication services.

We are pleased that since our recent introductions of our industry's most highly integrated through-chip wireless LAN solutions we have been gaining strong momentum in design wins.

We believe we are gaining the majority of design wins for the next generation of access points as our customers are seeing the credible performance and range improvements in real-life benchmarks against existing solutions.

These are not only about who has the lowest cost solutions.

We have the only radio and DSP solutions in the market today that really work in the challenging home environment where typically, only a single access device is used to serve the whole house.

Recent testing of our wireless LAN solutions versus other competitors' solutions have shown that our solutions are four to five times better in multipass tolerance, two to three times better in receive sensitivity, and the most powerful on chip power amplifier on the market while we extend battery life due to the self-adjust power amplifier features.

We believe by the middle of next year, our 802.11B solutions will be the detector of reference platforms for which any other solutions are compared against.

To date, we have already introduced several different products addressing the 802.11B market including a device with mini-PCI for wireless LAN on motherboard in laptops, a device with card bus interface for cards in laptops, a device with USB connectivity for use in home PC, and more recently a device with integrated interface MAC and physical layer to create the industry first and only wireless and wire LAN router on the chip.

Because all of our devices include a fast on-chip microprocessor, we can easily add services through software upgrades.

These along with the performance and range advantages of our radio are the reasons that we are rapidly gaining design win momentum over the last several months.

While it is important to address different point solutions for the current 802.11B standard, we are also aware of the upcoming new wireless LAN standard, the 802.11G expected to be ratified by the IEEE committee by May of next year.

We are happy to report to you that we have made excellent progress in our development in this new area.

We are also confident that when we show our 802.11G solutions early next year, they will also be the most advanced and robust solutions in the market just as we have shown in our current 802.11B solutions.

We are confident that the end users, especially the home consumers, will demand the most robust wireless LAN devices just as they demand that their cell phones to always work anywhere in their home.

Now, while initial shipments of silicon already started last quarter, we're hopeful to have our wireless LAN to contribute most significantly to our revenue next year.

Our goal over the next several years is to grow our wireless LAN business to be just as big as our wireline LAN business.

Moving to the wireline networking space, as you are aware, we have recently amended our partnership agreement with Intel to give us more flexibility to address the larger market segments for Gigabit Ethernet NIC and LAN on motherboard.

Our relationship with Intel continues to be strong even with the introduction of our own Yukon Gigabit Ethernet network card and LAN on motherboard solutions.

With the Yukon products, we are now able to better serve the markets that were previously too cost sensitive to address.

In fact, as soon as we introduced the Yukon products in our press release, we received dozens of phone calls from ODMs to request samples and information on the Yukon products.

PC OEMs and motherboard suppliers are now telling us by the middle of next year the majority of all business and high-end home PCs will have Gigabit Ethernet as standard networking solutions.

In the few short weeks since our introduction, we have already secured more than a dozen meaningful design wins for the Yukon.

As part of these design wins, I would like to report our latest progress with the other large pier one LAN on motherboard and NIC vendor, specifically we are pleased to announce that recently, 3Com has selected our Yukon family of Gigabit Ethernet controllers for their next generation desktop solutions.

Both companies will work together to jointly promote Yukon products with a particular focus on LAN on motherboard applications.

Through an aggressive joint sales effort including 3Com's channel, we expect to expand the reach of our gigabit technology further into the desktop platforms to make Gigabit Ethernet a universal feature for all desktop users.

Now, Intel and 3Com are the two tier one NIC and LAN on motherboard players in the PC player market.

In the last two years, Intel and Marvell's joint efforts have been very successful in the deployment of Gigabit Ethernet to the desktop.

Together, we have gained significant market share in the Gigabit Ethernet PC client market.

Now with 3Com as the other tier one LAN and NIC player along with the superior technology that we provide, this will drive our gigabit NIC and LAN solutions as the de facto standards.

This will also help our infrastructure business as for sure our the -- end customers do not have to worry about compatibility with their PCs as they purchase new gigabit infrastructure equipment down the road.

I will give you more updates about the design wins that we have in the infrastructure hopefully by next quarter as our customer starts to introduce them into the market.

But suffice to say, since we introduced the Prestera switching solutions, we have been gaining most if not all of the tier one design wins.

Our Prestera family of products offers total solution that covers the entire market from the high-end metro in data centers to the edge of the enterprise network in the desktop.

Finally my comments would not be complete if I don't give you the update on our storage business.

While at this moment the general storage market is not growing due to the slowdown in the PC business, the storage market continues to be a huge opportunity for us to gain market share against existing competitors.

With the introduction of our latest 7500 re-channel technology and with its derivatives being integrated into SOC devices, we are starting to capture a larger market share in the desktop segment, which traditionally has been the most challenging market for us to enter.

We project that by the end of next year, to capture about 40 percent of the overall market share.

Roughly doubling our current market share.

Most of this growth is expected to come from the ramp-up of the western digital design wins as well as the increase in the end market share gains by our current customer base.

In the long term, as consumer devices such as time shifting video become more popular, we believe this market could be one of the largest revenue opportunities for our SOC devices.

Meanwhile, we are seeing a nonreversible trend of our zero ATA transitions.

We continue to gain more design wins with our 0 ATA solutions as our customers are seeing the performance benefits of zero ATA.

Most recently at Comdex this week, we are demonstrating a prototype zero ATA rate solution with equal to or better performance than [ultradiscusscy] 3.2 solutions using our hercules single chip PCIX to 8 port serial ATA controller.

The momentum of zero ATA is unstoppable.

The PC OEMs are telling us that they would like to see zero ATA in all their desktop PCs by the end of next year with initial shipments starting in Q2 of next year.

This is another exciting direction for Marvell as we are the leader in the zero ATA solutions.

Additionally, this will further enhance our leadership in the SOC space as we can quickly help our customers to integrate zero ATA into ours as well as their SOC to reduce their costs of moving to zero ATA.

Finally, traditionally, Q4 is usually our strongest quarter.

This coming quarter is no exception.

We are hopeful to continue our track record of managing the company growth responsibly and at the same time serve our customer to their satisfactions.

Now I would like to turn the call back to George for additional comments regarding our financials and guidance for the next quarter.

Thank you, Sehat.

First, I'd like to make some additional comments on our Q3 results.

Our Q3 revenue of 135.9 million was a new quarterly record for the company and an 86 percent increase from Q3 last year.

Additionally, the 14 percent increase in revenue from Q2 to Q3 compares very favorably to our guidance of a 10 percent sequential quarterly increase in revenue.

On our Q 2 call, we indicated that we expected the ramp up the Ethernet to the PC client market to continue in Q3 and again our performance was ahead of expectations.

For Q3, sequential revenue growth from Q2 in our communications business was 23 percent versus our guidance of high teens.

Gigabit Ethernet revenue increased 37 percent from Q2.

In addition to the strong performance of our gigabit client products, we also saw strength in our packet switching products as the number of our numerous design wins with customers such as Dell, 3Com, Foundry and Interisis ramped into production.

Moving to storage, our revenue growth continues to be driven by increases in production ramps of our SOC solutions, desktop preamps, and initial shipments of serial ATA.

Entering Q3, there were a number of data points that indicated overall unit demand in the storage market in Q3 would be flat to down from Q2.

And this was reflected in our sequential revenue growth guidance of mid single digits.

Late in the second quarter, the tone of the storage market improved significantly, resulting in a Q3 sequential revenue growth of 7 percent from Q2 as well as a more positive outlook for Q4.

For the quarter, storage represented 53 percent of total revenue with com indications products representing the balance.

In Q3, our gross margin percent increased over 50 basis points to 53.7 percent.

We are pleased with this increase since it reflects improvements in our manufacturing efficiency and benefits from our yield improvement programs.

This outstanding manufacturing performance which results in very cost-effective products is very important as high-volume PC client shipments continue to represent an increasing percentage of our revenue mix.

Operating expenses as a percent average revenue in Q3 were 40.2 percent, a decline of 110 basis points from Q2.

While we continue to increase our investments for the future, as evidenced by the almost $40 million spent in R&D in Q3, we remain committed to controlling our operating expenses.

Q3 was the fifth consecutive quarter that operating expenses have declined as a percentage of revenue and coupled with a solid gross margin percentage performance, we have increased our operating income percentage over the same five quarters from 2 percent to 13.5 percent.

This puts us slightly over 4 percent away from our long-term model for operating income of 18 percent.

While there are many metrics to measure the financial performance of a company, we set as an objective for fiscal 2003 to significantly improve our profitability versus fiscal 2002.

For the first three quarters of this year, our pro forma net income was $42.3 million compared to $11.3 million for the same period last year.

This represents an increase of 275 percent.

On the balance sheet, our cash and short-term investments increased from Q2 by approximately $6 million to $256 million.

In addition to the $6 million increase in cash, we decreased our accounts payable by $17 million.

Linearity of our revenue in Q3 improved from Q2, resulting in DSOs for Q3 declining to 48 days, from 53 days in Q2, which were in range of our guidance of high 40s to low 50 days.

DSOs are likely to remain at the high end of our range during these periods of rapid revenue growth.

On our Q2 call we discussed the significant increase of both our inventory balance and days of inventory.

Those increases were the result of our very successful ramping of production to meet the Q2 Gigabit Ethernet revenue demand Q2 increased 90 percent, bill sufficient inventory levels to support increasing demand for Gigabit Ethernet going forward, Q3 increased 37 percent.

And load the front end portion of the upcoming desktop storage ramp, first production was delivered to WD last week.

We indicated that we would balance these production ramps during the second half of the year and expected our days of inventory to decrease from Q2 79 days to a range between 65 to 70 days.

During Q3 we took the operational steps required to achieve our objectives.

And I'm very pleased with our progress.

In Q3, we reduced our inventory balance by approximately $1 million, while our revenue increased 14 percent and we expect additional increases to revenue in Q4.

Our days of inventory declined to 70 days.

We will continue to monitor our production levels going forward with the goal of putting us in the most favorable position to respond to increases in demand from our customers. -- for our products.

Now, turning to our future.

Since we are entering the last quarter of our fiscal year, our guidance will be specifically for Q4.

On our Q4 call, we will be providing our annual guidance for fiscal '04 as well as the first quarter.

As we have previously mentioned we have significant revenue growth opportunities which are not directly tied to the growth of the end markets.

Several examples are the continued adoption of Gigabit Ethernet, the replacement -- or upgrade for fast Ethernet, further expansion of SOC devices in the storage market, replacement and upgrade from existing parallel ATA drive interface to serial ATA, market share gains against our competitors, and market share gains by our customers versus their competitors.

In addition, our recent entry into the wireless LAN market should provide additional growth opportunities next year.

We exited Q3 with strong momentum which we expect to continue in Q4.

We have targeted company revenue for Q4 to increase 10 percent from Q3.

With the improving conditions in the storage market, we expect both our storage and communications businesses to grow 10 percent from their Q3 levels.

Backlog entering Q4 '03 remains at very high levels for both our businesses.

Due to the continued volatility in our markets, we believe it's prudent to anticipate that our actual Q4 revenue may range within plus or minus a few percent of our target.

As I mentioned on our -- our increase in gross margin percentage for Q3 reflected the positive impact of our manufacturing efficiencies and yield improvement programs.

We expect to receive further benefits from these initiatives which are important as we expect our product mix to continue to be more heavily weighted towards the PC desktop market.

The Q4, we are expecting a slight decline in our gross margin percent to 53.5 percent plus or minus 25 basis points.

As we continue our new product investments and structure the company for continuing long term growth, operating expenses in absolute dollars will increase in Q4 but as we previously mentioned we are committed to increasing our operating income percent.

Consequently, Q4 operating expenses as a percentage of revenue are expected to decline 150 basis points from the Q3 level.

During these times of reduced interest rates, the return on our cash assets is decreased.

We anticipate Q4 interest and other income to be consistent with Q3.

In summary, considering the various factors impacting our business, we anticipate Q4 EPS to be 16 cents per share, an increase of 2 cents per share from Q3.

Now I'd like to turn the call back to Sehat.

Thank you, George.

This completes our commentary.

David, would you, please, poll for questions?

Yes, sir.

At this time, I would like to remind everyone, in order to ask a question, please press Star 1 on your telephone keypad.

We'll pause for just a moment to compile the Q&A roster.

Your first question comes from Jim Leang from Pacific Growth Equities.

Thank you.

Can you talk about your outlook for the 10 Gigabit Ethernet market given the significant ramp of Gigabit Ethernet to the desktop in 2003, and also, your potential opportunity in that space?

Sure, Jim.

This is Sehat.

I will answer the question.

We have actually introduced several solutions for the 10 Gigabit Ethernets over the last several quarters.

We have -- the acceptance has been very, very, very well.

In fact, if you look at the -- the suppliers such as [Molex] and other 10 gigabit space, our solution are practically the de facto standards out there in the market.

Together with 10 gigabits we also need solutions for the back planes like the (indiscernible), the back planes communication links to connect all the line cards together, so you can build a big chassis systems.

Again, our solutions to date are considered to be the premier solution in the market.

Our solutions work more than 80 inches over the standard FR-4 back planes versus competitors' solutions running about 40 inches or less.

In fact, a lot of -- some of them are significantly less than 40 inches.

So our solutions, we are very, very well positioned in 10 gigabit space.

We didn't talk too much about it this quarter, but we hope to talk more about it together with the Prestera -- all the Prestera design wins in the gigabits and multi, you know, gigabits and 10 gigabit space next quarter.

Any early read as far as the timing of the 10 Gigabit Ethernet market starting to take off?

The 10 gigabit market will be -- the 10 gigabit will initially be used to -- to, uhm, for the up links for the gigabit boxes so especially in the spitzer boxes like the 24-4, 48-4 gigabits with 10 or 20 gigabit up links.

Those are the first usage for 10 gigabits.

And eventually, the 10 gigabits markets will be -- will move to the storage space for 10 gigabit fibre channels.

So the similar technologies requirements, uhm, for -- for -- for the storage sites.

So -- but the Ethernet will take off first.

Great.

Second question, on the storage side, can you just give us an update on the competitive landscape especially regarding to competition with respect to Aguirre and also your potential to gain further market share in the space especially at the IBM HDV division of Hitachi?

Sure.

As I mentioned on our -- on this conference call, we expect to grow our business -- our market share to around 40 percent, which is doubling our share by the end of next year.

So we're very optimistic about this opportunity.

We also introduced the Sony 500 class of rechannels together with its derivatives for the -- 7500 is actually the design for the Enterprise, but the derivatives are designed for the desktops as well as for the mobile and ultramobile space so extremely low power as well as very, very high density applications.

We have probably the biggest number of design wins in this market today with the 7500 class family of products including the system on the chips integrated with those rechannels.

So from what we have seen in the market, we do have competitive -- well, better products compared to our competitor and specifically relating to IBM, we were -- this is a market there was a little bit tricky for us to address last year where IBM was competing with us heavily at the Western Digital, and we had -- we decided not to show up our solutions at IBM at the time because of the sensitivity with the competitions when we were chasing the WD market.

As a result, we didn't pursue that opportunity.

But we believe with the superior solution that we provide for the next generations's rechannel providing better density better yield, we will -- our prospect will be very, very positive on that side.

Great.

Thank you very much, Sehat.

Your next question comes from Nathaniel Cohen of Goldman Sachs.

Great, thank you.

Nice quarter.

Wondered, George, I guess on the gross margins, can you just give us an update?

I assume there is no change, but in terms of your long-term gross margin model as the desktop ramp continues to become a bigger percentage of your business?

Right.

Well, first of all, I think our -- you know, number one, our performance from Q3 was in line with what we had indicated and also our guidance for Q4 is consistent with what we said, you know, last quarter.

We continue to, you know, move very heavily into the pc market.

You know, it's obviously a big growth factor for us.

But, you know, with our products line up with the significant programs that we have under way within the company, to reduce costs, we feel good about our ability to stay up with the move into this more cost sensitive market..

Our long-term model remains, you know, a gross margin of 52 percent.

But, again, our visibility looking out shows that that's not a number that we should approach anytime soon.

We expect to stay above that level, you know, into next year possibly all the way through next year.

And so we're very pleased with what we're doing and, of course, we will continue to work very hard at, you know, improving our gross margin.

So we're very comfortable with where we are in that regard and have it under control.

So we're again, just very comfortable to where we are.

And then in terms of the storage guidance, you mentioned an uptick that you saw towards the latter part of the quarter.

Can you just give some color on perhaps which segments you might be seeing that in?

And then also, in terms of the SOC transition, if you could just give I guess more broadly across your existing customer base, you know, where you are in that transition and how much more legs are there in terms of transitioning your customers from the rechannel only over to SOC?

Great.

Let me do the second one first.

Which is our major transition that we're accomplishing here during this fiscal year is converting Samsung over to the SOC that we did for them.

And through the first half of this year, they were about 60 percent converted and are in the process during the second half year to convert the balance of the 40 percent.

Not clear that they will get all the way there by the end of this quarter but we're certainly working with them very hard to try and accomplish that.

But it may -- it may spill over a little bit into Q1.

But that you know, as we have indicated before, an SOC benefit to us is an ASP multiplier of 1.8 to 2 x so that's a very, very significant in driving our revenue.

What -- the firming up of the market, uhm, towards end of the quarter, predominantly is in two areas.

One is in the mobile area, one of our customers was pretty weak during Q3 and that is now reversed itself and they are looking very strong for Q4.

Which is indication of the positioning of their products in the market.

But the other one actually is Samsung, because as Sehat mentioned in his prepared comments, that, you know, our market share gain is not only just us against our competitors, but it's our competitor -- our customers against their competitors.

And that's maybe a subtle thing, but it's very, very meaningful.

And that clearly is happening in the desktop segment right now.

And we like to believe that that is being accomplished because our -- our customers using our products make them very, very competitive versus the other solutions that are out there.

Actually, I want to add on that one.

Sure, go ahead.

We -- we, uhm, historically in the past, all our customers that use our silicon have gained market shares against their competitors.

The Enterprise has gained significantly since the use of our silicon in the mobile space.

Hitachi used to be the smallest player in the market with, you know, a few percent of market share growing to be one of the biggest.

So -- so you know, we don't just build products that's cost-effective but also products that works, that helps our customers to -- to -- to get -- to gain market share.

Okay.

And I guess you're also seeing -- you mentioned WD is starting.

How's that trend for you?

How do you see that progressing?

It's, you know, consistent with what we have been saying which is that it would start in the Q4 time period.

You know, the real inflection point begins in the first quarter of next year.

You know, we would expect them to be fully -- we would be fully engaged with them, you know, certainly by the end of calendar '03.

But this is a big step with the first, you know, production.

Okay.

Great.

And then just last question regarding Yukon, and the nice win that you announced today with respect to 3Com.

Can you just talk I guess a little bit more -- I know you're sort of early stages, but a little bit more about that relationship?

Is this really a supplier?

So unlike perhaps the Intel relationship?

It's all your IP on the Yukon and you're sort of a supplier to 3Com and its joint marketing, or if you could just, I guess, flush that out.

And also in terms of the timing of revenue that you expect, I guess on both the NIC and LOM side as you move forward both with your own design wins as well as partner with 3Com, that would be great.

Thanks.

I'll let Weili Dai to answer it.

Thanks Sehat.

First of all, we are very pleased to have 3Com as Sehat mentioned earlier as the other Tier 1 player in the (indiscernible) space.

And, you know, if you look at the Marvell goal, our goal is to grow and capture big market shares in this space.

So working together with the leaders in those space, if you look at essentially the biggest player in the last number of years has been Intel and 3Com.

So we're very pleased that with the relationship is extremely successful big market share with Intel, we're shipping volume, we'll continue to ship next couple of years and now having 3Com as another customer, and in terms of the 3Com relationship in addition to being our customer, they also provide a lot of support, for example, the technical support. 3Com has built infrastructure to have 24/7 support structures.

This is adding a lot of value.

So we are -- you know, aggressively co-promoting in the marketplace as far as the in terms of revenue contribution it will start first half of next year and we are extremely positive bullish about our potential as Sehat mentioned earlier, we already have over a dozen designs.

And the dozen designs, are those with 3Com or will you be also marketing like, say, in the other regions of the world on your own?

You know, again, it's the combined effort.

I mean, 3Com in the NIC space, the name brand.

And 3Com, NIC is extremely pleased to have -- to be in on the 3Com NIC system.

And also the open market, the LOM, and we have (indiscernible) design wins there we are very please.

So you have design wins already for LOM?

Yes.

Great.

Thank you.

Congrats.

Your next question comes from Michael Masdia of Credit Suisse First Boston.

Great.

Thanks and congratulations on the quarter, guys.

On the storage front you said 40 percent market share.

Can you give us an idea how much of that's going to be rechannel, how much is system on chip and also embedded in that how much do we need to see from Western Digital penetration?

In other words do you still have a ways to go next year with Western Digital?

You know, as we've said, the -- you know, we will certainly have converted Samsung, you know, either late this year or early next year to SOC.

Our relationship with WD is starting out, you know, as a rechannel only but we do anticipate, you know, since we've done an SOC for them that they will phase that into the production cycle sometime, you know, hopefully by the middle of next year.

So when we get -- I would say, Michael, to the end of, you know, next year, clearly we expect SOC shipments to be north of 50 percent.

Maybe as high as 70 percent of our overall, you know, storage revenue.

And, you know, that 40 percent number would entail a pretty much being fully engaged with WD.

Great.

On the serial ATA side of storage, initially looks like you are targeting the hard disk drive guys.

Want the -- what about the motherboard manufacturers?

Do you have any plans there?

Yes.

Actually, the -- the surprisingly, the motherboard is -- guys are as equally excited about these transitions because in the past, the transition from, you know, different interface takes a little bit longer.

But this time the serial ATA -- I mean the parallel ATA is running out of gas so everybody realized that the serial ATA must be incorporated in the next generation's systems.

So there are quite a few motherboard especially the white boxes.

They have already incorporated serial ATA using our silicon.

You can buy it on the shelf as of Fry's for example.

So majority of those old motherboards have serial ATA so they are using our serial ATA solution.

Great.

On the Gigabit Ethernet side, as you take a look at the next round of design wins for desktop LOM designs, when is that timing or that design window and when would your competitors have to have solutions out to compete for that?

What was the --

Yes, the design window typically, you are looking at so-called Spring refresh and the Fall refresh, so you talking about the end of the year through early next year and then there is another window I would say mid next year -- like Q3 time frame.

So it's every six months you have the refresh.

As far as the solution competition, you know, these -- these thing happens -- it's ongoing basis.

Anytime in the future, competition can come out with solution, but I think in terms of gigabit technology, Marvell has demonstrate absolutely the leadership in that space.

So we are extremely excited I think we have great opportunities especially now with -- we have two biggest players that we provide solutions to Intel 3Com so we are very pleased.

Great.

This is the last question on the guidance, maybe, George.

If you take a look at the guidance for the first quarter, how much do you feel is coming from share gain and traditional Legacy products that are rolling forward in the next quarter?

We didn't give first quarter.

Yeah, fourth quarter to next quarter, sorry.

Uhm, well, clearly, you know, it's, uhm, I would say on the com side it's really more again going to be heavily driven by the Gigabit Ethernet ramp.

Now, which is predominantly still Intel, although infrastructure as we indicated from our packet switching, you know, uptick is also seeing some momentum and we expect that to -- to, you know, continue in Q4.

On the storage side, I would say that you know, clearly WD has started, also serial ATA is going to be more substantial. -- in Q4 than it was in Q1.

And then the rest, quite honestly, we are -- we do believe that several of our customers are absolutely gaining share against, you know, their competitors which are getting their products provided by our competition.

Great, so a good chunk is not dependent on the general market trend, most of it --

Very little.

I'm sorry, I didn't understand the question properly.

Yeah, very little is going to be actually tied to, you know, the actual performance of the end market.

Great.

Thanks, guys.

Congratulations.

(Pause) the David?

David?

(Pause) hello?? (Pause) still connected?

Your next question comes from Anab Chanday of Lehman Brothers.

It's Anab Chanda from Lehman Brothers.

Anyway, couple of questions.

First of all, could you talk about what you think -- a little bit more granularity from the communications business you expect the gigabit system and switching and systems controller to grow next quarter?

Again, overall, you know, we expect 10 percent for the com bills.

I would expect as I said the growth come primarily from gigabit client products and from the packet switching.

I don't think -- we don't give that fine of a breakdown on the guidance.

We certainly will tell you on the -- when the actuals, you know, are posted at the end of the quarter.

But those still will be the two main driving areas.

System controllers, by the way, we're very excited about system controllers.

I mean, they have gone through a difficult challenging period because of what's happened in the networking market.

But as evidenced by the recent design win that we announced several weeks ago, the applications for system controllers is broadening out.

That was a design win with Fuji Xerox for printers.

And that's -- that has very significant potential as we move forward.

Second, as we take serial ATA into the raid market, we're also seeing that there are good opportunities to have the system controller be part of where An embedded processor.

There's good opportunities for the system controllers to, you know, gain some wins there so while it still, you know, suffering from the overall malaise of the networking market, we're actually encouraged for when we move into next year.

Great.

And then a question about Yukon.

When do you expect Yukon/3Com revenues to start showing up next year, or maybe even this year?

Yeah, no, no.

This year is premature.

We feel that in the first half of next year, we will see a contribution from Yukon.

Thank you.

And just one last question.

It seems like after the IBM sale, some of the captive business are coming up for grabs.

What do you think that happens in the Enterprise and desktop market and how are you positioned there?

We -- obviously, this is a huge opportunity for -- for us to -- to address, but as I said in the previous call -- previous -- last conference call, some of the revisions have already been made over the last six months, nine months, will probably not change for the next year or so over the next year of production.

So the opportunity will be for 209s and -- 2004 calendar year of productions.

And for those productions time frame, we are optimistic because on the Enterprise sides, we have the highest performance, highest speed rechannel in the market, and it's proven.

We have grown that business from zero to more than 75 percent of the market share.

And on the desktop side as well as mobiles, okay, we have system on the chips integrated with processors, with in some cases we also have our firm wears that we have provide to actually our customers to apply it to quickly to their market.

We are talking about ATA.

It will be the one will be able to integrate the ATA quicker than anybody else is because of our leadership in the serial ATA, the next generation serial ATA 2.

We are the major contributor in the community.

So all these things are required by -- by the desktops and we feel that we have stronger opportunity than anybody else to capture this market.

In fact, IBM is using our bridge solution initially, you know, for the initial phase of serial ATA adoption.

In fact, some of the demos demonstrations for the these rate with 8 channels of rates for serial ATA we have shown with IBM drives which happen to have the best performance when combined with our solutions.

Thank you, and nice quarter.

Thank you.

Your next question comes from Jeremy Bippel of Thomas Weisel Partners.

Thank you very much.

George, could you just list the over 10 cents (indiscernible) and what that revenue contribution was?

We have 4 of those outstanding customers this quarter.

Intel, Samsung, Hitachi and Sea Gate are all 10 percent customers.

The last quarter.

Are you able to give us what their contributions are?

No, we don't normally provide that but that is the order of, you know, their ranking though.

Very good.

With the packets switching platforms, you mentioned Dell 3Com and Foundry, are they a mix of Ethernet and (indiscernible) [ audio low ] or are they predominantly gigabit ethernet?

And are you able to give us the actual platforms?

They are a combination of both because in the market, you have both fast Ethernet as well as gigabit products.

For example, on -- we can give you some of them for example like a Dell we're part of the -- in the power connect family of products in 3Com in the super stack family of products, at Foundry we're across almost all the iron family of products.

And unfortunately I'm just not sure on Intel just what the product family name is there but it's a combination of both fast Ethernet as well as gigabit.

And finally, in the wireless LAN space, do you see your greatest strength potential to be in the PC space access points or do you think it's fairly evenly split?

Let me answer this one.

Our greatest strength in the wireless LAN will be for the customers that cares about the range and performance, the coverage, the distance coverage of the products.

And obviously, those the -- people that cares about this are usually the home users.

So our strength will be the consumer space where -- where -- where the cost of supporting those products are staggering.

The reason we are getting these design wins the rapidly the last several months since we introduced our products is because our customers starting to realize that the majority of the costs of supporting the wireless end products are the -- wireless LAN products are the customer service call, the return for those products.

By using our solutions, they all hope that to drastically reduce the -- this phone service calls as well as the retails that they have seen in the past.

So we believe that those are the strength that we provide the as well as obviously with, you know, with the fact that we are powerful process on chips, we can adam occasions, we can add more security features that's not even, you know, thought about today, down the road.

So we believe that once people see the products in the markets, people will change their minds about what they want to buy.

Okay.

Thank you very much.

That's very helpful.

Your next question comes from Sammy Harrison of Banc of America Securities.

Sandy Harrison of Banc of America Securities.

Hi, good afternoon, how are you?

Fine.

How are you.

Good.

How's pricing bin?

We have all been reading stories about pricing and hearing stories from the potential competitors, not competitors but even the customers.

What's the current pricing environment feel like and when you guys are winning these design was 3Com and others, what are sort of the pricing expectations in the clients over the time of these relationships?

George?

Let me start and then I'm sure Sehat may have other additional comments.

You know, again, as we talked about, the vast majority of our business is design win, you know, oriented and also at the time we get the design win, prices are negotiated for the life of the design so we have very good visibility into what our pricing models will look like and what our pricing curves look like, you know, for a large percentage of our business out of fairly decent number of quarters.

But, as we have been saying over the past several quarters, we are moving into the higher PC market we are bringing our Yukon product as well as our wireless LAN products specifically because we know that as the volumes in these markets accelerates, the normal semiconductor curve sets in and prices come down.

You know, these products allow us to, you know we never want to be the price leader but we want to be the best low-cost provider to our customers.

And that the -- types of products that we have positions us to be able to do that so as the market price moves, able to move with that and feel very comfortable that, you know, that we can handle that.

You know, it's reflected in our gross margin guidance and in our revenue guidance so I think while it will come down, prices do come down, this is semiconductors, we feel we're well positioned to be able to competitively compete.

And I want to add on the general questions about pricing, prices in semiconductors will always go down if we do not do anything f we provide the same functions, the price will go down.

It will always go down.

But the way to counter that is always to integrate more functionality, to integrate more functions that used to be external functions or add more features and use the geometry of the devices so that we can use more advanced process geometry.

To give an example, the majority of our storage products that we're shipping today is still in .18 micron.

There are cost reductions to use smaller process geometry to counter some of those costs -- those pricing -- pricing pressure that is we'll normally see in any market.

So we are well positioned from across the board to -- to -- to be able to maintain our gross margins as we move to the higher volume markets than just -- (indiscernible) in the PC space.

And the consumer space.

Gotcha.

Okay and then, uhm, you talked a little bit about, uhm, you know, 3Com having another nice win.

What sort of market share do you guys -- I guess Intel having the largest market share currently in Gigabit Ethernet, how do you guys, for those of us who may not be as familiar with 3Com's business, where do they currently play in sort of market share and are they high end, are they a low end?

Could you maybe give us a little view of that?

With the 3Com, you know, for the gigaspace, I think with the joint effort within the market share. [ low audio ] For 3Com brand... essentially now 3Com will have the best technology support from Marvell. (overlapping speakers).

And other players, other 2 second tier players.

And then the, you know, overall, you know, if you look at the market share as I said our key goal is to be the market share leader so Intel has a big market share and it will grow into a significant player so together those two, one plus one, that's a very decent size of percentage.

Historically it was equal to or greater than what market share Intel had in the fast Ethernet.

So they are, you know, we are helping them to now come into the gigabit market.

Gotcha.

And then lastly you talked a little bit about linearity in the quarter and so forth.

What was the level of turns you guys did in the quarter and what do you expect for hitting -- before hitting your estimates in this quarter based upon that turns to be in line, same, lower?

And kind of where was your backlog comparatively as far as the dollar rate into this quarter versus last quarter?

Right.

Our -- I mean, on an overall -- we don't give that fine a detail, but what we said is that entering Q3, you know, the, uhm, the amount of, you know, turns is sometimes a misleading word.

It's actually fill-in on the existing, you know, production orders.

It was probably at a low point because just the perceived tightness on supply.

Going into Q4, we remain again essentially very highly on a percentage basis booked to the guidance that we just provided.

And so therefore, our fill-in is very, very, you know, nominal at this point to achieve those numbers.

Okay.

All right, thanks, guys.

Your next question comes from Mark Westmont of Salomon Smith Barney.

Usually say Clark.

But, uhm, anyhow, nice quarter, guys.

Couple of things.

Could you I think George last quarter you told us about what if you added up your greater than 10 percent customers what they added up to totally as a percentage of sales?

And then I have two others.

They're probably still in that same consistent level that they were before, Clark.

Think I it was like 83 percent?

Uhm... let's say somewhere between 75 and that number.

Okay.

All right.

Could you -- I think this is related to the last question.

You know, lead times, is that -- is that meaningful to talk about in your business, or, uhm, could you give us any sense on what, you know, lead time you quote to customers and where that stands versus 3 months ago?

It sounds like, you know things have loosened.

It's not as tight a perception out there as it was 3 months ago.

Is that fair?

I think that's a fair statement, Clark.

I mean, the fab capacity is more plentiful now than it was three months ago.

You know, we have, you know, a large you know, amount of our business -- I don't like to use the word custom but in some ways the SOCs he -- chips that can only be sold to the given customer, and there we ask our customers to provide us some very substantial coverage in which they are, you know, have been very good in helping us doing that some of the standard products, though, because of the fab issues are a little more customers are being a little more taking advantage of that and wait a little bit longer to place their orders.

But that being said, the majority of our businesses in those with the very large guys where our coverage is, is very high.

And therefore, you know, the amount that isn't, you know, like that is very small.

Okay.

Good.

That's helpful.

Last question, I don't know if it's worth delving into or not, but said 10 percent sequential plus or minus a few percent.

Is there -- that's on the top line.

On the bottom line, is it just 16 cents regardless of where you fall in your sales range?

My plus or minus is always my qualifier, Clark. [ Laughter ]

Okay.

We're extremely comfortable with 10 percent.

And 10 percent certainly I think if you work through the guidance gets you very comfortably at 16 cents.

So it's 10 percent without -- it's 10 percent maybe plus a little or --

Oh.

We are just giving -- you have to wait at least a day or two! [ Laughter ] Before we update that number.

Okay.

Yeah, I just -- I -- I don't recall you saying plus or minus before.

That's no big deal.

Okay.

Your next question comes from David Wu of Wedbush Morgan Securities.

Good afternoon.

Very good quarter.

I'd like to ask three different questions, please.

The first one, I'm asking about is can you qualify or help us with the 3Com and other designs with your own gig E integrated chip set?

I guess I assume that you have at least two design wins that 3Com, one for NIC card and one for LAN and motherboard?

And are there any others which kind of design wins you have with 3Com?

That's the first question.

The second regards -- is in regards to your rollout of the 802.11G, I assume. -- in the early part of calendar '03.

How do you view the pricing of that market?

How much premium can it support over the existing "B" structure?

And the last question I have is about you mentioned about optimism about IT's recovery in the middle of next year.

What kind of evidence could you cite or to support that -- that kind of a timetable for IT recovery?

Sure.

Why don't I take the first one.

Sure.

On the 3Com, I guess to make sure we clarify, clearly the 3Com NIC business is a design win, you know, by itself because that is a specific product.

Beyond that, it's going to be multiple as they take --

Multiple to NIC.

Today they have like a dozen or something.

Okay.

And then of course there will be every time that -- you know, as we're successful together taking the product -- take the Yukon product and having it designed in on -- in a LAN on motherboard application that will be a design win, as well.

So it's not just two.

It's going to become multiple as we move --

I see.

Is that similar to the -- I was thinking about you and Intel had about 6 or 7 of these kind of deals.

And it started with the NIC card and then it got to mobile and all the rest of them server.

Intel is six platforms.

Yes.

Which then they take to a large number of customers.

Right.

You have to kind of -- so in essence it's two platforms that then get taken.

You know?

Across a number of customers.

In a case of 3Com, we have a design win of Yukon on the NIC card side, right?

That's the first design win.

And then further down the road, you expect to get the LAN on motherboard?

We mentioned that we have LAN on motherboard design wins already.

Already?

At 3Com? (overlapping speakers).

Again the design win the names that we will announce after our customers --

Let's clarify it okay, now. 3Com does not make LAN on a motherboard.

Together we're addressing the LAN on motherboard.

Okay, fine.

Third channel.

We want to address the switch -- maybe complete the 3Com questions about switch.

Yeah, we have basically a family of switches, pact processors, the -- Gigabit Ethernets for the 3Coms but that has nothing to do with these --

Right.

That's on the infrastructure.

Okay.

Can you talk about the upcoming 802.11G offering?

It sounds like you're about ready to roll.

The 802.11G is basically the enhancements of the 11 B using the protocols of the 11A to achieve the 54 Meg bits of data rates.

Because it uses the same RF with the enhancement to get the best performance, the cost difference between the 11G will be minimal, compared to the B, will be minimal and that's the beauty of the G.

Currently just last week there were questions that people raised about the compatibility issues from the B to the G. We hope to be resolved over the next couple of months or so and hopefully we'll be soon enough so that we can introduce our 11G in time for those questions to be clarified.

But the [trial certification] is May.

I assume you'll be shipping by May?

Yes.

We definitely will hope so before that.

Yes.

Would the premium be in the 20 percent range or would it be in the -- obviously it doesn't sound like it's going to be 50 percent range?

Probably at the end users the premium will be somewhere around 20 percent.

That will be a good number.

Mm-hm.

So maybe even less eventually.

I see.

Okay.

What about the -- the -- you say --

Let me -- the 11B will still be a big market for -- for -- for if we had the G alone because there are a lot of applications like cell phones and audio players that -- cordless phones, anything that requires audio range of fibre data rates can be served very, very well with the B, all these solutions.

DSL is only running at one megabit, and 11-B is 11 megabits.

It's hard -- it's very hard to find applications for 11G except for video applications.

So but -- but because 11G will be -- as soon as the compatibility is resolved across all areas, 11Gwill eventually be dominant in the PC space in the video space and that time frame probably will be 2004 time frame.

I see.

So basically, in 2004, G will be the number one in the 2.4 GHz ban?

Maybe 50/50.

I see.

Because the application they want to pay the 20 percent.

What do you think the pricing on the B would turn out to be in '03?

It's been pretty fast coming down in '02.

Would the same kind of price degradation of something in the order of 40 percent hold true in '03, as well?

There will be the low teens.

In '03.

And entering '03?

(indiscernible) first half or so.

Okay.

Thank you.

Can you talk a little bit about you said your -- you are optimistic about the middle of the year, the turn of the IT market?

What kind of evidence have you seen to be this encouraged?

The evidence is all the design wins that we have.

Our switching solutions, the Prestera family.

We are seeing that a lot of our customers as well all the tier one players are gearing up for -- for -- for -- for massive replacements of the -- of the, uhm, business network infrastructure to move to gigabits.

And when that happens, it will pretty much obsolete all the past infrastructure that people have been using in the last whatever, five, six years.

So basically it's these 3Coms, the Dells, Foundry, Intel, those kind of people?

Yes.

Okay, thank you.

Your next question comes from Mark Lepasos of Merrill Lynch.

Couple questions.

On 3Com, do you -- is the implication there that you are going to be only supplier of Gigabit Ethernet silicon into their NIC and LOM business?

We hope eventually.

But initially, they are using a multiple source strategy?

No.

This is a major -- this is a major engagement so we -- both of us hopes that this will be the platform.

Okay.

And then on the wireless LAN, are you guys shipping production revenues right now?

We started shipping the wireless LAN in Q3 last quarter.

And it will be increasing this quarter, thank you know, but we again believe that the bigger opportunity for wireless, you know, is obviously fiscal 2004 but yeah, as we had said we would, we did begin shipping, you know, wireless for revenue in Q3.

Okay.

Did you -- you didn't announce the customers, did you?

Not yet, no.

Okay.

And just so I'm clear, on the IBM mobile hard disk drive side, you guys did not get that win because you decided not to share your silicon with IBM at the early stages of the design?

You're correct.

We were in the quandary so we disclosed it, we may have lost the -- the WD.

Right.

Understand.

And then George, what was the share count down?

Shareholders chose to take our stock price down so when you do the treasury stock method, that takes --

It was due to the stock price then?

Right.

The treasury method.

And on the -- how should we think about a modeling R&D going forward past the next quarter?

Should we think about it in terms of some fraction of growth of your top line or would you expect to flatten it out at some point?

Well, no.

I think you should assume that our operating expenses in absolute dollars goes up every quarter because we're constantly increasing our investment in our business, but as we move closer, Mark, to the 18 percent operating income, with the growth in our top line, so forth, you know, on a percentage basis, the numbers, you know, the percentage comes down and it should come down literally every quarter also next year but, you know, uhm the absolute dollars, no, you should definitely model that our operating expense dollars go up every quarter.

The other part is the -- you also need assume that we continue to invest in other areas that we haven't talk about.

We -- you know, we -- a lot of things that we talk about like, for example, wireless, we spend -- we started the development one or two years ago.

So next year, we introduce a new product, product line, you can assume that we have been investing in those areas for couple years before that.

Okay.

Last question is on the payables, were they down because of better linearity?

Uhm, well, obviously, there was certainly a build-up in Q2 as we were, you know, ramping and as we, you know, it kind of goes along with the smoothing out of the production ramp and making sure that everything is balanced going forward so, yes, in essence, linearity has definitely had an effect there.

Okay.

I understand.

Okay.

That's all I had.

Thank you very much.

Ladies and gentlemen, we have reached the end of the allotted time for questions and answers.

We'll now go back to Dr. Sutardja for any closing remarks.

Okay.

Thanks, David.

This completes our Q3 fiscal 2003 conference call.

I would like to thank you all for joining us and looking forward to updating you next quarter as well for the next year at that time.

Thank you.

Thank you for participating in today's Marvell third quarter fiscal 2003 conference call.

This call will be available for replay beginning at 9 p.m.

Eastern Standard Time today, through 11:59 p.m.

Eastern Standard Time on Thursday, November 28, 2002.

The conference ID number for the replay is 6564396.

Again, that's 6564396.

The number to dial for the replay is 1- 800-642-1687.

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