邁威爾科技 (MRVL) 2004 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the Marvell Technology Group, Ltd. third quarter 2004 earnings 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 today on Wednesday November 19th.

I will now turn the conference call over to Dr. Sehat Sutardja, Co-Chairman and CEO of Marvell.

Thank you, Julie.

Welcome, everyone to our third quarter fiscal year 2004 conference call.

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

Now while we -- I do not on a regular basis monitor the health of our industry, I could not avoid noticing that the overall semiconductor market recently is rather bullish on the growth rate for the next year.

For the market this is welcome news indeed.

As we have been waiting on the recovery for the last several years.

To our employees and investors alike that is also welcome news.

When the general semiconductor market was not doing well, there was a high level of nervousness amongst the semiconductor companies which included us.

While in hindsight the concern regarding us was unwarranted I clearly understand from the point of view of investors they saw only the general market conditions.

As anyone knows, just because someone was doing well against the market did not guarantee their future performance.

My objective as we become a more mature company and through the quarterly updates that we provide to you is to give you our investors a better understanding that we are running the company for the long-term goals.

Of course, this is easier said than done.

As much as we would like to provide you with detailed information to give you a better understanding about us, we could only give you the information related to our current businesses.

I have learned from the past that if we talk too much about our future products or markets or maybe even too soon we are just giving away competitive information to our current and future competitors.

The result could potentially negatively impact our future success.

Based on my eight years' experience running Marvell I have come to a conclusion that any financial impact to our business from all the new product developments will not be material for the first two to four quarters or sometimes even longer after the product introductions.

Therefore, if you notice that over the last year or so I have changed my quarterly discussion away from disclosing details of new product developments.

This has been done quite intentionally with the company's future competitiveness in mind.

We will, however, still provide you with the general future direction.

Just not specific products or specific time frames to avoid anyone to speculate on the benefits of these specific products.

My objective is to run the company to outperform our own judged on expectation.

After all, even I cannot predict precisely when the revenues from new products will take off.

We will stick to the facts that we can reasonably expect to achieve.

In return I hope you gain confidence in our strategy of managing a company for long-term growth which I believe is consistent which why you want to invest in a growth company.

I would like to provide you the updates for the last quarter's financial performance and hopefully give you some insight on what we could reasonably do for the next quarter.

As customary George will give you the Safe Harbor statements before I go into specifics.

George, would you do that and give the summary of Q3 financial statement.

Absolutely.

Thank you, Sehat.

Good afternoon, ladies and gentlemen.

I would 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 and 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.

These statements include those relating to the pace of our business as we completed our first, second, and now third quarters and the impact of the continued adoption of our solutions on our revenue growth.

The following factors among others could cause actual results to deliver 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 and 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, and 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.

Marvell reports net income or loss and basic and diluted net income or loss per share in accordance with GAAP and additionally on a non-GAAP basis referred to as pro forma.

Marvell’s management believes that non-GAAP information is useful because it can enhance the understanding of the company's ongoing economic performance and Marvell therefore uses pro forma reporting internally to evaluate and manage the company's operation.

Marvell has chosen to provide this information to investors to enable them to perform comparisons of operating results in a manner similar to how the company analyzes its operating results.

Today we reported the net revenue for the third quarter of fiscal 2004 was a record $215.3 million or an increase of 58% over the $135.9 million reported for the comparable quarter in fiscal 2003 and a sequential increase of 12% from the second quarter of fiscal 2004.

Pro forma net income which excludes the effect of acquisition related expenses amortization of stock based compensation and charges related to facilities consolidation was $35.1 million or 25 cents per share for the third quarter of fiscal 2004, compared with pro forma net income of $17.6 million or 14 cents per share diluted for the third quarter of fiscal 2003.

Shares using computing pro forma earnings per share for the third quarter of fiscal 2004 increased to 142.4 million as compared to 127.6 million shares for the third quarter of fiscal quarter of fiscal 2003.

This quarter we also continued to increase our net income under generally accepted accounting principles or GAAP.

Our third quarter fiscal 2004 GAAP net income was $12 million or 8 cents per share diluted compared with net loss under GAAP of $7.7 million or 6 cents per share for the third quarter of fiscal 2003.

This represents our third consecutive quarter of GAAP profitability since our acquisition of Galileo Technology Limited in the fourth quarter of 2001.

We have provided on our Website in the investors section at www.marvell.com a reconciliation of GAAP net income -- loss -- to pro forma net income for the quarter reported today plus the prior 8 quarters.

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

Thank you, George.

Before I start with specific business updates I would like to take a moment to review what our business is all about.

A lot of people in the semiconductor business as well as the general end markets that use semiconductors in their products could easily recognize Marvell as a major supplier of semiconductor components.

But if you ask them about what we actually do, or what our core competency is, most of them will get it right probably less than half of the time.

This is quite sad even though our sales -- our run rates are considered to be quite significant by any measures.

I have been asking myself why have we ended up in this situation.

I have some ideas why so I would like to use this opportunity to explain our business in easier terms to understand.

First, the technology we provide to the market is so complex that it is very hard for us to convey without getting into a discussion that becomes very technical and most of the time misses the point any way.

As a result, often in the past we have had no choice when discussing our technology with our customers and investors explaining our technology by comparing things that they have often heard about or understood well because of the things that they have to deal with in their daily lives.

This unfortunately creates an impression that we as a company mainly built those products that we most often talk about.

Guess what?

As we have grown, we serve a lot more market segments and it is becoming impossible to relate the company to any specific core business alone.

If you say Marvell is a communication company, you are sort of right because this is what you hear most often.

If you say Marvell is a storage company, you are also right because this is a significant part of our business.

Yet, on the other hand you are also wrong because we do not build the end storage products that most people think of in terms of storage companies.

In fact, the SIA or the Semiconductor Industry Association does not even have a category for storage IC components.

If you say that we are mixed signal and DSB company you are also right and in fact more right so than the first two definitions because these mixed signals and DSP technologies are what differentiates us against our competitors, regardless of which market segment we play in.

We pride ourselves as the industry leader in inventing new mixed signal technology and developing proprietary DSP algorithms and processors to solve many existing problems as well as problems in the new emerging market.

If anything, I personally think that by placing the label of storage and communication this just propagates the stereotypes of Marvell as a storage and communication company and further increases the confusions to our investors.

While there was a more appropriate definition of Marvell a few years back it is not appropriate to keep this definition moving forward.

I personally believe you should always think of Marvell as a mixed signal and DSP company since there are many more new market opportunities for us to participate in and most of those have little to do with storage or communication.

Furthermore, as more and more of communication products are used in a storage business and vice versa, it becomes impractical to keep the separation any longer for financial reporting purposes.

With this in mind, over the next two quarters we will be moving to review our business as a whole and provide you with detailed discussion on each of the several end market segments that we play in instead of continually calling our business storage or communication.

We believe this will provide you with a better idea on how well we do as well as provide you with the capability to estimate our future performance based not on the specific product informations which most of the times would be limited any way but more broader on the performance on the individual end market segments that we play in.

Of course, in order to prepare our investors for the changes in the reporting style, we would for the next two quarters prepare the same two numbers for storage and communications for your reference.

The caveat is that as many of the businesses opportunities are intermingled, the two numbers are going to be not precisely meaningful any longer.

We will provide these numbers so you can get used to the new format over the next two quarters.

So, the question is what are the end market segments that we are currently play in.

Well, here they are.

The first one is the enterprise or business end market which includes the enterprise or business storage market the infrastructure networking market and the business PC market.

The second end market that we play in is the consumer market which includes the consumer PCs and entertainment market.

And the third market is what we call the emerging market.

Not necessarily a new market that we invent, which includes among other things the industrial and automotive markets.

While previously all in fact almost 100% of our products were sold to the enterprise market, today more and more of our products are starting to be found in the consumer market.

We do have high hopes that over time the consumer market for our products is going to be as large and eventually bigger than the enterprise of business market.

This is a natural evolution for us as even though each consumer only spends a fraction of what the enterprise customer spends, the number of consumers clearly outnumber the number of enterprise businesses by leaps and bounds.

We estimated that today approximately 80 to 85% of our products are used in the enterprise business end market.

The rest, about 15 to 20% are finding their way into more other things.

Home PC market, personal video recorders, more widely known as PVRs, Digital MP3 players, audio players such as I-pods, wired or wireless home broadband access routers, and firewalls, and futuristic wireless TVs.

In the imaging market our storage products are starting to be found in automotive GPS systems.

In the future as we realize the vast potential of our mixed signal and DSP technology we expect that more of our product developments will be targeted at these markets.

One of the many goals that I have for Marvell to achieve over the next several years is when somebody in the market faces a challenge in building new products we would like to be the company that they will call first to solve their complex mixed signal and DSP problems.

Now, historically we targeted the enterprise market first because that was the larger market that existed at the time.

We realized that even though we have only barely scratched the surface in this market, meaning there is still a lot of room to grow, our 80 to 85% dependence on the enterprise market is quite high for the all the revenue that we now generate.

We hope over the next few years to lower this percentage as we increase our overall revenue while still increasing the absolute dollar value of the enterprise business end market segments.

Our long-term target which is measured in 3 to 4 year time frame is to achieve 40 to 60% of our revenue from the enterprise business end market with the balance of 60 to 40% in the consumer and emerging market segments.

Our goal is that each of the end market segments will contribute to us some where in the billion dollar range of revenue opportunity once we are fully engaged in the market.

We are, of course, well on our way in executing our plan in the enterprise business end market segment.

We are now just beginning our focus to address the consumer and emerging market segments.

With that, I hope you now can feel where we are going as a company with this discussion of our future direction.

Now, I would like to give you more color on how we did in each market segment.

In the enterprise business end market we continue to perform well.

After being in this business for the last 8 years, we know that as long as we continue to do our job, that is delivering newer most competitive and highest quality products, we will continue to grow our business.

The good news is that despite the challenges that we face we are performing extremely well against our current competition and have established an extremely high bar for would-be new competitors.

We also understand that in this business we do not win because of technology press releases or public debate regarding misleading information on competitive position of technology or even speculation on customer engagements.

Our enterprise customers are way too sophisticated to know who delivers and who does not.

This one -- this is one of the main reasons that even though in the last several quarters we have been rather quiet in disclosing new products, we still gained the majority of design wins.

For example, our Prestera networking products have gained several dozens of design wins across many different platforms.

While this number is a lot less than some of our competitors' recently claimed design wins we believe the dozens of design wins are pretty much the total current merchant market opportunities to begin with.

If anything, out of this discussion, one message that I would like to give you is that if we talk about Gigabit networking our technology is second to nobody.

Moving to other segments in our enterprise business.

We also are quite pleased with the performance of our customers which results in increasing orders for chips or semiconductors that we built.

They are eventually targeted for the mobile and desktop PC business market.

As we look forward, we are optimistic that our deep engineering engagements with many of our customers should prepare us well to serve their needs for many years to come.

Now, moving to the consumer market.

The consumer market is a huge opportunity for our technology.

The advent of low-cost high definition televisions or HDTV for example will provide us a huge opportunity for specifically optimized products targeted for storage and computing devices such as personal video recorders or PVR functions.

Just by looking at the numerous end products on the shelves in consumer electronics stores that I have visited recently, one can predict that this is a market that is ready to take off big-time in the next 2 to 4 years.

We are of course not the first company to enter this consumer market but we also have an -- advantage of looking into solving this consumer problem from the outside.

And thus hopefully avoid the mistakes that others have made in the past.

Therefore, allowing us to build products that can more effectively compete in the future without carrying the Legacy architecture limitation of existing generation of electronics devices.

Another example of the seriousness of our focus in the consumer market is the low power and highly integrated wireless networking solutions.

While everyone else in the industry is focusing their wireless solutions for the enterprise PC market, our wireless solution has always from the very beginning been targeted for use in the embedded stand alone consumer market by integrating low power with embedded processors into our silicon.

This is of course much harder to do compared to that of the PC market where one simply just taps the processing power which is plenty of the main CPU to do the wireless mag pro processing in software.

On the other hand because we are ahead in the embedded market solution we do expect to gain more design win opportunities that have just started to open up in many consumer electronics devices.

Already today we are one of the leaders if not the leader in shipping wireless networking router and firewall silicon for the home consumer.

This leadership position is in contrast to our neglegible market share less than a year ago.

Our superior mixed signal and DSP technology coupled with our expertise tease in building high performance embedded CPUs positions us very well in providing simply the best class of products for the home consumer market.

Our wireless solutions do not just provide high performance.

They are also the lowest power and the smallest die sized in the market.

Last I checked, we have the most cost competitive products in the market.

Now, speaking on die sizes I also would like to mention that other products including our Gigabit Ethernet products are also significantly smaller than our competitors.

In some cases up to 50% smaller in die sizes, this advantage has consistently been demonstrated in the performance of our products and our ability to have outstanding manufacturing performance.

This advantage has been clearly recognized by our customers.

Now, this should not be surprising for our customers or silicon foundries that have worked with us over the years.

Our superior mixed signal and DSP capability is what differentiates us.

Our sophisticated customers do not just look at the package device.

After all, you can only fool the customer for so long by hiding a big chip into small packaging.

In the long run those who have the most cost competitive products wins the game.

We are confident that our eight years of experience in building low power and high performance mixed signal and DSP technology will not be matched anytime soon, especially by someone that has chosen a different path.

We are also confident that much of our mixed signal technology which give us those low power and smaller die size attributes is highly patented.

Finally as we expand our focus into new emerging markets we are hopeful that our low power and high performance mixed signal and DSP technology will position us equally well to compete with existing chip suppliers in this new emerging market.

This segment is, of course, way too early to talk about.

But I can assure you that we have quite significant engineering resources assigned to solve existing as well as new problems using the (indiscernible) mixed signal and DSP technology.

In summary we believe the opportunity for our mixed signal and DSP technology is limitless or at least so big that it will be decades before we run out of ideas on what to do with our technology.

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 would like to make some additional comments on our Q3 results.

Our Q3 revenue of $215.3 million was a new quarterly record for the company.

A 58% increase from Q3 of last year, additionally a 12% increase in revenue from Q2 to Q3 compares favorably to our guidence of a 10% increase in revenue.

The Q3 sequential increase of 12% represents the 8th consecutive quarter that our sequential revenue growth greater than 10% and our 24th consecutive quarter of revenue growth.

During Q3 both our storage and communications businesses performed well resulting in increasing revenue for both businesses.

On our Q2 conference call we commented that the revenue growth drivers we had identified entering fiscal 2004 were continuing to gain momentum.

These revenue drivers include Gigabit Ethernet for PC Client, Desktop storage, Gigabit Ethernet for network infrastructure, 802.11 wireless and serial ATA.

Additionally based on trends that we saw develop during Q2 we added mobile storage to our list of revenue opportunities for fiscal 2004.

During Q3 our performance across all of these revenue drivers was excellent and all contributed to our sequentially revenue growth.

From an end market perspective, we saw better than anticipated contributions from mobile storage as well as 802.11b wireless.

Additionally, we shipped our first 802.11bg volume during Q3, one quarter earlier than planned.

For the quarter, storage products contributed 50% of total revenue with communications products representing the balance.

Q3 gross margin of 53.2% was at the high end of our guidance of 53% plus or minus 25 basis points.

Q3 product mix which is the largest determiner of gross margin percentage was slightly better than our expectations.

Our end markets remain very competitive and during Q3 we continued with our cost reduction programs to achieve our targeted gross margins.

We continue to be focused on our strategic direction to invest a significant portion of our R&D expenditures developing new products that will provide us opportunities for growth over the next several years.

We balance that focus with the objective of achieving operating leverage in our business model.

In Q3 our pro forma operating expense as a percentage of revenue declined to 35.4% which represents a 160 basis point decline from Q2 and a 30 basis points favorable to our Q2 guidance of a 130 basis point decline.

The ninth consecutive quarter we increased our pro forma operating income percentage.

Our continued double digit sequential revenue growth, balanced product mix generating consistent gross margin percentage contribution and decreasing pro forma operating expenses as a percentage of revenue resulted in an 80 basis point increase in Q3 pro forma operating income percentage from 16.9% to 17.7%.

The result of this continuous improvement has brought us very close to our long-term model of 18%.

Shares used in computing pro forma net income per share for the third quarter increased to 142.4 million compared with 136.8 million for the second quarter of fiscal 2004.

The increase in shares was largely driven by the use of a higher average stock price for Marvell shares in the treasury stock method calculation as well as a full quarter shares related to the Radian acquisition which closed on June 28th.

The strength of our balance sheet continued to improve in Q3.

We increased our cash and short term investments by approximately $56 million to $400 million.

Year-to-date we have increased our cash and short term investments by $135 million.

DSOs for Q3 were 50 days.

Our DSOs continue to remain in the 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.

During Q3 we increased our inventory by approximately $16 million to support the current and projected growth of our business.

Our days of inventory increased from 61 days to 69 days which puts us comfortably now in our target range of 65 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 for our products.

Now turning to the future, as we have progressed through the year we have begun to see signs of improvement in the overall economic environment.

This coupled with the momentum from our fiscal 2004 revenue drivers provides us the frame work to expect further growth as we enter our Q4.

Mentioned during the last several calls our visibility as we enter a quarter has been very good.

This remains consistent as we enter Q4.

We have targeted company revenue for Q4 to increase 10 to 12% from Q3.

As we previously mentioned as Marvell continues to grow our quarterly revenue at double digit sequential rate we believe that a significant portion of that growth will be derived from the PC market.

As it did in Q3, this will impact the product mix of shipments in Q4.

While we believe that normal ASP declines will be offset by continued reductions in our manufacturing costs the anticipated product mix of our shipments in Q4 should result in Q4 gross margin of 52.5% plus or minus 25 basis points.

With our focus set on providing the technologies products and building a company structure to support long term growth R&D and SG&A in absolute dollars will increase in Q4 but decline approximately 120 basis points as a percentage of revenue from Q3.

Interest and other income should remain consistent with the Q3 level.

Shares used in computing pro forma net income should increase to approximately 144 million.

Now I would like to turn the call back to Sehat.

Thank you George.

That completes our commentary.

Julie, will you please poll for questions.

At this time, if you would like to ask a question, please press star then the number one on your telephone keypad.

We'll pause for just a moment to compile the question and answer roster, the first question comes from Karl Motey of Wachovia securities.

Thanks.

Recently there has been a lot of discussion about Prestera mentioned in your prepared comments.

Can you give us a little bit more color on any recent wins or kind of your outlook here over the next few quarters?

Thank you.

Did do you want to answer this?

Sure, first of all, we are very pleased to say our Prestera is in production.

Our customers continue to build more platforms using Prestera based products.

What you are seeing the platforms that our customers introduce in the marketplace currently is in the enterprise market segment and as you see more products introduced by our customers in the next couple quarters you will see more even moving down to the desktop platform.

As our company policy, we always announce our product design win after our customers announce their product.

So I understand recently there are false rumors floating around the street talking about our Prestera product and lots of -- loss of the customer design wins.

And we want to let you guys know that is absolutely not true and Sehat I think addressed in his speech earlier.

As you guys know, Marvell, our style is very much result-driven and we might be a little soft-spoken.

However, we certainly deliver quality results and that is Marvell track record.

And I think that is what we are famous for.

Thank you.

Your next question comes from Ambrish Srivastava of Harris Nesbit Gerrard.

Hi thanks George, comments on inventories where we should expect they have been up pretty strong the last three quarters and then secondly for Sehat, any early signs of seasonality for the fiscal first quarter and what sense are you getting from the customers?

You mentioned that you are seeing good visibility and also increasing signs of improvements, thanks.

The inventory – again, the absolute dollar number is not the important number to look at because our business is growing

I mean our actual number of units that we ship on a monthly basis since the beginning of the year has grown by over 60% so we need to obviously be ramping the actual dollars -- number of units that we are running through the inventory and we have been working very hard to get actually to the level that we been able to achieve here and especially now going into what most people are beginning to perceive as a much tighter fab capacity environment one of the worst things you can do is be light on ability to respond to your customers so again with the days of inventory at 69 -- comfortably in that range of 65 to 70 we are very pleased with where we are.

I think we put ourselves in a good position you know to support the revenue guidance that we've given.

Now that being said, we are taking a very hard look at inventory right now in given this you know potential, you know, sort of tougher period or higher capacity utilization by the foundries.

We may need to make even further investments there just to make sure that we are going to be able to address a lot of the commentary that Sehat made about the new consumer opportunities.

So we are -- we feel very good about our inventory and you know looking forward to shipping that to our customers over the next couple quarters.

Talk about the Q1.

The question about Q1.

Of course the most important part is the output for the (indiscernible) which George have just given to you and now Q1 in general if you look at Q1 there will always be seasonality in some of the segments there that we play in.

But because of the new design wins and new end market segments they are going after we do not expect to hit that seasonality now.

If you ask me what will happen between Q4 and Q1 three years from now, four years from now, yeah, I will say it will be as we become a bigger company at that time okay we will be -- we will be more -- we will be somewhat impacted by seasonality that other people will see it but, for this coming year I do not expect to hear that yet.

Just a clarification the seasonality would be alleviated by the new design wins that are ramping or is it from existing maybe enterprise being stronger than?

It is across the board from the enterprise business markets from the fact that we are entering the consumer markets.

So there are certain markets where we have zero markets we just announced that we -- George just mentioned about the G, the wireless G so that was shipping -- that is shipping ahead of schedule.

So we have a deal shipment in the past any seasonality you will not see it hopefully for quite awhile.

Okay, Thank you.

Your next question comes from Jim Liang of Pacific Growth Equity.

Thank you.

Sehat, you mentioned earlier regarding Marvell having unique mixed signal and DSP technologies.

Can you just elaborate a little more on that as far as how your technology differentiates from other mixed signal and DSP players?

Then I have a follow-up.

Thanks.

Sure.

Yeah, the -- I mentioned about using our mixed signal and DSP technology to go after many new markets outside the storage and communication and I really meant that.

The -- the when we entered the storage market years ago, like six or seven years ago, the market at that time was mainly driven by purely analog technology.

Solutions available in the market at that time basically by suppliers they were very good in delivering fewer analog technologies and at that time the solutions was appropriate for the market and as we realized that with the advancements of deep soft microns moving forward, the DSP combined with you know mixed signal capability is actually will give you superior performance and at the same time lower power and lower cost -- lower cost ownerships.

Fewer external components because things will be integrated internally – processed in digital domain using DSP algorithms so as we look forward in the future we are identifying many new markets – several new markets.

They’re currently being solved by -- by purely analog approach.

We believe that the same thing that we have done in the storage markets can be replicated in this new emerging markets where the analog guys are the king today.

So, so that's a hint.

And I will promise that maybe in two quarters from now I will disclose more in detail about maybe I at least an example of such products that will -- that you will not imagine why you didn't need a DSP or do with a DSP because we are looking forward to give that -- to give our customers better performance and lower costs down the road.

So in that respect as far as your technology, you know, replacing the pure analog approach but, do you anticipate some of the current mixed signal DSP players potentially going after the similar markets as you are and competing with you in those new markets?

Sure, this is a lot of reason why I am a little bit cautious about talking about it too early.

I mean I mentioned in my discussion that if you notice over the last year or so I have been intentionally been vague about specific product in development.

A lot of the things that we have -- in the past okay usually -- in the past what we have done whenever we want to go in a new market we say we're going to this market and what we found out the hard way is that everybody else was listening and say yeah, we can also do the same thing and they put investment in this market and as a result you know it will -- it will one way or another it impact our future competitiveness.

So we learned from our lessons.

I mean being naive in the past when we were younger and talk everything and now learn to do it and we are developing all these products as we speak.

We do not talk about what they are because they are -- because like a hundred different ways of a different specific products to do.

Let our competitors guess what they are and when we are ready in productions and hopefully in higher volume productions then we talk about it.

Great, we look forward to updates on that topic.

Just a follow-up question.

Can you maybe Weili, give us an update on the Rad LAN (ph) software integration and how is that helping to sell the Prestera switch as a total solution, also is there any kind of potential push back from the tier one OEMs who have their own software and potentially may view Rad LAN as sort of an enabler of low end competition so to speak?

Thank you.

Yeah, first of all I think the acquisition of Rad LAN is extremely strategic.

Due to the complexity of the Prestera chip set the software component piece is extremely important.

Now as far as the more different business models to address different customers we are extremely flexible so there are customers that require total solutions.

Others require low level firmware, drivers, software solutions.

So we are extremely flexible.

We can offer anywhere from 20% of the software support up to 80% or 90%.

So it has been viewed as very positive.

And this is also help in terms of time to market execution for the overall product offering.

Great, thank you.

Great quarter.

Thank you.

Thank you.

Ladies and gentlemen, please limit questions to one per person.

Your next question comes from Cody Acree of Legg Mason.

Thanks.

Congrats on another solid quarter.

Weili I have a question back on Prestera.

I know you can't get overly specific about those design wins but can you talk about the number of customers that you're shipping Prestera and Gigabit Ethernet products to and what we can look to as volumes of customers in the coming quarters?

There are a few customers already shipping and I think our next quarter that number will increase significantly.

I'm sorry you said two customers?

No, more than two customers.

Okay, do you have a specific number?

I think we hit our objective of three, Cody, for the October quarter, yes.

And going forward how fast do we see other customers ramping in?

Probably by Q1 definitely you will see probably close to a dozen.

Okay.

Perfect.

And can I ask a follow-up here?

Sure.

Okay.

On that same topic on the client side, can you talk about the competitive position?

Obviously you kind of addressed this somewhat in the opening remarks and lots of discussion about this as of late.

Can you talk about what you're seeing from some of your peers, the Intel business as well as what is going on in Taiwan?

I assume you are referring to the Gigabit clients?

I'm sorry Gigabit clients.

As you guys know, we partner with Intel has being a successful venture.

I think if you look at the Intel market share is over 70%.

And as well as the Gigabit migrations from Fast Ethernet is absolutely happening.

We talk about last quarter also.

And Marvell I think we are in very good position whether or not it’s Marvell 5 (ph) based solution to address the client side or our total solution.

It is being very well received and we are in very high volume production.

Your next question comes from Max Schuetz of Credit Suisse First Boston Corporation.

Hi, guys.

I had a followup on the gigy client side.

I was wondering if you could give us an update on what the status was of your PCI Express part and what share of the gigy client market do you expect to be PCI Express next year?

The schedule of PCI Express is that we expect, you know, again, the development of the Gigabit chip is actually secondary to have having a chip set available that supports PCI Express and that is not the case in the market at the moment so it is a little premature to get too wrapped up around the actual Gigabit Ethernet chips.

But, we are on target as we said before to have your our solution available prior to the end of the calendar year.

So we believe that will put us in very good position when the Ultimate PCI Express chip set is available for the general -- for the general market.

So right on track to where we thought.

On our own Yukon-based product into the white box -- it has done extremely well.

We have been very successful at two of the tier ones with Zeus Tech and Elite Group.

Obviously that leaves additional opportunities at some of the other large tier ones and we are actively working right now to expand our penetration you know into that market.

So again I think between the partnership that we have you know with Intel and our own you know we are -- we are very active in the PC Gigabit client market. [d1]

George, do you have an estimate of what percentage of the Gigabit client market next year will be PCI Express based?

No, I mean even Intel last week on there call was sort of vague as to when they thought exactly PCI Express would become a large percentage.

So I think it is too early yet Max, to know.

In either case whether it is going to be taking off faster or slower, we will be prepared.

We are going to be basically don't care whether it’s going to be all or 10% or 5% or 50%.

The difference between the PCI Express and the regular PCI is just the interface portions -- the replacing the interface to the chip set.

As far as the technology that we -- that needs to be -- they're some what new in the PCI Express.

But as you know, our service (ph) already in the 12th or 11th or 12th generation -- in fact I loss number the track –- of the number of generation of service that we have introduced in the market.

So, those are proven like years, years ago.

So nothing that, you know, we have to be concerned with.

So no technological difference -- the difference is on the relationship side but, there is no Intel relationship or announced relationship on the PCI Express part?

No barrier at all.

Yeah, nothing that we will talk about specific on the relationship side.

Okay, Thanks guys.

Your next question comes from Jeremy Bunting of Thomas Partners.

Hi, guys.

It's Reuben Roy for Jeremy.

I was wondering if you would touch on (indiscernible) and if you're going to ship product out I'm wondering specifically for mobile drives I know this product (technical difficulty) drives are you seeing (technical difficulty)

You kind of -- we didn't hear the last part of that.

I was wondering if you were seeing increasing interest from other mobile drive manufacturers for that type of a part and how you feel the serial ATA adoption rate is coming along.

Okay.

I will answer the serial ATA question.

The serial ATA is here to stay.

You know, some people thought that ATA is going to take off a little bit slower.

We happened to believe two years ago that it is going to take off faster and the thought is some where in between.

So we thought it would take off like maybe within a year or so after we introduced serial ATA.

So it has been almost two years since we introduced our serial ATA, but good thing is serial ATA now is taking off.

Every storage device manufacturers are working on serial ATA and not a single one that is not working on a serial ATA.

Not a single one is not working on it.

The chipset as you know is moving to serial ATA.

And by from what we heard from the market the support for the parallel ATA by sometimes like 2005 or so time frame will -- may disappear.

Now, that is from the -- from the requirements from the market.

Now, from the performance point of view, everybody clearly is pleased at the benefits of going to serial ATA.

From the cost point of view all our customers now knows that embedded serial ATA is the way to go.

Fewer -- smaller packaging.

Lower costs.

It is moving very fast.

We believe that by the end of next year or so or practically all the desktop -- I mean at least half of the desktop and maybe quite a bit on the mobile will go to serial ATA.

Okay, Great, that's what I was looking for.

Thanks.

Your next question comes from Dushyant Desai of CE Unterberg Towbin

Good afternoon.

This is a question for George.

With respect to the breakdown between storage and communication, it seems that communication grew a lot more this quarter, because last quarter breakdown was 55 storage, 45 comm and this quarter it’s 50-50 even.

Could you give us some more detail about the product trend or the revenue trend there?

I think you might have heard that wrong Dushyant.

We said that the split is storage in the mid 50s.

Mid 50s, okay.

Mid 50%.

So they basically were consistent.

So both of them -- both of them showed growth, any color about which area of storage was growing more with respect to enterprise, portable, desktop?

We said all the growth drivers contributed -- if you look at end markets, we said global storage was probably a little better than we thought and also the wireless was better than we thought?

Okay.

Thank you.

Your next question comes from Charlie Galvin of Bank Equity Partners.

Thanks George, at the risk of sounding a little greedy.

Have you guys found any particular constraints both within the -- from the laptop side as far as the flat panel, given that laptops have been a great grower for you?

Is this possibly one of the concerns in regards to mix and why the gross margin may be coming down a little bit?

And then kind of a corollary to that in terms of you said you are watching inventory in the foundry.

Assuming that you do get another source come up how quickly could that source come up at this time?

Well, again, the -- there has been a lot of discussion about how many -- how the mobile drive guys are able to service the demand in the market and there has been some commentary that that is being constrained.

You know, from our perspective, as we said we have continued to see extremely strong demand from our mobile drive customers.

We are obviously stepping up and meeting that demand.

And, you know, that is what we look at.

Whether that meets the whole end market demand is really -- is really, you know, a question that -- we can't answer that one.

But we can answer that whatever they are asking for at this point we certainly are in a position to step up and service that demand and that it has been increasing.

We have mentioned previously that we are going to expand, you know, our foundry resources beyond just one and we have been in the process of doing that for almost two years now.

And we are, you know, running volume at more than one foundry at this point.

So I don't -- you know, we are executing to a plan that we feel comfortable supports what we need to do.

So we don't feel exposed at this point given some of the recent talk in the market about capacity.

If I could paraphrase in terms of the foundry while there may be some allocation issue at the first source, the second source is alleviating it for you don't find any limitations?

This is the kind of question that always comes.

When capacity is -- capacity is plentiful everybody is worried.

Wow, price is going down and all this other stuff.

I think the capacity is good for the industry in general.

It leaves less pressure on pricing.

There will always be lower pricing requirements from the customer.

That is unavoidable.

That is the business we are in.

But, at least it won't be as bad as we have seen in the last several years.

Maybe just one more comment.

We are not getting surprised by what is going on in the foundries.

We have to work -- we work closely with our partners and we have increased our monthly shipments in unit rates to 60% since the beginning of the year.

So in order to even achieve what we have been able to do so far, it has required us to have a very extensive foundry plan in place which our operations folks have done an outstanding job in executing too.

So, we saw a lot of what is currently being communicated out there coming and I think we put ourselves in a good position that as we go through another year which will be probably pretty challenging from a capacity standpoint, we're in good shape.

Thanks, George.

At least a good challenge.

We have reached the end of the allotted time for Q&A.

Are there any closing remarks?

Well, thank you, everyone.

Since this is the end of it, Julie, this completes our Q3 fiscal year 2004 conference call.

I would like to thank you, everyone, for joining us.

And we look forward to updating you for the next quarter.

Thank you.

This concludes today's conference call.

You may now disconnect.

[d1]The deleted text was a complete copy of the above paragraph.