邁威爾科技 (MRVL) 2005 Q1 法說會逐字稿

Welcome to the Marvell semiconductor quarter one fiscal year 2005 financial results conference call. (OPERATOR INSTRUCTIONS) This conference call is being recorded today on Thursday, May the 20th.

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

Welcome everyone to our first quarter fiscal year 2005 conference call.

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

I'm very pleased to announce another quarter of record financial results for Marvell.

Q1 revenues increased 60 percent from the prior year to $269.6 million.

Our Q1 revenue growth of 11 percent marks our 26th consecutive quarter of revenue growth and our 10th consecutive quarter where our sequential revenue growth grew greater than 10 percent.

Our long track record of growing our quarterly revenues over the last six plus years is the result of our solid execution of our growth strategies.

It is important to note that we have been able to consistently deliver such solid results regardless of what stage of a given economy cycle we are in or the quarter-to-quarter growth of our end markets.

This is due to the fact that we continue to focus our long-term growth strategies on factors that we can directly control.

One of the key strategies of our success is that we target very large market opportunities where our world-class technologies gives us a technological advantage.

In many of our target markets the solutions that we provide are so advanced that they actually help drive technological transitions in the market, which helps accelerate the adoptions of our products.

For example, the adoption of our storage SoCs Gigabit Ethernet products in the past.

And today we have a number of additional exciting products that are also driving (indiscernible) in some very large markets.

Another of our key strategies for our success is that we partner very closely with our customers in these large markets and provide them state-of-the-art technology which enables them to be successful in their markets.

Through their success we both succeed.

Even in mature and demanding markets customers who choose our technology are able to derive tremendous value with the technological and performance advantages that we offer.

We're clearly executing once again on this formula for success in the emerging consumer market.

We're winning very large designs through our partnerships with the leading manufacturers of high-volume devices such as cell phones, gaming, MP3 players, digital cameras, printers and speakers.

This is a very exciting time for Marvell as many new consumer applications will quickly begin to adopt our innovative wireless LAN technology.

Our technology has clearly distinguished Marvell from our competition and has positioned us to lead the broad adoption of wireless LAN.

The strength of our technology goes beyond the fact that we consistently offer the highest performance in the industry; our technology is also highly differentiated and is specifically developed to address the specific technological issues that our customers struggle with.

Our announced entrance into power management market last quarter is such an example.

Our innovative approach to handling power management with digital signal processing, or DSP, is providing a much-needed solution to the critical power issues that many OEMs are struggling to resolve, while also offering the best performance.

Yesterday, we announced yet another new major strategic technological direction for Marvell with our announcement of our high-performance microprocessors for the embedded applications.

This capability gives us a tremendous technological advantage by enabling us to offer superior products and dramatically increase our ability to expand our product offerings for the consumer market.

I will elaborate more about the tremendous opportunities that our new technology brings to us and give an update on our strong business progress, but first I will have George give our Safe Harbor statement and provide more insight into our Q1 financial results.

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 enterprise, consumer and emerging 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 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 quarter of fiscal year 2005 and the impact of the continued adoption of our solutions on our revenue growth.

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, developed 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, 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 Q1 financials.

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

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

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 that net revenue for the first quarter of fiscal 2005 was a record 269.6 million, an increase of 60 percent over the 168.3 million reported for the comparable quarter in fiscal 2004 and a sequential increase of 11 percent for the fourth quarter of fiscal 2004.

Pro forma net income, which excludes the effect of the amortization and write-off of acquired intangible assets and the amortization of stock based compensation, was 49.1 million or 34 cents per share diluted for the first quarter of fiscal 2005 compared with pro forma net income of 24.5 million or 19 cents per share diluted for the first quarter of fiscal 2004.

Shares used in computing pro forma earnings per share diluted for the first quarter of fiscal 2005 increased to 146.1 million as compared to 129.6 million shares for the first quarter of fiscal 2004.

Net income under Generally Accepted Accounting Principles, or GAAP, for the first quarter of fiscal 2005 was 14.5 million or 10 cents per share diluted compared with a net income under GAAP of 4.4 million or 3 cents per share diluted for the first quarter of fiscal 2004.

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

Next I would like to make some additional comments on our Q1 results.

Our Q1 revenue of 269 million was another quarterly record for the company.

Additionally, the 11 percent increase in revenue from Q4 to Q1 compares favorably to our guidance of a 10 percent sequential quarterly increase in revenue.

The Q1 sequential revenue increase of 11 percent represents the 10th consecutive quarter that our sequential revenue growth has been greater than 10 percent.

During the second half of fiscal '04 we advised investors that beginning with fiscal '05 we would be changing the breakout of our quarterly revenue to reflect the end markets that we are targeting.

These end markets are enterprise and consumer.

We believe that this breakout will be more meaningful as our momentum into consumer and emerging market increases.

Included in our enterprise end market revenue are products for enterprise storage, enterprise networking, business PCs and enterprise wireless.

Included in our consumer end market revenue are products for small form factor drives, consumer PCs, consumer wireless and the SOHO/small-business market.

For Q1 the enterprise market accounted for approximately 80 to 85 percent of our revenue and the consumer market accounted for the balance.

In Q1 we saw growth across a number of our products despite some of our end markets experiencing normal seasonality.

Key contributors to our 11 percent sequential revenue growth were our REs (ph) channels and SoCs for the business PC market, Alaska PHYs and Prestera switching solutions for enterprise networking, SoCs for small form factor drives and wireless 802.11 chip sets.

Q1 gross margin of 52.6 percent was above the high end of our guidance with Q1 product mix consistent with our expectations.

We continue with our focus on operational efficiencies and our performance in Q1 was outstanding.

This resulted in the 40 basis point improvement in gross margin percentage.

While we continue to invest increasing amounts in the development of new products that will provide us opportunities for growth over the next several years, we continue to experience the operating leverage from the increasing revenue contribution from products developed over the last several years.

In Q1 our pro forma operating expense as a percentage of revenue declined to 32.9 percent, which represents a 70 basis point decline from Q4 and 50 basis points favorable to our Q1 guidance.

For the 11th consecutive quarter we increased our pro forma operating income percentage.

During our Q4 call we discussed that our Q4 18.6 percent operating income percentage was above the then long-term model of 18 percent, and we established a new long-term model of 21 to 23 percent which we expect to reach in four to six quarters.

In Q1 with our improved gross margin percentage and lower operating expenses as a percentage of revenue, we increased our operating income percentage by 100 basis point to 19.6 percent.

Shares used in computing pro forma net income per share for the first quarter increased to 146.1 million compared with 144.1 million for the fourth quarter of fiscal 2004.

Our balance sheet continues to remain very strong.

During Q1 we generated approximately 35 million in cash and exited Q1 with cash and short-term investments of 421 million.

DSOs for Q1 were 51 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 Q1 we increased our inventory by approximately $16 million to support the current and projected growth of our business.

As discussed in our Q4 call, as the second half of fiscal '04 progressed it became apparent that wafer fab capacity was tightening and lead-times were increasing.

As a result, we needed to adjust our plans.

Beginning in late Q3 of last year and continuing into Q1 of this year we began building some buffer inventory which has increased our days of inventory to 76 days.

One of the main focuses is to support the growth of our emerging and consumer products.

During Q1 we completed the production of the buffer inventory which is mostly in die form.

We will continue to manager 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 I'd like to turn the call back to Sehat for comments on our business outlook.

Before I go into detail about the exciting market opportunities that our new high-performance microprocessor technology brings to Marvell, I want to highlight the strong business success we are having across a number of exciting areas in both the consumer and enterprise markets.

First, as I mentioned in my opening comments I'm very happy to report that we continue to have tremendous success in winning high-volume designs for many different consumer applications.

By the end of this summer we should start to ramp into significant volume production for gaining applications that will utilize our unique wireless LAN technology as part of the gaming experience.

Additionally, towards the end of this year we expect to commence initial shipments of our wireless LAN solutions into a number of cell phone designs with leading cell phone manufacturers with an accelerating ramp into the next year.

We are also working closely with large OEMs for consumer applications such as MP3 players, digital cameras and speakers, utilizing our advanced wireless LAN technology.

Our solution set is driving the adoption of wireless LAN into many applications for cable RISC (ph) placement, as well as the high-volume camera to printer conductivity applications.

Given the breadth of the large volume consumer applications they are actively designing in our wireless LAN technology, it is clear that this is going to be a market opportunity that will be quickly made measured in hundreds of millions of units in a short period of time.

The design activity and excitement around consumer wireless LAN is tremendous and our technology is leading the way.

We have said all along that we have designed our wireless LAN solutions from the beginning for the consumer wireless LAN markets and now we are deriving huge benefits from the architectural decisions that we have made a few years back.

Our consumer wireless LAN solution has been designed with the most advanced power management techniques in the industry, which results in extremely low power consumption and extended battery life.

Additionally, we have designed our solution to off-load the host CPU by handling all wireless LAN related network and security stacks with our embedded microprocessor capabilities.

Furthermore, our customers are taking advantage of our microprocessor capabilities to handle incremental functionality such as MP3 audio decoding.

We look forward to giving you more specifics as our customers begin to roll out their new products into the markets.

Additionally, we are also enjoying strong momentum and revenue growth from the existing wireless LAN applications, and continue to lead the industry with innovative solutions.

In Q1 we enjoyed another solid quarter of growth from our 802.11 G products and are receiving very strong response from our recently announced All-into-1 and LiveAP product.

We're winning numerous designs with our first products from our All-into-1 platform, which for the first time allows the integration of many wireless LAN functions into a single device that were previously handled by multiple devices.

At the size of just a credit card the All-into-1 can add wireless capabilities to any Internet enabled device, extend the range of an access point or router, set up for wireless gaming over the Internet and allow personal hot spot connectivity.

Additionally, we were demonstrating at the network in shop (ph) last week our innovative LiveAP solution as a desktop Access Point where through the use of Marvell's extremely low power and integrated processor technology, the access point can seamlessly operate even when the desktop computer is powered down.

Through such unique applications and technology we continue to greatly distinguish Marvell from our competition and gain share in the wireless LAN markets.

Now moving to the Gigabit Ethernet market, we have once again raised the technology bar.

Just this week we announced yet another advancement to our industry-leading Alaska 5 product family.

Marvell has now significantly lowered the power consumption on its Gigabit 5s (ph) to under half a watt per port which enables our customers to introduce even higher density in ultra compact form factors with our single quad or also five products (ph).

By providing such low power consumption the system designers can now significantly reduce power supplies and in many cases eliminate cooling fans, thus further driving down the system costs.

Following our strong success in driving widespread adoption of our Gigabit Ethernet technology in the PC market we're now seeing a strong pick up in the gigabit infrastructure market.

We are currently in a position to lead this next wave of gigabit adoption with our years of strong partnership with our customers and large design wins in major platforms.

We're very excited about the gigabit market given our leadership position and the size and growth rate of this very large market opportunity.

Now in the storage market we continue to enjoy strong revenue growth and market share gains.

The opportunities in the traditional storage market continues to be very substantial as the market opportunity has now grown to be over $3 billion and we are focused on continued share gains as we expand our silicon content in drives beyond our SoCs and RE (ph) channels.

Additionally, Q1 was again another strong quarter for the emerging small form factor drives.

We are continuing to expand our market position in these emerging drives and see strong growth for many years to come as these drives become more and more common in high-volume applications such as cell phones, digital camera and MP3 players.

It is forecasted that in the near-term, these small form factor drives will ultimately grow into a market as big as the traditional drive market.

The performance of our embedded microprocessor technology is just another example of the many technologies that will continue to differentiate us from our competition in this very exciting space.

I would now like to give an update on our progress with our DSP based power management solution which we call the DSP Switcher family.

Last quarter we changed the landscape for power management with our instruction of our highly innovative DSP approach to power management.

Since then we have been visiting with a number of customers, discussing the benefits of our innovative approach to power management.

We're very excited about the strong response that we have received and design momentum is accelerating.

Moving forward we continue to roll out and develop additional products for our power management portfolio to address the entire power management market, which is now estimated to be measured at over $5 billion.

This quarter yet again Marvell has introduced another highly innovative and powerful technology that will once more dramatically change the competitive landscape and greatly expand our market opportunities.

Yesterday's announcement of our new high-performance embedded microprocessors marked another major strategic initiative for Marvell.

This technology will further distinguish Marvell from our competition.

By combining this new embedded microprocessor technology with our world-class integration expertise and our state-of-the-art analog, mixed signal and DSP technologies we're offering our customers SoCs that were previously unthinkable.

We've been looking on our microprocessor technology for years to address the lack of (ph) performance of existing embedded microprocessors.

We now plan to leverage this technology broadly across both of the consumer and the existing enterprise markets.

The capability to offer very high-speed embedded microprocessor specifically in the consumer implemented in standard low cost CMOS manufacturing is a key strategy for us.

We are now able to produce ultra compact SoCs with embedded very fast microprocessors that runoff of 500 MHz.

At these operating speeds our embedded microprocessors have enough processing horsepower to perform tasks that currently require three separate embedded processors.

We made the decision to support the ARM architecture because ARM has become the de facto standard and is pervasively used across many high-volume mainstream consumer applications.

This will allow our customers to leverage their years of software investment in running the ARM instruction set on our new processors.

By embedding higher performing microprocessors in our SoCs our solutions can perform in software many of the functions that today are handled discretely by separate semiconductor devices.

This has many immediate tangible benefits to our customers.

They will clearly be able to lower costs, improve performance and lower power consumption.

Additionally, through software upgrades they can implement new industry standards and receive feature upgrades.

With this technology we just dramatically increase our TAMs (ph) once again and have created another growth driver for our future.

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

Our strong Q1 financial results have positioned Marvell to achieve another record year.

We are very refocused on achieving our business and financial targets, and would like to again review the strategic assumptions used in anticipation of achieving those objectives.

First, use our superior analog, mixed signal and DSP technology in our new embedded microprocessor capabilities to create products that put us in a leadership position in our target markets.

Second, focus on markets with large TAMs (ph) to maximize the rate of quarterly revenue growth.

Third, used our design expertise to create the smallest die sizes at a given process geometry below cost.

And forth, continue with our investment in R&D to ensure a flow of products that position the company for long-term growth.

Based on our Q1 performance and our visibility into the remainder of fiscal '05, we want to take this opportunity to update our guidance for fiscal '05.

The adoption of our products based on our analog, mixed signal and DSP technology across a broad array of consumer platforms and our recent entry into the power management market utilizing our linear DSP technology, is definitely increasing our TAM.

Additionally, our position in our established markets remains very strong and the technology changes that have been underway for sometime continue.

Given this strong position we believe for fiscal '05 our revenues should now range between 1.200 billion to 1.225 billion.

At the point of this guidance our annual revenue growth for fiscal '04 to fiscal '05 would be 48 percent.

Gross margin percentage for fiscal '05 should now be 52 percent plus or minus 50 basis points and pro forma operating expenses should range between 31 to 33 percent.

Now moving specifically the Q2 '05, our business momentum in Q1 was quite strong, even during a time period that is normally seasonally slower.

Entering Q2 we are encouraged by the continued ordering patterns from our customers and consequently feel that any end market seasonality in Q2 will have no significant impact on our Q2 revenue.

The continued adoption of our technology in new product offerings from our customers and our continued market share gains against our competitors positions us for revenue growth in Q2.

We've targeted Q2 fiscal '05 revenue to increase to approximately 297 million, which is a 10 percent growth from Q1 fiscal '05.

Based on our assumptions of the product mix of revenue in Q2, we expect Q2 gross margin percentage to decline approximately 25 basis points from Q1.

Consistent with our performance, we expect to continue to experience operating leverage in Q2.

While operating expenses in absolute dollars will increase to support our future, they will decline by approximately 70 basis points from Q1.

Our balance sheet indices should be consistent with the last several quarters and shares used in computing pro forma net income should increase to 149 million.

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

That completes our commentary.

Derek, would you please poll for questions?

(OPERATOR INSTRUCTIONS) Cody Acree, Legg Mason.

Congratulations on another great quarter.

Maybe you can give a little bit of detail on a couple of markets.

I'd like to hear as much as you can talk about on the Gigabit Ethernet infrastructure market.

You say that it's coming back nicely.

What kind of growth -- or not coming back, but starting to ramp nicely.

What kind of growth did you see in the current quarter or the prior quarter, how much was this as a percentage of revenue and how much of that is contributing to the 10 percent of growth?

And then also I'd like to hear whatever detail you can provide on the (indiscernible) the small form factor drives as well as far as customers, competitors, what have you.

Maybe we should review what we said in the past.

Remember when we talk about Gigabit Ethernet in the past we believed that the markets usually starts from the client side where the clients took off first and then a few quarters or a year later the infrastructure will take off behind it.

So we have seen the adoptions of Gigabit to the desktop taking place solidly over the last year, and now we're seeing that the enterprise is picking up very well as well.

I think, first of all, just as a general statement, our results -- if you have had an opportunity to see many of our customers' reports and the positive things that they've been saying, the ones that are our customers, our results are very closely tracking to what you're seeing there.

So for example, many of the networking guys have talked very positively about the infrastructure market growing.

And of course given our position there, we saw that demand increase.

We're not going to be specific on the percentage, but suffice it to say that it was a substantial growth sequentially from the prior quarter and is reflecting again what our customers are telling you folks about the end market.

On the small form factor drives, we believe we're in all the major ones shipping in the market today, and that's definitely picking up in volume.

It's a sizable piece of the consumer portion of our revenue.

So it's again a very good growth driver.

And the key of our small form factor drives market, we've been actually working on this technology solutions for the last three or four years, before anybody realized there was such a market for this technologies.

So as a result, we are strongly position to benefit from when micro storage goes into cell phones because the volumes will be tremendous at that time.

So we're very excited.

We're the only solution today.

What are your customers telling you about the timing or their expectations for a wider consumer electronic adoption of these micro drives?

I think everybody is working as hard as possible.

Everybody is racing against each other, trying to the first one to be able to go into high-volume production.

And a lot of these drives requires new factories to be built because the volume requirements is so high, as well as the assembly requirements are a lot more precise.

So everybody's investing lots of money in building the small form factor drives.

Thanks guys and congratulations again.

Karl Motey, Wachovia Securities.

Could you give a little bit more color about the wireless LAN opportunity in the game console market?

How big is the market potentially?

How many wins do you have currently that you might be able to talk about?

And you mentioned you're going to start seeing some revenue over the summer.

When can we see that market be a meaningful revenue contributor?

And also, besides wireless LAN are there other opportunities to up-sell some of your other products like power management into that same market?

First of all, we're extremely pleased with this accomplishment.

As far as specific customers' names, as usual we like to wait until a customer announce their product, then we acknowledge.

But what's important is we that obviously see huge revenue opportunities ahead of us.

So I would say second half of this year and next year is going to be tremendous.

And to get into power management, clearly on the power management the products that were built actually to address many different markets from hand held devices, all the way down to the traditional PC networking businesses.

So we do have tremendous tractions across all different markets.

Now at the same time we also are developing and delivering new solutions to cover more applications.

So you'll see from us over the next year -- for the next two years, or even the next five years, more and more product that will be built utilizing our Linear DSP technology to address the specific different market requirements for different markets.

But suffice it to say that everything we build is not specific for one market.

I think, Karl, without being specific as to the customer, from a timing standpoint we would expect wireless LAN revenue on a gaming platform to begin in Q3 and certainly become more substantial as we get even later into the year.

And as Weili said, these are the early ramps.

The really, really larger numbers could happen or should happen next year.

But it's going to happen as early as Q3.

Thank you.

Ambrish Srivistava.

A couple of book keeping questions here.

Deferred income was up pretty significantly.

Is that all Wintech?

Also if you could please give us the CFO and D&A?

Also if you could please comment on the GM and what contributed to the slight up tick here?

And then lastly, on the product side I was wondering if Sehat or Weili could comment on the Gig E infrastructure market a little bit more, especially vis-a-vis the largest infrastructure Gig E player out there.

What are you guys seeing there?

Is it still going to be all farmed out to ASIC suppliers or do think there's any initial inroads of your standard product there?

I think I might have missed one of your questions, but the first one on the deferred revenue, it did increase from Q2 Q3, and that is again part of our new consumer and emerging products being positioned in the market for revenue as we move through the balance of the year.

So those are all very new products that will go from deferred to actual revenue as we move forward from here.

It's not necessarily just in Asia; it is across a broader number of distributors than just our Asian distributors.

You said something about the CFO.

I didn't get that part.

The cash flow from ops and also D&A for the quarter -- or CapEx.

The operating cash flow was probably about 80 percent of the total cash that we generated during the quarter, with the balance of 20 percent coming from exercise of options and so forth.

And our depreciation was right around 9 million, and our CapEx was about 8 million.

And then on the gross margin, I think we're very focused on, as we said, operating efficiency.

I think, as we mentioned, we're in a tighter fab environment so we need to also spend a lot of time working on other things that affect -- that can improve our gross margins, be it testing or packaging or whatever.

We've had a lot of concerted effort by our operations folks in that area, and once again they came through with a very, very good performance in Q1.

So that was the main -- the mix of products, as I said, in Q1 was pretty close to what our expectations were going into the quarter.

You want to do the question on the adoption of the infrastructure, especially in a large player?

I am assuming you refer to (multiple speakers) percent market share leader.

As you guys know, we are the leader to provide Gigabit physical layer solutions, and obviously for Cisco we are the key supplier.

So I think on Cisco's earnings call the outlook was good, and we obviously are going to benefit from that.

And I think the second half question was regarding ASIC (multiple speakers).

Cisco today as far as the switching side that they have their internal solution, but the physical layer part is also a great opportunity and we are the key supplier.

The rest of the market with our Prestera switching product family and we believe we are ahead of the curve.

So we have a lot of opportunities.

And for example, you see Nortel introduced very high-end chassis that is based on wisilica (ph).

And so we are pretty much covered with very high-end products and all the way down to the desktop market.

So we are the leader in that so-called emerging space as well.

Thank you very much.

Nice job.

Arnab Chanda, Lehman Brothers.

First of all, could you talk a little bit more in detail about power management?

You did describe that you have a unique architecture, but what kind of applications or what kind of customer do think would be most suitable versus current (technical difficulty)

This might not be so obvious.

When I talk about DSP based power management, we're talking about very, very high-performance power management solutions.

So obviously the best target markets for this power management is the market where people care about performance.

What do I mean by that?

Well, meaning that people they have pipe noise (ph) margin requirements.

So if you're building chips -- SoCs, ASICs, FPGAs and .13 microns and below -- you're running your devices at 1.2 volts, 1 volt, .9 volts or .8 volts, very low voltage and you don't have enough noise margin (ph), you need power to those chips to be more stable, to be more robust.

So these are the markets that will strongly benefit -- talking about CPU also -- (indiscernible) profiting CPU where it runs a 1 volt at 100 amps.

So your target market is really for people who care about quality.

If you're looking for something that requires 10 volts, that's not what one of the markets we're targeting where don't care about performance.

Does that imply sort of communications and servers and things like that or maybe --?

It implies advanced products that requires either low voltage, high-speed or very high current and low voltages at the same time.

So new markets.

These are definitely new market opportunities.

We're not trying to replace exiting markets here that requires an anything where low performance devices are sufficient.

We're talking about where you -- also, I forgot to mention that the target markets would be application that requires tight space.

So if you're building a laptop and you don't have enough space on your boards for the large passive component, again our markets because our advance DSP implementation require a smaller facet component and as a result you've got more space for other things on the board.

So a few other things that is very hard to talk about without going to the board and explaining what are the benefits that we provide in our solution.

These are some of the easier things to understand.

Thank you for the explanation.

One question about your embedded processor business.

Is this a continuation of the SoC that includes ARM in hard drive applications or are using that for kind of wireless LAN or other embedded processors?

Or if you could describe the application a little bit that would be great.

When we talk about this new embedded processor, this is a completely new processor that we built from scratch from the ground up that can execute the ARM instruction set architecture, the ARM ISA.

So the performance -- this is a big deal for us because the performance that we're talking about is about three times faster, three times high-performance than the standard off the shelf embedded processor that anybody -- that the general public can have.

The reason we feel this is a great deal for us is because when we integrate this embedded processor into our SoCs, our SoCs now can do a lot more things than what they could do in the past using standard processor.

So either we can do more things or we can run significantly low power by lowering the voltage of the SoCs to run at the same speed as what you run in the past.

So it you've either both higher performance or lower power, depending on the application.

So again you ask, okay what applications does this thing run?

In consumers you can run more complex operating systems, you can run audios, in a lot of cases you can also run video on the same processor without adding any extra hardware to perform this task.

So clearly the target markets for our high-performance processor is for the embedded consumer markets.

Thank you very much.

Michael Masdea, Credit Suisse First Boston.

Congratulations.

Historically we have gotten used to you guys talking a lot about going with new products into areas where its DSP and analog.

On the surface this would look like the embedded processor would be a little bit of an aberration.

Could you help us reconcile that a little bit first?

If you look at SoCs, what do we mean by SoCs?

A true SoC to us means you integrate everything.

A lot of devices that we talk about whether they are for communication, storage, or entertainment devices, or printers market, those are kind of devices they would combine analog, DSP and processors.

Historically we did not talk too much about a processor because we have processors just like anybody else -- processors.

Lower performance processors.

Lower performance processors.

We have been integrating processors for the last three or four years, but there is nothing to talk about because what differentiated our products historically has been better higher frequency analog, lower power analog, better DSP, our proprietary DSP that we're intimating in our chip, and now we can add on top of that is the higher performance embedded processor.

So this is a very important strategy because you need everything to be better.

You cannot just have one thing to be the best.

You want everything to be the best.

I guess from that answer and kind of what your guidance was you would say that the R&D intensity of your business and also the need to push to more advanced geometry, nothing has changed on that front for you guys?

Exactly.

That's why we continue to spend a significant -- that's why we keep saying every quarter we are spending more dollars on our advanced development, but even as we're doing that we're still gaining the benefit of the leverage from all the products that we've already developed.

But we continue every quarter to invest more money in the future.

And you'll probably hear about more things as time goes on.

A clear example is embedded processor.

This is not something that came out from the blue and took us like a day to do it.

That's true.

That is a very good point (multiple speakers) on this for a while.

That's true.

That's helpful.

You guys talked earlier about building inventories because of some of the tightness, etc.

Any bottlenecks out there, especially as it looks like a number of people built up some die bank?

Any back end bottlenecks or anything you see out there that could limit your growth?

No.

I think the key was to make sure -- the biggest issue we have to deal with is the lead-time from the fab in order to match that up to the customer demand.

So once it's in die form we're pretty flexile and we don't really see any issues with converting that to finished product.

Thanks a lot.

Good quarter.

Srinivas Pajjuri, Merrill Lynch.

Just a couple of quick questions.

On the power management side, what's your expectation for this year and when do you think we will see some meaningful revenues?

We started to ship actually here the first quarter some of the initial designs that we actually achieved last year.

So this really is a time period lag between design and then ultimate.

As Sehat mentioned, these are all new platforms.

There's nothing -- these are all new products that have to be introduced by our customers.

Again, I would put the more meaningful power management revenue later in the third quarter and into the fourth quarter.

Are you including any of these revenues in your 48 percent guidance at this point?

Yes, there is some in that.

Also, if I take your 48 percent guidance and do the math, it seems like you're expecting the next two quarters to grow in about single digits, and typically the October quarter is seasonally strong.

Is there any reason to believe that you'll grow slightly lower than your end markets in October?

I think as you just saw as we've adjusted Q2, from what I believe going into this call the expectations for Q2 our growth was something like 5 percent and we updated it to 10.

We always our conservative when we look out because we have to make sure things actually happen in a manner which we expect.

You can certainly take from our commentary a number of very exciting things that are out there.

I think taking the numbers one quarter at a time is really the way to look at it.

And I know the ability for the company to get over $1.2 billion this year, up from 800 million last year, is pretty substantial.

Fair enough.

My final question on the on-licensed, I don't expect you to disclose how much you're paying for this and that.

How do you plan to recognize these revenues?

Are they going into CapEx or will they be in R&D, or is it going to be a onetime charge?

Revenues?

No, the expenses on the ARM licensing.

For competitive reasons we can't really go into that level of detail.

There will be some commentary obviously in our Q about this, but I think I will need to leave it until the Q is published.

I think the biggest thing you have to take from this is a serious investment for us.

It's not a onetime investment because we have to build the real -- we build the real team (ph) to build the processor.

This is not a device that we got from anybody.

We have to build it from scratch, from the ground up, and we have to maintain this development over the next ten years to continue to increase the performance, improve the architecture, build new processors with even higher speeds, even lower power.

So the investment that we went to put on this embedded (indiscernible) processor will be very, very high.

But the same time, we also believe that this is the right thing to do because the markets that we're addressing are huge in number, so of all the consumer market we are talking about 100 million units for us alone.

So this investment can be justified obviously.

I guess I was asking more from how the mechanics work.

Is it going to be a onetime payment for ARM or are you looking to pay them over time?

How does that work?

Again I think today we don't want to -- we obviously will go into that detail a little bit more when we file our Q. It's likely to be a combination of both over time.

So I think there would be some onetime and probably some ongoing, is probably the best way to look at it.

But there will be more detail in the Q on that.

Thank you.

Dushyant Desai, CE Unterberg Towbin.

A couple of product questions.

First for Weili on Gigabit Ethernet, can you comment on PCI Express and where we are in desktop adoption with respect to Grantsdale chipset and different platforms?

We're doing extremely well.

As you can see, Intel launched their motherboard with our Yukon EC family of products and we're very excited.

We believe from performance, from the package size we're absolutely a few times smaller than anything you can see in the marketplace, and clearly we're the winner for addressing the PC (multiple speakers) market.

Our understanding is that Intel has said that they're going to launch the actual launch of Grantsdale on June 21st.

One small follow-up on that is Weili in your market outlook or your market research or observation when do think the PCI Express on motherboard overtakes the normal PCI in terms of new shipments?

(multiple speakers) I think with the launch happening midyear this year, probably not going to happen until sometime next year.

I don't think it's really for us to predict that begin with.

That's more I would ask Intel I think --

(multiple speakers) is relatively new technology.

It always typically takes at least twelve months (multiple speakers)

It is not going to be this year.

If we learn from history -- again, this is my observation -- the high-end guys are the one that's the first to adopt the technology because that's how they all differentiate their products in the market.

Then once it is a success smooth transitions, everybody will jump to the bandwagon because nobody wants to be an the third guy or the fourth guy in the pipe.

And it always takes longer than you think.

A couple of questions for Sehat on the other product segments.

On the drive side, I know small form factor is where a lot of action and growth is.

Can you specifically comment on what are called sub-notebooks, because they are the micro drives for the music players and consumer products among which is exploding?

Then there is the traditional notebook, but there is this 2, 3 pound notebook category, if you can tell us about what kind of form factor drives are used and how the growth dynamics are there?

So the small form factor drives, as well as notebooks, are that areas that we put a lot of investment over the last (indiscernible) small form factors I said the last three or four years and the notebook actually waited for that.

We actually were the only one until just recently.

Nobody believed that this market was going to be a meaningful market.

But from the very beginning as we were preparing Marvell to enter in the consumer space beyond building this low-power wireless Ethernet over the (indiscernible) we also knew that for the consumer markets to take off the consumer also needs to be able to store that information in smaller form factor disk drives.

So an example of that is MP3 player.

Everybody now is talking about iPods, iPods, iPods, those MP3 players.

We rolled on that way before people even realized this -- before even Apple were working on the design we were already working on all the electronics.

So as a result we're the one actually benefits from the ramp up in those markets because our solutions are the ones that are being used in those devices.

So whether you're talking about three pounds or four pounds notebooks or two pound notebooks, they're all basically using the same technology that we developed.

Just a couple more.

On the gaming systems, you mentioned about wireless LAN and I could conjecture that some gaming systems eventually may have a small drive in them too for either carrying video or audio or some other functionality, and then could power management and wireless LAN be in the hand held gaming systems as well as on the traditional living bound?

Both are your target markets?

Yes.

You can look at wireless and you can think about wireless as replacement of cables.

Every time so you want (indiscernible) in and out on your boxes, either you have to use wires or use wireless LAN.

So wireless LAN is clearly the choice.

It's a no-brainer choice for the those markets.

Regarding pushing storage to gaming devices, obviously that's what would like to see.

We actively promote that with the end-users, not just working with our customers in the drive markets, but also actively working with the end-user partners, people who make the chipsets in those devices to have special interfaces to our chips.

So we are our actively engaging to make sure that adoption will run smoothly.

On the power management and side and the ARM I was intrigued by that because ARM is the most dominant architecture in the cell phone market, which is large.

Do you have any thinking or ideas about integrating power management and/or going after the cell phone applications?

I think that this is something that is not appropriate for us to talk about and not to speculate as well at this point.

Thank you very much and congratulations on a good quarter.

(OPERATOR INSTRUCTIONS) Seojgu Lee, Goldman Sachs.

In terms of the segment breakdown, you're using the consumer versus the enterprise.

Just wondering if you could give us historical how that looked in fiscal '04 and the expectation as you go through this year in Q2 and then for the full year as well?

I think again we're going to use ranges because this is hard to be absolutely precise.

But I would say in the second half of last year the enterprise was probably between 85 and 90 percent of our business, and the consumer therefore represented the balance.

And now we're seeing here in Q1 it was 80 to 85.

And you should expect I think as we get further into consumer wireless LAN and the small form factor drives because power management will be in both pieces, both markets.

It has enterprise applications, as well as consumer applications.

That's why we went to this breakout, is that the consumer numbers should begin to represent more and more of our revenue over time -- as a percentage of our revenue over time as it already is starting to do.

But in Q2 you would expect the mix to be sort of flattish with Q1 then?

We will tell you that when we report Q2.

But you could take the trend -- the trend is really the thing to look at.

It is not to say about (ph) quarter-to-quarter, but we look at the next couple years, and the next several years I would like to see the consumer portion of our business to represent 50 percent of our business.

One last follow-up question.

In terms of 10 percent customers in the quarter?

We had four -- Samsung, WD, Intel and Toshiba, all very, very nice customers.

Thanks.

Good quarter.

David Wu, Wedbush Morgan Securities.

Good afternoon.

A couple of easy ones.

The first one is George, you talked about your gross margin going to be sequentially down in Q2 by a small amount.

What is that due to?

I assumed you're packaging and test guys are every bit as smart the next quarter as they were the last quarter.

If that a mix issue --?

I said actually based on the projected product mix for the quarter.

And again, 25 basis points is not very much.

So that's just taking into account what we see at this point in time and what the mix is going to look like.

I assumed consumer tend to be lower than the enterprise side.

Is that the right --?

Not necessarily.

Onto something different.

ARM embedded processor, I saw Intel did a license with ARM and they got themselves into what they called an IXP.

Is that the sort of thing that we should be expecting out of Marvell -- you do your version of IXP or derivative of ARM architecture and you're going after probably a sub-segment of that marketplace?

Let me answer this one.

This is a little bit confusing because as everybody knows ARM is the de facto standard in very much all cell phone consumer devices in the market today.

The architecture license is very unique because there are only a few companies in the world that have the actual license.

As well, there's more importantly the capability to develop a processor in-house for the ground up themselves.

Obviously, Intel was the first in the world to have an architecture license -- actually Digital Equipment was the first one, but (multiple speakers) later acquired by Intel.

Then as the word class (ph) microprocessor companies, DAC (ph) or Intel at the time -- I mean DAC (ph) at the time and now Intel -- obviously building a proprietary ARM processor from the ground up is no big deal.

So we realize okay this is an important.

Having a high-performance embedded processor is important direction for us, so that's why we invested a few years ago to do this.

Now we have a second company in the world today that are able to develop a processor from the ground up.

In terms of performance I would say they are comparable -- that we are comparable -- so I do not want to make any comparisons beyond that.

But in terms of the market we're addressing, we happen to address different markets.

Intel developed the processor for application processors, more general purpose application processor for the general market like for PDAs, for cell phones, high-end cell phones and so on.

Our direction for our application processor, even though we have the same comparable performance, our target is actually for our embedded applications such as for our wireless LAN that can do audio and videos, they can do our storage, they can do audio and videos; our networking routers, they can do more packet per second firewalls, they can do more advanced security functions.

So anytime where we want to process more data at a faster rate, that's what we're targeting.

So different market segments, similar processor.

The last question I have very quickly is on the contribution for your consumer segment, that seems be the growth segment.

We're probably looking at hundreds of millions of dollars in growth between next year and this year in micro drives, wireless LAN, and power management.

That is three categories.

I assumed that micro drives would be the biggest contributor to next year's growth over this year and I was wondering how --

I would not assume that because they're all equally big, so I do know which one is going to grow faster first.

Remember our strategy -- develop products that goes after large markets.

All of those are addressing very, very large markets and they all probably hit at different rates and so forth, and we just don't know yet which one is going to (multiple speakers) which one will be -- they all should be big over time, we just don't know the slope and rate at which each one will occur.

The only thing I was curious was power management in your traditional competitors' that have existing products out there, it took them a long time to get to $100 million revenue a year kind of thing, and is there anything special about your product that would allow you to jump start that 0 to $100 million a lot quicker?

Clearly we spend a long time analyzing the dynamics, the issues that the traditional suppliers faced.

So it is true that the existing suppliers, it took them a bit longer to get the kind of revenues that we're talking about.

But so is in anything in the world.

When this kind of technology was first adopted the revenue growth is always -- you start from zero, you get to something, you always -- it takes longer time.

But as a lot of SoCs, a lot of chips are being designed using .13 micron moving to 90 nm and then next year 65 nm, a lot of these solutions now will be needed while previously you can live without it.

There are other ways to solve this problem without using these advanced DC to DC converters.

So in the past the volume requirements for these advanced DC to DC converters was limited only for people that really cared about power.

I can guess the majority of them didn't care about it.

They cared more about the cost.

So they essentially used LDOs (ph) so the (indiscernible) used to be very cheap LDOs.

Now (indiscernible) change rapidly that the market is expanding.

At the same time the requirements are more challenging.

I have a lot of other things that we do that will simplify the adoption of the device, but this is something I cannot talk about today.

The other thing is from the business penetration standpoint of view, if you look at the consumer space we got all the critical technology we need to address that from the mixed signal side, from the processor side, from the storage technology, wireless LAN, power management.

So we believe we're the only company that covers the communication as well as the storage side of critical technology.

So obviously from that we are in much better position that anybody.

Thank you.

Aalok Shah, Pacific Crest.

Most of the questions have been answered, but maybe if you can talk a little bit about what's going on versus the competitors, what are you seeing out there in the marketplace.

And also maybe if you can also talk about what are the dynamics in the end markets, what are the pricing on a per port basis looking like at this point?

I think we don't want to focus on our competitors.

We will let them do what they need to do.

We would focus on what the strength of our product offerings are, and they're very good.

And we have been talking over several quarters now that we have over 12 customers in production volume on Prestera, and that is increasing every quarter.

So we're continuing to do very well there.

The Nortels and Dell and Weweis (ph) of the world are definitely ramping, and that's a good portion of the market.

Clearly as Weili mentioned our position at Cisco with our 5s remains extremely strong.

So competition has to do what it needs to do and we're executing to our business plan, which we believe you're seeing the results of that execution in the numbers that we guide here.

So I think that's probably all we want to say on that.

Pricing?

I think we passed the point that we talk about competitors.

Many year ago we would talk little bit more about it, but it is kind of late now --

(multiple speakers) on the pricing question, I think it's in a broad general statement we're in the semiconductor business and our customers are always looking to try to buy these solutions at a cheaper price.

We work very hard from a technology standpoint to provide them solutions that meet those objectives.

So we don't see anything in the market that is contrary to what our assumptions are and certainly we would be giving the gross margin guidance that we've given or the performance that we posted if there were significant things going on and pricing that we hadn't contemplated.

One follow up.

Are there more competitors now or is it pretty much the same kind of competitive landscape that you saw last quarter?

It doesn't change.

(multiple speakers) is a mature business.

It is maturing rapidly.

It's not mature yet.

So it this is a business not --

(multiple speakers) strategy we are trying to move with what we're doing.

We're actually moving into a point where there are going be fewer and fewer competitors because they can't do what we can do.

A lot of the customers either are looking for suppliers that can provide complete the solution.

They want everything that the need -- hardware, DSP analog, mixed signal, power management, anything, anything they need from a single supplier because they have more leverage actually if they can buy from the same supplier.

Thank you very much.

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

Dr. Sutardja, are there any closing remarks?

Thank you.

If there are no further questions (indiscernible) this completes our Q1 fiscal year 2005 conference call.

I would like to thank you for joining us, and we look forward to updating you next quarter.

Thank you.

This concludes today's Marvell semiconductor conference call.

You may now disconnect.