邁威爾科技 (MRVL) 2005 Q2 法說會逐字稿

Good afternoon.

My name is Linda, and I will be your conference facilitator.

At this time, I would like to welcome everyone to the Marvell Technology Group Limited second quarter fiscal year 2005 financial results conference call.

All lines have, placed on mute to prevent any background noise.

After the speakers' remarks, there will be a question and answer period.

If you would like to ask a question during this time, simply press star, then the number 1, on your telephone keypad.

If you would like to withdraw your question, press star, then the number 2, on your telephone keypad.

Thank you.

Dr. Sutardja, you may begin your conference.

Thank you, Linda.

Welcome, everyone, to our second 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.

Q2 revenues increased 54% from the prior year, and 10% from the previous quarter to $297 million.

Along with another quarter of strong revenue growth, we also continued to further expand our operating margins and strengthen our balance sheet.

Marvell continues to focus and execute on our strategic mission of positioning the Company for long-term growth, while at the same time maximizing our profitability and shareholder value.

During the quarter, we increased our leadership position and enjoyed solid growth from the enterprise market.

We continue to see tremendous opportunities from the enterprise markets as the strength of our word class technologies enables us to continue to gain share against our competition.

There is also great deal of excitement within the Company regarding the large opportunities in front of us in the imaging consumer markets.

Consumer devices are clearly integrating more and more advanced features at an accelerating pace.

The technological bar for many of these new exciting devices is rapidly increasing with the need for very low power consumption, highly integrated small form factors, and robust solutions that can coexist with many new and different technologies.

After years of heavy investment on the specific technologies required for these new devices, Marvell is uniquely positioned as the leader to drive the induction of such advanced technologies as wireless LAN, high capacity storage, high performance embedded microprocessors, and advanced power management.

During the quarter, we continued to make strong progress in these imaging consumer markets.

We continue to win very significant high-volume designs, as design activity across many different applications is accelerating.

Brand name consumer companies are rushing to introduce the latest consumer device with such advanced technologies as wireless LAN and high capacity storage.

Because of our unique positioning as the first semiconductor company with solutions specifically designed for these new devices, we are quickly becoming the incumbent supplier at major OEMs of high volume applications, such as cell phones, gaming, digital cameras, MP3 players, printers, PDAs, and home media client devices.

We are very focused on expanding our portfolio of products and technologies for these exciting high volume consumer devices, and aggressively expand upon our first mover advantage.

I'll elaborate more about these exciting opportunities and our business progress, but first I will have George give our Safe Harbor statement and provide more insight into our Q2 financial results.

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 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 half 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, develop, and achieve success for new products, services, and technologies, increase competition and it's 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.

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

Now, moving to the Q2 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 the 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 then to perform comparisons of operating results in a manner similar tohow the Company analyzes its operating results.

Today, we reported that net revenue for the second quarter of fiscal 2005 was a record 297.2 million, an increase of 54% over the 192.9 million reported for the comparable quarter in fiscal 2004, and a sequential increase of 10.2% from the first first quarter of fiscal 2005.

Pro forma net income, which excludes the effect of the amortization and write-off of acquired intangible assets and other, and amortization of stock-based compensation, was 59.7 million, or 20 cents per share diluted for the second quarter of fiscal 2005, compared with pro forma net income of 30 million, or 11 cents per share diluted for the second quarter of fiscal 2004.

Shares used in computing pro forma diluted earnings per share for the second quarter of fiscal 2005 increased 295.8 million, as compared with 273.6 million shares for the second quarter of fiscal 2004.

Net income under generally accepted accounting principles, GAAP, for the second quarter of fiscal 2005 was 28.6 million, or 10 cents per share diluted, compared with a net income under GAAP of 9.4 million, or 3 cents per share diluted for the second 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, pro forma net income for the quarter reported today, plus the prior 8 quarters.

Next I would like to make some additional comments on our Q2 results.

Our Q2 revenue of 297.2 million was another quarterly record for the Company.

Additionally, the 10.2% increase in revenue from Q1 to Q2 was consistent with our guidance of a 10% sequential quarterly increase in revenue.

The Q2 sequential increase of 10.2% represents the eleventh consecutive quarter that our sequential revenue growth has been greater than 10%, and the twenty-seventh consecutive quarter of revenue increase.

Beginning with fiscal '05, we changed the breakout of our quarterly revenue to reflect the end markets are that we are targeting.

These end markets are enterprise and consumer.

As we mentioned on our Q1 call, we believe that this breakout will be more meaningful as our momentum into consumer and emerging markets increases.

Once again, for review, included in our enterprise and 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 and small and medium business market.

For Q2, the enterprise market accounted for 80 to 85% of revenue, and the consumer market accounted for the balance.

Continuing with the strong growth posted in Q1, we saw growth across a number of our products and markets in Q2.

This growth was achieved despite some of our end markets experiencing normal seasonality, and very competitive pricing environments.

Key contributors to our 10% sequential revenue growth, were our re-channels and SOCs for the business PC market, Alaska gigabit PHYs and Prestera switching solutions for enterprise networking, SOCs for small form factor drives, and wireless 802.11 chip sets.

Q2 gross margin of 52.6% was above the high end of our guidance, and 40 basis points above the mid-point of our Q2 guidance.

Given the competitive nature of some of our end markets, we continue with our focus on cost reductions, and our performance in Q2 was outstanding, which resulted in achieving higher than guidance gross margin percentage.

While we continue to invest increasing amounts in the development of new products, technologies, and advanced process geometries to keep us in a leadership position in our targeted markets, we continue to experience the operating leverage from the increasing revenue contribution from products developed over the last several years.

In Q2, this operating leverage was quite significant.

Our pro forma operating expense declined as a percentage of revenue to 30.8%, which represents a 210 basis point decline from Q1, and 140 basis points favorable to our Q2 guidance.

For the twelfth consecutive quarter, we increased our pro forma operating income percentage.

Beginning with fiscal '05, we established a new long term model of 21 to 23% for operating income, which we expected to reach in 4 to 6 quarters.

In Q2, with our consistent gross margin percentage and lower operating expenses as a percentage of revenue, we increased our operating income percentage by 210 basis points to 21.7%, which is approximately the mid-point of our long-term model.

Reflecting the 2-for-1 stock split in June, shares used in computing pro forma net income per share for the second quarter increased to 295.8 million, compared with 273.6 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.

Our balance sheet continues to remain very strong.

During Q2, we generated approximately $61 million in cash, and exited Q2 with cash and short term investments of $482 million.

DSOs for Q2 were down 2 days, to 49 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.

Now moving on to inventory.

During the Q2 earnings reports from other semiconductor and systems companies, there has been significant discussion regarding the levels of Q2 inventories.

We are very pleased with our inventory management, and during Q2 we reduced our inventory by $11 million, and our days of inventory by 14 days to 62 days.

This reduction reflects the continued strong demand for our products, and our comfort with wafer fab capacity.

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

Thank you, George.

We have been talking about our wireless LAN design in high volume consumer devices for the past few quarters.

Based upon the strong success we have -- we continue to have this in these emerging market, we clearly have become the leader to drive adoption of wireless LAN into consumer applications.

I would now like to give more detail update on the progress we are making.

First, we continue to have great success in winning the large majority of embedded wireless LAN opportunities with the leading cell phone manufacturers around the world.

The breadth of our design success is very strong, and covers all the different cell phone platform technologies, including GSM, GPRS, CDMA, 3G, high end smart phones, and enterprise class phones.

We are also very excited that many of our high volume designs that we have won over the past few quarters, have now moved into the field trial stage.

In fact, we now have field trials of our wireless LAN solutions taking place in 3 different continents this summer.

As a result, we are planning initial volume shipments into the cell phone market to commence in Q4, with an accelerating ramp into the next year.

Given that there are well over 500 million cell phones shipped annually, we are very excited about the upcoming adoption of our technology into this very large market.

I'm also happy to report that we are scheduled to commence shipping of our wireless LAN solution into a major gaming platform this quarter.

This is a very exciting and significant gaming machine that for the first time such a device will fully utilize all the benefits of our 802.11 technology.

This game machine is a clear example of the many different uses and benefits that our wireless LAN technology can provide for advanced consumer electronics.

Marvell has clearly positioned our wireless LAN solution to lead the market adoptions and utilizations of the 802.11 technology in such new consumer devices.

We are very excited about this platform as we anticipate it to ramp into millions of units this year, and continue to grow to very significant volumes next year.

In addition to our success with cell phones and gaming, we are also having strong design wins with cameras, printers, MP3 players, PDAs, and home media client devices.

Leading consumer companies are looking to utilize 802.11 technology for a variety of applications, such as Internet connectivity, voice over IP, LAN connections, gaming functionality, even as simple as cable replacement technology.

We have clearly distinguished our offering for these high volume devices by providing the lowest power, smallest compact solution with very powerful embedded microprocessor technology.

We are proud that these strengths of our technology are not only appreciated by our customers, but more important, were also just recently recognized by the Lindley Group, a leading network market research firm, with their selections of our solution as the best 802.11G chip set in their recent report on the industry.

Now, although the PC related [inaudible] market place is very price competitive, we continue to make great progress in this small traditional wireless LAN space.

We continue to succeed by differentiating our products, such as with our LiveAP solution that we introduced last quarter.

Our LiveAP solution allows for our 802.11 product to be designed directly onto the motherboard and serve, as well as an access point for the PC desktops.

We're happy to report that at the end of the quarter, we started volume shipment for this application and continue to have very strong design success with leading motherboard manufacturers.

Because of our extremely low power solution, coupled with our integrated microprocessor technology, our LiveAP is still fully functional without interus, even when the PC is shut down, allowing all other client devices to maintain connectivity to the access point.

Additionally, shipment volumes and designs of our All-into-1 wireless solution continue to be very strong.

Many different OEMs are beginning to introduce this technology in a variety of interesting platforms.

Given all of our recent success and strength of our consumer and traditional wireless LAN products, we are more excited than ever about our 802.11 business, and our position to drive strong revenue growth moving forward.

In addition to the rapid adoption of wireless LAN in consumer devices, many consumer applications are also quickly developing a requirement for high capacity storage.

We're very excited about the momentum building this year for the adoption of small form factor drives based upon our technology.

We have experienced strong adoptions of small form factor drives into consumer applications such as MP3 players over the past several quarters.

Additionally we expect a solid increase in the adoption rate of small form factor drives with the upcoming launch of the All-into-1has the 0.85 inch form factor drives built upon our SOC technology.

These incredible drives will also see great success in penetrating such high volume markets as the cell phone market, digital cameras, and microsized MP3 players.

Ultimately, we expect the adoption of consumer drives will grow into a market as big as the traditional drive market.

We have clearly positioned Marvell as the leader in this huge opportunity, as we continue to be the only company shipping integrated SOCs into these emerging small form factor drives.

We are also experiencing very strong customer response regarding our recently introduced high performance embedded microprocessors that we made just 3 months ago.

Our customers are quickly appreciating our unique position to provide highly scalable CPU technology that scales from the ultra-low price points for highest volume low-cost consumer applications, to very high performance embedded applications.

We are quickly adopting this technology across many of our existing products, such as our SOCs, our small form factor drives, and consumer wireless LAN.

We are also developing exciting new SOCs for markets we have not addressed before.

This technology clearly strengthens our position and also greatly expands our TAM.

Now, in the enterprise market, as we continue to see tremendous opportunities for growth as well.

First, our Alaska Gigabit 5 continues to maintain its clear leadership position in the market.

During the quarter, we built upon our technological leadership by offering new octal and quad physical layer devices that continue to offer the lowest power solution in the industry.

Combining these technological strengths with our solid execution and strong customer relationships has enabled us to be the clear volume leader in the marketplace.

In the enterprise switching, we continue to experience growth and success with our Prestera Switches due to our award class [inaudible] and execution.

As announced just this morning, Marvell once again has raised the technology bar with the introduction of the world's first 60 Gigabit per second single chip solutions.

These new Prestera devices which utilize the Marvell Distributed Switching Architecture offer true security quality service, and fully integrated support for the next generation IPv6 protocols.

We are having considerable design wins success globally, and continue to gain share against our competitors across all market segments, from the small - medium businesses to the very large scale enterprise markets.

We are also well positioned for the continued adoptions of Gigabit for client applications.

During the quarter, we commenced volume shipment of our Yukon PCI-Express solutions, and we continue to win strong designs.

Marvell is positioned strongly for when the volume market transitions to PCI-Express later next year.

In the storage market, we continue to see significant opportunities for growth in this very large market.

During the quarter, we again enjoyed strong revenue growth as we expanded our leadership position in the market and our customers executed well.

Going forward, we are very focused on continuing to gain share in the desktop segment, which still represents over 60% of the total market.

Also, we see significant opportunities and are making progress in increasing our silicon content in drives beyond SOCs and read channels across all segments.

We continue to strengthen our partnerships with our customers in delivering world class technologies that help enable their drives to succeed and gain share in their markets.

Now, finally, our linear DSP-based power management solution continues to receive strong design activity, and we continue to quickly expand parts and modules to our linear DSP switcher family.

We now have designs across a number of different applications including storage, graphics, laptops, and enterprise applications.

We also are now producing our power management modules in addition to our discreet silicon solutions, and have begun to sample our modules to our distributor partners during the quarter.

We are very excited about the strong market response of our linear DSP approach, and the designs that we continue to win.

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

Thanks, Sehat.

Our strong first half fiscal '05 financial results have positioned Marvell to achieve another record year, and we remain very focused on achieving our business and financial targets.

We continue to develop new products and target new markets to expand our TAM.

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

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

Now moving to Q3 FY '05.

Our business momentum for the first half of fiscal '05 was quite strong, and was achieved despite some of our end markets experiencing normal seasonality and very competitive pricing environments.

Entering Q3, we are encouraged by the continued ordering patterns from our customers, and feel that end market demand remains reasonable.

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 Q3.

We've targeted Q3 fiscal '05 revenue to increase approximately 7% from Q2 fiscal '05.

Given our continued momentum, we believe that our revenue for all of fiscal '05 should be at the high end of our previous guidance of 1.200 billion to 1.225 billion.

Based on our assumptions of the product mix of revenue in Q3, and our continued operational efficiency, we expect our Q3 gross margin percentage to be essentially flat with Q2, at 52.5%.

Consistent with our first half fiscal '05 performance, we expect to continue to experience operating leverage in Q3.

While operating expenses in absolute dollars will increase to support our future, they will decline as a percentage of revenue by 15 basis points from Q2.

Our balance sheet in this [inaudible] should be consistent with the last several quarters.

And shares used in computing pro forma net income should increase to 299 million shares.

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

Thank you, George.

That completes our commentary.

Linda, would you please poll for questions.

Yes, sir.

At this time, I would like to remind everyone, if you would like to ask a question, press star, then the number 1, on your telephone keypad.

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

Our first question is from Michael Masdea of Credit Suisse First Asset.

Congratulations, guys.

I guess the question is, clearly you guys have great product cycles going on, you've got the share gains going on, you guys referred to all of those.

How much do you think the underlying demand is move around.

And how much can that swing your quarter, or your outlook?

Can it swing it very much or do you feel pretty confident on the roll out of these products to give you some resilience?

I think, Michael, we have showed over a fairly long period of time the ability -- as we bring new products to the market and engage with customers that we're very successful in doing this.

And we see no reason why these moves into these new things that we're being -- starting to engage with will be any different from what our track record has already experienced.

But again, with anything new, as always, you know, you have to line up with when the introductions of products are going to happen and so forth.

So we feel very comfortable in our execution.

We're on track to hit the things that we are already talking about, and you know we think this is just the beginning of what is going to be an extended, you know, opportunity for us for revenue growth going forward.

Great.

And then on the pricing side, I guess sort of similarly, seeing some dynamics recently which seem to be worse than what they were over the last couple of years.

Especially in areas like wireless LAN or even in storage.

Is that having any impact at all?

And if not, is it just that you guys are gaining content, and that's helping out, or what's allowing you to keep your resiliency there?

Pricing is always lower in the semiconductor business.

The key is to increase the features of the silicons that we provide, as well as to do all of the necessary cost reductions, and we've been -- we have proven to be able to that consistently over the last -- I mean for all of the time we've been in business.

Great, thanks.

Your next question is from Jeremy Bunting of Thomas Weisel Partners.

Thanks very much.

Could you just -- George, could you just comment on what your strategy towards inventories are going forward, that you've declined inventories in current quarter, after the pretty steep ramp in Q1.

Could you reiterate what the thinking was behind that steep ramp in Q1?

Thank you.

Sure.

As we indicated previously, it goes all the way back into last year, when there was, you know, a feeling that fab capacity would be tight in calendar 2004, that lead times would be extending from the fabs, which in fact did take place, so we felt it was prudent to build a certain amount of buffer stock which we mentioned in our last call, we had completed doing that.

And so that's one factor that is definitely involved in the inventory.

And our demand, as I said, you know, in our prepared comments, our demand continues to be very robust, and is already eating into the buffer that we had built.

So, longer term, our days of inventory, I think as we'd said previously, we shoot for 65 to 70 days.

That's obviously a target that -- in this business it's difficult to be precise, but that's in general where we want to be.

We'll always be maybe a little bit on one side of that, but clearly the factors as it relates specifically to us are strong end demand, and quite honestly, our comfort level that we're able to get whatever fab capacity we need.

Thank youl.

I also saw that the increase that you had in R&D in Q2 was the smallest actual dollar increase for many, many, many courses.

If you could, just comment if you thought the increase in R&D in Q2 was abnormally low, or is that the sort of range of increase that you expect going forward?

Thank you.

In Q2, you know, a lot of what we've talked about over the last several quarters, as far as our investments into R&D and other things, are tied to a lot of our new initiatives.

And some of these thing are depending upon when some of these things are completed, so they will move around a little bit from quarter to quarter, but in general, as -- if you translate the guidance we just put out for operating expenses, we believe over the long term here, they should be pretty much in the range of growth that we've experienced over the last couple of years.

Okay.

George, thank you very much.

The next question is from Jim Liang of SG Cowen.

Thank you.

A couple of questions.

On the subject of embedded microprocessors, can you contrast between the different architectures, i.e. MIPS, PowerPC and ARM, as far as why ARM has advantages in your target markets of embedded consumer applications.

And how would you differentiate your processors versus competitors, and then I have my second question.

Sure.

Obviously, the battle for embedded microprocessors has been going on for the last maybe more than 10 years.

If you look at the -- if you follow the history, the ARM architecture has pretty much won the battle in the embedded consumer markets, cell phones, all of the cell phones that I know of use ARM processors in one form or another.

But It tends to be -- originally tends to be that our [inaudible] tends to be -- to address the low end of the performance markets.

So we've decided that due to the strong adoptions of ARM in the embedded space, we thought that t3 or 4 years ago, that it was prudent for us to come up with a strategy that will allow us to build a much higher performance embedded processors beyond the MIPs and PowerPC types of performance level into the ARM space.

As we have announced 3 months ago, we have succeeded in developing a proprietary internally developed ARM processor that performs significantly higher performance compared to what anything is available out there.

So we're very hopeful that as we standardize our solutions over the next several years on the ARM processor, on our own ARM processor development, that we'll be able to leverage better performance, lower power, lower cost structures, and also easier to use -- easier to support, not just by us, also by our customers, because a lot of our customers are very familiar with the ARM tool chain.

So this is going to a good move for us, and I wouldn't be surprised if some of our competitors in the next year or so will follow this approach.

Great.

On the wireless LAN side, as far as your shipments into a major gaming platform, could you give us some more color as far as, is that an existing gaming platform, or is this a brand new platform?

It is the new platform, and will be introduced this year.

Okay.

In that respect, we have recently heard about Sony coming to market with a new PlayStation called PSP that is both portable and has wireless LAN capability.

Could you comment on whether that is your silicon?

Thank you.

Yeah, I think we are very pleased to see the -- our wireless LAN solution used in the Sony PSP system.

I think, you know, as Sehat mentioned earlier in the call, we have -- clearly we have the leadership addressing our wireless solution in the consumer space, such as gaming, cell phone, and so on and so forth.

I think you probably will see more introductions from our customers in the consumer space, leveraging our wireless LAN solutions.

Thank you very much.

Great quarter.

Thanks.

Thank you.

At this time, I would like to remind everyone, if you would like to ask a question, press star, then the number 1, on your telephone keypad.

The next question is from Srinivas Pajjuri of Merrill Lynch.

Thank you.

George, just a housekeeping item.

Who are the 10% customers for the quarter?

They're our normal list of customers.

They are WD, Samsung, Intel, and Toshiba.

Okay.

And then, I guess, on the balance sheet, on the differed revenues line.

They have gone down a little bit.

I guess in the last few quarters, they've been very volatile.

Can you help us understand what drives the volatility in differ revenues?

Sure.

Specifically at the end of Q1, as we were bringing, you know, and as Sehat mentioned in our comments, you know, we're coming on very strong in the 802.11g market, as well as the -- at the end of Q1, the market was beginning to get ready for the introduction of Grantsdale, and of course we support that Grantsdale architecture with our Yukon PCI Express.

So at the end of the first quarter, we positioned a significant amount of inventory on some of those products, as well as other products in our distribution chain for shipment here in the second quarter.

So again, given the conservative nature of how we record our revenue, we don't take that revenue until it actually sells through from the distributor to the end customer, and, in fact, that's what happened during the second quarter.

Okay.

Fair enough.

One last question.

On the [inaudible] side, it is good to see that Intel is still a 10% customer.

What are your expectations going forward for this year?

Do you expect growth out of that business, or do you expect that to be be flattish, or maybe down?

You know, we've been saying -- since the beginning of the year, that the client market overall, we view as a flat market here in calendar 2004.

You know, there clearly is still unit growth going on in the market, but there also is price erosion taking place in the market, and right now it has been our view, like I said, since the beginning of the year, that this would tend to pretty much make the dollars available flat for the year.

So while we're excited with the PCI Express, again, we believe most of the PCI Express ramp is next year, not this year, so for the remainder of the year, I think we're just going to basically -- and in our guidance, basically assumes flat for that segment.

Okay.

Thank you.

The next question is from Ambrish Srivastava of Harris Nesbitt.

Hello, guys.

All of my questions have been asked and answered.

Thanks.

The next question is from Shaw Wu of American Technology Research.

Thanks.

I just have 1 question.

It's regarding a question in your storage IC business.

You've made good progress with SOCs and read channels.

Just wondering what's the progress been in the other areas, like the preamps and motor controllers.

Thanks.

Sure.

Obviously, you know, we talk a lot about SOCs, because SOC is the one that allows the adoptions of new drive platforms.

Specifically on the small form factor.

We've been working on this specialized SOCs for lets say 0.85 inch types of markets where solution has to be completely designed from the ground up.

So while we're working on that, we also build, actually, motor controllers and preamps to support some of this new businesses, because a lot of these markets require completely new solutions.

So actually we've been doing pretty well, so on the motor controller side, on the emerging markets where we would earlier -- the early providers and producing those tiny, tiny devices for this market.

So as the market for the small form factor drives increases over the next several years, this will be good for us.

Now, we also developed other -- I mean by leveraging the technology we developed for the small form factors, we also went back to the desktop markets where we also are developing new solution for that market, but we haven't talked too much about it, because it's in the very early stage of the development.

At this time I would like to remind everyone, if you would like to ask a question, press star, then the number 1, on your telephone keypad.

We do ask that everyone limit their questions to 1.

The next question is from Karl Motey of Wachovia Securities.

Thank you.

A couple of questions.

First of all, regarding your recent win with your Octal Gigabit 5, the networking application.

How quickly would you say is the market transitioning over to Octal 5, and in your estimation,how much of a lead do you think you have over your competition?

I think the -- in terms of volume production, you are looking at next year.

In terms of the lead, I think Marvell, since 4 years ago, introduced the best price performance, highest quality Gigabit technology, and we have been the leader in this space, with a majority market share, and will continue to maintain that position.

I think, in 4 years a proven track record, and I think obviously we continue to phase the technology part, and we believe we'll be -- continue to be the leader.

It's not just about the density.

We are also the only company in the business now that has the additional features beyond what the standard requires, such as the virtual cable tested, the VCT technology, that will allow the end users to debug their networks when there's a problem in the system.

So it tremendously helps the deployment of their networks.

And the lowest power of any solution out there.

Great.

Thank you.

The next question is from Seogju Lee of Goldman Sachs.

Hi, thanks.

Just 1 clarification and 1 question.

First, the clarification.

Can you repeat what you said about the operating expense guidance for Q3?

Oh, for Q3?

Yeah.

Basically, I said that we'll continue increasing operating expenses as we do each quarter, and they are likely to decline as a percentage of revenue from the Q2 percentage of revenue, by approximately 15 basis points.

Okay.

Great.

And then in terms of question, can you talk about linearity in Q2, and just trends so far into Q3?

And also can you discuss what, from an end market perspective, what you would normally expect from a seasonal basis for the end markets?

Thanks.

Yeah, well, again, we don't talk about every -- you know, the percentages on a monthly basis, but again, I think if you look at our continued DSO performance over an extended period of time, it basically indicates, you know, with the stability of that number only moving 1 or 2 days from quarter to quarter, it pretty much tells you that our linearity remains pretty constant from quarter to quarter.

There can potentially be some movement in that as new programs start, because they don't all start on the first day of a quarter, so to the extent -- and in the past, that has occasionally skewed that number a little bit, and if that was to occur, as we move into some of these consumer types of programs, that will probably happen again.

But right now, we're not -- we're anticipating a relatively consistent shipping rate, you know, linearity rate as what we've experienced recently.

What was the second part of that question, sir?

Oh, sorry about that.

What was the second part of the question, please?

Just in terms of seasonality for your end markets.

Oh, yeah.

Well, again I think as I said in my comments, the end market demand appears reasonable, and that's what the back drop of the overall, you know, demand or end markets that we see.

We are moving into what is normally considered in our business, to be the seasonally stronger period, and I don't see any reason why we won't experience -- and that's basically encompassed in that comment about end markets being reasonable right now.

Okay.

Thanks.

The next question is from Arnab Chanda of Lehman Brothers.

Thanks, guys.

A couple of questions.

First of all, I think one of the reasons that you've done obviously much better, or maybe even market agnostic, is some of the ramps that you're seeing in places like desktop storage, as well as Gigabit infrastructure.

Could you talk a little bit about how much longer should we expect you to grow ahead of the market because of the increased penetration in both of these markets?

Is it this year versus next year?

And then I have a follow-up about power management and wireless LAN.

Thank you.

Sure.

Obviously -- I mean, our goal is obviously to be able to be able to grow the Company well above the average of the market, and what we've learned over the last -- over the last several years, I mean many, many years that we've been in business, the way to do that is really is to build better technology so that we can capture bigger market share against our competition, that's one.

But that only works until we capture maybe like 70, 80% of the market, and then we'll follow the market in those businesses, so eventually we'll have to follow the markets.

So we have to have a second strategy, which is to build new products that will extend our reach into the market, and we have been doing that, in fact the second strategy is also part of our important strategy over the last several years, I mentioned we've been working on the high performance embedded ARM processor.

Those activities have been going on for more than 3 years, 3 to 4 years.

We've been working on small form factor electronics for addressing this 500 million units of cell phones, plus digital cameras, plus all other consumer devices, the gaming devices and so on.

We've been working on our wireless LAN to address the hand-held devices.

We've been saying -- in fact, if you follow our story in the last year or so, on wireless LAN, we always specifically say that we are -- we were very focused on addressing the new market segments, because we as a company do not like to follow what the other people are working on.

We want to go a different trend, and we've been very successful in following our intuitions on what new markets to address.

So our power management is another area we've been working on for the last couple of years.

Again, it will be very exciting as some of these products start with the productions, we hope to be able to grow at at a faster rate than the end market.

Okay.

I guess 1 other follow up to that.

We're talking about power management and wireless LAN.

Can we assume those businesses, say power management 5%, and wireless LAN maybe 10% of revenues for next year, so that it kind of takes over the growth a little bit from things like Kline (ph), which are, I assuming, either flat or declining next year?

We don't want to be that specific yet, Arnab, but clearly those 2 areas we've identified a number of times in speaking with the Street as significant growth opportunities for us as we move, actually even as early as the second half of this year.

We've already commented to wireless LAN and consumer is already contributing here beginning in Q3 with the gaming platform, and will begin contributing in cell phones in the fourth quarter, and that's just the beginning.

So, yes, it would clearly continue that momentum into next year, power management is doing well, and is certainly increasing every quarter.

You know, we'll update, you know, when we give our guidance for the next fiscal year on some of these break downs, but clearly we're expecting very nice things out of our power management products next year.

But those are just a couple.

You know, you've got the small form factor drives clearly coming on, and we did say -- made some comments that we aren't done yet in our existing markets, as well.

Thank you, George.

the next question is from Dushyant Desai of C.E.

Unterberg, Towbin.

Thank you.

The question is on the new products Sehat talked about, specifically on the embedded processor side, as you mentioned, you have been working on it for some time, so the product probably is much more ready than many other product announcements.

What is your expectation for a design-to-revenue cycle for an embedded product -- embedded processor product line, or applications?

Actually, we are already in the prepared statements, we already are incorporating our newly developed processors in our market, replacing the existing processors that we have used in the last several years.

So this has already been incorporated as we speak, and it will be -- and you can be assured that in the next year or so, the majority of these products will be incorporating this higher performance processor.

Right.

To distinguish our products to be better performing, lower power, more devices that can run more applications on the same silicon.

So, effectively providing lower cost solutions to our customers.

Now, maybe I can break this embedded processor, you know, potential opportunities into 2 categories.

One where it will be into existing applications and markets, where you are using processor, and this will just come in a [inaudible] manner, and there could be some some new applications and new end products where you will also be going after.

I think that's a fair statement, but we're not going to talk about, you know, which new markets are we going to go after with the processor.

Okay.

And just 1 follow-up.

I noticed that you are using, in your marketing activities, the linear DSP term.

So that makes me think that power management is just 1 application, and that could be 1 product segment.

Again, if you can give an idea about what are the -- you know, the time periods from design to revenue on the power management, and also what are the other possibilities of linear DSP.

You're right that we specifically hinted that the use of the word linear and the DSP, because it's not just about power management.

There are a slew of linear products that can benefit from DSP technology.

We are obviously working with quite a few of those applications that potentially will be very large in revenue opportunity for in the next 5 years, and we're talking about very, very large market opportunities, but we don't -- I'm not in a position to talk about the specifics in products or end markets that we're going to go after, but our team is working -- working very hard to accelerate some of the adoption of DSP technology in the linear market.

So hopefully, once these products are introduced in the next several years, it will continue to help the growth of the Company to be better than the -- I mean the overall markets.

And how would you contrast the lead -- the time to revenue for the power management and linear DSP, versus say a Prestera or Gigabit Ethernet client, or a drive SOC?

Oh, I would say -- we may want to step back a little bit.

All of the products that we built, we built proprietary products, because a lot of the features that we provide to markets are completely different than what the existing market is currently providing.

So as a result, okay, it may take a little bit longer than, let's say, building a pin-to-pin compatible parts to the existing players in the market.

We have decided from -- as a company, that we will not go into -- into pin-to-pin compatible markets, because we do want to differentiate our products, and once we get -- once we ramp our products, it will be harder for our competitors to catch up, to displace us down the road.

So typically it takes about -- if we look at all of the history, takes about a year or so for the products to go into higher volume productions after we introduce the part.

Got it.

Thank you very much.

And congratulations on a good quarter.

Thank you.

The next question is from Aalok Shah of Pacific Crest.

Hi guys.

A couple of quick questions for you.

One was on the -- I know you mentioned earlier in the call about moving into the cell phone market and more consumer.

Could you talk about how you're doing in the 85-inch drive market and the 1-inch drive market.

Are we also expecting wins there?

Starting ramping in Q4 and maybe early next year?

Second question is, is there any metrics you can give us on how Gigabit Ethernet trends are shaping up this year, versus maybe a more sequential basis?

How the number of ports you see an increase, or something along those lines?

I think on the drive, on the true .85-inch drive, there actually is only 1 drive in the market that's been announced.

There are others, but only 1 --

There are -- if you are in the business, okay, if you talk to some of these people, they will tell you they have products, but we're not about to discuss who they are.

So right now there's only 1 drive that's been announced, and that's from Toshiba, and that is the drive that we're talking about which is going into production here in the second half of -- in the second half of the year.

And, you know, we do -- as Sehat just said, we expect more of those as they make their way to the market.

And, you know, we have the leading technology to provide do those manufacturers, so we feel very good about our positioning as those drives will make their way into the market.

On the Gigabit, I think we've already covered the client, what our view is.

By contrast, we think the infrastructure is just now starting to see a pick up.

We've been experiencing that over the last several quarters, it was definitely a -- that segment was definitely a contributing factor to our growth in the first half of the year, as it will be in our growth going into the back half of the year.

It clearly is showing that the adoption of Gigabit Ethernet, whether that be by, you know, the largest player in the market, or all of the other players, is absolutely on the increase, and with the types of products like we announced this morning, you know, we -- we are in an extremely good position to be in the leader in providing, and basically therefore benefiting from that ramp as it continues.

Thanks, George.

Next question is from Sandy Harrison of Pacific Growth Equities.

Thanks, good afternoon, folks.

George, you've used the word "reasonable" as far as growth and what your expectations in your guidance were for the October quarter.

You've also kind of laid out a pretty good path as far as how you guys are penetrating into the different consumer markets, and you had also said that, you know, with the strength of the seasonal second half.

How do you guys thing as we said head into the seasonal challenging first part of next year, how do you guys see offsetting some of the effects of playing in the consumer markets?

How do you guys -- what is your plan of attack there?

Well, you know, we look at our business on a very long-term basis.

And I think as Sehat put it absolutely appropriately, you know, we know what our positions are in the markets that we're already engaged in.

We understand the seasonal trends that affect our markets.

And, therefore, we're constantly planning new things to come into our business that helps us as we've demonstrated over the last 3 years, an ability to post good results even when, as you allude to, those kind of market continue conditions exist.

So I think our -- you know, we've -- you know, to the extent that we're, you know, willing to elaborate on that, because we don't want to divulge, you know, competitive information, but we have kind of laid out our road map of where we think a number of these new things that we have going for us are starting here in the second half of the year, they should gain momentum going into the first half of next year, and then beyond.

So when you throw it all into the mix, we're not prepared to give fiscal '06 guidance yet, but those are the kind of things that allow us to provide growth opportunities when maybe some of the existing markets go through what they're going go through.

Sure that makes sense.

Thanks for that.

And then just a quick follow-up.

On the wireless LAN, what sort of ASPs are you looking at in some of the different markets, for kind of modeling purposes, or trying to run our own bottom's up model.

I mean, what's the ASP in say your solution in a game versus say, an ASP of yours and a cell phone, versus the ASP in sort of the PC?

Yeah, you know, I think that's too much competitive information for us to give out.

I think what we've given as a base line is we've -- we've thrown out, you know, numbers in the past that say, you know, these are consumer applications, therefore the pricing has to be -- you know, pretty, pretty effective, efficient, to allow the bill of materials to hit the price points that the consumer devices have to be at to hit their high volume.

You know, and that's the kind of business we're already in, so we're, you know, I think you can probably draw from some of the historical ASPs that we've talked about.

We just don't want to get that specific yet, Sandy, because of some competitive issues and advantages we have.

But suffice it to say, you know, look at our gross margins, look at our performance, we are the 1 player that can be there wherever the market needs.

Fair enough.

And then Sehat, you guys on your press release, you talked about some of the Prestera devices, and what they're offering and I'm seeing IPv6 seems to be an up and coming protocol.

What's the big deal with IPv6?

Why is that important in the distributed switching environment?

Well, first of all, this latest device in the Prestera family, this is one of the most highly integrated, highest performance devices you'll ever find in the industry.

This device integrates so many ports, that it delivers 60 Gigabits per second through-put in a single-chip device, without using any external component.

So I don't think you can find -- if you to compare that against solutions that are shipping today, it becomes in many, many chips of silicon, plus lots of external components.

So this particular solution will allow the Gigabits to go into more main stream, lower cost, higher volume market segments than are traditionally being addressed by the fast Ethernet, because obviously the fast Ethernet is a lot cheaper to build, especially because the through-put is only 1/10 the requirements of the Gigabit.

So what was the question?

IPV6, what's the relevance?

Okay.

So IPV6 would be important down the road as we go to consumer applications where consumer devices are connected through the Ethernet pipes for its wireless or wired networks.

As more and more nodes, devices are connected, you need the IP people, the original technology, is getting out of -- running out of steam, so it will be more important in the next several years

Gotcha.

All right.

Thanks, guys.

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

Dr. Sutardja, are there any closing remarks?

Thank you, everyone.

And this completes our Q2 fiscal 2005 conference call.

I would like to thank you for joining us, and looking forward to updating you on the next quarter.

Thank you.

This concludes today's conference call.

You may now disconnect.