邁威爾科技 (MRVL) 2006 Q1 法說會逐字稿

Good afternoon.

My name is Derek, and I will your conference facilitator/ At this time I would like to welcome everyone to the Marvell Technology Group Limited first quarter 2006 conference call.

As a remind today's call is being recorded.

For opening remarks I would like to turn the call over to Dr. Sehat Sutardja, Chairman and CEO of Marvell Technology Group.

Sir, please go ahead.

Thank you, Derek.

Welcome ever to our first quarter fiscal year 2006 conference call.

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

Today I am pleased to report the results of another strong quarter for Marvell.

Q1 revenue increased 35% from the prior year to a record of $365 million.

Also, our sequential Q1 revenue increase of 7% from the prior quarter marked our 30th consecutive quarter of revenue growth.

We are currently enjoying revenue growth and momentum across all of our markets and continue to execute strongly on our business strategies.

One of our key strategies for our long-term growth, is our focus on driving the adoption of our advanced technologies into very large markets, especially where the technology is very challenging, and where we can lead the technological transitions.

Today we are executing on this strategy in a number of very large markets, which is providing us with tremendous opportunities for continued strong growth over a long period of time.

Additionally, within Marvell, we are also hard at work on a number of new initiatives in which we're able to further leverage or core technology of analog, mixed signal, DSV, and microprocessors.

Today, I'm pleased to announce one of these initiatives with our entrance into another high-volume market for Marvell.

Before I elaborate more about our tremendous opportunities that we see from this new market, and also further discuss or business progress, I will have George give our Safe Harbor statement and provide more insight into our Q1 fiscal year 2006 financial results.

Thank you, Sehat.

Good afternoon, ladies and gentlemen.

I'd like to remind all participants that the following dialogue will contain predictions, estimates, and other forward-looking statements covering subjects such as enterprise, consumer, and emerging market trends, competition, customers, suppliers, product 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 related to the pace of our business for fiscal year 2006, 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 a success for new products, services and technologies, increased competition, and its affect 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 our 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 nonGAAP basis referred to as pro forma.

Marvell's management believe nonGAAP 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 shown to provide the information to investigators, to enable operating results in a manner similar to how the company analyzes it's operating results.

Today we reported that net revenue for the first quarter of 2006 was a record 364.8 million, an increase of 35% over the 269.6 million reported for the comparable quarter in fiscal 2005 and a sequential increase of 7.2% from the fourth 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 competition was 84.2 million or $.27 per share diluted for the fist quarter of 2006.

Compared with pro forma net income of $49.1 million, or $0.17 per share diluted for the first quarter of fiscal 2005.

The 84.2 million pro forma net income for Q1 fiscal '06, represents a 71% increase from the Q1 fiscal '05 pro forma net income.

Shares used in computing pro forma earnings per share for the first quarter of fiscal 2006 increased to 310.7 million, as compared to 293.2 million shares for the first quarter of fiscal 2005.

Net income under generally accepting accounting principles, or GAAP, for first quarter 2006 was 63.5 million or $.20 per share diluted.

Compared with net income under GAAP of 14.5 million or $.05 per share diluted for the first quarter of fiscal 2005.

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

Now, I'd like to make some additional comment on our Q1 results.

Our Q1 revenue of 364.8 million was another quarterly record for the Company, and the 7.2% increase in revenue from Q4 to Q1 was slightly above the high end of our guidance of a 5 to 7% sequential increase in quarterly revenue.

The increase in Q1 revenue represents the 30th consecutive quarter of revenue increase.

On our Q4 call, we mentioned that Q1 is normally a seasonally slower period, but ordering patterns from our customers entering Q1 led us to conclude that seasonality in Q1 would have no effect -- no significant impact on our Q1 revenue.

We are pleased to report that our assumptions were correct and seasonality was not a significant factor in our Q1 revenue growth.

During Q1 we experienced revenue growth from a number of of different products including the storage SOCs for both enterprise and consumer products, wireless SOCs for consumer products, serial ATA and Prestera switching solutions for the network infrastructure.

This broad contribution shows the strength of our core market positions, and we are encouraged as we enter Q2.

Q1 our enterprise markets represented approximately 75% of revenue with consumer the balance.

We had 4 10% customers in Q1, Western Digital, Samsung, Toshiba and Fujitsu.

Q1 gross margin of 52% was consistent with our Q1 guidance.

Over the last six quarters we have achieved a strong increase in our quarterly revenue while our gross margin percentage has ranged just 70 basis points over that same period.

Given the competitive nature of our end markets, we continue to focus on improving our manufacturing efficiency, resulting in cost reductions keeping our gross margin percentage above our long-term of 51 to 52%.

We continue to invest in the development of new products, technologies, and advanced process geometries to keep us in a leadership period in our targeted markets.

For Q,1 operating expenses grew 3%, but our continued strong revenue growth again resulted in a reduction of a pro forma operating expense as a percentage of revenue to 27.3%.

There was 110 basis point decline from Q4 and 150 basis points favorable to our Q1 guidance.

For the 15th consecutive quarter we increased our pro forma operating income percentage.

Again, given the strength of our revenue growth, our consistent gross margin percentage and lower operating expenses as a percentage of revenue, we increased our operating income percentage by 80 basis points to 24.6%, which is above the high end of our long-term model.

Shares used in computing pro forma net income per share for the first quarter increased to 310.7 million compared to 308 million for the fourth quarter of fiscal 2005.

The increase in shares was primarily 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 Q1, we generated approximately 67 million in cash and exited Q1 with cash and short-term investments of 727 million.

Continuing the Q4 fiscal '05 improvement in DSOs, DSOs for Q1 was down two days to 51 days.

DSOs are likely to remain at the high end of our range of high 40s to low 50 days during these periods of rapid revenue growth.

We continue to tightly manage our inventory.

For the last several quarters we have been consistent in keeping our days of inventory in the 65 to 70 day range, plus or minus a couple days and ensuring that our production levels going forward keep us in the most favorable position to respond to increases in demand for our product.

In Q1, we held the lower than typical level of inventory in response to a favorable manufacturing environment.

We expect days of inventory to work back into our targeted range during the course of the year.

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

Thanks, George.

Before I go into the details of our new product initiative, I would like to make some general comments on our strong execution in our existing markets.

First, we continue to enjoy great success with our push into the consumer markets.

Our very unique consumer wireless LAN solutions continue to show solid growth and increasing design wins due to our highly differentiated products.

During the quarter, the Sony PSP wireless gaming device continues to join a strong rollout with its successful launch in the U.S.

Now during this upcoming quarter, we will enjoy the initial ramp of a number of other new products based on our consumer wireless LAN technology, including phone, digital cameras, printers, PDAs, and other gaming solutions.

We also continue to expand our breadth of designs in the cell phone market as many cell phone manufacturers embrace our consumer wireless LAN technology as a key feature in our their next generation phones.

In the storage market we continue to experience strength from our products being shipped into consumer hard disk drives.

The volume of small form factor drives being shipped in the market continues to grow, even the increasing number of handheld consumer devices are being introduced with high-capacity storage.

For example, during the quarter Nokia announced their hand 91 cell phone that integrates a 4 gigabyte drive based on our SOC.

We believe that the adoption of high capacity storage in cell phones will continue to expand as our consumers demand more features and functionality in cell phones.

In the enterprise markets, we continue to see strong growth from our gigabit Internet switching and solutions.

At the networking trade show, NetWorld+Interop, earlier this month, many top tier OEMs were displaying new systems based on our technology, ranging from very high-end multiclass equipment to high-volume value-based systems.

Many of these new systems are based on the Marvell total solution of software and production proven silicon which allows our customers a record time to market.

We are looking forward to a continued strong year of growth from both our gigabit infrastructure as well as our new PCI Express gigabit controllers for the client market.

All right.

I would now like to spend some time going over our new market opportunity that I mentioned in my opening remarks.

Today we are announcing our entrance into the optical storage market.

The optical storage market is a very large market with over 300 million drives expected to be shipped next year.

Our initial products will be focused on the DVD recordable drive segment, which is forecasted to grow at a 40% compounded growth rate over the next four years.

We have been studying this market for a few years now, and we are very excited to see that the dynamics of this market are very similar to those of the hard disk drive market ten years ago when we chose to enter that market.

The growth and market adoption of DVD technology has been incredible to date.

DVD technology has so many advantages over VCR tape technology such as significantly better viewing quality, much less expensive media, and smaller and more convenient media form factor.

However, even with so many obvious benefits, the rate of adoption of DVD recordable technology is slower than expected, as consumers are having a hard time dealing with the DVD recordable technology in the marketplace today.

DVD recordable drives are not meeting the stringent requirements of quality and performance expected for high-volume consumer markets.

This problem is becoming even more apparent as drive manufacturers stretch to achieve 16X speeds.

As these drives attempt to perform at the highest possible speeds, the data that is recorded is typically recorded poorly and loaded with errors.

As a result, it is very common that a DVD recorded on one computer drive will not function on the consumer DVD player, as that player struggles to recover the poorly recorded data.

These issues are further complicated by the fact that most DVD drives cannot deal with the ever-changing quality and different types of media being introduced into the market by a growing number of different suppliers.

The reason DVD recorders are struggling with all these problems is that reading and recording data on DVD media is extremely complicated, especially at high speeds, and today it's largely being addressed by analog-based semiconductor solutions.

Just as the case when PRML and DSP technologies were introduced into the hard disk drive market about ten years ago, we believe it is now time for DVD semiconductor solutions to utilize sophisticated PRML and DSP technologies in order to resolve all these technical challenges being encountered.

We identified this tremendous opportunity a few years back, and have been working hard on developing products that leverage our proven PRML and DSP expertise to solve these specific challenges.

As a result, we have now developed highly integrated, high-performance DVD solutions and are working closely with select leading OEMs to develop systems based on our new advanced products.

This market provides us with another multi-billion dollar [tam].

With the strength of our solutions, we plan on quickly becoming an established player, which will place us in a strong position to further lead the industry's next technological transition through new laser DVD technology with full backward capability to our existing solutions.

I look forward to updating our progress on this exciting new market as the year progresses.

Finally, before I turn the call back to George, I want to give a quick update on our high-performance ARM based embedded microprocessors, which we call the [Ferocian] Family The Ferocian Family uniquely employs architectural advances previously only attainable in more expensive, stand-alone high-end CPUs.

Unlike current standard ARM-based microprocessors, the Ferocian Family incorporated sophisticated techniques such as out of order processing, dynamic branch prediction, and an advanced variable stage pipeline to achieve superior instruction for cycle numbers.

As a result of such advanced CPU techniques, the Ferocian Family achieves impressive performance spanning from 100 megahertz to over a gigabit of operating speed, while at the time being able to conserve very low power and maintain attractive price points.

Design activity for Ferocian-based SOC is very strong.

We are leveraging this technology to further strengthen our competitive advantage in our existing markets as well as to address many new markets in application.

By combining such advanced features in standard low cost processes, the number of new applications and markets we are now able to address is quite broad, including SOCs for highly sophisticated enterprised networking, VDSL firewalls and routers, color laser printers, and shadow boxes.

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

Thanks, Sehat.

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

We are very focused on achieving our business and financial targets and would like to again review the strategic assumptions used in anticipation of achieving our objectives:

First use our superior analog, mixed signal, DSP, and microprocessor technology to create products that put us in the leadership position in our targeted markets.

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

Third, use our design expertise to create the smallest dye sizes at a given process geometry for low cost, and fourth, continue with our investments in R&D to ensure flow of products that position the company for long-term growth.

Building on our Q1 performance, our improving visibility into upcoming production releases for additional consumer products utilizing our technology, and reasonable enterprise market conditions for the remainder of fiscal '06, we believe we are in a position to increase our guidance for fiscal '06.

We are increasing our targeted revenue range for FY '06 to 1.57 billion to 1.61 billion.

At the midpoint of this guidance, our annual revenue growth fiscal '05 to fiscal '06 would be 30%.

Given the consistent gross margin percentage generated by our business over the last several quarters, we believe that gross margin percentage for the balance of fiscal '06 should be consistent with our Q1 margin percentage of 52%.

Our rapid revenue growth and strong gross margin percentage has consistently allowed us to improve our operating income percentage, and exceed our long-term model.

While the business assumptions in our model remain valid, we feel it is appropriate to reflect the additional operating leverage generated by our business in out long-term model.

Moving forward, pro forma operating expenses should range between 26 to 29% with operating income percentage ranging between 23 and 26%.

Now, moving specifically to Q2 fiscal '06, our business momentum in Q1 was quite strong despite normal seasonality.

Entering Q2, which is also normally a seasonally lower period, we're encouraged by the continued ordering patterns from our customers, and consequently feel that seasonality in Q2 will have no significant impact in our Q2 revenue.

As I mentioned in my Q1 commentary, we experienced a number of positive trends that resulted in good breadth of product, and then markets contributing to our Q1 growth.

These trends continue into Q2 and we're excited about these opportunities.

Considering all the above, we've targeted Q2 fiscal '06 revenue to increase approximately 5 to 7% from Q1 fiscal '06.

As I mentioned in the annual guidance update, we expect our Q2 gross percentage to be consistent with consistent with our Q1 gross margin percentage of 52%.

Operating expenses should increase approximately $4 million plus or minus 500,000.

Our balance sheet indices should be consistent with the last several quarters.

The shares used in computing pro forma net income should increase to 314 million.

I would like to turn the call back to Sehat.

Thank you, George.

That completes our commentary.

Derek, would you please poll for questions?

Yes, sir. [OPERATOR INSTRUCTIONS].

Your first question comes from Bill Lewis with JP Morgan.

Great, thank you.

I'd like to ask a little bit more about the new optical drive product.

I guess, could you talk about what you think the units are for that market in '05-'06 and also the timing of when you expect Marvell shipments as well as when you expect your customers with your product to begin shipping?

Yeah.

I don't have the number in front of me.

I think what is important to realize is that the -- the DVD recordable technologies will be the dominant technologies in the future, as it will -- as recordable technology will replace VCRs.

As I mentioned in the commentary, the challenge that people are facing in the industry is that the recordable technologies available in the market today are below the capability that's normally expected by the consumers.

So it's -- I would say the numbers could be very, very big in a couple years from now.

Now, the revenue we expect from them, you should assume that the revenue from this year will be negligible as we are spending the rest of the year basically working with our partners to develop solutions from wares and to develop a system in their the airport of life.

So contributions in revenues should be sometime next year.

Can you talk about what area you're going going after in terms of if you look at the block diagram of those drives what are the types of products it is you're developing?

It will be very, very highly integrated controller.

So it will be a single chip device.

Okay.

And a second question.

On the inventories which you wrote down significantly, you talked about slack or a lot of excess supplies from some of your foundry partners.

One of your competitors saw a gross margin benefit from the better wafer pricing.

Are you seeing that benefit, and there is a reason you don't see it the same as some of your competitors in terms of how you set up some of your long-term agreements with the suppliers?

I think we did see some of that, Bill.

Okay.

I can't speak for how my competitors do their forecasting and so forth, but positive foundry pricing is not a surprise event to a customer.

We work very closely with our partners, and so we have -- we know in advance of what kind of pricing we're going to be enjoying.

So in our typical fashion, when we give out our guidance, much of any of those kinds of things are already factored into our guidance.

So that's the short-term thing.

I think, though, the very second part of your question is actually reflected positively in our statement that our gross margins are going to remain essentially flat for the balance of the year, even as the mix of our business continues to change.

Great.

That's very helpful.

Thank you.

Your next question comes from Michael Masdea from CSFB.

Thanks a lot.

Great quarter, guys.

The embedded wifi market, there's a lot of announcements from your competitors.

Help us understand the dynamics of that market, how it's different from the street market, what keeps others out of that market?

What's your real advantage there?

Maybe I can cover this a little bit.

I have some additional comment on that.

As we have been saying over the last year or so, the wifi markets we have been addressing all these years are not not the PC wifi markets.

We have put all in our efforts in the five years in building consumer oriented wifi devices.

What I mean by that is wifi devices that can easily be embedded in many different types of consumer products.

Unlike PCs, the the consumer products are in many different implementations.

Even processors, even capabilities, some of them requires -- gaming devices are different than cell phone devices.

So the solution has to be so flexible that it should be easily imported in many applications.

There's many of these different applications.

So these are the strength of our wifi solutions, and people just are starting to realize -- our competitors you mentioned about talking about embedded wifis..

They're trying to go into just -- just starting to realize that they may have been mistaken in architecting their solutions originally.

So of course we don't want to sit still.

We want to continue to improve our solution to make sure that we're continue to stay ahead of the competition.

As far as the business accomplishment and market presence, we believe we have over 70% market share.

As far as the maturity of our products, we being addressing these segments in the last two years, and this is why we have the majority of market share.

Looking at moving ahead, I think we can continue to raise our technology bar.

I think that this is another case where I think a tough for competitions catch up.

We're extremely pleased, as you can see some of our customers are also introduced, very advanced products in the market in the last number of weeks as well.

Sehat, you announced this new product area today.

You've done this in the past for many years now, put on these new areas you're going after.

Is there any point you get too stretched with your engineering talent, or do you feel like you still have a lot of leverage from the people you have?

Yeah.

Obviously, we have a very, very large market.

It requires a lot of resources.

So, you know, are we stretched, maybe somewhat, but are we overstretched?

Well, the way to answer that is if you look at a lot of the products we're going after, the products we can leverage, the existing technology we already developed in existing markets that we have.

For example, PRML and DSP technologies for the optical storage market that we are working on a direct result of basically a derivative of what we've been building all these years, over the last ten years developing for the disk drive.

If we started not knowing -- not having those technologies, the situation will be much different, obviously.

So either way we would obviously be able to build that.

This is something that we don't have to manage.

Thanks a lot.

Your next question comes from Karl Motey with Wachovia.

Thank you.

This week, Sony announced their PlayStation 3 and just going through the -- some of the features, they are featuring wireless LAN and gigabit ethernet, and I was wondering if those are Marvell wins and if so when can we see a revenue impact?

Well, first of all, I think Marvell, we have established a very solid business relationship with Sony.

We're working with Sony with developing a number of projects with them, and PSP is announces this chip in the market has been extremely successful as leveraging our wireless LAN technology.

As far as the specific products in the future, what I prefer to do is once these products are into production, and we will give you more details.

But as far as technology wireless LAN customer technology, we're the leader.

As far as gigabit, we're the leaders, so I would say just stay tuned for the details.

Okay.

Fair enough.

Then Sehat, could you talk a little bit more about the new product and give us just a rough idea of what the ASP of these controllers might be, and also what does the gross margin of that product look like, whether it's above or below your corporate average, and to the extent you can give us some detail in the architecture, is it ARM based?

Okay.

Maybe the easier answers would be obviously the financial side.

We look at the financial -- the impact of addressing this business.

I will say that it will be at the corporate average, gross margin in some sort of pricing.

The pricing, it's too early for us to talk about pricing at this point, especially whether the pricing is quite high at this point as well as the yield.

The end product yield actually are pretty poor from what we heard in the markets.

So the pricing is not the cost of silicon but also the cost of the E loss of building the end products.

So the other point is solution out there is still a two-chip solution.

We're working on a single chip solution.

It's a little bit early to talk about pricing.

It you be could be some upside to the margin.

Great thank you.

Your next question comes from Seogju Lee with Goldman Sachs.

Just a clarification on the DVD recorder.

Your single chip solution -- are you doing the controller, or the MPEG decode?

The key technology -- the most challenging technology is not the MPEG decoder or encoder.

It is the read and the write channel.

The signal is processes the optical signals, whether you're writing or reading the media.

So what we've devised with the DVD recordable channel -- solution we're talking about, the front-end solution.

Okay.

That's very helpful.

And then in terms of the opportunities that you see for the optical solutions, Sehat, do you see that more related to DVD recorders that we know in the market today, or are you looking more at the opportunities related to blue laser based technologies like HD DVD or blue ray?

The answer is both.

The recordable technologies, the DVD recordable technologies are supposed to be targeted for VCR replacement.

You'll be surprised why, even with all the advantages of DVD technology, people are not replacing their VCRs in droves.

It's because about 25% or more of those recordable devices that you buy in the aftermarket are not really working properly.

So there's a lot of bad experience in the consumers when they're dealing with recordable technologies.

This is where we're coming into play, because we're looking at this technology for the last several years trying to understand what exactly could be causing these problems.

And we -- after working for the last several years, we get a better understanding on how to solve this problem, and we believe that as our solutions start to come out in the field down the road, that consumers will move quickly to recordable technologies and hopefully that will give a good experience in the cost consumers so that when we introduce our HD DVD technology in the future, they will have good experience with the recordable technology.

Okay.

And then can you just talk about the competitive environment at this point?

My understanding is it's primarily captive, but you have a few merchant suppliers like LSI Logic.

Yes.

The DVD recordable technology, as you said are pretty much captive by a lot of Japanese DVD recordable suppliers.

The -- they're noncaptive under that nonrecordable vital technology, the traditional playback types of DVD technology that you see primarily analog-based signal processing technology.

So because of that, we also believe that this is a huge opportunity for us to go into this market in in borrowing our PRML technology

Okay.

Great.

Thank you, and good luck

Thank you.

Your next question, comes from Ambrish Srivastava from Harris Nesbitt.

George, the prepaid expenses were up quite a bit.

Is that tied to buying some additional capacity, and does that also play into likely getting better margins throughout the year?

The second question was what was cash flow for ops and Capex for the quarter?

Thank you.

If you go and look at the 10-K we filed at the end of the year, we do make a disclosure in there that we've entered into some long-term foundry arrangements to provide us capacity moving forward.

Under those arrangements we will be making periodic payments against those arrangements, and then draw them down against the production.

So when we make a payment such as that, you will see that show up in the prepaid expense part of our balance shee,t and then of course be drawn down moving forward.

So we are, that's the mechanics of how that's going to work going forward.

Clearly, any of these kinds of things are sort of in lock step with the constant objective of lowering our costs.

So I think again Ambrish, the most positive thing I can say is the fact is our gross margins are flat at this point and predicted to be flat with the dynamic parts of our business changing.

So I think that's the impact that you're seeing there.

Then on the cash flow, you know, I don't have that right here with me, so we'll have to -- we'll be happy to get back to you after the call.

Thanks George.

I wanted to confirm that was the impact we see on the prepaid.

Thank you.

Yep.

Your next questions coming from Jim Liang with SG Cowen

Thank you.

A question on the cell phone market.

In these of these multiple technologies including base and application processor, wireless LAN, bluetooth, can you talk about your strategy going forward to potentially provide total solutions and maybe in that respect maybe you can elaborate a little bit on the reference design partnership with free scale?

Alco-is a free scale first.

This is a cost synergy play.

Free scale has the chipset for the cell phone, and Marvell is the leader for wireless net addressing the cell phone market.

This is a reference design and really increasing momentum for both companies.

As far as our overall strategy for cell phones, this is something probably again I always say stay tuned looking forward in the future.

At Marvell, we do have a number of critical technologies that can address the cell phone market well, but I like to leave it for the future discussion.

Great.

Just a follow-up question for George.

How do you see foundry lead times develop over the next several quarters, and when do you expect to see foundry tightness so you can start buffering inventory?

The foundry business is a very dynamic thing, Jim.

As evidenced by our commentary on our Q1 inventory, we've joined a very favorable environment.

From that perspective right now.

We're beginning to hear and maybe see the beginning of the capacity, utilization of the foundries now increasing.

Not in any kind of a shortage or anything, but actually going back towards a more fully utilized model.

So I would think as we get into the latter part of the year, we're going to be back to more normalized supplying environment, which for us supports our 12-week manufacturing cycle.

Thank you.

Great quarter.

Your next question comes from Allen Mishan with CIBC World Markets.

Hey guys, a couple questions first you mentioned --

Allan

Networld+Interop Can you just tell us who the most important customers are for posterity cases?

Allan?

Hello?

Allan?

Hello.

Operator?

Yes, sir.

One moment.

Why don't we move on.

We won't be able to hear that question.

Your next question comes from Arnab Chanda with Lehman Brothers.

Thanks.

A couple questions.

One maybe for either Sehat or Weili.

A question about the wireless LAN business.

You talked about 70% market share in embedded.

Do you mean that in terms of -- first of all, if you would describe what you mean by embedded market and is it a shipping or in terms of design wins and I'll have follow-up please

This is for the design wing as well as shipping.

So the segments for now we're referring to, is the cell phone, PDAs, gaming, printers, as well as other applications.

Thank you very much.

One question about the DVD recorder market.

I'm not too familiar with that, so maybe it's kind of an obvious question.

But it seems like the competitors in the market that are out there, they are getting gross margins in sort of the 40% range for their quarters and maybe in the 20s for players.

Can you talk about what you're doing that is fairly unique?

Is it higher integration?

Is it a more high performance product that others can't compete with?

Can you talk about it a little bit that'd be great.

Sure.

I think when you're referring to the lower margin part of the business, the very low end DVD player market, the difference between the player and recordable is that in the player market the electronics are only -- only needs to be able to perform at very, very low speeds like 1X or 2X of speed requirement, versus in the recordable, a segment market they'ree targeted for initially obviously for the PC market.

If you look at all the PCs that comes with a recordable DVD technology, that is much, much advanced technology compared to a DVD player technology.

Having said that, even though they come with more advanced technology, they're actually substandard.

A lot of PCs' recordable drives are not compatible with other PCs' recordable drives.

So what we're bringing to the table is a technology that's much, much more advanced compared to what's available until the market today that we believe will allow the market to accelerate the deployment of recordable technology to the homes.

So I would like see down the road all those DVD players that will get replaced with recordable technology.

Arnad, if you take a step back and look at our history and look how we -- when we enter new markets.

We're always coming with a very highly integrated Sehat mentioned technically advanced solution.

We have to compete in what is always a price-sensitive competitive market.

So it's our ability to design and manufacture and have a very, very low cost structure that puts us in a position to compete competitively, yet not see margins like, some of our other competitors have experienced, whether that be in storage, wireless LAN, whatever other markets.

So I think we feel very comfortable that this is going to be a very constructive profitable venture for us.

So if we can make our chips smaller, we can have higher margin, number one.

The other part is if we can allow our customers to have 10 - 20% better yield in the end productions, it also means lower overall costs to our customer.

If we can make this system so that our customers will not see return that they're seeing from the retail channel -- if you do some checking in the market, you will hear some horror stories about consumers returning those recordable technology in large lots percentages.

So those are costly to the manufacturer.

So you solve all those problems in a -- we'll do just fine.

Thank you very much.

Your next question comes from Sandy Harrison with Pacific Growth Equities.

Good afternoon, guys.

Good afternoon.

Last quarter you talked pretty extensively about the power management strategy and some of the cataloging, or the move towards a more catalog basis of products and expanding a number of them.

How about a quick update on how that's going and some of the success stories that you're seeing in power management today?

Yes.

We didn't talk so much about it.

There's so many things we have to talk about.

So in short, it's power management's activities are doing very well.

We continue to develop new products to address many different markets that we have to address.

This is huge -- this is a huge market where not everybody wants to have one type of solution, so we continue to develop a variety of derivatives as well as new technology to address this market.

So we're doing well with our existing customers that we have today, as well as new customers that we are starting to engage with.

And then as we look to the Power Management and you spent some time in your prepared remarks talking about the ARM products that are start to go take off and introduce, what sort of modeling on a bottom's up should we look at from contributions to these two products, say in the next six, twelve, and eighteen months?

Okay.

Let me --

So I understand, Sandy, the way to look at it is certainly the microprocessor can be embedded into any of the things we're currently doing, whether that be communications or in storage.

So I think that's -- we have an embedded strategy, so that's probably the way to be thinking that as a component.

You've probe heard us before that we're hoping that will allow us to continue our strong ASP performance by having these various IP blocks.

The power management is sold as part of the overall system.

We bundle it together with many of our own solutions.

Our own solutions require our type of power management to be effective in the systems they're designed into.

I think that's kind of way to think of the majority of what we're doing.

I got you..

Thanks, George.

Your next question comes from [Alock Shaw] with DA Davidson.

Couple quick questions for you.

Are you seeing any aggressive pricing behaviors as you move into the consumer electronics device market for wireless LAN technologies?

Are ASPs significantly lower in that space than some of the more traditional traditional LAN markets?

Second question is an update on storage.

If you can give us a sense of what's going on with the new platform designs for -- that are expected next year?

What's going on with some of those customers you have right now?

Let me take the first one.

I think as Sehat very clearly laid out when asked about our wireless LAN strategy and why we believe we're ahead in the wireless LAN market is that the type of product that we're bringing for the consumer applications is different than what the competitors are able to bring.

So you have to separate, I believe what the solution looks like and what the pricing environment is for that kind of a competitive situation.

In the short answers it's very good for us at this point in time.

You separate that from what you hear from most people who are participating in the PC part of the market that the pricing is very, very aggressive there from quarter to quarter.

So the two are totally different from one another, and I think that's one of the reasons why we chose to go into something where our technology would give us a differentiation and allow us to be successful.

Plus the PC solutions are bare-boned wireless solutions.

You're not doing anything except being a slave to the processor -- to the host-motherboard processor.

Absolutely.

I think we're very comfortable.

We're in the very early stages of these products even making their way into the market, so when the larger volumes come on stream, obviously there's pricing curves on all these products.

That's one of the things we're good at, keeping the cost in line so we can benefit our customers.

I think you're referring to the 160 gigabit generation of products, maybe Sehat wants to comment on maybe the state of the 160 development in the industry.

Yeah.

I don't know what to say about it.

In the storage business we have to develop technology years in advance of our customers' deployment.

So you can pretty much assume that we are looking at dozens of chips for all the different customers of products that will be introduced some time next year.

If you attended the TSMC Technology Symposium, you see that the TSMC only had a handful of partners in the technology development of 90 nanometers, and we were one of those handful partner in 90 nanometer process development.

And you can pretty much assume those are -- we used the storage technology to develop those -- the partnership development with TSMC on a 90 nanometer.

George, can I ask a quick follow-up on the first part of the question.

On the wireless LAN single-chip electronic devices?

Are you guys sole sourcing all these wins that you're getting?

Is it possible for someone else to come in there with another chipset?

The kinds of products we do with highly integrated SOCs utilizing a number of different IP blocks almost defines it has to be a unique design that is not interchangeable to somebody else's silicon.

So I think the answer to the question to look at a very broad perspective is yes they are sole source designs that would require significant change to go through somebody's else's solution.

Thank you.

Your next questions come from Cody Acree with Legg Mason.

George, can you talk about a little about the small form factor contribution this quarter?

We're starting to see a lot of design activity and maybe getting some initial product in the market.

Is it starting to hit your bottom line yet?

Well, small form factor has been a significant part of our consumer -- again, you have to include the 1.8 inch form factor into that equation, Cody.

Maybe below the 1.8 inch drive?

Below 1.8 is still very small at this point.

As we get further into the year, we anticipate those to come out as evidenced by Nokia's announcement of the N 91 phone.

As we get further into the year, you will start to see contribution coming from the sub1.8 inch drives.

And just in regards to your increase in the fiscal '06 guidance, was there one piece of the business that maybe gave you the most confidence to be able to do this?

Well, I think -- it's a continuation of what we've been saying for a year now, which is we're coming into the consumer space.

We have tremendous amount of momentum into that space, and we're not -- you know we will never get ahead of ourselves.

As we start to see clarity, it has been at least a HOF dozen product announcements in the last quarter that utilize our broadband technology, whether that be in storage or whether that be in the wireless LAN parts of our power management, whatever.

Chips we're putting into these products.

When we get more visibility into that, we're going to turn around and therefore reflect on in our outlook

So not one end-market, then?

No.

It's across the board.

That's what is so exciting for us.

We're seeing momentum across a number of things.

Very good.

One last thing.

The end market -- excuse me.

The suppliers today, the optical storage market that you're going to need to displace to start to get into those systems.

Could you give us a list of those players?

Most of them are -- a lot of this are captive suppliers.

To talk about names, we're not going to at this point.

Thanks, guys.

Your next question comes from Alex Gauna with UBS.

I was wondering in your storage product lines, what is the sweet spot in your manufacturing technology right now?

Is it .13?

Where are you in terms of ramping 90 nanometer?

What's the potential leverage for moving even beyond that going forward?

So we have products across all geometries.

We have .15, .18, .3, 90 nanometer prototypes.

So 90 nanometers will obviously down the road be more important than the older process geometries.

65 nanometers is a tool we need to talk about, because I don't think anybody can produce 65 nanometer production.

So we will continue to use more advanced process geometries when things -- when the process is reasonably mature.

For one thing, for sure we don't want to use the most advanced technology, the bleeding edge, that for our customers do not ship products.

You understand that a lot of these customers are single source, so what whatever we do we have to make sure we have to deliver every single piece of devices they need.

We cannot say, okay, we have a problems you'll accept.

That's not an acceptable answer to them.

We have to be conservative on that side.

As we move increasingly into the mini-hard disk drive market, especially the cell phone market?

Isn't it safe to assume in terms of power consumption and performance form factor, that there's some advantages to be derived from 90 nanometer?

Is that a part of that market strategy, or not necessarily?

Obviously, it's a smaller processor will give you an opportunity to have low power.

Power alone is not derived by process.

Architecture, we could actually derive a lot more power saving from the choice of architecture, choice of designing the analog front end, designing the DSP implementation.

We have actually, using the same process technology, from similar to our competitors' we're able -- so far we have not into this market to have less than half the power of their solution.

So going to one generation ahead, they're going to get you that kind of power.

It's scalable.

As we scale our technology for useful events, process technology will go further with lower power.

Does this conversation also apply to the Prestera platform?

Can you remind us where you are in terms of generations of Prestera, and how far that is advancing?

Sure.

Similar to all the chips that we built, we are very, very careful in selecting architecture, implementation architecture in building our products.

There are ways to make chips that consume 20 watts.

There are ways to make chips consume 5 watts or 4 watts, like Prestera.

So you could -- you can pick an architecture that will provide you with 100 gigabit per second switching through-put in a single device that consumes 21.

You can build one with 4 or 5 watt on a single device.

It's on the same process geometry.

This is, again, the same careful architecture selections, choices as well.

You mentioned we come up with to produce devices with lower power using mature process technology.

These will be events in mature process technology.

So we don't have to be at the bleeding edge all the time, because as the company gets bigger, we also need to be in a somewhat conservative, so we don't short change everybody with our business as well.

Thank you very much.

Congratulations.

Powerful quarter.

Thank you.

Thank you.

Your next question comes from David Wu with Global Crown Capital.

Can I ask a question regarding the free scale relationship.

As I look at one of the largest embedded markets is cell phones, obviously.

You have people like Texas Instruments that is both in the base band application process as well as wifi.

Can you strike a relationship with all the rest of them, people like Qualcomm that also have a chipset but no particular expertise in wifi?

Are all the non-TI players in that market a partner, potential partner for you, and in the partnership do you actually have to test the chips so that they actually operate pretty well between the -- I'd say the free scale platforms and your wifi chip?

Yeah.

The only thing I can say answering that question is that our engineers work very closely with the handsets, with the chipset suppliers in this case as well as the handset manufacturers to work on the firmware and software that will be needed in the cell phones.

It's a lot of work, a lot of collaboration.

That's probably the only thing I can say about it.

There's something about it -- it doesn't happen overnight.

We've been working for it for more than a year

Does it mean that my assumption that anybody who's not a TI customer is a potential partner for you in this embedded --

It's the other way around.

Even a TI customer is a candidate for our solutions, because our solutions are a lot more flexible than the TI solution.

So we have to support customers for different chipsets, meaning the cell phone chipset, of course wireless is going to be Marvell.

A free scale piece is the case where, as I said a synergy -- it's co-marketing.

So basically it's a co-marketing thing.

It's not something that you talk to the chipset guy?

You basically talk to the customer?

That's how you get your design wins?

From the chip side being addressed any technical issues and of course with this complete platform and targeting the end customers.

Thank you.

At this time there are no further questions.

Mr. Sutardja are there any closing remarks?

Thank you, Derek.

This completes our Q1 fiscal year 2006 conference call.

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

Thank you.

Thank you.

That concludes today's Marvell Technology Group Limited first quarter 2006 conference call.

You may now disconnect.