邁威爾科技 (MRVL) 2006 Q2 法說會逐字稿

At this time I would like to welcome everyone to the Marvell Technology Group limited first quarter 2006 conference call.

As a reminder today's conference call is being recorded August 18, 2005. [OPERATOR INSTRUCTIONS] I would like to turn the Kevin over to Sehat Sutardja, Chairman and CEO of Marvell Technology Group.

Sir, please go ahead.

Thank you.

Actually, it was for the second quarter fiscal year 2006.

Well, everyone welcome.

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 with me on this call.

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

Q2 revenue increased 31% from the prior year to a record $390.5 million.

Also our sequential Q2 revenue increase of 7% from the prior quarter mark our 31st consecutive quarter of revenue growth.

Along with our consistently strong revenue growth we also continued to improve our quarterly operating margin for the 16th consecutive quarter generating strong cash flows with an over $120 million increase this quarter.

We are experiencing a strong momentum and growth across all of our served markets and continue our solid and consistent execution of our business strategies.

We mainly focused on continuing to gain market share in our existing large markets as well as further expand the reach of our technologies into many new exciting high volume market opportunities to continue and fuel our long-term growth.

Currently in the enterprise markets we see continued strong adoption of our Gigabit Ethernet products for both the PC clients and our infrastructure switching solutions as well as seeing healthy unit growth in the hard disc drive market.

In the consumer markets we are very excited about the growing breadth of consumer applications that are adopting our technologies, the revenue growth we are experiencing from the consumer markets is just in the very early phase of a long term cycle where a whole new generation of applications will be developed that incorporate wireless connectivity, highest capacity storage, and many other advanced features based on our technology.

I will elaborate more about these opportunities and our business progress but first I will have George give our Safe Harbor statement and provide more insight into our Q2 fiscal 2006 financial results.

Thank you Sutardja.

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 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 inventories.

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

These statements include those relating to the pace of our business 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 success for new products, service, and technologies, increase competition and its effect on pricing, spending, third-party relationships, and revenues as well as the inability to establish and maintain relationships with commerce, advertising, marketing, and technology providers.

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

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

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

Now moving to the Q2 financials.

Marvell reports net income in 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 that non-GAAP information is useful because it can enhance the understanding of the Company's ongoing economic performance and Marvell therefore uses pro forma reporting internally to evaluate and manage the Company's operations.

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

Today the report of the net revenue for the second quarter of fiscal 2005 was a record 390.5 million an increase of 31% over the 297.2 million reported for the comparable quarter in fiscal 2005 and a sequential increase to 7% from the first quarter of fiscal 2006.

Pro forma net income which excludes the affect of the amortization and write off of acquired intangible assets and other amortization of stock-based compensation was 97.6 million or $0.31 per share diluted for the second quarter of fiscal 2006.

Compared with pro forma net income of 59.7 million or $0.20 per share diluted for the second quarter of fiscal 2005.

The 97.6 million pro forma net income for Q2 '06 represents a 64% and from the Q2 '05 pro forma net income.

Churns used in computing pro forma earnings per share diluted for the second quarter of fiscal 2006 increased to 313 million as compared to 296 million shares for the second quarter of fiscal 2005.

Net income under generally accepted accounting principals or GAAP for the second quarter, fiscal 2006 was 77.3 million or $0.25 per share diluted compared with the net income under GAAP of 28.6 million or $0.10 per share diluted for the second quarter of fiscal 2005.

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

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

Our Q2 revenue of 390.5 million was another quarterly record for Marvell.

And the 7% increase in revenue from Q1 to Q2 was consistent with the high end of our guidance of a 5 to 7% sequentially increase in quarterly revenue.

The increase in Q2 revenue represents the 31st consecutive quarter of revenue increase.

On our Q1 call we mentioned that Q2 like Q1 is normally a seasonally slower period but ordering patterns from our customers entering Q2 led us to conclude that seasonality in Q2 would have no significant impact on our Q2 revenue.

Overall for the first half of fiscal '06 seasonality was slightly positive versus historical norms.

During Q2 we experienced revenue growth from a number of our established products including storage SOCs for both enterprise and consumer products, Gigabit Ethernet 5 solutions, specifically PCI Express for the client market and Prostheric Gigabit switching solutions for the network infrastructure.

Additionally our wireless SOCs for the consumer products continue to expand into early production on an increasing number of platforms.

This broad contribution shows the strength of our core market positions as well as the growing potential of the consumer market.

Given this momentum we are encouraged as we enter Q3.

For Q2 our enterprise markets represented approximately 75% of revenue with consumer the balance while we had three 10% customers in Q2, Western Digital, Samsung, and Toshiba.

We are very pleased with our Q2 gross margin of 53% which was 100 basis points above our Q2 guidance.

We continue to operate a very high level of manufacturing efficiency and continue to work closely with our foundry and back-end assembly test partners to reduce our costs.

Positioning us to maintain -- to remain competitive in our targeted markets.

This focus on operational excellence has kept our gross margin percentage above our long-term model of 51 to 52%.

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

For Q2 operating expenses grew 3% but our continued strong revenue growth again resulted in reduction of our pro forma operating experience as percentage of revenue to 26.3% that was a 100 basis points decline from Q1 and 50 basis point favorable to our Q2 guidance.

For the 16th consecutive quarter we increased our pro forma operating income percentage.

Again, given the strength of our revenue growth or increasing gross margin percentage and lower operating expenses as a percentage of revenue we increased our operating income percentage by 200 basis points to 26.6% 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 313 million compared with 311 million for the first quarter of fiscal 2006.

The increase in shares was 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.

As we continue to increase the level of our profitability our cash flow generation continues to increases.

During Q2 we generated approximately 120 million in cash and exited Q2 with cash and short term investments of 847 million.

Continuing the Q1 fiscal '06 improved in DSOs, DSOs for Q2 were down 3 days to 48 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.

As we discussed in our Q1 call, we felt that our days of inventory were below our normal operating range.

And we would be adjusting our production levels going forward to keep us in the most favorable position to respond to increases in demand for our products.

We began that process during Q2 and expect to see the effect of those actions during the second half of fiscal '06.

For the Q2 our inventory was up $1 million with days of inventory decreasing to 56 days from 58 days in Q1.

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

Thanks, George.

As George highlighted our strong Q2 results reflect the solid momentum we are enjoying both the enterprise and consumer markets.

In the consumer markets we continued to lead the industry for wired and wireless networking and small form factor storage.

We are aggressively expanding the breadth of our designs across many different high volume applications, including gaming, cell phones, PDAs, digital cameras, MP3 players and printers.

Initial production ramps of many new products are beginning to occur as the designs we have been winning over the past year or so with our advanced solutions begin to be introduced into the market such as the HP1022 laser jet printer, Motorola M1000, and A910 cell phones and the M1 life drive mobile manager.

We continue to have great success in expanding the breadth of our designs across many other new applications and are excited about the continued product introductions planned by our customers during the course of the year.

One of the main factors for our strong success is that we architectured our embedded solutions from day one to address the specific technical requirements of these new consumer applications.

While we focused on tiny form factors, power, and integrating high performance features such as our Feroshiam (ph) processor and advanced networking capabilities, our competitors focused the architecture, the laptop applications which by the way do not require such levels of sophistication and ultra low power.

Now as to the consumer embedded wireless LAN market is beginning to take off our competitors are struggling to rearchitect their products in order to participate in this huge opportunity.

While the competition works on developing their fresh solutions for embedded applications we continue to raise the technology bar to the next level as we are now moving ahead with our third generation embedded solution.

Last month we showcased our capabilities of combining superior RF mixing those circuitries with millions of gates to digital logic in the industry first 90 nanometer single chip device that integrates multiple RF radios, in our high performance Feroshiam processor.

This tiny embedded wireless LAN solution significantly lowers operating power and frees up precious space within hand held devices.

The power is so low that in a cell phone it can allow for over 10 hours of Voice over IP phone calls and over 250 hours of standby time.

Our introduction of such an advanced cost effective solution is well timed with the anticipated high volume deployment of embedded wireless consumer LAN.

Also it is important to note that with this device we are now on par with the most advanced cell phone semiconductor technologies in the market.

In fact very few of the leading cell phone semiconductor solutions in the world utilize 90 nanometer technologies and this is the only 90 nanometer solution that has successfully combined a radio, well, actually two radios and a base-band mic.

We are quickly building very strong relationships with leading cell phone manufacturers as we provide such advanced solutions and prove our capabilities of providing by far the lowest power, highest level of integrations, and most advanced solution.

In addition to the huge opportunity of driving the adoption of Voice over IP in cell phones we are also very excited about the tremendous opportunity of Voice over IP within the home as well as high volume enterprise applications.

This morning Marvell announced it's entrance into the Voice over IP market with the world's most highly integrated single chip Voice over IP solution for both gateways as well as handsets.

We are entering the VoIP market at a time when the market is just beginning to take off.

This new family of solutions offers another clear example of how our high performance Feroshiam processor gives us a unique competitive advantage.

Today's competing VoIP solutions typically utilize two discrete processors.

One for general operations such as packet processing and security and another dedicated processor to handle the DSP VoIP single processing.

However our single chip solution can perform all of these high speed processing requirements -- requiring the wireless functionality in a single chip associated device.

As a result, in addition to the high level of performance we also offer our customers the smallest size and lowest power solutions.

We are being designed into a number of exciting applications from high-end Gateway solutions to new consumer hand held devices such as cordless phones, Wi-Fi functionality will also allow such additional features as easy downloading of address books, MP3 songs, and instant messaging.

Our initial designs ar on track for volume production shipments early next year.

Now moving to the hot disc drive market.

The consumer adoption of high capacity storage across a variety of different applications continues to result in very strong unit growth as evidenced by the industry shipping 34% more units in Q2 as compared to the prior year.

This strong unit growth is being fueled by a growing number of consumer devices such as digital video recorders, MP3 players, digital video and still cameras and cell phones.

All of which are relatively new applications that are just beginning their adoption curve while utilizing high capacity storage.

As these devices begin to regularly incorporate HDD technology.

The devices now are able to add new features and functionality that previously would have been impossible without HDD technology.

This in turn is further increasing the need for even higher storage capacities within these devices.

For example the strong adoption of high definition TV which is becoming a mandated standard on many TVs next year is creating an ever increasing demand for higher storage capacity within digital video recorders.

In consumer hand held devices the increasing integration of multi mult features is also driving up the demand for higher capacity points or small phone factor drives.

The drive manufacturers are responding to this trend by racing to expand the capacity of their drives such as the industry current move to 160 gigabytes for 3.5 inch drives.

While these drives expand the capacity and utilize advanced techniques such as perpendicular recording, the drives require even more advanced semiconductor solutions.

As the technology leader in storage electronics this trend is further enabling us to gain share in this exciting market as well as further strengthen the importance of our advanced technology with our existing customers.

In the enterprise market we are excited about this strong revenue growth coming from our Gigabit Ethernet products.

Our new PCI Express gigabit products shipping to Intel are experiencing very strong growth for PC, laptop and server applications as these new solutions are ramping many new designs into production.

On the infrastructure side we continue to be the leading gigabit supplier as we've built upon our strong success with our total solution offerings that combines our high performance silicon complete software and full system design capabilities.

Our complete offerings scale across all market segments from the high end metro class equipment to the very high volume mainstream desktop and SOHO switches.

In the gigabit infrastructure market it is quickly becoming essential that merchant semiconductor suppliers be able to offer a complete system level solution given the increasing levels of complexity and mounting time to market pressures faced by the OEMs.

We identified this trend years ago and have uniquely positioned ourselves as the only merchant supplier that is offering such a total solution.

As a result we are having great success in the market such as enabling the industry's first volume production of a merchant silicon based 1.2 terrabit switch as well as continuing to bring multiple customers to market within just six months from product decision to production.

The highly visible success of such customer product launches is resulting in further designs with a number of new customers from Marvell as we further expand our leadership position.

Finally I would like to give a quick update on our new optical storage products.

We continue to work very closely with a select number of key strategy customers for developing their high speed DVD recordable drives for PC based on our advanced solutions.

The response from our customer is very positive as our highly integrated, sophisticated device is enabling our customers to develop very high performance PC DVD recordable drives.

In addition to our optical storage products for the PC we are also working towards addressing the emerging video DVD recorders for the home.

With the continued adoption of digital video recorders and high definition video the advantages of high speed DVD recording we are quickly gaining popularity in the home as a replacement of VCR tape products.

Our advanced highly integrated solutions will function with all the different DVD formats and will allow too reliable performance for high speed recording.

We believe we're in a leadership position to drive the widespread adoption of such new consumer DVD recorder products.

We look forward to providing more specific updates as we expand our optical storage product line and as we prepare for initial volume production next fiscal year.

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

Thanks Sehat.

Our strong first half fiscal '06 financial results have positioned Marvell to achieve another record year.

We continue to make significant progress in penetrating the large consumer opportunity that we are addressing with products utilizing our extensive portfolio of technologies.

We believe that we are on track to achieve a revenue balance of 50/50 between the enterprise and consumer end markets by the end of calendar 2007.

Additionally our entry into other large markets such as digital power management, optical storage, and Voice over IP will continue to provide us with an increasing TAM to sustain our long-term revenue growth.

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

We are increasing our targeted revenue range for fiscal '06 to 1.615 billion to 1.635 billion.

At the midpoint of this guidance our annual revenue growth for fiscal '05 to fiscal '06 would be 33%.

With the improvement in gross margin percentage generated by our business in Q2 we believe that gross margin percentage for the balance of fiscal '06 should be consistent with our Q2 gross margin percentage of 53%.

Given our rapid revenue growth and strong gross margin we believe that our operating income percentage for the balance of fiscal '06 should range between 26 and 27%.

Now moving to Q3 fiscal '06.

Our business momentum in Q2 was quite strong with seasonality being slightly better than normal.

Entering Q3 we should begin to benefit from what is normally a seasonally stronger period.

We remain encouraged by the continued ordering patterns from our customers resulting in good visibility entering Q3.

As I mentioned in my Q2 commentary, we experienced a number of positive trends that resulted in good breadth of products and end markets contributing to our Q2 growth.

These trends continue into Q3 and we're excited about the opportunities.

Considering all of the above we've targeted Q3 fiscal '06 revenue to increase approximately 7 to 8% from Q2 fiscal '06.

As I mentioned in the annual guidance update we expect our Q3 gross margin percentage to be consistent with our Q2 gross margin percentage of 53%.

We continue to increase our development efforts, our future process technologies, and anticipate investing additional engineering dollars over the next several quarters.

As a result Q3 operating expenses should increase approximately $6 million plus or minus 500,000.

Our balance sheet indices should be consistent with the last several quarters and shares used in computing pro forma net income for Q3 should increase to 318 million.

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

Thank you, George.

That completes our commentary, would you please poll for questions.

Yes, sir. [OPERATOR INSTRUCTIONS] Your first question comes from Allan Mishan with CIBC World Markets.

Hey, guys great quarter again.

Your primary competitive in the ethernet market talked about a 35% increase in the gigabit business for them.

Can you tell us what's going on with your business there?

Then some color on the gross margin, was the strength driven by -- foundry pricing was driven by mix or is there something else going on?

Allan we don't get specific on individual prods but I think if you listened to some of the commentary we made, we definitely saw a pick up as our PCI Express product that we partner with Intel on plus our own PCI Express product is doing very well in the market.

And the Prestera products also are seeing a lot of their design wins starting to ramp into production.

Clearly those two areas contributed significantly to our overall growth in the Q2 time period.

But I don't think we'll be any more specific than that.

On the gross margin it's a combination of a number of things.

Clearly, as I mentioned we're working very closely with our foundry partners and our assembly and test partners to reduce our cost there and we're making a lot of progress along those lines.

But while those are important it's really our ability to design and produce products of the complexity that we do with extremely high yields.

That's the real thing that drives and will continue to drive Marvell's margins.

Okay great.

One last one if I could.

You talk about optical storage contributing revenue in the next fiscal year.

When do you think we could maybe hear a design win -- a particular customer from you guys?

It's hard to predict exactly.

We have various [INAUDIBLE - highly accented language] working with these guys.

I guess we just have to wait and see.

Everybody's very, very eager to introduce the product but this is a very complex solution.

This is -- we continue to be the first generation in the industry of any DVDs that use such advanced DSP technology so there is a lot of firms that needs to be written.

But you know once those things are completed if things -- it should be very, very quickly for them to ramp up the products.

The technology is based on a storage technology that we have developed over the last 10 years obviously with some modifications.

In terms of technology it's a mature technology it's just we just would have to do it step by step with our customers.

Okay.

If I could just go about it one different way.

Could you just tell us when you sampled products for the first time?

When we announced it.

Okay when you announced it.

Okay thanks very much.

Your next question comes from Cody Acree, with Legg Mason.

Thanks guys and of course echo my congratulations.

George you guided to obviously, something well amount sustainable above your target gross margins is it time to start thinking about another -- a new target for those margins?

Well, as I said there are a lot of moving pieces, Cody.

We're very comfortable now saying at least for the balance of this year we are going to operate above our targeted margin so 53% is a very comfortable range for us.

I think we want to see another quarter or two of sustainability there before we want to get any further longer term type of view on that but there is a lot of factors that would say that should continue.

We also in the process of trying to figure out how to accelerate some of the R&D but those obviously those depends on how fast we can ramp up our R&D resources.

Great.

And then with the increase in the comfort I guess for the remainder of the year.

Is there any one specific area that you point to that's maybe an outstanding driver?

Obviously it sounds like everything is turning in the right direction but is there any one that stands out in your mind?

The yields on the very, very complex chips.

We don't disclose our individual product yields.

But our yields are probably industry leading at worst.

That's -- when you get some of these high volume products that we ship in millions of units a month and we get good yields on those it's very, very profitable.

Remember that a lot of products that we built are very mission critical products.

So historically we've been shipping products with -- we've been overkilling the production test because we want to make sure that we got the best quality products in the world.

As we better understand about how to test the products better, better algorithms, as our test engineers work out their issues we improve our yield.

I think that's--.

As we learn what's important and what's not important we are able to improve our designs to get better yield and better quality at the same time.

Maybe the same question on the revenue upside.

Was there any one outlier that's giving you more confidence for the remainder of year.

Well, I think as we mentioned we went through a little bit of a lull period on our Gigabit Ethernet for the client market and we're pleased with where our position has now reemerged there.

We're excited about our partner and what our partner is doing in that market and I think we would look for continued improvement there as we go through the balance of the year.

Perfect, thanks and congratulations.

Your next question comes from Alex Donna with UBS.

Following up on the Gigabit Ethernet trends.

How strong is that ramp could that cause that product are to emerge say as a greater than 10% driver in the back half of the year?

Are you talking about overall gigabit Alex?

Or are you talking about one of the individual segments?

I'm talking about specifically the relationship with Intel and overall Gigabit Ethernet, down that avenue.

I don't think we would get too specific on an individual with just one customer although the client market is a large part of our market and obviously the better we do there with them that's very, very positive for us.

Gigabit as a technology is already 10% or greater of Marvell.

And so I think we're just looking for that to continue to grow.

Okay.

And with regard to the Prestera product line how large is that getting as a percentage of mix if you could ballpark that as well?

We're not going to go to that level with that product.

Well, at this point here is that pretty much ramping as expected right now or is it even seeing some exceeding of your expectations?

Yes.

I mean we're excited.

The Prestera wins are just mounting.

I think as Sehat mentioned in his commentary we can take customer from product decision to production in less than two quarters.

So we're seeing that being borne out in how rapidly the Prestera designs are making their way into production.

You mentioned that we'd seen a little bit better than seasonal strength here in the current -- or the last quarter.

You came in at the high end of the range so does that mean that the better than expected seasonality was on the order of a couple of percentage points here?

And then if that's the case have you padded some of your forward guidance the 7 to 8% thinking that you had some abnormally strong period therefore you're not factoring in a much larger seasonal increase for the back half of this year?

You sound like a drive guy.

No I think again, if you listen to our customers many of our large customer's reports we're basically confirming the same thing that they were saying about the positive seasonal impacts that they say in their business.

I think that's why we make a similar commentary vis-a-vis what we saw in the first half of this year.

As far as padding our -- our estimates are always what we believe is the most accurate thing that we can put out there based on the information that we have.

So I would say our 7 to 8% right now and our overall guidance for the year is something that we feel very, very comfortable with.

Is there any way to look at this in terms of okay obviously you've tried to create as accurate a target as possible.

But would the better seasonal strength if there were to be any that come from would it likely come from Wi-Fi maybe surprising you because that's a newer market opportunity or would it come from all right, maybe we're a little conservative on the hard disc side and then actually the secular trends there are so strong you could get a positive surprise there?

Most of at seasonality we're seeing is in the PC related types of products.

So both the storage as well as the gigabit going into the client market and any of our wireless going into laptops and stuff like that. so that's the seasonal -- the other things like enterprise and the consumer that's all new opportunities.

So we're not really tying any seasonal impact to that at this point.

Okay very good.

Well, congratulations on a great quarter.

Thank you.

Your next question comes from Michael Masdea with CSFB

Thanks a lot.

Do you think you can now make some more strides into the broadband gateway, you have ethernet now Voice over IP, handsets, you have small form factor, and now potentially Voice over IP should we just assume this margin continues in both these areas since they're pretty big areas with a lot more functionality in these devices than you're doing right now?

And if not just help us understand why not?

Yes.

We just announced our entry into the VoIP market.

You might ask why we somewhat late into the game.

Well, actually we are not because we have been working on VoIP to tie into our wireless -- to our wireless entry into consumers.

We believe the VoIP market is very, very big but only if it is easy for the consumers to use the products.

And for that to happen the wireless technology has to be widely adopted into the consumers and we've been working with a lot of our partners trying to introduce VoIP into all the different areas from digital cameras to printers to gaming devices with the anticipation that once everybody sees the benefits of wireless technology and the reliability of this technology that we provided to the market the acceptance of this technology in the VoIP world will be natural.

At the same time we've also been working on making this product to be as low cost as possible because, mind you that this has to be very cost effective solutions.

We're trying to replace cordless phones we need to build this solution with a single chip device and the same time providing all the features, high-end features that you would see beyond the enterprise class of VoIP phones.

So we are working very, very hard on this and taking a lot of inputs from our customers and we are very excited because now we have -- we have leading edge solutions into the market and we think this is going to drive the volumes of VoIPs in the consumers in the next several years.

I guess that all makes sense to me.

I guess what I'm trying to get at is there is a number of opportunities sitting around you on the broadband gateway and the handset that you're not tackling right now .

Do you see anything around what you're already doing that's still an opportunity for you to expand into in those markets?

Sure, sure.

Obviously the biggest volume target we're driving is the client devices.

I mean you will have three, four, five handsets in the home and we will have only a single gateway.

Now this happens to be our device is also capable.

By the way we have a family of devices that we introduced not just for the handset but also for the gateways.

The critical function the gateway is obviously the wireless connectivity, the wired connectivity, the switching function so you can have many, many ports of wired connectivity as well as very powerful network processors to deal with the increased -- the increase in the bandwidth that you are going to deal as video cell come into the market.

So that is handled by Feroshiam processor.

Feroshiam processor is capable of dealing 3X or 4X performance or standard processors so our device from the get-go is ready to deal with the increased -- I mean the expected increase in the database that these devices will -- it is expected to handle.

So we are addressing more and more of this market.

Now we didn't talk much about this because we're actually in this business but primarily in the enterprise side of the market through our system controller business, or high end system, high end system controller business.

So now we're moving into the low end high volume market.

Great that's helpful.

Is there a risk -- help us understand why there shouldn't be a risk.

As you're going into the consumer markets there's a bigger percentage of your revenue and you have a bunch of design wins ramping, is there a risk here of hyper seasonality as you go through a consumer bill period?

Well, the consumer markets -- as a company we believe that the future of semiconductors is in consumer because consumer has all the money to spend and they are willing to upgrade the system if not once a year or twice a year or sometimes happens every twice a year.

So we believe the future of the revenue growth is in consumers.

Now there's a price to be paid obviously that as more and more of our business in the consumers -- our revenue will be tied to seasonality but that's more like three, four years down the road and it will deal with that later and it may be by developing some new products for new markets.

The best example Michael that we can give you is just our whole penetration in the storage market.

The storage market is a very cyclical market.

But we've consistently grown right through the periods of seasonality and they're there but it's just our position and the emergence there.

So I think we feel that at least for the foreseeable future that probably is the situation in the consumer market.

Great.

Got it.

Last question just, as you continue to ramp into all these new areas help us understand what you have been doing with the number of design engineers or engineers that you have, has that been growing?

Also given what's going on with options, it's the nature of compensation and what it takes to bring these people in changing in the valley?

Yes, sir, obviously part of our challenge is to continue to keep the -- the -- the bar for you know for -- for the new hires.

So even as the Company's getting bigger to -- a slice of our company to date we always put -- we always remember that the reason of our success is because we were able to bring in some of the best engineers into the Company.

Now, how do we attract those people?

Obviously options are the easiest one part of it.

But a major part of it is actually providing them with exciting challenging -- exciting and challenging projects that they would not be able to get otherwise in other companies.

What I mean exciting is not just exciting from the point of that this technology is what people will be talking about but also exciting in terms of being able to work with other people that are very,very qualified very high caliber and that they can learn from at the same time be able to see the products to be productized down the road, so they can see the result of their sweat, hard work further down the road.

So it's all about pride as well as -- as well as be able to learn from other people.

We have about 2100 people roughly at the end of the site.

We didn't mention that. but we have about 2100 people at the end of the second quarter and about 75% of those people are what we would consider to be engineering and engineering support people.

And our target right now is to try to -- it's hard to describe it it's a tough bar to get over.

But we're trying to hire more than 100 people a quarter at this point.

Great thanks a lot.

Helpful.

Yes.

[OPERATOR INSTRUCTIONS] Your next question comes from Shawn Wu with American Technology Research.

Thanks.

Just a question on your -- any comments on when you expect the 160 per gigabyte platters to start ramping?

Thanks.

The development of that is moving along the industry's path.

We are not forecasting any 160 gigabyte revenue from any customers this year it's all going to start next year.

Probably sometime in the late Q1 -- late calendar Q1 time period would be the earliest that we believe any would make their way to the market.

I think you should be thinking second half of '06 -- of calendar '06 as the bigger ramp for 160s..

At the same time we are ready when they want to ramp up.

If they want to ramp up tomorrow then we are ready.

Our technology has been ready for quite awhile.

We have the chips.

Okay thanks.

All right.

Your next question comes from Jim Liang with SG Cowen.

Thanks.

Just a question on the wireless LAN technology road map side.

I understand that some of your current wireless LAN products use silicon germanium for their radio and Sehat you just mentioned that you do 90 nanometers you can have the entire multiple radios and baseband in a single CMOS chip.

So just wanted to understand a little better your technology road map going forward?

Not many people knows that we have all the different technologies in the Company.

We have been developing our wireless LAN solutions for about what 5 to 6 years now.

We have all the technologies from CMOS to some CMOS some silicon germanium, you're right, that's true some of the products we use silicon germanium.

The reason we do that was for very, very low powered solution.

As we learn more and more about how to design these things, we realize that we could take advantage of the advancements in process technology at 90 nanometer using 2CMOS to be able to get high performance and low power at the same time.

Process technology along with -- we're getting a lot better in the last few years allow us to jump ahead and build a single chip solution or CMOS.

The other part is we've been dealing with cell phone customers and these customers are very very, picky in terms of getting ultra low noise, very, very low interference to deal with co-existence with the rest of radios and the cell phone.

We also learn a lot from doing things with the customers in building products there that they are very, very clean.

And this again allows us to jump into single chip solutions earlier than most other people because we have the experience learning the hard way and building products that we have to work out with our customers over the last two or three years.

We're very, very excited.

There's a single chip solution that we believe won't be too many people in the world will be able to replicate anytime soon especially if they want to have the quality requirements of a cell phone.

It's -- maybe it's okay if they can do it for the access point level of quality but to get a quality level of cell phone is a lot more challenging.

So that -- Sehat, that product you mentioned the 90 nanometer base product, can you give us any color as far as from a revenue ramp perspective?

Is it targeted toward the end of this year or potentially next year?

Jim that's the second generation of products for the market.

We have the first ones that are already out there now that are ramping into like the Motorola M1000 and the A910.

Now by next year these products will be coming into those platforms.

So it's going to still be a ways out where these become -- they replace the other ones later next year.

Great.

Thank you very much.

Your next question comes from Arnab Chanda with Lehman Brothers.

Hey, guys you're being so consistent it's kind of getting boring.

But I'll try for a question here anyway.

Question, maybe technologically, Sehat, there's been a lot of discussion in the market about what happens with the flash versus hard drives for consumer devices.

Could you talk a little bit about that?

Do you think drives will continue to expand into cell phones and MP3 players or do you think it's going to be the other way?

Thank you.

Sure.

I don't know about those of you who listen to what I've said in some of public comments like about a year ago we -- I personally gave a presentation at one of those industry dinners.

So in that presentation I stated clearly that micro drives as a technology is superior compared to flash but it does not mean that flash does not have a market -- doesn't have an opportunity in this market.

So in certain markets obviously those things will coexist especially for those markets that require a much lower capacity requirements.

But we believe that the explosions of videos, the more complex applications will push the requirements for micro drive capacity requirements to be on the high sides in the next several years.

The other part is we also been proactively developing new technology to further accelerate the capacity increase in these micro drives so for those customers that are working with our solutions we hope that they will be able to further distance their solutions against the flash solutions and there will keep -- what we're trying to do is hoping to keep the price difference -- the price per capacity difference to be about 10X or so.

We believe about 10X -- 10X and above micro drive technology will always be -- will be the clear choice.

It's when you're starting to get into that 4X capacity distance meaning that if you don't move in the flash drive -- the flash drive moves faster than the drive guys and it will reach about 4X difference in capacity that's when you start worrying about the volumes -- I mean the future of the micro drive.

But as long as we work hard on developing new technology to continue to increase the capacity of this micro drive we believe that this 10X capacity difference will always be there.

If I could ask one last question about the Voice over IP business.

The chip you're announcing is that going to be client device, sort of an embedded client device or is it going to be more on the enterprise side which I don't think historically you've been maybe as focused on.

Could you talk a little bit about that?

Actually both the client device as well or the Gateway device.

The client device the difference between producing our chip -- using our chip you could build a home client device as well as an enterprise client device.

The main difference between the home and the enterprise probably would be the ID designs, the LCD display maybe on the enterprise you would put a big color LCDs because the enterprise guys can afford to pay more money on this handset.

For the home you probably just use a black and white LCD maybe a small sized LCD, smaller form factors less rugged so you don't expect this to be -- to survive in a harsh environment.

So -- but the solution -- the specific solution itself covers both the -- for the consumer home application as well as for the business.

Now you mentioned about historically we've not participated in the enterprise side.

Because historically those things were done in multiple chip solutions and when we look into the business opportunity at the time this was like two, three years ago we decided to skip the multiple chip solution and just leapfrog, decided to leapfrog to the single chip solutions because at the end of the day the volume is what counts.

And I think that the beauty is our solution is extremely highly integrated single chip solution and very low cost.

I think the client, the consumer market and that's where the huge volumes that we going to enjoy.

I think we have major design wins in these segments.

Thanks, Sehat and Weili.

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

Yes, I think I'm going to ask a pretty easy one.

I assume that the 53% gross margins got to do with some of these long-term contracts you folks signed earlier in the year.

Is there a -- since your standards of hiring engineers is so high really if you continue to grow hypothetically at 7 or 8% a quarter is there an upper limit on your pretax operating margin?

David we've been talking about that for a long time.

I think right now we've already demonstrated there's an awful lot of leverage in our business model and we've seen that consistently.

We definitely as we mentioned are investing in a lot of areas and want to keep our operating investments growing such that the kind of operating level that we're at is very, very good for a semiconductor company it doesn't mean we can't go higher but I'm saying this is a good level for us.

We are looking and very actively -- I'm sure Sehat wants to make a couple of comments on this as well, looking for additional areas that we are working on where we want to put our investments.

We are not going to change.

We're not driving the company to a higher.

Exactly.

The number one priority for the Company is not to get high operating margin.

It happens to be that way because the investments of the new -- the ramp-up of the new investments in the new areas just happened to be lagging behind slightly, slightly behind what we -- what we anticipated.

Oh, oh, maybe not even that.

Maybe we were a little bit more conservative in terms of our ramp up.

Our expectations of the things we've already won.

Yes, because as a company we run our operations behind our increase in revenue.

So we want to be on the conservative side and maybe we were a little bit -- too conservative for a quarter or two and what we would like to do is catch up on that accelerate some new development.

So you don't see these issues about the operating margin becoming too high.

I think the other thing is we're a very efficient company.

I think our time to result is the cycle is shorter than the typical semiconductor company and that due to our foundation.

When we develop technology and we really are thinking long-term and all these technology building blocks are very much can be -- it's reusable so that also contribute in terms of the investment side of efficiency and in terms of the outcome.

Okay.

So it's basically better revenues and more efficient development process?

Yes.

Thank you.

Your next question comes from Ruben Roy with Pacific Crest Securities.

Hi thanks.

Sehat, I had a quick question on optical storage.

You talked about in addition to the PC DVD recordable drives that you're working on some home DVD chips for those types of applications.

That sounds new.

I think when you guys came out at the end of last quarter and announced that you were entering the market you said that you would just address the PC drives.

So my question is is that new?

If so, do you have product ready?

If so when are you planning on recognizing some revenues?

Are you working with customers et cetera?

Thanks.

Sure.

So as you have pointed out we initially focused on the PC market and as I mentioned also on the previous call, last quarter call, the reason we did that is because we believe the PC market is the biggest opportunity for this new technology VSP-based technology for the DVD RW because a lot of those DVD RW devices that you have on the PCs are just horrible.

A lot of them are not compatible with each other creating a lot of aggravation from the -- from the customers.

So we saw a huge opportunity to get into this market quickly.

Now as we were in the develop -- middle of this development talking to other customers we also realized that the other big opportunities on the home and we did not address the home -- we didn't want to target the home initially because we thought the home market was a lower margin business that the DVD was -- a lot of low-end DVDs that were there and we didn't like this low-end DVD market but as we talked to more customers and realized that people were willing to pay a little bit more to get much better quality.

We realized that there's a huge opportunity for this technology as well.

So we just started to deal with this home side of the market.

So we don't have anything to announce yet at this point.

But it is clearly a target for our technology for the home especially -- especially when HDD TV is coming to the picture next year there will be more and more -- bigger and bigger for people who want to basically record the HDD TV content and either have no choice but to use DVD RW because at the least if not for the HDD or blue [INAUDIBLE - highly accented language] for sure you cannot use your VCRs anymore.

So we saw this opportunity to be coming or to be a future for sometimes next year or the end of next year or so.

Okay.

Thank you that's great.

And then the only other question I had is you mentioned some new applications that you're selling your wireless LAN chip into the laser printer, cell phones et cetera.

Are the ISPs in those types of applications similar to the gaming platform or the products that you're selling into today?

Most of our chips are all in the $5 range that we talked about.

Great thanks George.

Your next question come from Srini Pajjuri with Merrill Lynch.

Thanks hi, guys.

I have a question for Weili or Sehat.

Just wondering where the Gig Eth pricing on the switching side is relative to fast ethernet?

Pricing?

Pricing difference between fast and Gig Eth today and how do you see that trend over the next--?

I think it's right now, it's about 2X on a per port basis.

When do you think it will be close to 1X?

How long do you think it will take before we see it get closer to 1X?

Well, I think this will be what naturally will happen over time because nobody even to work develop new technology for the fast ethernet.

As the Gig Eth gets smaller and smaller geometries, the cost structure will get lower and lower over time.

At some point nobody wants -- it's good to crossover.

Just like in the DRAMs nobody built 64 megabit DRAMs in a 90 nanometer technology that's the reason why you see the 256 megabit DRAMs is cheaper than an old 64 megabit DRAM is they use maybe like 0.35 micro technology.

So the same behavior will happen in the switching products.

Now having said that if the customers are willing to pay more for the products because we don't have just megabits per second.

This new technology this gigabit has a lot more features a lot more layer 3 of all types of technology which usually did not happen in the fast ethernet market segment.

So it's very hard to just to compare them as apple to apple basis.

So a slight price premium is acceptable at market because you get more for your money even if you don't consider the megabits part of the benefit.

Okay, thank you.

Your next question comes from Adam Benjamin with Jefferies.

Thanks guys solid quarter.

Can you just clarify.

You seem to indicate that in terms of the recent quarter that all products were strong and you saw growth across those product lines.

Can you just confirm that?

Yes I mean all of our products -- obviously not everyone is exactly the same.

The comment is that we're seeing strength across all of our major segments.

That's encouraging when you have as many -- things all going in the same direction.

So on a sequential basis all of the product lines were up various amounts but they were all up?

Yes.

Great.

And then with respect to the last quarter you talked on the call about having roughly 70% market share of the consumer wireless LAN market.

You didn't talk about that today.

There have been a fair amount of product announcements by some of your competitors, can you just talk roughly as to where you are today with you design win ramps, where you would estimate your market share?

Is it still at that, or where do you expect it to be?

Thanks.

Sure.

Again I think we're -- as Sehat went through in a lot of detail for you.

Our products put us we believe in a class that's very difficult for people to compete with us in the embedded part of a market which is where our main focus is.

So we're very comfortable that it's at least 70% in that segment and increasing.

We're not as focused as we said before on the PC part of it although we are a player there.

It's not our main -- it's not our main focus.

I think we've set a very high bar for people to try and come and compete against us for the market share in that embedded space.

Yes, as we are more experienced in this market we are adding more functionality to our device.

We are working on silicons with more features we're adding more software functionalities to make the mobile applications -- make our customers to be -- to make it easier for our customers to incorporate our products.

The bar is getting higher and higher.

So if anything it's getting harder and harder for our competitor to break into this market because it's a chicken/egg situation where they're not in the market so they don't know how to fix -- they don't know what problems they're going to encounter so they cannot fix the problems they don't even know how to fix.

The market share like we mentioned last quarter this quarter the way we stand should be at least or if -- even more.

In terms of like what George and Sehat said the learning curve right, to address that segment.

That takes years.

I mean we announced our first generation almost three years ago.

It takes almost three years time going through the learning curve as well as all the software IP which is extremely critical.

So from product announcement to be the number one player it took us three years.

At the same time now we raise the technology bar again moving onto the next generation.

So I think we're in very strong position in this segment.

Great thanks a lot.

Your next question comes from Jeremy Bunting with Thomas Weisel Partners.

I this is Jenny Shih calling in for Jeremy.

Just one quick question, I was wondering, so just given all the chatter in the storage pipeline about the component shortages I was wondering one, would that have any impact on you?

And two, if that were the case limiting some potential set to units would that be offset by new product ramps and new consumer devices?

Yes, Jenny, we're not aware of these shortages having any impact on the involvement with our storage customers.

It doesn't mean that there aren't some in the industry but at least with the customers that we're mostly involved with they're not reporting this as being an issue.

So I think again we just feel very comfortable with the level of the storage business within our guidance that we've given you for Q3.

I haven't heard myself either about the shortage.

Media, it's supposed to be media, media shortage.

If it is true it's actually good for us because our technologies allow our customers to use more variety of the medias to get better yield at the same time.

So if this is true, my customer will do better -- they will have a better -- better -- better time -- easier time to deal with this.

Okay all right, just one follow-up given that you're guiding for a stronger FY '06 now when you look into the first two quarters of '07 do you see any better than seasonality as well driven by new product ramps?

We're not going to worry about -- we're not going to get into detail on the first half I think what we want -- of what we want next year I think that's a little too far out even for our crystal ball.

But you can tell from the momentum we're generating and what we hope to be able to share with you as we go through the Q3 and Q4 reports that we should be in pretty good shape as we enter calendar '06.

Thank you very much.

Your next question comes from Seogju Lee with Golden Sachs.

Thanks.

In terms of the seasonality George, if you could just walk through your typical end market seasonality for Q4 what is sort of augmenting your -- Marvell's growth rate to be a little bit ahead of that.

Thanks.

Okay.

Well, I think the seasonality comment is there because our main customers in our PC related businesses talk about seasonality affecting their business and therefore many people feel that that has a direct correlation to what we're going to experience and that really hasn't borne itself out very much.

While there is seasonality there it's true, because of our market share gains and so forth we don't get effected to the extent that players that don't have the situation that we do have to experience.

I think again going back and if you listen to our major customers and what they've said they felt that while seasonality was clearly there it wasn't -- it was below norm and that we are going into the seasonally -- again as I said earlier what would be considered to be the stronger phase but again seasonality is not what drives our business.

Our market share gains and our new product introductions into all these areas is really what the growth driver is for Marvell.

Seasonality is a much, much smaller component of our revenue but we feel it's appropriate to at least comment on it because our end customers are always making comments vis-a-vis -- but from our perspective it's a very, very minute part of our revenue.

So far.

Okay thank you.

Great quarter.

Thank you.

Your final question comes from Aalok Shah with D.A. Davidson.

Hi, guys.

A couple of quick questions for you is the enterprise drive strength this quarter -- was that somewhat out of the norm isn't this a typically weaker quarter for enterprise drives?

And the second question is in terms of wireless LAN revenue is it now -- I know you don't want to give too much specifics but is it getting close to 10% of total revenue now?

Well, sure.

The enterprise -- again remember that we have a very large market share in enterprise drives and so that is a healthy -- it's not the fastest growing segment but it has a growth curve associated with it.

On the wireless LAN again you're right we're not going to get specific but it certainly is -- if it hasn't gotten there it certainly is looking very close.

Okay George, is there any kind of normal pricing going on in the storage space yet?

Are you seeing any kind of strange pricing from any of your competitors?

Pricing is not -- yes we always see our competitors try to go and do some things.

But again, our success is not based on price our success is based on the technology and products that we deliver.

What we are seeing, actually our competitors are selling their products higher price than what we are selling products to our customers.

They might quote lower prices to my customer.

But when they sell it to their own customers they actually are higher prices.

Our solutions are smaller size our power is lower so our packaging cost is less because I don't use expensive packaging to deal with these 3 to 4 watts of solutions that you have to deal with.

So it's really the fact that we have better solutions that we have more customers than our competitors.

They can quote anything they want.

The fact is they're still selling at higher price than we're selling if you look at their prices.

Great.

One last question, George, are you seeing better price for wafers at this point?

Because you locked in that relationship with TSMC last quarter are you starting to get better pricing out of them and is that contributing significantly to the gross margin at this point?

Like we said we're working with our foundry partners and with -- all of our manufacturing partners which includes our foundry partners as well as our assembly and test partners because we have to constantly reduce our costs and part of that comes with working with them to -- and part of it is us moving to good geometries and those kinds of things.

So I don't want to get precise on any one piece of it but it's all played together.

Okay great thanks a lot guys.

Okay.

You have no further questions at this time.

All right.

So thank you.

This completes our Q2 fiscal 2006 conference call.

I would like to thank everyone that joined us and look forward to updating you the next quarter.

Thank you.

Thank you.

Thanks.

That concludes today's Marvell Technology's second quarter fiscal year, 2006 earnings call.

You may now disconnect.