邁威爾科技 (MRVL) 2006 Q4 法說會逐字稿

Good afternoon.

My name is Miles and I will be your conference facilitator. +++ presentation At this time I would like to welcome everyone to the Marvell Technology Group Limited fourth quarter and fiscal year 2006 financial results conference call.

As a reminder, today's call is being recorded February 23rd, 2006.

For opening remarks and comments, I would now like to turn the conference over to Dr. Sehat Sutardja, chairman and CEO of the Marvell Technology Group.

Sir, please go ahead.

Thank you, miles.

Welcome everyone to our fourth quarter and fiscal year 2006 conference call.

Weili Dai, executive vice president of the communications and [inaudible] and George Hervey, vice president of finance and chief financial officer are joining me on this call.

Today I'm pleased to announce the results of another record year and fourth quarter for Marvell.

Our fiscal 2006 annual revenue increased 36% from the prior fiscal year.

And our annual pro forma non-GAAP net income grew by 71%.

Also, our sequential Q4 revenue increase of 15% from the prior quarter marked our 33rd consecutive quarter of revenue growth.

We are experiencing strength and strong momentum from both the consumer and enterprise markets.

Now during the quarter, our enterprise solutions in particular for the hard disk drive and internet markets experienced a very strong quarter of revenue growth.

The success that we are enjoying in this market as a result of the huge investments we have made over the last ten years in developing our world class enterprise solutions.

While leveraging our proven enterprise class analog, [inaudible] signal, BSP, and processor technologies for the development of our consumer products, we are experiencing similar success with these products.

This all comes at a time when consumer OEMs are rushing to introduce highly converged sophisticated devices that combine high performance processing, networking, and storage, all of which plays right into the proven strengths of our technologies that we have been shipping for years in the enterprise markets.

As a result, we are very excited about the strength and positioning of our advance solutions to serve the needs of our customers in both the enterprise and consumer markets.

Also with our consistently strong financial performance and prospects for continued solid growth, the board of directors believes now is an appropriate time to approve a two-for-one split of our stock.

Once verified and approved by our shareholders at our upcoming annual general meeting, we believe this stock split will offer our investors enhanced liquidities of our shares and make them more attractive to a broader range of investors.

I will elaborate more about our opportunities and our business progress.

But first I will have George give our Safe Harbor statement and provide more insight into our Q4, as well as, fiscal 2006 financial results.

Thank you, Sehat.

Good afternoon, ladies and gentlemen.

I'd like to remind all participants that the following dialog will contain predictions, estimates and other forward-looking statements covering subjects such as enterprise, consumer, and emerging market trends, competition, customers, suppliers, products and demand, revenue growth, gross margin expectations, operating expenses, other income, accounts receivable and inventory.

Such statements will be preceded by the words like, expect, anticipates, believes, should, will, they, or is the 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, services, and technologies, increased competition and its effect on pricing, spending, third party relationships and revenues, as well as the inability to establish and maintain relationships with commerce, advertising, marketing, and technology providers.

But we direct your attention to our annual report on form 10-K, recent quarterly reports on form 10-Q, recent current reports on forms 8-K and other Securities and Exchange Commission filings, all of which discuss other important risk factors that may affect our business, results of operations, and financial condition.

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

Now, moving to the Q4 financials.

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

Marvell's management believes the non-GAAP information is useful because it can enhance the understanding of the company's ongoing economic performance and Marvell, therefore, uses pro forma non-GAAP 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 annualizes its operating results.

Today we reported the net revenue for the fourth quarter of fiscal 2006 was a record $489 million, an increase of 44% over the 340.3 million reported for the comparable quarter in fiscal 2005 and a sequential increase of 14.8% from the third fiscal quarter of 2006.

Pro forma non-GAAP net income which excludes the effect of the amortization and write-off of acquired intangible assets and other amortization of stock based compensation and charges related to facilities consolidation was 134.6 million or $0.42 per share diluted for the fourth quarter of fiscal 2006 compared with pro forma non-GAAP net income of 75.2 million, or $0.24 per share diluted for the fourth quarter of fiscal 2005. 134.6 million pro forma non-GAAP net income for Q4 represents a 79% increase from the Q4 '05 pro forma non-GAAP net income.

Shares using computing pro forma non-GAAP earnings per share diluted for the fourth quarter of fiscal 2006 increased to 322.6 million as compared to 308.3 million shares for the fourth quarter of fiscal 2005.

Net income of the generally accepted accounting principals of GAAP for the fourth quarter fiscal 2006 was 97.5 million, or $0.30 per share diluted, compared with a net income under GAAP of 54.9 million, or $0.18 per share diluted for the fourth 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 non-GAAP net income for the quarter reported today plus the prior eight quarters.

Net revenue for fiscal 2006 was 1,670,300,000, an increase of 36.4% over net revenue of 1,224,600,000 for fiscal 2005.

Pro forma non-GAAP net income for fiscal 2006 was 429.6 million or $1.36 per share diluted, compared with 250.6 million or $0.84 per share for fiscal 2005.

I'd like to make some additional comments on our Q4 results.

Our Q4 revenue of 489 million was another quarterly record for Marvell.

And the 14.8% increase in revenue from Q3 to Q4 reflects strong business momentum and was at the high end of our guidance of the 13 to 15% sequential increase in quarterly revenue.

The increase in Q4 represents the 33rd consecutive quarter of revenue increase.

Positive seasonality in Q4 continued the trend from Q3.

Q4 seasonality was consistent with our expectations and continued to be below historical norm.

During Q4 we continued to experience revenue growth from a number of our established products including storage SOCs for both enterprise and consumer products with particular strength in the 1.8 inch market.

Continuing the revenue momentum from Q3 our Prestera switching products for the network infrastructure showed significant growth in Q4.

Additionally our wireless SOCs for consumer products continued to expand into early production on an increasing number of gaming products, mobile phones, PDAs, digital still cameras, and printers.

As we mentioned on our Q3 call, our Q4 revenue would include a partial quarter of revenue contribution from the hard disk controller products acquired from QLogic in early Q4.

The revenue contribution from those products was consistent with our expectations. [Inaudible] contributions shows the strength of our core enterprise market positions as well as the growing potential of the consumer market.

We ended fiscal 2006 with strong momentum and we are encouraged as we enter fiscal 2007.

For Q4 our enterprise markets represented approximately high-70% of revenue with consumer the balance.

We had four 10% customers at Q4, Western Digital, Toshiba, Samsung, and Fujitsu.

Q4 gross margin percentage of 54.9% was 50 basis points above our guidance and continues to reflect a very high level of manufacturing efficiency.

In addition, the slightly richer enterprise product mix contributed to the increase in gross margin percentage.

We continue working closely with our foundry and back-end assembly test partners to reduce our costs positioning us to remain competitive in our targeted markets.

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

During Q4 we increased our dollar investment in new product development and the migration to advanced process geometries to keep us in a leadership position in our targeted markets.

This resulted in Q4 operating expenses increasing slightly as a percentage of revenue from 25.4% in Q3 to 25.6% in Q4.

Total head count increased to 2500 employees.

For the 18th consecutive quarter we increased our pro form non-GAAP operating income percentage.

Consistent with our guidance, our operating income percentage increased by 100 basis points to 29.3%.

The increase was again primarily a result of our strong business momentum, driving substantial revenue growth and our increasing gross margin percentage.

Our operating income percentage continues to be above the high-end of our long-term model.

Shares using computing pro forma non-GAAP net income per share for the third quarter increased to 322 million compared to with 316 million for the third quarter of fiscal 2006.

The increase in shares was primarily driven by the use of the average of a higher average stock price from Marvell shares in the treasury stock method calculation.

Our balance sheet continues to remain very strong.

If we continue the increase the level of our profitability, our cash flow generation continues at healthy levels.

Our Q4 cash and short-term investments increased slightly to 921 million.

During Q4 we actually generated approximately 185 million in cash and paid 180 million to QLogic for the purchase of their hard disk controller business.

Q4 DSOs decreased to 45 days to 54 days in Q3.

The larger than normal decline in DSOs was a result of a combination of improved sales linearity, as well as several large collections occuring prior to the Chinese New Year period.

During the last several quarterly calls, we have been discussing our concern regarding the capacity tightness throughout the supply chain.

Beginning at the end of Q1 fiscal '06, we increased our production levels to ensure a smooth supply for our customers.

As we progressed through the second half of calendar 2005, we remained concerned about capacity and several of our larger customers also expressed concern.

As a result, we have positioned inventory at both the front-end and back-end of our production flow to ensure an uninterrupted supply for our customers.

During Q4 we began the process of decreasing our production level to a level which going forward will keep us in the most favorable position -- respond to customers' demands for our products.

We would expect to see the first impact of these actions in Q1 fiscal '07.

We would expect a decline in inventory days from the Q4 86 [inaudible].

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

Thanks, George.

As George stated, we continue to enjoy strength both from our established position in the enterprise market as well as our emerging penetration into the consumer markets.

In the enterprise market, we continue to enjoy strong revenue growth from our gigabit products.

During the year gigabit internet continues its transition as a replacement for fast internet in the infrastructure market as gigabit ports grew to represent about 35% of the total infrastructure ports in Q4 from the 25% at the beginning of the year.

We are clearly seeing the benefits of this strong adoption rate and we are leading the [inaudible] audition with our total system level solutions which combine our high performance software and silicon.

As we look into next year, we expect another very strong year of market adoption of gigabit along with our continued leadership across the different networking market segments.

In the high-end segment we continued to win many new designs as the metro continues to migrate to low cost internet technology.

Our production proven [mental] class solutions continued to ship in high volume while the competition is only now just realizing the need to invest in this segment.

And in the high volume SoHo and SMB markets, we're having great success as we enable our customers very quick time to market with our complete system level approach and integration of such advanced features as wireless switching and advanced [inaudible] capabilities.

Now, on the client side we are entering fiscal 2007 with great momentum as we have recently won a number of very high volume new designs with our Yukon controllers for a number of new tier one PC OEMs such as Apple.

These new designs will begin to roll out in the first half of the year.

We continue to have great success in migrating our Yukon devices from the white box to some of the highest performing computers in the world even the tremendous advantages we offer for both performance and power.

In the hard disk drive market we continue to enjoy great success and look forward to yet another strong year in fiscal 2007.

The hard disk drive market continues to be very healthy, even the strong unit growth enjoyed by the entire market.

An ever increasing number of non-PC application are demanding high capacity storages, such as DVRs, game consoles, personal media players, GPS systems, high-end cell phones, and video cameras.

Additionally we are very focused on [technical difficulty]to invest heavily on expanding upon our world class technologies for the hard disk drive markets including for the one inch and the 0.85 inch small form factor drives.

We continue to be very excited about the market opportunity for these tiny drives and are working very closely with our customers to further increase the capacity [OEMs] of these drives to address a wider range of consumer applications, as well as to stay ahead of the recent capacity increases of [nen] flash technology.

Now, moving to the consumer markets, we continue to aggressively capitalize on our positioning as the only supplier with true embedded wireless LAN solutions for the consumer market.

With our unique low power embedded wireless LAN solutions, including our very advanced software, we continue to have great success in winning many additional designs for cell phones, PDAs, cameras, [inaudible], games, MP 3 players, and a whole variety of other consumer devices that are adopting WiFi technology for the first time.

To some extent we can understand why there is a lack of competitive solution as we clearly appreciate the huge amount of effort and complexity involved to successfully develop and better solutions supporting many different usage models and as well as with the ability to support a large variety of software environments and host devices.

While the competition works on the development of their first embedded solutions, we continue to aggressively increase the level of feature integration and performance of our solutions and expand our lead to serve this huge market opportunity.

In addition to the strong positioning of our embedded wireless LAN solutions, we are also very excited about the strength and positioning of our new 802.11n family of products.

We are very pleased with the progress made by the [inaudible] in voting for the EWC specification to be the [drust] 802.11n standard last month.

As a founding member of the EWC, we helped drive the [inaudible] of this standard.

On that, the draft is approved we are going to even more aggressively draft the adoption of this technology across the entire market with our high performance 802.11n solution for the enterprise, retail, pc, media distributions, and embedded applications.

Given the significant increase in performance and sophistication of the 802.11n standard, the advantages and breadth of our advanced technologies will further differentiate our solutions.

We have leveraged all of our expertise and experienced from our proven and highly successful embedded wireless LAN solutions in the development of our family of 802.11n solutions.

Just as in the embedded space our unique architecture will lead the way in performance, our consumption, integration and size.

Now with the [inaudible] of over 300 megabits a second, our ability to integrate our own high performance, low power processors is critical to handle the high speed processing requirements also lowering the overall power consumption of the overall system.

Our [inaudible] advantage is becoming especially important in today's laptops which are continually trying to reduce its power budget even with the implementation of such new advanced features.

With the highest performance and the first solution made available in the market we're winning very exciting designs with PO1 customers, and I'll try to begin [inaudible] shipments this quarter.

Additionally, we are also leveraging our processor technology into a number of other exciting -- in applications and markets. [FCS] in January, we announced our Orion product family that is targeted at a range of media bulk platforms.

These device leverages our storage [technical difficulty] and embedded processor technology combined with software to enable a variety of stand alone and integrated storage appliances for the home.

We have been winning a number of designs with this exciting solution and expect initial shipments to start this quarter.

Another exciting market opportunity that we are applying our embedded processor technology is for the printer market.

We have developed custom SOCs based on our processors, specifically for the printer market and have been enjoying very sound design wins with our high performance, low cost printer solutions.

By combining such exciting SOCs with our strong portfolio of technologies such as our system controllers, wireless and wireless networking, power management and storage, we're in an excellent position to serve the needs of the printer market by helping increase the performance and lower system costs of today's printers.

Tuesday's announcement this week of our acquisition of the printer business from Avago Technology, fits right into our strategy to address this large market.

This acquisition strengthens our engineering team and system level skills with a dedicated engineering team to serve the needs of Hewlett-Packard with our advanced technologies.

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

Thanks, Sehat.

Consistent with past years, we will be including as part of our Q4 call guidance for the new fiscal year and specifically for Q1.

Additionally, we will update our long-term operating model.

Fiscal '06 was a very strong year for Marvell.

And as we made significant progress in growing our revenue in the consumer market and our expansion into the VoIP market.

Storage products we introduced our solutions to address the optical DVD market and completed the acquisition of the enterprise hard disk controller business from QLogic.

We also continued with the development of our embedded high performance microprocessor and introduced the Orion product family at CES.

Entering fiscal '07, our position in our [serve] markets continues to strengthen.

And we are executing on our objective of significantly increasing our addressable [tan].

Having reached the 1.7 billion revenue level in fiscal '06, we are now ready to continue our growth to the next level.

For fiscal '07, our revenue should range between 2.250 billion to $2.300 billion.

At the mid point of this guidance, our annual revenue growth from fiscal '06 to fiscal '07 would be 36%.

This annual guidance excludes the recently announced planned acquisition from Avago of their printer [Asic] business.

Consistent with our other acquisitions we will update our guidance once the acquisition has closed.

Gross margin percentage for fiscal '07 should be about 54% plus or minus 50 basis points.

And pro forma non-GAAP operating expenses should range between 25 to 26%.

During fiscal '06, we were very successful in exceeding our previous long-term operating model.

As we continue with our business strategy of growing Marvell into a very large semiconductor company, we believe that our long-term operating model will change from the current level.

Our long-term model for gross margin percentage is 53% with pro forma non-GAAP operating expenses of 25%.

Given our anticipated growth prospects moving forward we feel this long term model will continue to generate strong profitability for Marvell.

Beginning with Q1 fiscal '07 we will be adopting FAS123R.

The impact will be included in our GAAP financials but excluded from our pro forma non-GAAP financials.

Now, moving to the Q1 guidance.

Our business momentum in Q4 was strong and we entered Q1 expecting growth.

Our visibility remains good with ordering patterns from our customers remaining consistent with prior quarters and has been the case in past years, both Q1 and Q2 should experience some level of seasonality.

In fiscal '06, Q1 seasonality was below historical norms.

And we expect Q1 fiscal '07 to be similar to Q1 fiscal '06.

We are comfortable that our strong business momentum will more than offset the seasonal softness and expect Q1 fiscal '07 revenue to grow 5 to 6% from Q4 fiscal '06.

While we do expect a decline in long-term gross margin percentage, we expect Q1 gross margin percentage to be flat with Q4 at 54.9%.

This reflects our continued manufacturing efficiencies and positive product mix.

Pro forma non-GAAP operating expenses for Q1 should increase about 90 basis points from Q4.

In Q1 pro forma non-GAAP operating expenses reflect our annual employee reviews and increases in payroll taxes associated with the new year.

We expect interest income to increase by approximately 400K with our balance sheet [indecees] remaining strong. [Chairs] using computing pro forma non-GAAP net income should increase to 326 million shares.

I'll turn it back to Sehat.

Thanks, George.

That completes our commentary.

Miles, would you please poll for questions?

Very well, sir.

[OPERATOR INSTRUCTIONS] Your first question comes from the line of Alan Mishan with CIBC World Markets.

Hey, guys, very good guidance.

I just have a couple quick questions on the QLogic business.

Could you tell us how about how significant that was for you this quarter whether it will reach the run rate that you had talked about previously in the coming quarter here and also do you expect any impact when Fujitsu moves to serial attached SCSI in a greater way?

Thank you.

So as I said, Allan, for Q4, we gave that guidance on our Q3 call.

The revenue level for QLogic products was consistent with that level, which was not a complete quarter and so hear in Q1, it is going to be a complete quarter and I feel comfortable in -- although we won't continue to break it out.

But I feel comfortable in telling you that it is going to be at the historic quarterly rates.

And regarding the -- some impacts on the [inaudible] SCSI there will be some -- there will be some impact [inaudible] to come from day one when we acquired the business from QLogic.

Your next question comes from the line of Michael Masdea at Credit Suisse.

Thanks, a lot.

In looking at that fiscal '07 guidance I guess what some of us are trying to figure out is just what you think were true organic business is and your acquired business growth is for the year, and really, how do we think about that going forward?

What do you think the organic sort of growth rate for Marvell is?

And then as you add acquisitions on what that incremental's going to be.

Right.

Well, I think a couple things, Michael, we will probably be doing more acquisitions as we move forward.

We're already seeing that.

And so you're going to start to get a blend of the organic and the acquisitions and then the organic products starting to affect the revenue of the acquired operations as well.

I think what we will say basically is we will in most instances give you a starting point for a major piece of business like we did with the QLogic.

And then beyond that everything is just folded together into our guidance.

So that 36% is really the combination of what was the traditional Marvell product's preacquisition, but now they are all Marvell products and that growth rate is overall Marvell.

Maybe I will give a little bit color about organic verses acquisition.

In general, in general, it is our philosophy is -- we like to do things as much as possible organically.

But the certain things like the printer [Asic] business from Avago -- this is something that's been done for, I don't know like bazillion years.

And we -- those things just don't make sense for us to build organically.

So acquisitions make a lot of sense in this case, actually, on top of that because we have developed numerous technologies [inaudible] synergistic to that existing business.

So by combining the resources from that side -- from the Avago's printer's team site with our embedded processor technology or the wireless and technology, we could come up with a more effective products to -- in this case for Hewlett Packard.

So this is -- so we're doing the acquisition from the synergistic point of view in this case.

Your next question comes from the line of William Lewis with JPMorgan.

Great.

Thank you.

Looking at your guidance and also your mix of business, enterprise it sounds like was up. [technical difficulty] little bit stronger than consumers so -- hello?

Next we'll go to the line of Shelby Seyrafi with Kaufman Brothers.

Yes.

Thank you very much.

Maybe you can talk about expectations for the sequential growth in your storage [technical difficulty] in the first quarter.

The 1.8-inch strive mark [technical difficulty].

Hello, hello.

[technical difficulty] decline.

Did you expect your storage business to grow better or worse than your corporate growth rate?

Shelby, you know we don't go to that level of detail of specifically talking about individual pieces of our business.

Clearly, our storage business because of its PC component is exposed to seasonal impacts, but with the expansion of mobile computing across 2.5-inch, 1.8-inch and small form factor, there's a lot of momentum in that business.

So clearly, we would not be giving a 5 to 6% overall corporate growth if we didn't expect growth out of that part of our business.

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

Yes.

Can you perhaps give us a little bit more guidance on two things.

Number one, Sehat, you talked about the printer Asic business that you bought.

Obviously it's going to be more of an SOC business over time.

Do you have a -- give us an idea idea, rough idea, of how long it would take as you enrich the product to more of an SOC solution that the margins in that business would approach the corporate average?

I assume basic business is quite a bit lower than the current corporate level.

And secondly, can you comment about Mac stores, your Mac store desktop business, I assume, is ramping as expected.

And can you talk about what other [inaudible] factors to the decision of a combined Seagate Mac store design in the next 24 months?

How do you see it working as the two product line merge once the acquisition takes place?

Okay.

Well, I think we're going to split that up.

I'll take the Mac store --

You'll take the Mac -- David, give me the first part again a little bit, I'm a --

The easy one is the -- the gross margin on the Asic printer business, presumably is kind of typical Asic and quite a bit below your corporate average gross margin.

And -- can you give us a time frame of when by incorporating your own I.P. into the total solution that can you make that business approach the corporate margin at this point?

Okay.

Well, again, we're very excited about the opportunity there.

And you're absolutely correct.

You know a traditional Asic business is not -- does not generate the same gross margin percentages as an ASSP type of business does which is the majority of our business.

The opportunity for us as we've stated is to number one, improve the base product with our own technology and our own manufacturing capability, that will take at least one generation of total to incorporate some of the technology that we have into those products, although I believe we could have a quicker impact on the actual cost of the existing product by having it be part of Marvell versus being part of where it was previous to the acquisition.

And then, of course, the real side benefit to this is all of the other revenue that comes with going alongside this product, which should be at typical corporate contribution margins.

So I have to say the Asic business itself will never be equal to the rest of our business just by the definition of what it is.

But we do anticipate over the next, say, one to two years seeing an improvement in the actual margin even from that part.

Okay.

So -- moving to the [Nextor] question, the Nextor production will start at the 160 gigabytes [inaudible] platforms.

Moving to the next one, question -- the next door production will start at the one out of sixty gigabytes of [inaudible] platforms.

So that's on schedule.

I guess the [inaudible] up to them --

Should be sometime in the second calendar quarter.

Yes.

Okay.

So we're very very excited about that, obviously about that, about that production.

I know the products are going to be a very, very competitive products.

The family of the 160 gigabytes of applied products are going to be very, very competitive products, it's going to be very, very exciting for Mac store [inaudible] and we're also very excited now, Mac store is part of, is going to be part of Seagate we have very good relationship with Seagate for, I don't know, like ten years now.

One of the first customers.

It's our first customer, in fact.

So we have a lot of engagement discussion with them already, so all I can tell you is the future, is it should be good.

How long do these technology cycle last before we go to 250 gigabytes per platter?

It's hard to pinpoint that, but if you look from the historical experience, every generation will last longer and longer, like the 40 gig generation was shorter than the 80 gig.

The 160 gig generation will be probably is going to be longer than 80 gig.

And then the 320 gigs generations will come quite a bit later.

The 250 gigs will not be a strong a note so it will be a minor note just like the 120 gig it's just a minor note, nobody talks about a 130 gig even though it exists.

So it's going to be a long -- most likely it's going to be a long cycle

Okay.

Great.

Thank you.

Thank you, David.

Your next question comes from Cody Acree with Stifel Nicolaus.

Thanks, guys.

And, George, thanks for finally raising that gross margin target.

Can you talk about the WiFi competition?

Obviously a lot of the current WiFi incumbents mourn the desktop/laptop access point market are now realizing the potential benefits of the embedded markets starting to move more in that direction.

How long of a window do you believe you have before this becomes much more price sensitive and do we ever start to see the kind of price declines in the embedded WiFi space that we've seen in the desktop/laptop market?

Okay.

Let's take care of this.

So obviously -- as you are aware and as to what we say for the last several years.

The embedded markets is the bigger market opportunity.

Now, for many years nobody believed it, nobody take us seriously on this one.

Because the market was -- there was no market for embedded -- there was no market for embedded WiFi at the time.

We have actually to build this market.

We have to build huge application team, software teams to write all the codes for all the different usage models [inaudible] mentioned about that earlier.

The different usage model for cell phones, for VoIP, for digital cameras, for wireless printers, for wireless musics, there's so many different softwares that they have to write.

So it's not just about making the chips to be able to work at low power which we have the lowest power in the world.

But more importantly is to get all these applications to work with each other.

And everyone of those are different, yet every one of them wants to be able to talk to each other.

It's all about putting years of software effort into this.

So we believe as the first player to get into this market, we have a huge advantage.

But because this market's huge, there will be always be people there that will affect -- that will try to get into this market and they will introduce price pressure into the products.

The price pressure will always be there.

But that's okay.

We live in this business.

As the volume goes up, the price goes has to go down.

And it has to work that way.

It works both ways.

Okay.

But the volume -- for the volume to be big, the price has to be lower.

Right.

And that plays into, again, our view of the long-term operating model of the company, that as -- the consumer opportunity in '06 was still relatively small.

It's going to be much much bigger over the next two or three years.

And, while it's still very profitable, after what Sehat's saying is --

And it is -- I forgot to mention this, the reason why we proactively work on new generations of devices, like we introduce our [90 millimeter] WIFI single chip WiFi device, embedded WiFi device what, several quarters ago?

Meaning that we work on that like two years ago, basically.

So we've been broadcast in investing for the future to address the fact that devices n the future has to be lower cost and lower power and more advanced capabilities.

And, guys, if I could just one quick follow-up, the Asic ASPs that you're getting now at Hewlett Packard, maybe if you could give us some idea what those are running, but maybe more importantly, on a percentage basis what do you think your opportunity is as you move Orion in and a few other tertiary items, where can we see the dollar content in the printer marketing increase and how quickly could you start to begin benefiting from that cross sale?

Okay [inaudible].

You know that we don't go to the specific ASPs for product except to say that those are very complex systems that have currently been produced by the Avago team.

And they're actually system level, they're more than just Asics, they're actually system level and increasing that amount of system level sales.

So those are very, very good products from an ASP standpoint.

We would hope obviously that as we bring more technology to the platform that we will get a fair ASP return for the technology that we add.

So we'll -- we hope to see that grow over time.

But again we don't go to that specific breakup.

But is there an opportunity to increase by a small percentage or a magnitude with the products that you plan on targeting at HP?

Well, I think there's a lot of opportunity right now.

I mean the group -- the printer group is excited about being part of Marvell and having access to the I.P. portfolio, whether that be wireless LAN, the processor, gigabits, there's just a whole bunch of things that they can see that they can incorporate into the system.

I think realistically you should be thinking of one generation though to -- at a minimum to see some of the impact come into the -- of that type of thing come in.

Maybe I can add a little bit on this one is that we're seeing from other printer customers, we're building things from scratch.

In the last like this last one year.

The benefits, the benefits that we provide to our customers were very significant.

Remember, we came into this business very, very late, okay, in the printer business.

There were others -- big, big players out there in the past and for us to come in into the market in the last minute and be able to take market shares away from our competition, new design wins for all this -- some of this printer players, obviously, the benefits has to be there.

And the same benefit that was [inaudible] other customers things will be the same benefit that HP will be seeing.

Great, thanks and congratulations.

Thank you.

And your next question comes from the line of Arnab Chanda with Lehman brothers.

Thank you.

Hey, a question, I'll ask only one question, maybe for either -- actually, for either Sehat, or even George.

You talk historically about your three major growth drivers, the desktop storage market, wireless LAN, as well as gigabit ethernet for [inaudible] or '06.

Could you you talk more about just qualitatively if there are any different drivers for say, the first quarter versus the whole year or are we missing any new ones such as maybe Orion or anything else?

Thank you.

[Inaudible] I'll start and you can add what -- I think, Arnab, in general, the three main growth drivers encompass much of what we do.

I think that's still going to be evident even in Q1.

We're very excited about the networking business right now.

Prestera has just been a real, real successful product family for us.

The second half of last year, it grew dramatically from where it had previously been.

But we're thinking and expecting that to be very strong moving into the first half of this year.

But all of them will play.

I mean as we've talked about previously we've just scratched the surface on the wireless LAN, embedded wireless LAN from the standpoint of platforms actually going into production.

And as we said in our commentary now we've seen an increase in the number of platforms which I equate to a product actually starting into production.

So that would be good and then of course, with the new Mac store ramp that plays into the desktop thing, so again, the three main things still will be there.

I'm sure Sehat wants to add a couple of new ones.

Yes.

Talking about spending more than two years writing the software for, I'd say for cell phone, dual mode cell phone, GSM plus WiFi, or plus CDMA plus WiFi.

So it's like two years, more than two years efforts to write the codes.

It's not --this is like investment for the huge potential growth down the road for this dual mode phones Again, these are the -- a lot of things that we've been working organically for the last several years to enable some of this new markets once it takes off, it could be very, very positive to us.

In the meantime, obviously, the acquisition of Avago will be -- there's more of combining just leverage of technology investment across [inaudible] together.

That's more quicker activities so -- and then we can talk about power management so that's also continue to have new product lines.

But [inaudible] to talk about it when we are so many different products that we introducing to the market.

So many customers there.

They are so many different [inaudible] because they are spread about in so many different segments, it's very, very hard to talk about it.

But over time as more and more people find out about the diverse product that we're coming out, these business also going to be more and more important over the next several years.

One follow-up, if I could, Sehat.

You didn't talk about the optical storage market.

Where are we and what are we looking for in the market to see your products based on your technology to come out, is it this year or next year, are there certain things that need to happen before your products are launched?

Thank you.

Yes.

We're still working with our customers in [inaudible] all the different firm [inaudible] to our platform.

As well as building several new devices.

We didn't talk about it.

Again it's very hard to talk about it.

We got a new certain features requirement, ceratin customers we have to build different chips for different customers.

These things takes times, but we are numerous activities, several chips, they are difficult or going to say buy additional chips over the next couple years, the next year, the next year alone will [inaudible] several more chips.

With different features for different customers or different target market.

I think it's an interesting question, Arnab, because and maybe I should have highlighted it.

Our guidance that we gave has no revenue expectations for the DVD market in that number.

And so we're looking -- that doesn't mean we aren't going to have revenue this year, but we feel that we want to be again putting out as realistic and conservative a plan going forward for this year.

I do believe that we will see revenue -- it will be modest, in fact, but it should occur in the second half of the year.

George and Sehat with clarifications.

Your next question comes from Charlie Glavin with Needham & Company.

Thanks.

George, I think Bill Lewis got cut off, I could hear him but I'm not sure whether you guys could.

No, we never, we never heard him.

Sounds like there's a crossed line.

Sehat, if you could go into a little more detail in terms of the synergies within the printer business.

If I'm not mistaken, a lot of the previous HPs be a little bit more MIPS based in terms that it certainly is geared more on the Arm base, can you explain some of the synergies off of that and how long would it take or have you already started to do some of the software bridging with either Asia or somebody to reconcile those differences?

Yes.

So obviously, just like in other businesses, we have number of processors that we use across many our different businesses from RTC, MIPS, and Arm processors.

Over the last several years, we have decided to consolidate platforms into Arm based, more products into Arm base.

Whether this is for the networkings or printers.

So the last five, four or five years investments and developing high performance and [inaudible] Arm processor will be very, very important for us to gain market shares in high end -- okay, I forgot to mention, we are getting design wins in high-end printers with using our Arm processor, against MIPS already.

So if we could, again, design wins at the very high-end, it will be very straightforward to get design wins on the mid-end and low-end printer business using Arm.

So is it fair to say that historically HP has used more of a network processor based on Gary Smith's [inaudible] --

I'm not sure that's correct or not.

Well, [CMCs] here and I think they've been selling it and based on what we've seen from other module makers such as [Hart module] or others, seems that HPs going to more standard base.

Is this the fundamental shift that they're doing from the traditional enterprise base in more lower-end which -- would they be your Arm processor or are you going to be patching together and Arm with their midst based --

Okay.

Let me -- I understand the question.

So historically, if you look in the very, very high-end printer business or very, very high-end networking network processor business these are all MIPS that made same or [inaudible] based.

And the reason for that is because Arm processors are not at the level to compete against high-end MIPS or high-end quality processors.

This is the the fact in the past.

We have , okay, we have changed that dynamics, okay?

Our [inaudible] Arm processor is just as good as the high-end MIPS processor in some MIPS for megahertz in terms of number of megahertz that we could run.

It's at the absolute maximum performance so we are -- I would say we are competitive, if not we are better than the high-end MIPS processor.

So -- but the difference is our processors are not targeted for stand alone devices.

Our processors are designed for embedded purposes.

So for integration.

So the benefits will be some more [inaudible], lower power, and a lower cost.

And at the same time giving -- give the same performance as using dedicated stand alone external processors.

So and because this is a huge business, this is going to be an advantage for anyone that can put this technology into a single chip device.

Got it.

George, just one clarification going back to Michael's question in terms of not so much the organic growth but taking a look -- it sounds if you'd reiterate that you're still on track to have a 50/50 split by the end of 2007 -- pardon me?

On the consumer versus the enterprise?

Yes.

No. that's still the -- that's still the objective and I think we -- we've got a lot of -- I think what you're seeing, Charlie, is a lot of exciting things going on.

And we set an objective.

As you move from starting the objective to ultimately getting there there's lots of things that happen on the way.

Some are enterprise related, such as QLogic, some are going to be consumer related such as the printer and so forth, so it's going to have it's ebbs and flows but yes, our objective is still to by the end of the next year to be in a 50/50 split.

The question that I had was -- the way you started off responding to Arnab there's certainly a lot of things that doesn't sound like you're including in the '07 guidance.

Kind of melding Arnab's and Michael's question, are you looking for, from this point forward, the need to acquire companies in order to hit that 50/50 or do you believe that your organic growth right now can enable you to hit the 50/50 split by the end of '07?

Well, first of all when we're target at 50/50 that's the means, okay, we can potential make it to be exactly 50/50 by sacrificing our enterprise business.

If we can grow enterprise business, and [inaudible] the 50/50 must be able to be achieved.

We have to make sure that the enterprise business will continue to [inaudible] the investment so to continue to capture design wins, [inaudible], ethernet or the [mantle sticks] we want to make sure.

Ethernet and the [mantle] to win against [Sonnet].

So we'll continue to invest heavily in this area.

So, Charlie, I think your question actually is are we going to do anymore acquisitions, and I think the answer to that question is the probability is yes, we probably will.

As we look for complementary things to match up with our core competencies.

But we have a lot of -- as I said earlier, we've just scratched the surface on the wireless LAN and the processor into the consumer so it's very dif -- I understand the question is very difficult to be specific.

Except to say that we think we see a lot of opportunity moving forward.

Got it.

Thank you.

Next we go to the line of Mr. William Lewis of JPMorgan.

Can you hear me now?

We can hear you now.

Oh, great.

Are you going Verizon or what?

What's that?

You going Verizon or T-Mobile?

I think it was their mistake.

I think I had a hotline only into Charlie's office.

But -- I guess what I wanted to ask was I guess also about the guidance and -- a little bit on this consumer enterprise mixed question, I'm assuming you expect to make progress in terms of growing the consumer faster and making it a higher percentage.

How much of that is behind kind of the higher enterprise mix is behind the 54% gross margin guidance you're able to provide for the year versus other factors?

Well, if you look at it, Bill, we were running pretty close to 54% before we made any -- even before we did the QLogic acquisition so clearly even our existing business is performing very well.

And it even improved in Q4.

So clearly when we acquire a business which has very high gross margins, which everyone now understands, that contributes positively but we are -- one of the things that we're very proud about is just our ability to have cost reduced our products to the level that we're able to do it such that, even though, we have pricing pressures and so forth like other people in our market, we are able to outperform because of that.

So I wouldn't read more -- they all contribute positively.

And that's why we gave a range, by the way, I said 54 plus or minus 50 basis points so it can swing either way.

Okay.

And then on the operating expense, I think you said up 90 basis points as a percent of sales.

So could you just talk about where the -- what the drivers are, the significant increase in operating expense is this quarter?

Yes.

Well, again, Q1 is always a quarter that begins the year.

For us, we do annual reviews.

So we have an increase in our obviously labor cost and associated fringe cost in Q1 and of course also everyone starts paying taxes again.

So we have those lawyer taxes that affect us in Q1.

So clearly those things are there and I think that probably an appropriate comment would be you shouldn't expect to see the same rate of increase from going beyond Q1.

But Q1 is a quarter that does have higher expenses than some of the other -- from an increased percentage standpoint then other quarters.

Okay, and lastly, at what point should we expect some more detailed commentary from you relative to the financial impact from the Avago acquisition?

When it closes.

Okay.

All right, thanks.

And your next question comes from Shaw Wu with American Technology Research.

Thanks.

First, great quarter, I just had a just two quick ones, could you provide a little more color on -- in terms of your hard drive IC business like how you've been doing in terms of the other areas like the pre-amps and motor controllers?

And the second question I have is do you have a strategy with these new combo drives that some of the drive makers are talking about, the combo-nan flash drive in terms of like a controller or something?

Thanks.

I'll do the first part, I'll let Sehat talk about -- well, I think the first part, let me take the first part and then let you -- Shaw, we've been very, I think, vocal in letting Wall Street know that we're not just an SOC provider to the storage business.

We have a world class pre-amps, motor controllers, power management, memories, technology, and we are working very closely with our customers to see if, in fact, we can have them utilize more than just the DSO [inaudible] we've made some very nice progress across all the segments, by the way, it's not limited to one of the traditional segments in the market.

So we would like to see in general an SOC might represent 50% of the bill of materials, semiconducted bill of materials of the driving.

We'd like to see that grow significantly moving forward.

We are having success.

It is contributing to our -- to the growth of our storage business and it's primarily in those areas.

And second part is relating the combo nan and HDT, well, you're starting to hear about it but this -- the only thing I can say about it is we've been talking about this ourselves internally for the last two to three years.

So finally -- finally people are start looking into it.

So I don't know what's beyond that I can talk about, we've been looking at it for [inaudible] -- [Inaudible] for the future.

Okay, then.

And just a quick follow-up.

In terms of, George, you talk about your contribution from these areas, would you say your -- is your storage strength now, I'd say more of a function of the core unit growth in terms of like the 1.8-inch program that you mentioned, or is it upselling, I don't know if upselling is the word, but I guess co-selling more of these other additional storage -- HCDIC products.

Well, Shaw, I think if you were just to talk about general growth of the market that I'd say they'd be unbalanced, in other words just the unit growth of the market and the growth of these other technologies, they're both kind of going along at the same pace.

But as you know in the storage market that isn't really what drives growth. what drives growth is taking some major platform and adding it to your portfolio of customers and so we are excited about the [Maxstar] opportunity as Sehat said and that will far out strip anything that would be of the other things.

Okay, thanks.

And your next question comes from Arnab Chanda with Lehman Brothers.

Hi, thank you very much.

Sehat, I had a follow-up question.

You started the discussion about [Brosser] architecture and is historical, obviously, people have been very religious as to -- in the high performances [inaudible].

Arm has been the low power.

Does this suggest that you can -- you're going to continue to sort of poliferate Arm in multiple places and just curious as to how if you can give us some qualitative ideas where you are with say networking.

You talked about printers and then there's a whole transition to, I think 32-bit arm controllers from the [inaudible] of date, but March controller markets if you're doing anything there.

Sorry for the kind of long question.

Thanks.

Yes.

So I guess I get to reiterate the MIPS and [RTC] traditionally have been targeted for very high-end, high performance [inaudible].

Was targeted for low power, low performance, cell phones, low power -- low speed of the markets.

From the architecture point of view there's no reason in the world why Arm cannot be made to run just as fast as a MIPS or RTC.

It's just -- it will happen always a choice by Arm to develop to target, to target diplomatic segments that are higher volumes.

They were ignoring the lower volume printer markets for [inaudible] processor types of market in the past, so this is why we came in.

We came in with our own architecture development -- internal development.

A standard onprocessing with single issue device. [inaudible] processor.

So we handle, we have on a high-end internally developed processor.

We have a dual issue machine.

Meaning that we can actually get up to two instruction per cycles.

About there that running in a deeper pipeline so you can run at higher frequencies.

So all those things combined, okay, is reason why our Arm processor now is on part with -- but that's not the best MIPS of RTC.

Now, again, the difference is we're not targeting this [inaudible] long devices, we're targeting for integration with our SOCs.

And what are the SOCs for the storage or for [NAS] for printers, that's really irrelevant as far our development of the processors.

Because they all can use the same processors.

The majority of the [inaudible] for all this application are reason [inaudible].

So supporting from Mips to parties of RTC to [inaudible].

It's's very straight forward.

It's very, very -- we have done this ourself in our system controller when traditionally we use MIPS and for RTC.

And then we have gone to one -- a few customers and we converted to Arm just like practically overnight.

And what was the other one?

The 32 is -- the transition from [inaudible] market controllers to Arm based --

Oh, yes, yes.

So regarding questions about I guess your prequaintance of this huge, huge market of 8 bits, microcontrollers, what is get the most to 32 bit?

Like the Arm base?

If the duties out there, still out there, so I don't know how to answer that.

The only thing I can say is if it happens we'll be there, if it happens.

If the customer wants to move on 8 bits cheap, cheap 8051 to a higher performance 32 bit Arm processor, we'll be there.

We are not betting on our revenue in the next several years, okay, for this to happen.

But we have our processor technology expense, our internally developed architecture expense from ultra high performance to ultra low power in a small [die] size.

So if the market wants at most a 32 bit and then it needs to have very low cost 32 bit micro controllers, we have the technology.

Just I think for [inaudible] to talk about it at this point because maybe 8 bits or 16 bits is sufficient for now.

But, again, if the market moves, okay we'll be there.

Thanks, Sehat.

You're next question comes from Karl Motey with Wachovia.

Thank you.

Question on gigabit controllers.

You mentioned the Apple design win, I know traditionally the partnership program with Intel was targeted at the tier one OEMs, can we expect to see Marvell -- more Marvell design wins at tier one OEMs and if that's the case could you give us an update on your [technical difficulty].

The Intel relationship it's been very [inaudible].

Apple, as you know, since almost five years ago, Apple has been using our gigabit 5 for their laptop.

So the migration to integrated single chip was [inaudible] controller that natural.

So -- and we're very pleased to be on that platform.

As far as the Intel join partnership has been very successful.

More supporting Intel's efforts in PCI express, we're completely behind [inaudible].

Yes.

I think we'll exist in two places.

Thanks.

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

I'll now turn the call back to management for closing remarks.

Thank you, Miles.

This completes our Q4 and fiscal year 2006 conference call.

I would like to thank you, everyone of you, for joining us and looking forward to [inaudible] next quarter.

Thank you very much.

Thank you.

Ladies and gentlemen, we do appreciate your joining us today.

This does conclude our conference call.

You may now disconnect.