邁威爾科技 (MRVL) 2007 Q2 法說會逐字稿

Welcome to the Marvell Technology Group 2007 second quarter earnings conference call.

My name is [LaTisha], and I will be your coordinator for today. [OPERATOR INSTRUCTIONS].

I will now turn the presentation over to your host of today's call, Dr. Sehat Sutardja, Chairman and CEO of Marvell Technology Group.

Please proceed, sir.

Thank you, LaTisha.

Welcome, everyone, to our second quarter fiscal year 2007 conference call.

Weili Dai, Chief Operating Officer, and George Hervey, Vice President of Finance and Chief Financial Officer, are joining me on this call.

Today we reported Q2 revenue increased 47% from the prior year to $574 million.

Also our sequential Q2 revenue increased 10% from the prior quarter, mark our 35th consecutive quarter of revenue growth.

While at this time some of our end markets such as the PC market, are facing some near-term challenges, we continue to be very encouraged about the strong growth opportunities in front of us.

Within Marvell, we've remained focused on executing on our long-term growth strategies and are excited about our leadership position in a growing number of high-volume markets.

We are very hard at work at continuing to aggressively leverage our core technology strength in developing leading edge solutions that provide our customers the highest level of performance and integration.

I will elaborate more about our opportunities and our business progress, but first I will have George provide more insight into our Q2 financial results.

Thank you, Sehat.

Good afternoon, ladies and gentlemen.

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

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

These statements include those related to the pace of our business for fiscal year 2007 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.

We direct your attention to our annual report on Form 10-K, recent quarterly reports on Form 10-Q, 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 operation, and financial condition.

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

As we stated in our press release, we are limited in the amount of financial results we will be able to discuss today, until our special committee of our Board of Directors completes its review of the company's historical stock option practices and related accounting matters.

Moving Q2 '07 financials, today we reported net revenue for the second quarter of fiscal 2007 was a record $574 million, an increase of 47% over the $390 million reported for the comparable quarter in fiscal 2006, and a sequential increase of 10.1% from the first quarter of fiscal 2007.

I'd like to make some additional comments on our Q2 results.

While we experienced a healthy level of growth in Q2, most of our product performing as expected, we did encounter two end markets that performed below our expectations, resulting in our overall Q2 revenue growth to be below our Q2 guidance.

For Q2, our storage-related products experienced growth.

Q2 is normally a seasonally challenged time period, which was offset by market share gains by several of our customers and end of life shipments to Seagate for the Maxtor products.

Our Prestera networking products contributed another solid quarter as we continued to gain market share.

In the embedded market, our wireless LAN 802.11a and b/g products continue to experience increasing demand and we began shipments to a new gaming platform.

Q2 was the first quarter that we have included the printer ASIC products, and they contributed revenue consistent with expectations.

As I mentioned, we did have two end markets below our expectations.

Q2 was a challenging quarter for PC related products, and demand for gigabit ethernet products for the PC client market was weak.

Additionally, the development of the 802.11n product was negatively affected by an excess of products being shipped into the channel during calendar Q2, resulting in demand significantly below our expectation.

For Q2 our enterprise markets represented approximately 70 to 75% of revenue with consumer the balance.

We had three 10% customers in Q2, Western Digital, Samsung, and Toshiba.

While we cannot provide detailed numbers for our gross margin and operating expenses, the following are trends that we experienced during the quarter.

As we indicated in our Q1 conference call, with inclusion of the printer ASIC products our Q2 gross margin percentage would decline from Q1.

During the quarter, our gross margin percentage generated on shipments, market pricing environment, and manufacturing performance were consistent with our expectations.

For operating expenses, our headcount additions and fixed spending items were as planned.

We did experience some favorable trends versus our plan for variable expense items.

Our balance sheet continues to remain very strong.

Our Q2 cash declined to $798 million from $921 million in Q1.

During the quarter we made a payment of approximately $250 million to Avago for the acquisition of their printer ASIC business, which was partially offset by continued strong cash flow of approximately $125 million.

Our accounts receivable DSOs came in at 54 days, which is consistent with our expectations.

Our inventory trends were as follows.

For Q2, the quantity of product in our inventory increased.

The increase was primarily the result of including the inventory acquired from Avago as well as the slightly lower than planned shipment level.

We believe that the increase in product quantities is reasonable given increase in our Q2 revenues.

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

Thanks, George.

Although we currently are facing some near-term challenges in some of our end markets, internally we continue to be very focused on expanding our technologies to further our leadership position and our existing markets while also enabling us to enter into additional new and large market opportunities.

Today's announcement of the world's first integrated Bluetooth and wireless LAN single-chip solution is another example of our ability to execute on such strategies.

Our solution is the first to integrate on a single chip full Bluetooth to EDR and 802.11a, b, and g wireless LAN capabilities, along with our Feroceon high-performance embedded CPU.

This product, built upon the strong success of our embedded wireless LAN solutions which are shipping into such consumer devices as cell phones, printers, game devices, and cameras.

Clearly, we are seeing more and more consumer devices take advantage of this superior wireless connectivity of the 802.11 technologies, or such advanced features as networking, voice over IP, high-speed data connectivity, and peer to peer connectivity.

However, although 802.11 is a superior technology, Bluetooth is not going away as it has already been strongly adopted in consumer devices to perform many simple wireless tasks such as short range connectivity applications, or wireless headsets.

By integrating Bluetooth into our wireless LAN solution, we offer our customers tremendous advantages of much smaller size, lower power, and higher performance.

One of the technical challenges in combining Bluetooth and wireless LAN in a single device is that the b and g wireless LAN radio and the Bluetooth radio share the same frequency, and accordingly, are subject to interference.

With our single-chip solution, our customers do not have to deal with such typical coexistence issues as our single chip solution seamlessly takes care of the coexistence of the two radios with no compromise to the performance.

Additionally, by also integrating our own Feroceon CPU and advanced software tools our single chip solution offers complete system whole-CPU offload which allows our customers by far the lowest power solutions and ease of design.

We have commenced sampling of these parts and are receiving very strong interest from our customers.

Now let's talk about the emerging 802.11n market.

Our retail solutions continued to experience strong adoption as we are the only supplier to be shipping to all five leading retail OEMs, and the only company shipping 802.11n USB client solutions.

Although this emerging market is facing some near-term inventory issues, which will hamper short-term growth, we believe the benefits of this new wireless technology will further expand the total wireless LAN market.

We believe many new applications such as digital TV, HD, and blue ray DVD players and set-top boxes will incorporate wireless LAN for the first time to enable the distribution of high-definition video in the home.

We are engaged with customers in their initial designs for such applications as they work to roll out their new production next year.

Now moving to gigabit ethernet, the gigabit ethernet market continues to be a strong market for Marvell as we continue to enjoy market transition from fast ethernet to gigabit ethernet.

Our years of heavy investment in complete system level solutions of both software and silicon continues to put us ahead of the competition.

Our advanced total solutions are enabling our customers tremendous time to market and performance advantages as they have success in their market.

As our customers relies these benefits, we are increasingly working to leverage our total solution across more of the product portfolios.

We are now seeing the adoption of gigabit technology continued its adoption migration from the high end enterprise applications to the SMB market.

We are at the forefront of this transition as we are accelerating the replacement of unmanaged fast ethernet systems with smart managed gigabit solutions, complete with our own management software.

On the client side, although the adoption of gigabit technology has largely run its course and our revenues are now more subject to end PC market dynamics, we continue to drive the adoption of our Yukon solutions as we expand our success from the white box market, leading PC OEM designs.

In the printer market, we have very successful first quarter with our new printer ASIC business that we acquired from Avago.

We are very excited about the large opportunity of growth that the printer market provides us as we work to expand our solutions to support our customers' needs across the complete product portfolios from the large volume value printers to the high-end color hard copy solutions.

The printer market is yet another very large market where we can leverage our high-performance Feroceon processors to offer our customers performance and speed.

We also making good progress in increasing our content in printers as we leverage our core technology to develop many other advanced solutions for our customers printer applications.

Now moving to storage, we continue to make tremendous investments in our storage products and offer our customers superior solutions.

Our heavy investment in our Feroceon processor is greatly differentiating our SOCs.

Now with our on coming acquisition of the Intel XPL processor, our technology initiative will only continue to expand.

No other company has the level of investment that we are making.

By leveraging our Feroceon and XGL microprocessors, along with our core storage technology, we will continue to offer our customers unmatched performance.

With the advanced solutions under development, we are confident that over time our technology investments will result in continued market share gains and that our share in the desktop segment will grow to be as successful as our strong share that we have earned in the other disk drive segments.

Lastly, I would like to make some comments on our pending acquisition of Intel's communication and application processor business.

As you know, we have been internally preparing for our entry into the cell phone market for many years.

The size and the technological trend of the cell phone market make at very attractive market for us, even though the market has been largely dominated by a few very strong and entrenched silicon suppliers.

For the past five years, we have been developing the technology for our entry into this market, including our embedded Wi-Fi, Bluetooth, and more importantly, our own Feroceon processors.

We have been talking about the strength and capabilities that our Feroceon processor provides us in a number of embedded applications over the past few years.

While this remains a very important use of this technology, we have also been hard at work on developing our own cell phone application processor based on this advanced microprocessor technology.

The missing ingredient until now has been the base span technology and their related software platforms for the application processor which for us to internally develop, would take a few years of tremendous investment.

As such, when Intel's communication processor business became available, we were very excited.

Now instead of developing a base span from scratch we are able to utilize the proven IP that Intel has heavily invested and proven for many years.

By acquiring these advanced solutions, we are able to accelerate our entry into this very exciting market at a time when 3G and smartphones are just beginning to take off.

Additionally, the fact that this business comes with the XGL application processor business is also very exciting to us.

By combining our Feroceon and XGL, we will create an incredible force with the strongest team in the world focused on creating the most advanced application processors for the next-generation 3G and full-featured smartphones.

Also, by combining the application processors and baseband technology with our embedded Wi-Fi, Bluetooth, and automated media capabilities, we believe we will be very strongly positioned in the cell phone market.

Since the time we announced the acquisition, we have met with many of the customers.

And employees of this business.

The feedback has been very positive as they understand the tremendous investment, road map and commitment we have for this business.

Given the combination of this acquired technology, along with our own efforts for the cell phone applications, our customers are confident that they now have a new strong second, and more importantly, a more complete 3G supplier in the cell known market.

As well, we are confident that our move into the cell phone market, which is one of the largest semiconductor markets in the world, will clearly take Marvell to the next level.

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

Thanks, Sehat.

As I mentioned in my Q2 commentary, many of our products and endmarkets performed to expectation while two endmarkets performed below our expectations.

As we enter Q3, most of the conditions that were present in Q2 continue into Q3.

We remain concerned about overall demand for our storage and gigabit ethernet PC-related products, and the likelihood that we will see a lower than normal seasonal increase in demand for Q3.

Additionally, based on the channel inventory situation in the 802.11n market we do not expect to have growth from that market in Q3.

We believe that demand should increase for our Prestera and printer ASIC products and expect to continue ramping new platforms in the embedded 802.11 market.

Based on the above factors, we believe that our Q3 revenue should increase approximately 1% from Q2.

While we remain positive about our business, our current visibility into how the market conditions will affect our revenue during Q3 and Q4 is unclear.

As a result, we are lowering our revenue estimate for fiscal '07 from the previous guidance of $2.37 billion to $2.425 billion to a revised range of $2.27 billion to $2.29 billion.

Our gross margin percentage and operating expense percentages will also be affected.

We currently expect a less favorable product mix for our revenue in Q3 and Q4 resulting in a slight decline in gross margin percentage.

Although we are experiencing a period of slower revenue growth, we believe it is very important to continue our investment in new product and process development.

We are reviewing discretionary spending to ensure that those levels more closely reflect the growth of our business.

However, we do anticipate that Q3 operating expenses, excluding stock option related expenses, to grow on a percentage basis significantly higher than our Q3 revenue growth expectations.

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

Thank you, George.

That completes our commentary.

LaTisha, would you please poll for questions?

Thank you.

[OPERATOR INSTRUCTIONS].

And your first question comes from the line of Michael Masdea representing Credit Suisse.

I guess the biggest question a lot of people will be asking is if this is a change in your long-term growth rate or just the whole endmarket slowing down and the whole downturn concerns out there.

Can you give us your best answer in terms of how you sea your future growth rate and what are going to be the biggest drivers?

I think, Michael, this is a temporary period that we're going through here.

There's been a lot of talk about the PC market, of which we obviously have a very significant position.

It just appears here that there are challenges for the back half, which we have to take into account when we look at our growth prospects.

We're very excited about all the things we have on our plate with the embedded and all the other products, so, no, I do not believe we are anticipating any significant change in our long-term growth rate.

Remember, we are a bigger company now, so there is some of that, that plays into that, but, no, you should not be thinking this is a change to -- a material change to our long-term growth rate.

A few other things that we were working on that not generating revenue yet, so hopefully sometime in the next year it will start seeing revenue to grow.

Right.

In terms of some of the weakness that's hitting now, would you say that visibility is decreased, or would you say your visibility is still good, just your customers are less optimistic?

That's a hard one.

It's a little bit more the latter.

I think it's a little bit more the latter.

You look at the stuff -- the commentary about the C market, some of the guidance that people that we sell to and so forth have in that market, there's wide variation and widespread in the guidance.

So that, to me, is -- to us is sending is us a message that there's some uncertainty.

Last one for me.

The desktop business, how do you make kind of a comment of being as successful as you've been, enterprise and mobile areas, can you give us a time frame or is that something where we're going to start to see fruits in'07?

What time frame?

Well, as we discussed this many, many times in the past, when it happens, it happens.

So the only thing I can talk about is that we are accelerating our advancements in the technology that gets to us these product.

And we hope that, just like we have done, for the mobiles and enterprise markets, to see that -- obviously we hope to be able to shorter time, to see equal success in the business.

Now, as I say -- either you get zero business on the new account or you get 100% of the business.

Right.

And our track record is -- I believe customers would like to see better product, and we're confident that in the long run we will win numbers as well.

Thanks a lot, guys.

From the line of Cowan & Company, you have a question from the line of Jim Liang.

Thank you.

Can you give us an update on the integration of the Avago printer ASIC business in terms of cost reduction, margin, improvement, product roadmap and future design win activities?

Thank you.

Sure.

Weili.

it's been going very well.

I think as far as the roadmap, extremely strong.

The team has built very tight relationship with supporting HP, and in terms of design win, we have won a number of design since May 1 after the closing.

As far as costs and margins, we continue to work on this, and we'll give you future updates hopefully in the next quarter or so.

So but we are working on it.

High priority obviously is to address the future -- the next-generation devices to leverage the advantages of our technology into this market.

We have made some progress, as we have indicated previously, by putting them into our manufacturing flow and with our buying relationships with our suppliers, we have, you know, got the low hanging fruit.

We're realizing that already, and that is contributing positively.

But as Weili indicated, there still is room for us to do some work there.

Are you seeing a bit of more favorable pricing terms in general from your foundry suppliers?

How do you see that developing next couple of quarters?

Right, as we said repeatedly, our pricing with our suppliers is really a partnership type of pricing.

We don't go up and down necessarily just with the little changes in the market.

So, we're always in there sharing with our partners what our opportunities are and looking for the appropriate costs to go with that.

So we're not really -- our pricing doesn't move just because there's a little change in the market.

Okay.

Just lastly, if I take the midpoint of the full-year guidance, looks like Q4 could be up potentially mid single digits sequentially.

Can you just give us more color as far as your visibility into Q4 and potentially areas of growth drivers?

Thank you.

Jim, at this point, I think, we're -- we want to see a little bit more development in the market.

We are very concerned about seasonality, and we want to see how that plays out.

I think we've taken a pretty conservative view at the moment on that.

We hope we're wrong.

We hope it's better, but right now we need to take that view.

So I think before we want to get out in front of Q4 we want to see is because that will be a big impact, if, in fact, seasonality, is not maybe as far down as we are thinking.

So we'll just have to wait to give you an update on that.

Thanks very much.

Yeah.

Representing JP Morgan you have a question from the line of Bill Lewis.

Please proceed.

Thanks.

I'd like to ask about the Intel communications processor business.

Any update you could give, in particular around, Sehat, your comments about the processor.

It sounds like what you really bought it for in particular is the base band, so about two-thirds of the revenue, or whatever, the majority of the revenue is coming in the application processor where you kind of have some overlap.

Could you kind of walk us through how you see the XPL processor versus your own?

Are those going to converge over time?

How do you think about the base band business?

They haven't had a lot of success there.

There's good tech --

Sure.

Now, obviously the application processor, the XPL application processor has been in the market a lot longer than the baseband processor part of the business.

The base processor is -- as I mentioned in my comments, we are now -- with this base band processor we are now practically the only second provider of the 3G solution in the market.

Third party supplier, I should say.

Independent party suppliers of 3G base band processor in the market.

The X scale application processor obviously is very successful in the market.

No doubt.

It is known in the industry as a very powerful processor for smartphones.

I talk about the Feroceon.

Equally powerful.

There are some differences, but in general, there are certain advantages each has, but the combined teams, the combined efforts will obviously have tall best of the two.

So obviously we are even more positive about the future of that application processor part of continues.

But despite the fact you mentioned that the base band process ser a smaller part of the business, which is true, that's not meant that it's meant to be bigger than the application processor, but business further down the road for the 3G market to take off but regardless whether it's going to take off a few years from now, a year from now, we're not that concerned because there's a lot more stuff we can add into the platforms.

The Wi-Fi, the Bluetooth, the other types of radios that we -- technology that we can add.

So it's -- to us it's a long-term investment for our long-term growth.

just want to add, on top of what Sehat has said, if you look at XPL today, it's -- overall it's a platform solution with a very mature and sophisticated software in that space, and if you look at Feroceon, our base for embedded purpose.

So from silicon technology point of view, if you put the two piece together, with the great work Intel has done, we offer customers the best total solution.

Even though it's a little subtle, the overall software third-party ecosystem, so this is a very good presence for X scale.

We believe this is great opportunity for us, and, we'll do quite a bit additional investment to make this thing to a very successful long-term business.

Okay.

Thank you.

As a quick follow-up, do you have a view at this point, how many employees are likely to be coming over?

The majority.

Majority.

Okay.

And with Morgan Stanley, you have a question from the line of Louis Gerhardy.

Good afternoon.

You mentioned in fiscal Q2 the Yukon and the Pre-N is why you were slightly below plan.

Then in fiscal Q3, just to make sure I got it right, you're thinking Yukon Pre-N will also be weak, but also storage, and was there any other change?

It's not Yukon, per se, Louis, it's really our business with Intel which is branded under the Intel.

It's the same basic technology, but it's not Yukon, it's the partnership products that we do for Intel.

I think what we're seeing in the expansion that we're making into the third quarter is that the overall conditions and the PC market look challenging, and, there's a little bit more challenge for storage to grow in that environment so that is true.

Okay.

And then your wireless LAN business, I heard what you said about pre-N and fiscal Q2, but was the overall business up, then the fiscal Q3, would you expect overall business to be up or flat or down?

You're including N?

Yes.

Yeah, sure.

Definitely grow.

Because we did ship some in.

We didn't ship zero.

But I'm just saying we said it was below our expectations, but the embedded 802.11 and revenue base is going to grow in Q3.

Got that.

And then Sehat, maybe just a question on the Bluetooth wireless LAN product, thinking about your vision and the space.

Do you ultimately see a product like this, supporting other types of radios like DVBH, and FM radio and GPS?

Just trying to understand, is this a platform going forward, what your ideas are there.

Okay.

So -- okay.

So let me -- maybe I should address the Bluetooth question a little bit.

Maybe why even we -- we only just switched now into the Bluetooth.

Well, as you know, many years ago I decided, okay, that with the limited resources that we have, we are going to focus on embedded Wi-Fi even for the cell phones, because we truly believe that Wi-Fi is a superior technology can be used for long range and, of course, can be useful for short range handset applications.

Okay, I made a mistake a little bit in forecasting that because Bluetooth is a much simpler technology relative to Wi-Fi, and it was adopted earlier into the cell phone, for example, the headset type of application, and we missed the boat on the Bluetooth side.

But, you know, now we have the solution.

We realize Bluetooth is not going to go away.

We had an internal development effort for the last year and a half or so, two-and-a-half years, so internal effort, and we are -- we now have a device there integrated solution for both the superior Wi-Fi solution as well as the Bluetooth that everybody else has.

So we believe this is going to be big market for the cell phones, for example, because now they can have both solutions in the same footprint of what the Bluetooth device used to occupy.

So now you can do voice over IP over the enterprise networks or for your home DSL networks or cable modem networks.

So this is a major step for us as we enter the cell phone markets.

Now, you're asking about the -- where this leads to other types of integration.

Yes, over time, we do believe other types of integration makes sense.

Integrating DVBH, WAN.

When the service is widely available, so integrating GPS, yes.

Integrating FM radio, yes.

As the market requirements, yes, we do believe integration makes sense.

Obvious we are working on those.

Thank you very much.

And your next question comes from the line of Thea Lee with Goldman Sachs.

Please proceed.

Thanks.

George, in terms of the options review, if you could just go into a little detail in terms of what is -- how that's proceeding in terms of just sort of time lines and what the issues might be.

Well, obviously, I really can't say any more than we've said in our press release.

Except maybe I'll clarify it one more time.

Our internal options review is ongoing, and we'll still continue for a period of time long enough that we probably will not be in position, by the early part of September to do a Q filing, but we're hoping that as we indicated it could be completed as quickly as possible so we could get this issue behind us and, you know, that's kind of the path we're on right now.

Okay.

And then in terms of the hard disk drive market, Sehat, can you just talk about the competitive dynamics there?

Your main competitor, or primary competitor in the SOC market, Gear, has made some claims about getting some design wins with Asian OEMs.

Just your thoughts would be very helpful.

Thanks.

okay.

Sure.

The primary competitor is, as you say, mention, is gear, so in terms of the technology we clearly obviously have superior solutions over the last 11 years or so we have been in this business.

We always ahead in terms of introducing technology by about a year to two years, and a given process technology, we always early.

So this is the reason why in every segment, every.

We could see this clearly over the last 11 years.

Any customer that use our technologies always gain market share.

So this is another reason why, besides what I mentioned about that we have now not just better microprocessor technology for this business.

We are confident in the long run we'll win this business for we have already won the enterprise and the mobile space.

Okay.

But you know terms of just competitively at accounts like Samsung, how do you feel about your market share there?

We feel just fine.

In this business, people want to use the best technology.

As long as we have the best technology, we feel just fine.

Right.

Exactly.

Over the last three to four years periodically these sort of things surface where someone thinks --

Not the first time.

Not the first time.

When all the smoke clears, technology wins, and we're the technology leader.

I don't want to maybe address that a little bit.

In this storage business, it's a tough business from the point of view that people in the storage -- the end storage device, people makes money or lose money simply because yield.

What is the yield they can get out of the drive, manufacturing, and also how fast they can grow the time to market.

They make the majority of the money at the early stage of the product introductions and then at end of life they might not make as much money.

So people have customers using better technology will have a better -- will be most likely to have high likelihood to make money in this business versus people that are lagging in the technology space.

Thanks.

Good luck.

Thanks.

From the line of Lehman Brothers, you have a question from Arnab Chanda.

Question on the PC market.

It seems like in hard drive there is some inventory build on the finished goods side while there's certainly been issues in the end PC market.

Are you seeing any qualitative different characteristics between, say, the hard drive market and the gigabit client market?

You also talked about Intel.

Is it a question of Intel losing share?

If you could discuss that a little bit and I have a couple of follow-ups.

I don't think Intel is losing share.

The drive market has certain characteristics, and I think our comment about, you know, less than seasonal growth is really the result of the commentary you have been hearing out there from the market.

Okay.

Since that is our market we're basically reflecting the same caution that you're hearing, you know, out there in that market.

On the gigabit ethernet that's just an overall market demand issue.

Nothing to do, you know, with an Intel-specific place in the market.

It's really just -- we see -- I was clarifying the other question that that is not the Yukon product being shipped, it was the partnership product being shipped.

We just see that we have challenges in Q3.

Thank you.

One question.

Again, anybody, maybe a combination, good answer here, historically Marvell has not pushed the technology, seems like especially given some of the acquisitions that that will change in the future, or -- if you could comment on that, if that is true.

In that case are we going to see sort of a gross margin going towards sort of that low 50% rang versus where you were in the mid fifty only a couple quarters ago?

If you could discuss that a little bit.

I thick we feel very comfortable with our model that we've put out there, which is -- gang, I'm not supposed to mention any numbers today, so I won't quantify it again, but I think everyone knows the model that we've been operating you should, and, you know, we don't expect to violate that model.

Now, moving forward we're going to be -- assuming we are successful in closing the purchase of the X scale business from Intel in the early part of Q4, we're going to be incorporating that into our results beginning in Q4, and the margin profile of that business is below the historical rate of Marvell, and we did give some indications at the time we announced the transaction what that would do to our longer term model.

So I don't see at this point, I don't have anything going on that would change those assumptions at this point, but, yes, as we get to deal with more varied pieces of business, it's a different -- it's a different mix of product.

The one last question, please, about the Intel business once again, either for Sehat or Weili, it's been a little bit of time I'm sure you've spent in this market.

Clearly Intel has not been historically a tier 1 player, maybe a stronger application processor and base band, if I remember, DSB communications business, which has been on for long time, Marvell is a relatively new player, obviously very strong other markets but not necessarily established in handsets.

What is -- other than sort of pure technology seems there are things like software that Weili has talked about.

What will make you more successful and what are you seeing from the customers after this process?

Thanks.

Maybe I can -- maybe address this from a different angle.

As you know, we've been looking into trying to get to this business for the last many years.

We started our Wi-Fi, embedded Wi-Fi development and the process of -- processor developments with the anticipation that further down the road we get to get into this business, into the cell phone base band business.

So we've been looking from how to get into this business we've been looking into how to develop technology.

We have several activities going on in-house, and because our partnership with Intel, we also know what's going on there.

The only thing I can say is we have very, very comfortable that this is the right thing to do.

This is the right thing to do for us, to acquire the Intel business.

Despite the perception out there that Intel is not a tear 1 supplier.

That's okay.

We are not concerned by that.

We are looking from the technology, what is the basic -- base technology that we're getting what we can do with that, and what we can enhance from that.

So we are extremely comfortable that this is it this is the right thing for us to do.

Thanks, Sehat.

You're welcome.

Your next question comes from the line of Shaw Wu representing American Technology Research.

Please proceed.

I'd like to revisit the competitive question.

I'm looking at guidance for the next two quarters.

I understand that a lot of is it the market trends and in terms of the PC end market, but it appears that gear has been gaining some share at Samsung is and there's some talk as to gaining some share in some of your desktop customers.

Just want a little more color on that and why you don't think that's a longer term trend.

First of all, let me answer short one.

I do not believe that gear has gained market share in this market.

That's absolutely -- what Sehat said is absolutely right.

They are making no progress against us on any of our key customers.

We -- the basic challenge that we see, and we are taking -- I will say we are taking a conservative view of this at this time, just given all the things we see in the market regarding the challenges that are out there.

Our competitive position continues to remain and our market share at the leading customers we have has not changed one bit.

Your next question comes from the line of Jenny Hsu with Thomas Weisel.

Your guidance seams like it grew just a couple points modestly in order to meet the new guidance or kind of the old guidance, but really I'm wondering is there any sort of new product ramp that could potentially sort of bring the Q4 growth maybe more in line with general growth in the past?

I'm thinking optical drives or maybe a work-down, better than expected work-down of inventory.

Again, as we said is it's too early for us to try to get too precise about Q4.

Clearly we've been consistent saying optical drives don't start until next year, so that's not something that's on the table.

As far as the 11-n market, we just need a little bit more time to digest the trends that are there.

We're expecting and hoping they will improve from where we see them today but it's not prudent at this point to, you know, go any further than what we've already done.

Okay.

And just a follow-up question on embedded wireless then.

Could you sort of rank the following end markets just in terms of where you see growing the fastest over the next quarter or two, one being the UM A handset, secondly being gaming consoles, and third being -- sorry.

Printers, or other handheld devices.

Well, the designs are being done across all of those.

I'd probably say handsets has the -- an awful lot of design activity, but the time from design to revenue there takes awhile.

The segment that has moved quickest --

Let me just mention, we also starting to learn about this business.

A lot of times, you introduce product into the market, cell phone, some products have like three, four years life into it, into the cell phone.

So things just -- when it takes off, it takes off, but ramp-up slower than we normally see in the PC market.

Correct.

So what we have experienced, though, is that the gaming sector is definitely the quickest to adopt the technology and bring it to the market and, of course, we've been the key player and continue to be the key player in enabling the manufacturers of the game consoles to have wireless connectivity, we're very excited about that.

Thank you.

Your next question comes from the line of Ross Seymore with Deutsche Bank.

Thanks, guys.

Just a question on the lower than seasonal outlook for everything C. There's been a decent debate whether seasonality was going to be just delayed or, in fact, weaker.

It seems like you're voting in the latter.

But from a unit perspective, a lot of the data points look like people are looking at the former, that it's just going to be a little bit later but people are guiding to decent growth.

What is it that you're seeing that makes you believe that first -- or that view is not, in fact, going doum to fruition?

I'm sure -- I'm not sure we look at it on exact basis, Ross.

We've done -- our approach to coming up with our, what we expect our revenue expectations going forward is the bottoms up process, and it's fed by what we are aware of as demand from our end customers.

So, that's really the way we look at it, and, therefore, the guidance that we're talk about is reflecting the end demand that we're seeing from our customers.

So how that plays into those two scenarios, I can't honestly determine which one, except to tell you that it's based -- our view is based on what we see the demand coming to us.

Maybe a hard drive specific question.

I think it's quite clear that your customers have gained share versus your competitors customers recently, especially with the merger of the two big handset -- excuse me, HDD OEMS.

How long do you think that sort of share shift can occur before it comes to a point that your growth above and beyond the overall market will be dependent upon penetrating Seagate?

Correct.

That period ended at the end of the second quarter.

Okay.

So from here forward basically you will grow in line or you will be -- you will have to take share at Seagate?

I don't know about Seagate.

We have to gain -- we will now look more like the market.

okay.

Shifting really quickly over to the wireless LAN side, you and Broadcom both pointed to the to the 802.11n side and the inventory problems there.

From your point of view is that inventory problem or lack of demand due to the price point being inappropriate for what consumers are looking for, some quality issues with interoperability, et cetera, or some variable that I'm not aware of?

A big part, obviously, the obvious -- price point, obviously, is an issue.

People get used to paying things for nothing, then when you have advanced technology, so that creates, obviously, some challenges, how to move from b, g, to n.

But the price point will they'll go down as the volume -- as volume goes up as well as the next-generation devices come to the market, naturally.

And as one -- consumers getting into the home.

But more importantly probably is the fact that some of our competitors, I think, became too aggressive in terms of shipping the products more than what the channel could deliver.

If we had known this, we should have done the same thing.

But it's too late for us to do that.

From that it sounds like you didn't shop as much, so if there's an inventory correction to occur yours wouldn't be as bad as some of the other competitors.

Hopefully.

I think that's already been discussed by some people what the condition -- other suppliers to that market, about the conditions here in Q3.

Okay.

One final wireless LAN question, then I'll go away.

On the wireless LAN Bluetooth chip that you announced, typically, if I remember right, when you guys announced a product you usually have design wins in your pocket already.

One, is that the case now?

Two, when would we expect to see revenues from that product begin to hit your income statement?

So the design win already happened with tier 1 customers.

The revenue you should expect in decent volume in second half next year.

Any particular application?

Across the board.

Thank you.

Your next question comes from the line of Srini Pajjuri of Merrill Lynch.

Please proceed.

Thank you, George.

You said Q3 expenses will be significantly higher.

Could you help us understand what's driving that equation?

Higher than the growth rate of revenue.

Clearly with revenue guidance of 1% our expenses are going to grow significantly more than 1%.

So that's what that comment is.

Fair enough.

And then, Sehat, just going back to the Bluetooth wireless LAN product, do you have any plan to announce a stand-alone Bluetooth chip at this point, or are you going to focus on the integrated market?

In time we'll do that stand-alone device, but we are focused -- we are more focused on right now we are focused on fully integrated.

We believe the market will move to integrated anyway.

The stand-alone device is not as important in time.

In time don't have to be as important as the integrated device.

So we reserve the right not to do it.

Most of the customers that we talk to prefer to have integrated anyway.

Okay.

And in terms of pricing, what sort of price premium are you expecting for the product if you compare normal wireless LAN chip versus integrated Bluetooth chip?

It's going to be -- actually, our customers will see lower cost because of the -- because lower chip count, lower assembly cost, lower power management cost.

A bunch of things that disappear from the board.

Also, easier board design, there's quite a bit of cost reduction for especially for people that need both functions on the phone.

Wi-Fi, we've been talking about Wi-Fi and the phone, we really mean it because we see a lot of people wanting to put Wi-Fi -- designing Wi-Fi into the phone.

This is the reason why we, about a year and a half ago we started to internal blue R&D to deal with the fact that they don't have too much space on the phone, yet they want to have both of them.

So in terms of cost, we have a natural cost reduction as we go to smaller process for the next few years.

It's not an issue at this point.

Okay.

And then finally, on the Intel business, you talked about the base band capability but my understanding is that Intel relies on some third party for the protocol stack.

So do you have any plans --

-- customers.

I'm sorry?

At some customers.

okay.

So do you have -- I mean, does -- or do you have any plans to invest or acquire that technology going forward?

as far as the third party dependents from IP point of view it's going to be addressed.

So it should not be an issue.

Some customers already have their own --

And with Harris Nesbitt, your next question, comes from the line of Ambrish Srivastava.

Please proceed.

Hi, guys.

George, couple of clarifications.

Number one, what was the year-over-year growth on the organic business?

I'm sorry, say that one more time, Ambrish.

year-over-year growth for the organic business excluding the three acquisitions.

I haven't figured that number out precisely.

We have the three in there, so I don't have an answer.

I'll follow up.

Clarification on N. Did you say that you expect N to grow in the third quarter or not?

We said would it not grow.

Not to see growth it.

And so you -- are you expecting growth in the fourth quarter or so far out that it's tough to tell?

Just aren't really -- I don't think it's productive at this point, Ambrish to get too detailed about the fourth quarter.

That's fine.

That's fair.

Question on the Avago business.

Now that it's part of the company, what is the expectation?

How should we be looking at it remembers of the quarterly growth and what's the expectation for the current quarter?

You know we give detailed by any products except to -- we gave the starting point which was $30 million, and a full quarter run rate is about $35.

So I think that's the point you should be at.

So the full quarterly run rate is 35.

Yes.

Okay.

And the final question on inventory, George, and I'll go away, your HDD customer is not just specifically your customer, the other guy also has a lot of inventory, then you said that you build inventory on your organic business as well excluding the Avago business.

Are you a little bit concerned given the high level that you had going into the quarter?

No.

Again, it's very difficult to answer this question because of the constraints that we have to talk about today.

Because if I could talk the way I normally would talk it would make perfect sense but I can't.

The -- our unit inventory today is in very good balance to the level that we're going to be shipping moving forward.

It's tracking to where we thought it would be at this point, and so I think we're comfortable, and I know we're comfortable with the level of inventory, because it's not just the story, it's across all of our products.

So I think our inventory now two quarters after the build that we experienced in the fourth quarter is much more balanced at this point.

Okay.

But your expectations for the years have changed versus what it was earlier in the year, and that's why I asked the question.

Still have a half a year to go.

So we will make sure that we're diligent and that it doesn't get out of control.

Thanks.

Ladies and gentlemen, we have now reached our time limit for the conference call.

At this time, I will turn the call over to Dr. Sutardja for closing remarks.

Thank you.

This completes our Q2 in fiscal 2007 conference call.

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

Thank you.

Thank you for your participation today's conference.

Ladies and gentlemen, this concludes the presentation.

You may all disconnect, and have a good day.