邁威爾科技 (MRVL) 2008 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Marvell Technology Group 2008 second quarter earnings conference call.

My name is Cammie, and it will be my pleasure to be your coordinator for today.

At this time, all participants are in a listen-only mode.

We will be conduction a question-and-answer session towards the end of this conference.

(OPERATOR INSTRUCTIONS) As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the presentation over to Dr.

Sehat Sutardja, chairman and CEO of Marvell Technology.

Please proceed, sir.

Thank you, Cammie.

Welcome, everyone, to our second quarter fiscal 2008 conference call.

Mike Raskin, our Interim Chief Financial Officer is also on the call with me today.

Today we reported Q2 revenue of $657 million, which represented the year-over-year increase of 14% and a sequential increase of 3% from the prior quarter.

We had previously guided our Q2 revenues to approximately $645 million on our Q1 earnings call last May.

As a result of strong sales in our communication processors and wireless LAN businesses, our Q2 revenues exceeded our expectations.

(Inaudible) for our products is continuing and it will lead to further revenue increases in Q3, which Mike will detail later.

A sales trend is an indication that we are starting to see payoff from our investments in a broad range of technologies and from our ability to efficiently integrate these technologies into superior products across many markets.

With that, I would like to turn the call over to Mike Rashkin who can provide more insight into our Q2 financial results.

Thank you, Sehat.

Good afternoon, everyone.

I would like to remind all participants that our discussion today will contain predictions, estimates, and other forward-looking statements covering subjects such as enterprise, consumer, and emerging market trends, competition, customer, suppliers, products and demands, and expectation regarding sales trends, revenue growth, gross margins, operating expenses, and other income and expense, cash, accounts receivable, and inventory.

Such statements are usually preceded by words like expects, anticipates, believes, should, will, may, or words with similar import and actual results can materially differ from our current expectation.

To understand the risks that cause results to differ please refer to our annual report on Form 10-K, quarterly reports on Form 10-Q, recent current reports on Form 8-K and other Securities and Exchange Commission filings all of which discuss important risk factors that may affect our business, results of operations and financial conditions.

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

In addition, this presentation includes non-GAAP financial measures.

With respect to historic information, the GAAP information and a reconciliation between the non-GAAP and GAAP figures is provided in our Q2 '08 press release which has been furnished to the SEC on Form 8-K and on our Web site in the Investor Section at www.marvell.com.

With respect to prospective information, the GAAP information and reconciliation between the non-GAAP and GAAP figures is also provided on our Web site.

During the quarter, we completed our restatement for the years 2001 through 2006 and filed our Form 10-K and the quarterly reports for fiscal 2007.

Moreover, we filed our Q1 2008 Form 10-Q on July 9, 2007.

These filings brought our financials up to date and we are currently in compliance with NASDAQ filing requirements.

In addition to disclosing financial results calculated in accordance with GAAP, Marvell also reports non-GAAP measures.

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

Non-GAAP measures exclude the effect of stock-based compensation and amortization of acquired intangible assets.

Now, moving on to our Q2 fiscal 2008 financials.

Today we reported that net revenue for the second quarter of fiscal 2008 was $650 million, an increase of 14% over the $574 million reported for the comparable quarter in fiscal 2007, and a sequential increase of 3% from the first quarter of fiscal 2008.

Our Q2 fiscal 2008 revenues of $657 million exceeded our guidance of $645 million.

As Sehat indicated, our sales were particularly strong in the wireless LAN and PXA businesses.

Storage continued to show some seasonal weakness.

Our other businesses generally maintained their Q1 levels.

Non-GAAP net income was $39.8 million, or $0.06 per share diluted for Q2 fiscal 2008 and represents a 27% increase from Q1 fiscal 2008 non-GAAP net income of $31.3 million, or $0.05 per share diluted.

Non-GAAP net income for Q2 2007 was $127.8 million, or $0.20 per share diluted.

Please note that non-GAAP income for Q2 fiscal 2008 was computed using a tax rate of 19.5% rather than the 10% rate used in prior years.

Shares used to compute non-GAAP earnings per share dilutes for Q2 fiscal 2008 decreased to 630 million as compared to 638 million for Q2 fiscal 2007.

Net loss under Generally Accepted Accounting Principles, or GAAP, for Q2 fiscal 2008 was $0.10 per share diluted compared with the net income under GAAP of $44.9 million, or $0.07 per share diluted for Q2 fiscal 2007.

As noted before, we have provided a reconciliation of GAAP net income to non-GAAP for the quarter we are reporting today in our Q2 '08 press release, which has been furnished to the SEC on Form 8-K and on our Web site in the Investor Section at www.marvell.com.

During the quarter, our cell phone business had strong shipments as a result of the increased demand for our customers smart phone products.

We have completed the porting of the highest volumes products over to TSMC and these new products are in customer qualification stages.

Other products are in the pipeline to be ported to TSMC.

Wireless LAN has shown strong growth from the prior quarter as our design wins have gone into production.

We currently expect an increase in sale in wireless LAN in Q3 as a result of the seasonality of consumer products.

Storage experience continued seasonality in Q2 as expected, however, our Q3 backlog is strong and points to a seasonal increase in Q3.

On our Q1 conference call, we had indicated that our Q2 non-GAAP gross margin percentage would be slightly higher than Q1.

Our actual non-GAAP gross margin percentage was consistent with our expectations.

Consistent with the prior quarter, our gross margin reflects the fair market value of PXA inventory that was supplied under an agreement with Intel.

Non-GAAP operating expenses for Q2 reflected head count increases, cost increases related to our internal review of the Company's historical stock option practices, and a net gain of approximately $5 million due to a one-time divestment of an interest in an asset under construction.

On our Q1 call, we indicated that we expected our operating expenses would increase at a rate slightly higher than our guided revenue growth rate.

Our non-GAAP operating expenses for the quarter ended up slightly lower than expected, due in part to limiting head count additions and the one-time gain.

In other income and expense, our net interest expense was consistent with expectations.

Our Q2 cash and investments declined from Q1 by $97 million from $593 million to $496 million, primarily due to working capital requirements.

Our accounts receivable and DSOs increased slightly during the quarter, but remain in line with historical levels after counting for increases in sales.

Our inventory increase from the prior quarter relative to sales primarily due to the advanced purchase of inventory under our Intel supply agreement.

Under our current forecast, we believe this inventory will utilize under normal operations.

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

Thank you, Mike.

As we move forward in Q3 we can see that our investment in a broad portfolio of advance products is starting to bear fruit.

In many cases, it has taken some time for our R&D expenditures to be converted into products, products into design wins, and design wins into revenue from production.

For example, many of our wireless LAN design wins in the consumer and cell phone market are now in production in Q3, which we expect will provide us with an increase in revenue from that business in future quarters.

We expect this process to continue, resulting in strong growth in future years.

The strong backlog we are now experiencing for our wireless LAN products is a result of many years of investment we have in that area and is also similar tangible evidence of progress and growth potential in other markets in which we have invested.

We continue to see strong design activity from current and new customers with our PXA line of application and communication processors.

During the quarter, Sharp [launched] enterprise and consumer models of our PXA wireless handheld with three carriers, Wilcom EMobile and [Soft Bang] in Japan.

This product used our PXA processor as well as our low-power wireless LAN solution.

We are pleased to see growth of our RIM business as they launch products in emerging markets like India.

Also during the quarter, we saw increased engagements of our first highly integrated single-chip communications processor which combines an [HSBPA] 3G base [pan] with high-speed application processor.

New design wins for our application processors continue to increase well beyond smart phones in existing market segments like mobile work force handheld devices, GPS, PDAs, VoIP and (inaudible) phones, as well as in other emerging embedded segments.

In the PC notebook segment, we are seeing strong adoption of our Gigabit Ethernet technology.

We are seeing strong adoption and growth of our Yukon family of Gigabit Ethernet LAN on motherboard connectivity solutions which are being used widely for desktop PCs, notebooks, and motherboard from consumer or entertainment as well as corporate PC space.

We are pleased to see that our solutions have been adopted by the major PC manufacturers due to our technology leadership, rich functionality, leading performance, small footprint, and enhanced hardware security capability as well as IP infrastructure manageability.

We are witnessing a synergistic trend in the desktop and enterprise switching market segment, as well, where the [position] from the Fast Ethernet to Gigabit Ethernet is driving wider adoption of our low-power gigabit Alaska (inaudible), our Prestera switches and as well as our networking CPUs.

Our end-to-end offering continues to raise the technology bar to provide highest performance, most robust and hardware security connectivity solution in the market.

Additionally, during the last quarter, we introduced a second Bluetooth device with an integrated FM radio.

All of our Bluetooth solutions are completely certified to support enhanced data rates 2.0.

As the clear leader in the embedded wireless LAN market, we are in a strong position to leverage these designs to now include the Bluetooth and FM functionality.

We are seeing great interest and exciting designs in high volume applications such as MP3 players, cell phones, and gaming.

Now moving to the hard disk drive market, our technology advances continue to help our customers improve their product offering, thereby, resulting in expansions of our business.

For example, Samsung recently announced a three-platter terabyte that hard drive, which was achieved using our SOC technology.

Last conference call we announced our breakthrough [Ethretest] technology which allows our customers to improve signal to voice ratio and performance and allows greater capacity points and manufacturing yields.

This device is already sampling and our customers indicate that this technology will clearly help them solve the challenge of achieving the next capacity point.

The [drug] industry is extremely careful when introducing new technology so it is important for us to introduce silicon innovation early.

We were the first to introduce 90-nanometer parts two years ago and now we are the first to be in production.

Now we also have prototypes in 65-nanometer process.

As a result of these accomplishments, we expect to see growth in both revenue and market share.

For example, in the segment where our innovative technology is clearly highly valued in the enterprise hard disk drive market, we expect to see double-digit growth in the next several years.

As part of our strategy to enter the home entertainment consumer electronics market, we have invested heavily in the past few years to develop optical storage technology and are making great strides.

We have achieved a significant design win and are looking forward to go into production next year.

Additionally, as part of this effort, we also invested in image processing for high definition display technology and recently launch our first high definition digital media format converter featuring our quiet video technology.

We are pleased to announce we are already seeing significant traction on this product.

This product has been designed into a number of high definition players in other products which are expected to launch in fall 2007 and early 2008.

Our investment in wired and wireless networking will also strengthen our position in the home entertainment consumer electronics market.

In short, we are well on our way to providing a complete platform solution in this market.

With that, I would like now to turn the call back to Mike for additional comments regarding our financials and guidance for the next quarter.

Thank you, Sehat.

In Q3 we expect continued growth from both our consumer and wireless LAN products and our PXA processor business.

We expect our storage sales to improve over Q2 as a result of positive seasonal factors.

The remainder of our business appears to be consistent with Q2 levels.

Based on the above factors, we currently believe our Q3 revenues will be approximately $710 million.

We expect our Q3 gross margin to be slightly over 48% as a result of an increased mix of consumer products and PXA products.

We expect our Q3 non-GAAP operating expenses to be approximately $274 million.

Although we are investing in a number of new product initiatives, we also remain focused on controlling our expense growth and expect our expenses to grow at a rate below our rate of revenue growth in Q3.

Shares used to compute our non-GAAP net income diluted shares is expected to increase to approximately 640 million for Q3.

Our non-GAAP tax rate for the quarter will be 19.4%, although we expect to return to historic 10% rate or better in future years when operating income increases.

As you know, Marvell recently announced the completion of an investigation into the Company's historical stock option practices.

As that matter is the subject of ongoing litigation and governmental investigations, it would be inappropriate for us to comment on any aspect of those issues and, unfortunately, we are not in a position to field any related questions during today's call.

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

Thanks, Mike.

I have one concluding remark.

Some of you may be concerned about the large increase in R&D expenses over the last year.

As you know, the recent (inaudible) expenses, (inaudible) increase in expenses has been our decision to enter the consumer electronics home entertainment, and the cell phone spaces.

As a result, we incurred initial heavy expenses.

For example, in the cell phone space, we have to continue to support existing customers while investing in parallel future technologies to strengthen our position in this market.

Now, it is our intention to manage our existing resources efficiently as we build a critical mass [whether] we can achieve our long-term financial model.

I want to thank investors for your belief in the Company during this past year.

And that completes our commentary.

Cammie, would you please poll for questions for the Q&A?

Sure.

Thank you.

(OPERATOR INSTRUCTIONS) And gentlemen, your first question comes from the line of Craig Ellis with Citi.

Please proceed.

Thank you, guys.

Congratulations on the strong revenue outlook.

It looks like it's about 8% growth.

Can you just tell us given that it seems to be deriving from wireless LAN in the handset business how the growth in those two businesses compare?

Is it about equal, or is one in particular driving the growth that we're seeing on the top line?

Mike, do you want to do it?

I think that at this point in Q2 that they were equal.

Contributed equally.

Okay.

And then as a follow-up to that, as you mentioned on the prior quarter's results, there was a one-time benefit to operating expense, Michael.

Can you quantify what that benefit was?

The one-time?

That was a $5 million benefit.

Okay.

Thanks, guys.

Thank you.

Your next question comes from the line of Arnab Chanda with Deutsche Bank.

Please proceed.

Thank you.

A couple of things.

First of all, Sehat, you talked about the potential for you to gain market share in storage.

Given where you are in storage, there's only a few possible customers you could gain.

Could you flesh that out a little bit, please, what areas do you think?

Is it on the enterprise or the desktop that you think you can gain share?

As I mentioned in the call as well in last call, we've been investing heavily in, we continue to invest in new technologies for the storage.

As a result, this is our strategy from over the last 12 years investing in storage is to build always the most advance technology to allow customers to build better products to allow them to give, to build new capacity points earlier, to get better yields earlier than their competitors.

They're not using our technology.

And this is the same recipe that we've been using over the years to achieve increase in revenue as well as increase in market share.

Specifically, with regards to the enterprise, yes, I did mention that we expect to see revenue growth and increase in that space as a result of this kind of investment we have in storage.

And one follow-up, please.

Optical storage was a product line that you were very excited about and obviously hasn't quite worked out in the same time frame that you were looking for.

Should we assume that is a contributor, a significant contributor for calendar '08?

And even if you can't tell us kind of specific customers, could you give us a sense of how significant or how confident you are that you are going to get some contribution from that segment?

Thank you.

Yes.

The optical technology is a very important piece of technology for us to get into the consumer electronics home entertainment market because the optical technology is the foundation of this market.

Now another piece of the technology is the medial, the high definition medial processor technology, which I also mentioned in the call.

You're right.

Our revenue expectations in the optical side is a little bit off compared to our original goal.

But at the same time, I'm still very, very positive with this prospect of this technology allowing us to get into this large market opportunity.

At the same time, if you look at our, the other piece of the technology that we invested for the video, the high definition video processing, actually, that one is earlier than expected in terms of the market acceptance.

So I will say net-to-net, we are still -- we're still not that -- we're still early in the game, basically, in terms of this high definition market.

We do expect that the revenue to be, to have some revenue in 2008 and 2009 will be the biggest time frame where we see more revenue, significant revenue increase.

Thanks, Sehat.

And last question for Mike Rashkin.

Mike, if you could explain why your tax rate went up, almost doubled and why or what time frame do you think you can go to back to 10%?

Thank you.

Yes.

We do business in many countries throughout the world and in some cases, our income is not necessarily, our taxes are not necessarily dependent on the amount of income we earned.

And so even when we have a low amount of income, we're still paying a certain base amount of tax.

As our net income increases in future years, that tax won't scale proportionally and so our tax rate will naturally come down.

Can you tell us what time frame that is?

I would anticipate that it would be next year.

Thanks, Mike.

Thanks, Sehat.

Your next question comes from the line of Seogju Lee with Goldman Sachs.

Please proceed.

Great.

Thank you.

Just a quick follow-up on the tax rate, Mike.

In terms of next year, you're expecting it to be a 10% tax rate for that year?

Or just to clarify that?

It would depend on our revenue and our profitability and since I don't have enough of information about that at this stage, I really can't give you what our tax rate would be.

So I would say that the trend would be our tax rate would be down.

I think this year is an aberration.

But I can't give you an exact time when it's going to come down to 10% or what exactly would be next year.

Okay.

Great.

And then just wanted to follow-up on the gross margin side, I think your guidance you said slightly over 48% so I just wanted to confirm that.

And then if we think about that sequentially, just sort of what the drivers are there.

Is it just the mix shift with the PXA products having a richer portion of the mix or how should we think about that?

And if it is PXA, can you talk about how gross margin, or how you're progressing in terms of improving the cost on that?

Thanks and good luck.

Okay.

Thank you.

With regard to the margin, yes, I did say slightly over 48%, and yes, the primary driver there is the mix with the PXA products.

And in terms of how we're pursuing to increase our margins going forward, we are moving as quickly as we can to porting over to TSMC.

The high volume products and those products are now in qualification with the customer.

I think over time we might have some margin [pervertations] until we make a complete transition out of the Intel inventory until we get completely to our own inventory.

Your next question comes from the line of Cody Acree of Stifel Nicolaus.

Please proceed.

Thanks.

Mike, could we just follow-up there a little bit?

How long before you think you're fully ported over at least to the point that we're actually seeing maybe a little more stable margin increases?

Well, the fully porting over, there's a whole number of group of products and we're porting over initially all the high volume products and I think we will probably finish this process by the end of fiscal '09.

Okay.

All right.

Just want to add a little bit on that.

The reason is because we have, we do have commitment to the customers for even some of the latest designs to be produced at the Intel fab.

In parallel, we even though (inaudible) we also have to -- we have porting into the normal foundry model.

So there'll be a time when a number of products, even the new products, will be still manufactured at Intel before the whole, before everything's move to, I think by the end of next year, (inaudible) everything will be moved to TSMC.

Okay.

Maybe Sehat, we can just follow-up there for a second.

The prior Mike had actually reiterated a goal of 50% margin by the end of this year.

With this mix being higher, does that eliminate that possibility?

Does it just push it out further into next year?

I think that is probably a goal for beyond this year and it's going to take us some time to get there.

Okay.

And then lastly, on the Ethernet side, it sounds like that business is expected to be about flattish.

Can you give us any more color as to what you're seeing their order trends?

Is it inventory?

Is it just seasonal business?

Maybe a little bit more help.

Yes, we actually are getting a number of major, actually, major, major design wins across the PC OEMs, but at the same time, there are some price pressures.

So we'll probably see the business increasing but not spectacularly increasing.

I don't think it's flat.

But as we go to more and more customers seeing our complete solutions including the CPU network processor in their business we do expect down the road we gain more revenues in the segments.

Any details client versus infrastructure?

Yes, both, (inaudible) on both segments we're getting major design wins and some of those products will be out like some of the really high visibility products will be out by the middle of next year ramping out into productions.

Thanks, guys.

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

Please proceed.

Hey, guys.

A quick question on the WiFi business.

A lot of your growth right now is being driven by two fairly high profile consumer wins.

Just a question on the seasonality of when those things get built.

Would you normally expect that the peak quarter for you would be the third quarter or the peak quarter for you would be the fourth quarter just based on when those consumer devices get built and sold?

Yes.

(Inaudible)

I think consumer products for Q3 is the quarter with the most demand seasonality.

Okay.

So Q4 might just take a little bit of a dip based on the timing of those builds in that business?

I'm not going to make that statement at this point.

But just generally, Q3 is a better consumer quarter.

(Inaudible) say that because we have also have additional number of design wins.

So that seasonality in that wireless LAN maybe, hopefully, will be tempered off.

Okay.

That's fair.

And then on the optical drive win, can you just tell us what type of drive this is?

Is this a blue laser, a red laser?

And, I mean you said before that you'd see some in '08 and then more in '09.

If you could just confirm that.

Yes we, I guess I didn't make, I didn't say which, you're right, I didn't say that whether it's red or blue but it is both blue and red lasers.

The (inaudible) to that the high definition video processor, which is an important technology for this market, obviously requires us to provide a blue laser solutions.

Now we do have also the derivative of that solution, which is just only laser capability.

Okay.

But the bulk of the revenue that you would expect in '08 and '09, is that off a high volume red laser or is that off a new next generation blue laser in terms of just the revenue that you'll see?

It's hard for me to predict that.

It could be either way.

Okay.

Thanks very much.

Your next question comes from the line of Mark Heller with Merrill Lynch.

Please proceed.

Hi, guys.

This is Srini.

Mike, just a couple of clarifications.

First on the tax rate, again, sorry to beat a dead horse here but historically you never reported anything different from 10%.

I'm just curious as to what changed this quarter that's going up and then what's keeping higher?

Okay.

Well, as I said, in our tax structure there's a certain amount of tax that we pay that's not connected to the amount of income we have.

And so if our net income, operating income is relatively low, we still pay the same amount of tax in certain countries.

As a result, our tax rate increases.

As our operating income increases, that income, that amount of tax is a lower percentage of our overall income and our tax rate is much lower.

Okay.

I guess I still don't understand, maybe I'll take it offline, but the other thing is the nonoperating line.

You've been reporting a loss of, I guess, this quarter it was $7 million.

Could you explain what's going on there and how long we'll have that line?

How long we'll have that loss going forward?

(Inaudible) interest expense on our indebtedness.

So I understand there's a term loan, but given your cash position, it seems a fairly high number to me.

I'm just trying to understand how that will trend going forward.

Well, that represents interest expense.

There's no losses from any other kinds of transactions in there.

And it should trend the same (inaudible) interest rates.

Of course we're looking at overall how to restructure that debt.

Okay.

Fair enough.

And then Sehat, maybe one for you.

On the Bluetooth FM you talked about potential design wins, do you anticipate anything in the near-term or is it more of a longer-term opportunity for you?

Thank you.

Yes, I will say more of a middle-term opportunity so our sales and marketing is busy working with potential customers.

Thank you.

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

Please proceed.

Yes, I was interested in one clarification and one quick question.

The clarification is that with the hard drive business in a seasonal upturn, that usually carries very rich gross margins, and I was wondering, there must be a big differential between the consumer and the PSA business growth relative to the hard drive growth to drive gross margin to just below over 48%.

Am I correct in that assumption?

And the follow-on is actually on, Sehat, I hear from these stories that you've been hiring in Taiwan to support your cell phone business application engineers, and I was wondering, do you have expectation of major wins in Tier 1OEMs for base [pan] in addition to application processors any time soon?

Okay.

So let me answer the second part first.

As you're probably aware, we also mentioned that we have a large number of design wins on the application processor as well as the base [pan] cell phone application processors, cell phone base [pan] communication processor which integrate the application processor together with the base [pan].

So one of the key things to make the customer happy is for us to serve them with the appropriate application supports.

These products are very complex.

We do have large number of people that works in the application supports whether it's in Taiwan or other parts of the U.S., as well as in other countries.

We do expect those businesses to announce some other major design wins but I'm not so sure we can announce the names in some cases.

But we are actively engaged in many, many different areas.

I was wondering whether we're going to see, wake up one day and see the kind of thing that we saw out of [Nokia] with other Tier 1OEMs?

It's too early to talk about real, real major design wins at this point.

Okay.

I mean additional major, major design wins.

Super major, I suppose you would call it.

But our technology is [work] class so it's just a matter of time before we got additional super major design wins.

Now with regards to the margin, in general our product margins, in general, our target gross margins is on long-term gross margins are on 50% or so.

The (inaudible) products, there will be slightly higher than 50%, they'll always be products they will be slightly lower than 50%.

So I'm not going to make comments on which product is more than 50% or which product is less than 50%.

But we manage our business so that depending on the level investment we have to do depending on the competitiveness in the markets to adjust our -- to keep track, to compete in the market.

We're comfortable that we will down the road as things stabilize we'll be able to achieve the 50% gross margin on average.

Okay.

So, Sehat, just to clarify this point you made, we built up on expenses to support design wins in the cell phone business is not dependent on any time soon that you would hit a major jackpot like in the situation of certain companies at [Nokia]?

Did I read you correctly?

We don't just focus, I suppose, I guess the answer is we did not just focus on addressing the large (inaudible) design wins but we also focus on the middle volume design wins.

And middle volume design wins requires more support because we have more customers to support.

So probably maybe the answer to that is because we have more customers to support.

Okay.

Thank you.

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

Please proceed.

Hey, thanks.

I'm just trying to understand the gross margin guidance better.

You had a mix this quarter towards WiFi and PXA and then your gross margin expanded 50 basis points sequentially.

And from what I understand, that business is expected to continue to be strong.

And then your, I guess, storage business, historically has been a higher margin business.

So I'm just trying to reconcile, why is the gross margin going to decline so much sequentially even though it seems like them you know, just trying to understand what caused the strength this quarter and what's the big change in the October quarter?

Thanks.

As Sehat said that we have some products with higher margins, some products with lower margins.

We aim for the 50% margin and sometimes when we do have a decline in margin, it might turn out to be a particular product under a particular contract or circumstance and the mix winds up at that rate and that's what we calculate it will be for Q3.

So just to clarify, why were margins up sequentially?

What drove that?

You mean in Q2?

Yes, from Q1 to Q2, I guess, the non-GAAP operating margin, sorry non-GAAP gross margin expanded a bit.

Just trying to understand what was behind that.

Well, our product mix was a little bit different during that quarter and represented a higher gross margin percentage.

Your next question comes from the line of Adam Benjamin with Jefferies.

Please proceed.

Thanks.

This is [Lane] Curtis for Adam.

I was hoping to take another cut at this net interest question.

My understanding is on the debt you're paying about $7.6 million a quarter and you have $500 million in cash so you should be getting some interest rate on that.

Is there another piece of this equation that I'm missing?

No.

We have, let me see, that amount is net of our interest income.

Right.

So in Q2 you paid $6.8 million, you're not earning, you're earning less than $1 million on that cash.

Just trying to understand the math.

We have to look into that.

Yes, I have to, let me.

I'd have to look at that and be glad to talk to you about it off line.

Okay.

If you can just give me a call later.

Thank you.

Your next question comes from the line of Louis Gerhardy with Morgan Stanley.

Please proceed.

Yes, I just wanted to ask you about the inflection you've seen in the HTD business, maybe you can talk about it different form factors.

And given that business has really underperformed the drive market over the last year, are you just seeing a seasonal type of recovery in that area or any signs of something more than that?

I think it's -- I do believe it's a seasonal recovery.

Last quarter, I think the industry probably a little bit more conservative in terms of building inventories and this quarter they are probably at the level the inventory's probably too low.

That's in general.

Specific on our side, we, I think our customers are winning market share as in general compared to the rest of the market.

So combination of the two (inaudible) what caused our revenue to increase in Q3.

Okay.

Thanks.

And then I just wanted to ask you about [TAVOR] which applications are you really targeting here and just maybe talk about some of the design wins that you've landed and when can we start to see material revenue contribution from that?

Sure.

[TAVOR] is, for those people that haven't, or not familiar with [TAVOR], [TAVOR] is the code name for the [bi-step] integrate the HSBPA 3G base [pan] together with the high performance application processors.

So [TAVOR] is targeted for those people that want to move to 3G.

The smart phone customers, they are moving going to 3Gs.

And probably aware that more and more of the carriers are asking the phone suppliers to deliver 3G solutions as the carriers are starting to build up their 3G networks.

So in terms of where the volumes (inaudible) matter more will be sometimes the second half of next year and will be a lot from there as the industry switch from 2G to 3Gs.

Thank you.

Your next question comes from the line of Romit Shah with Lehman Brothers.

Please proceed.

Yes, thanks a lot.

When you talk about normal seasonality in your storage business, should we be thinking of sequential growth in the mid single-digit range?

Would you please repeat that question?

Yes, could you quantify what you mean by normal seasonality in your storage business?

What I meant by that is that typically in the storage industries, Q1 and Q2 is seasonally down and Q3 and Q4 seasonally up, typically that's what happened in the storage industries.

The industry tends to be adjusting time.

So we deliver our parts on a daily basis to certain customers so the industry only just built where the demand is up and typically it's up during the return to school and the Christmas holidays.

Sehat, when you say that the business will be up in the third quarter, should we be thinking low single-digit growth, high single-digit growth?

Oh, yes, I don't have that number with me.

Okay.

And then just one question on the one-time benefit to operating margin, the $5 million, was that included in the non-GAAP operating margin?

Yes, it was.

Okay.

Thank you.

Your next question comes from the line of Harsh Kumar with Morgan Keegan.

Please proceed.

Hey, guys, can you help me out real quick?

The combined chip DSP plus application processor, I think you said you're sampling it right now or when can we expect commercial shipments of that product?

Yes, we're talking about [TAVOR].

So it's, well actually, I guess to be precise, the combinations of base [pan] DSP with application processor has been shipping for many years in the different family of product, which is called [HERMON] so [TAVOR] which includes the more advanced 3G solution, that's the one they're going to ship.

That's the one that we've been sampling for the last year or so that we've been sampling to customers, customers been working in their labs.

We've been helping them to port all the different softwares.

Some of them, different customer requires different Linux operating systems.

Some customer prefers to have Windows mobile operating systems.

So we've been busy working with this customer for the last one year and we expect productions to be sometimes ramping up starting next year.

Okay.

And then a quick, thanks, Sehat, for that clarification.

Quick housekeeping question.

Can you break down the consumer versus the enterprise revenues as you have in the past?

Oh, yes.

We didn't have, I guess, we didn't have time to sit down to look at that.

I apologize for that.

We'll get an update next quarter.

Fair enough.

Thank you.

Your next question comes from the line of Craig Berger with Wedbush Morgan.

Please proceed.

Good afternoon.

When you look at the cell phone business, what's the goal in terms of gross margins there?

Is it a 40% gross margin kind of business out in time or can you do better than that?

Obviously, due to the limitation that we have when we acquired the business from Intel, the gross margin's going to be impacted in the beginning.

But in the long run, our plan is to design -- you see more advance process technologies as well as to have more features so that we can charge higher prices for those new feature phones, even higher feature phones, as well as building high performance process capabilities.

We think that the margin probably will be slightly lower in the long run.

So it'll be slightly lower than the 50%.

Are you guys still on track to exit the year at $150 million in revs this year and $200 million in revs next year in that business?

Are you tracking ahead or behind that goal?

I don't think we go to that much in detail.

But I think we can say is we are happy that we, that the communication processor business is going to be a growing piece of our business.

I can tell you the trend is we want to be -- we want to make all our revenues in the business to be as much as possible to be in communication part of the highly integrated communication part of the business.

And we will always be customers they will be buying standalone application processor but our goal is to get more revenues in the integrated portions.

Can you guys comment on your CFO search status when you might expect to have someone on a more permanent basis?

Yes, we have retained a search firm, as you might know, and we're currently interviewing candidates.

And we hope that we might have one on board in the very near future.

Last question.

While your income is low, you pay a certain amount of base taxes.

What is the amount of base taxes and what's the marginal tax rate?

And if you know the base number of income, that would be helpful.

I really don't think I can get into that level of detail on this call.

I would be happy off line to explain to you in more detail.

Thanks.

Good luck.

Okay.

And at this time, this concludes our Q&A session for today.

On behalf of Marvell Technology Group thank you for attending today's conference.

This concludes our presentation.

You may now disconnect, and have a great day.