邁威爾科技 (MRVL) 2008 Q3 法說會逐字稿

Good afternoon, everyone.

Welcome to Marvell Technology Group third quarter fiscal year 2008 financial results conference call.

Participating on today's conference call are Dr.

Sehat Sutardja, Chairman and CEO; and Mike Rashkin, Marvell's interim Chief Financial Officer.

Before we begin the call, I would like to remind all participants that the discussion today will contain predictions, estimates, and other forward-looking statements covering subjects such as enterprise, consumer and emerging market trends, competition, customers, suppliers, products on demand, and expectations regarding sales trends, revenue growth, gross margins, operating expenses, 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 of similar import, and actual results could differ materially from current expectations.

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

Please be reminded that the Company undertakes 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 most directly comparable GAAP information, and reconciliation between the non-GAAP and GAAP figure is provided in Marvell's Q3 '07 press release, which has been furnished to the SEC on Form 8-K and is available on Marvell's website in the investor relations section and at www.marvell.com.

With respect to perspective information the most directly comparable GAAP information and a reconciliation between the non-GAAP and GAAP figures is provided on the website in the investor's section.

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 use 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 manner similar to how the Company analyzes operating results.

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

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

Sehat Sutardja.

Please go ahead, sir.

Thank you, and welcome everyone, to our third quarter fiscal 2008 conference call.

Joining me on today's call is Mike Rashkin, our interim Chief Financial Officer.

This quarter we have achieved record revenues and reached a $3 billion annual run rate.

Our Q3 revenues, operating margins, and earnings per share have each exceeded our expectations.

Our Q3 revenue of $758 million represents a year-over-year increase of 46%, and a sequential increase of 15% from the prior quarter.

Last quarter, we had guided our Q3 revenues to approximately $710 million.

However, as a result of very strong customer demand in our major markets, our Q3 revenues greatly exceeded those expectations.

The overall market demand for all products continues, and we expect further revenue increases in Q4, which Mike will detail in a moment.

As we indicated in our Q2 call, our increasing sales trend is the result of our investments in a broad range of technologies, and from our ability to efficiently integrate these technologies into superior products across many markets.

Despite the significant increase in revenue this past quarter, our operating expense level remains outside the parameters of our financial model.

So we are taking action to reduce operating expenses through a reduction in force that was announced today, which we expect to complete in the fourth quarter.

Our -- I would like now to turn the call over to Mike for a detailed look at our financial results for the quarter.

After that, I'll discuss what we are doing in some of our businesses, the solid progress we are making, and the growth drivers in place to continue our momentum into fiscal year '09.

Mike?

Thanks, Sehat.

And good afternoon, everyone.

As Sehat mentioned, earlier today, we reported that net revenue for the third quarter of fiscal 2008 was $758 million, an increase of 46% over the $520 million reported for the comparable quarter in fiscal 2007, and a sequential increase of 15% from the second quarter of fiscal 2008.

Our third quarter revenues exceeded our guidance of $710 million, on particularly strong sales in certain businesses registering strong quarter-to-quarter gains.

Non-GAAP net income for the third fiscal quarter was $86 million or $0.14 per diluted share compared with fiscal Q2 non-GAAP net income of $40 million or $0.06 per diluted share.

Our non-GAAP tax rate for the quarter was minus 8% and is about 6% year to date.

The rate declined dramatically in Q3 as a result of a settlement of a foreign tax audit during the quarter, and the reversal of previously reserved taxes.

For comparison purposes, fiscal Q3, non-GAAP EPS if normalized at the Q2 tax rate of 19% would be $0.10 per diluted share representing an increase of 62% quarter-to-quarter.

Shares used to compute non-GAAP earnings for diluted share for Q3 fiscal 2008 were 631 million, slightly over the 630 million shares used for the prior quarter.

Net loss under GAAP for Q3 fiscal 2008 was $6 million or approximately $0.01 per diluted share, compared with a net loss under GAAP of $56 million or $0.10 per diluted share for the prior quarter.

Now I will speak to the performance of some of our growth drivers for this quarter.

We are very pleased with our Q3 results in storage.

Overall we have experienced strong demand for storage products across all customers and market segments, with revenue for hard disk drive related products growing 16% from Q2.

A majority of the growth is driven by the demand for 2.5-inch notebook drives at some of our major customers.

For our wireless LAN business the third quarter was a record quarter both in terms of revenue and of units shipped.

Being seasonally the highest quarter of the year, Q2 saw revenue grow over 200% year-over-year and over 50% sequentially quarter-over-quarter.

We have maintained our leadership position in the inventive wireless space in products such as handsets portable media, imaging devices, and gaming.

For our 802.11 end products we have secured leading Tier One design wins for our enterprise clearance wireless solutions as well as for consumer class gateways.

In our printer business we continued to be a leading SOC supplier.

For the quarter we exceeded our revenue plan in this area and achieved record shipments of platform components for both laser and ink products with over 20% quarter-to-quarter revenue growth.

In the cellular and hand-held business momentum continued in the third quarter as product shipments exceeded our plan, delivering quarter-over-quarter growth of about 10% driven by strong customer demand and growth in the application processor business.

Let me talk a moment about our gross margins.

You will recall that on our Q2 conference call, we had indicated that our Q3 non-GAAP gross margin percentage would be slightly higher than 48%.

Our actual non-GAAP gross margin percentage was 48.3%, versus 49.4% in the prior quarter.

Consistent with the prior quarter, and as described in our 10-Q, our gross margin included the fair market value adjustment of inventory that was supplied under the agreement with Intel.

The gross margin impact of this fair market of value adjustment in Q3 declined by approximately $17 million quarter-to-quarter.

This decline was greater than expected, and offset a otherwise strong margin performance resulting from favorable product mix and cost improvements.

The cost improvements are part of initiatives begun in Q3 to improve our gross margin by managing our costs, controlling our ASPs, and improving our operational efficiencies.

We expect to see some impact in Q4.

And even greater impact in FY '09.

I will indicate the impact of these changes in our guidance section.

Our non-GAAP operating expenses for the quarter ended up slightly higher than expected due mostly to legal expenses of approximately $9 million, related to the ongoing SEC inquiry, and litigation regarding stock-option matters.

We expect that these expenses will decline as we resolve these outstanding actions.

As you know, these matters are subject to ongoing litigation, and we'll not be able to discuss them any further today.

Further, in order to control costs and operating expenses, and meet our financial targets, today we announced the reduction in force that will reduce headcount by approximately 400 people, or 7% of our total work force.

We expect to take a one-time charge of up to $8 million in Q4 related to severance and other expenses due to this force reduction.

We expect the reduction in force will reduce operating expenses by approximately $10 million per quarter once implemented.

Of course, it is difficult to announce changes to our work force, but we have done this with the utmost care and respect for the hardworking and talented individuals involved.

Our other income and expense of $6 million was consistent with expectations.

And a breakdown of the components of other income and expense has been posted on our website.

Our Q3 cash and short-term investments increased from Q2 by $33 million, from $496 million to $529 million.

Primarily due to increased stock option exercises, and operating income net of capital expenditures.

Our Q3 account receivable DSO was 46 days, an improvement from the last quarter due to greater than usual linearity in sales.

Our inventory increased from the prior quarter by $86 million, primarily due to the advanced purchase of inventory under our Intel supply agreement.

Under our current forecast, we continue to believe this inventory will be utilized under our normal operations.

Excluding the Intel inventory, inventory turnover in fiscal 3, Q3 fiscal 2008 showed steady improvement.

Before discussing our guidance for the fourth quarter, let me turn the call back over to Sehat to discuss our longer-term growth drivers.

Thank you, Mike.

This really is an exciting time for Marvell.

We are executing on all cylinders and we have reeled in achievable goals.

As we move forward, we are well positioned to continue our upward sales trend in Q4.

And growth drivers are in place to continue that growth in fiscal year 2009.

Let me give you an idea of some of the newer things we are working on and the progress we are making.

In the storage market, next year, we will be in full production for our iterative technology, which we announced in earlier calls.

We have been sampling a stand-alone iterative based rechannel to our customers for over 10 months now.

In this quarter we sampled a hard disk drive, SOC utilizing this iterative technology.

To put this in perspective, using our previous generation rechannel SOC technology, which we introduced a year ago, today, our customers are able to ship a one terabyte drive in a three platter configuration.

The three platter configuration is the most cost effective solution as opposed to competitive solutions that require four or even five platters to achieve the same one terabyte capacity.

With our iterative SOC, our customers will be able to deliver a two terabyte solution in the same three (inaudible) configurations just one year from now.

We consider this to be one of the most revolutionary technology breakthroughs in the storage industry.

We believe these advances in the storage area will enable strong growth for these products well beyond non-traditional storage for PC -- for PC products.

As a result of our strong execution in the drive space and our ability to deliver industry-leading solutions to the market, significantly ahead of our competitors, in the traditional segments of our customer base, we have now captured all the new designs for product that will be going to production next year.

We feel confident that we can maintain double-digit growth year-over-year.

We expect our shipments to continue the momentum of Q3 into Q4, due to the success that our customers are having.

Now moving to a newer part of our storage business, in Q4, we will start shipments of our CL attached SCSI post bus controller or adapter.

This business is a new area of focus for us, and we are confident we can succeed by introducing significant technology advancements into this market.

Moving to optical storage, the optical storage market is one of the biggest markets for us to tap into.

As we have announced in the prior quarters, we have design wins for our our optical SOC products.

We continue to show progress on the software side with our customers in preparation for volume ramp in the next year.

To complement our optical strategy, we are invested in the video processing area.

Our technology in this area will enable the delivery of high-quality HDTV content into the mass market.

One of the first products we announced in this area is our video format converter with QDO technology.

In the short time since we announced QDO, we have made significant progress in market acceptance.

The visibility of QDO technology has increased dramatically over the last quarter as we have garnered endorsements from leading-industry experts.

More recently, Meridian, the industry-leading video equipment supplier, became the first adapter of the QDO branding.

Furthermore, four of the top consumer electronic brands, LG, Panasonic, Pioneer, and Sharp have all demonstrated products that incorporate QDO technology.

We have high hopes that in the future this technology will become standard in all forms of video devices.

I also want to take a minute to talk about an initiative we recently announced that I believe has enormous potential for Marvell.

For those of you who have known us for a long time, you know that Marvell has a proven track record of using breakthrough innovations to enter mass markets.

Our success in the storage industry is an excellent example of where we have done this in the past.

In that vein, earlier this month, Marvell introduced a new digital technology for power supplies that saves energies and helps reduce the issue of carbon footprint for today's consumer electronics.

This truly is a technological and environmental breakthrough.

We are pleased to say that after five years of development and research, Marvell is able to offer cost effective solutions to our customers that will save up to 50% of power currently being used by consumer electronics.

While existing solutions to conserve energy are currently available, these analyst's solutions have not been broadly implemented due to the additional significant cost.

At the same time, the analog solutions were impractical as they increased the size and weight of power supply adapters for portable applications in many instances doubling the size of the adaptor.

Our technology solve these problems.

We believe the market opportunity for our digital power supply products is huge.

It is simple to understand if you look at the number of power supplies utilized by virtually every consumer electronic device from PCs, LCD TVs, set-top boxes, cable DSL modems, printers, and more.

There are almost a billion products manufactured every year that could use our technology.

Marvell, more than any other company, is uniquely positioned to capitalize on this enormous market opportunity, and we are actively engaging with public and private stakeholders to raise awareness of this important issue and what we can do about it.

We have long supported green technologies, and it is our hope that Marvell's smart, energy efficient technology will eventually be used across all backs of consumer electronics.

We're confident that the initiatives I just discussed will extend our technology and leadership and undoubtedly enhance our ability to compete in the marketplace.

Now, Mike, will discuss our fourth quarter guidance.

Looking to the fourth quarter, we expect our storage sales to improve over Q3 as a result of continuing customer demand and consumer electronic seasonality.

In addition to strong PC sales, this continuing demand is caused partially by the proliferation of hard drives in to non-traditional application such as PVR security, DVD recorders, external storage for attachment to all kinds of devices.

And other peripheral or non computing applications.

Likewise, we expect continuing growth in our ethernet infrastructure, and connectivity business segments.

After a seasonally high Q3, we expect our wireless business to be relatively flat.

Based on these expectations, we currently believe that our Q4 revenues will be approximately $780 million.

We also expect our gross margin percentage to improve 40 basis points over Q3.

Despite even less benefit from the fair market value adjustment with regard to Intel inventory.

As a result of our gross margin improvement initiatives, we expect to see gross margins of 50% by the second half of FY '09.

We expect our pro forma operating expenses in Q4, a 14-week quarter, to remain approximately at Q3 levels when normalized for an extra week, excluding the charges related to the reduction in force and certain payroll tax expenses of up to $6 million related to our recently launched tender offer.

As indicated by the reduction in force we have announced today, we remain focused on controlling our expenses, and expect our expenses to grow at a rate below our rate of revenue growth for fiscal '09.

Shares used to compute non-GAAP net income per diluted share are expected to increase to approximately $640 million for Q4.

With that, let me turn the call back over to Sehat.

We will turn to Q&A in just a minute, but first let me briefly discuss a few other items.

We are, as you know, actively engaged in searches for a permanent CFO, and a permanent General Counsel, and these searches are ongoing.

When we are prepared to make an announcement on either of these positions, we will do so.

So as you have seen, we have achieved record revenues, taken serious action to improve our gross margins, and control operating expenses, and our tax rate has declined, and with the growth opportunities I have outlined, we are well on our way to achieving our financial goal.

Could you please poll for questions?

(OPERATOR INSTRUCTIONS) Your first question comes from the line of Cody Acree with Stifel Nicolaus.

Please proceed with your question.

Thank you and congrats on a good quarter.

Can you talk a little bit more in detail about when you expect to start seeing some benefits from the reduction in force efforts?

Sounds like $10 million per quarter, but when do we start to bake that into the model?

We are going to see some benefits in Q4.

We expect to see a reduction in expenses of about $4 million in Q4, and then in Q1, we will see the full effect of $10 million.

Okay.

Great.

The gross margin impact X, if you excluded the $17 million writedown of the inventory, if that was the right number, could you give us that net amount of what the gross margin would have looked like excluding that?

Well, I think the $17 million translates into almost 2.5%, almost 2.5 margin points.

That's a clean number, then?

2.5 points higher?

That's correct.

Okay.

Great.

And then lastly, we have seen shortages in some areas of hard disk drives throughout the quarter, has that going to had any impact on your order trends on your customer base?

Is that playing any into what you expect out of next quarter's outlook?

No, we -- we don't see shortages as being a problem, maybe you are referring to the double ordering issue that has been raised.

And we don't see any of that in our markets.

Our customers are -- we feel some of the most efficient in the world at managing their inventories, and the parts that we build for them especially in the storage area are customer parts.

So there's no need for them to be double ordering.

And then very lastly, we didn't get an update specifically on the progress of porting over to TSMC, could you give us maybe a little help there as to when you would expect to start to get the margin benefit of that?

The -- we imported products over the -- the -- where they are, is basically in qualification with the customer, and in the cell phone industry, it's difficult because it's not only the people we're selling to but their carriers, and so this process is moving along, and we expect to ship -- we hope to ship this quarter some TSMC parts, and then we expect a higher volume production in Q1.

All right.

Perfect.

Thanks, guys.

Your next question comes from the line of Seogju Lee with Goldman Sachs, please proceed with your question.

Great.

Thank you.

Just to clarify on the OpEx and the tax rate guidance for next quarter, when you talked about the OpEx being flat in third quarter from an, you said something about a normalized rate.

So can you help me think about that?

Is it $280 million or how should we think about that?

By a normalized read, we are -- meaning taking a look at it as if it were a 13 week quarter instead of a 14-week quarter, so we're looking at operating expenses of approximately $283 million, on an normalized basis.

Okay.

Great.

And then what is the expected tax rate for the fourth quarter?

The expected tax rate, we're looking at somewhere about 10%.

So you get back to your old traditional model and all of the past items that you were expecting in this quarter result?

In terms of the way that the tax rates are now computed under FIN 48, it's something that we have to look at on a quarter by quarter basis.

It depends on the income in the quarter, the expense in the quarter, reserves, and any particular events that occur that effect taxes for the quarter.

So this particular quarter, looking forward, we think it's going to be about 10%, but that rate can vary from quarter-to-quarter.

Okay.

Great.

And then just two last questions for me, you talked about getting to gross margins of 50% as you get into the second half of fiscal '09.

Can you talk about the drivers there?

And then just in terms of the OpEx as we look at the first quarter, if I think you are having $10 million of savings, should we think -- that would be $10 million off the $280 million base, right?

Right.

So first let me -- let me handle the gross margin question.

Gross margins is something that have become a central focus of the Company.

We look at it from an operating viewpoint, from a design viewpoint, and we have made a very determined effort to improve gross margins by looking at operational efficiencies, such as, and improving the way we do our testing, buying better equipment, the way we do packaging.

We have also looked at it from the point of view of controlling our costs by working with our vendors, and also by managing ASPs by working with our customers, and we think that these initiatives are starting to have an impact, and just -- and each quarter it's going to get a little bit better, and we think by the second half of the year, we will be at 50%.

And in terms of the operating expenses, right now it's a little too early for me to give you an indication of whether we -- whether we could just take the number for Q4 and reduce it by $10 million to come up with the expenses of Q1.

So I think I'm not prepared to make any comment on that at this point.

Okay.

Great.

Thank you.

And good luck.

Thank you.

Your next question comes from the line of Craig Ellis with PITI (sic), please proceed with your question.

Thanks, it's Craig Ellis at Citi.

Can you just clarify how you are looking at staffing plans for fiscal '09.

Given the reduction in force does that mean that staffing adds are on hold for a period?

How should we think about that?

In general, okay, we don't become sensitive in terms of launching new programs that are more of a long-term basis.

In the past we have no choice to do that because the rapid acceleration, the consolidations of the industry, so we have to invest in many different areas simultaneously.

So we have invested significantly over the last year, two years, and we felt that there -- the things that we are on hand sufficient for us to deal with, to drive our revenue growth in the next couple of years, so we don't -- I don't personally feel that we need to -- to increase our headcount on the general basis.

We may have to hire very specific areas that we lack the critical mass.

Otherwise, our goal is to control the rate of growth of the hiring.

Okay.

That's helpful Sehat.

And Michael on the inventory side, the increase in the quarter was higher that I would have expected.

Is there any risk of obsolescence given the volume of -- or the amount of inventory that you now have on the balance sheet?

Most of that inventory -- I would say $50 million of that increase in inventory related to inventory -- advanced purchase of inventory under our supply agreement with Intel.

The rest of it was just normal inventory growth as a result of our large sales.

With regard to the Intel inventory, based on our forecast and design wins that we have, we feel that we will be using that inventory through our normal operations.

Okay.

That's helpful.

Thanks, guys, and congratulations on the quarter, and the gross margin progress.

Your next question comes from the line of Shawn Webster with JPMorgan.

Please proceed with your question.

Yes, thank you for taking my question.

And good results for the quarter.

Can you talk to us a little bit about order linearity as we go into Q4?

You talked somewhat about storage being seasonal?

Have you seen changes in your order patterns as you have gone through the month of November?

And I guess the context is that with general anxiety out in the marketplace about what's happening in the demand environment, if you could give some color on how orders are tracking there?

And then as a follow-up to that what was the headcount for the quarter?

And as we go into Q1 do you expect your headcount to be down that 700 heads from where we are today?

Thanks?

I just want to clarify.

It was 400.

I'm sorry, 400, yes.

7%, approximately.

So with regard to linearity, in Q3, we had extremely good linearity from the point of view that our shipments in the first two months of the quarter were much greater than general, and that as we go into Q4, our backlog in Q4, as we ended Q3 is also very strong.

So with regard to the headcount -- your question is what is the headcount at the end of -- as of this moment?

Yes, at the end of October.

I don't have that exact number.

It's -- we'll be -- it will be about 400 less, though.

Yes.

It's between 5,500 and 6,000.

But I don't have the exact number right now.

Okay.

And then after you have your head count reduction plan implemented is your intent to keep headcount flat from that point?

Well, I think Sehat had addressed that.

We're going to -- that's our intent only to hire essential personnel for important projects, projects where we need critical mass, but that we feel that the investing saves of our activity is past.

And final question, the pricing environment, can you give us a sense of how pricing is relative to what you consider normal for your storage and wireless LAN businesses?

I think pricing is normal.

We have been trying to -- in certain areas, we are trying to hold on pricing, or at the very least, reduce the rate of pricing erosions in the last quarter.

So in general, we're in the business of semiconductors, that eventually prices will go down, will continue to go down, and our job is to develop new products with better features or using more advanced technology with high integrations to recapture the value of the products that we sell to our customers.

So but in the last quarter, it's been, on the positive side to be a good -- basically help us improve the margin.

Okay.

Thank you.

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

Please proceed with your question.

Just to clarify, the January quarter is a 14-week quarter, so on an invested 13-week basis you are forecasting revenues to decline about 4 to 5%; is that correct?

Well, if you normalize it that way, I'm not sure that in our industry the amount of revenue we would receive in a quarter would really correlate so strictly to how many weeks are in the quarter, but I think you're right if you took it at that, if you did it in a mathematical way that way.

Okay.

Thanks, and then you guys talked about reaching 50% gross margins in the second half of fiscal '09.

I guess baked into that forecast, what percentage of X-scale products are you assuming will be shipped from TSMC?

By -- that's Q3 -- let's say by Q3, we should be -- and I'm just going to give you a rough estimate -- we should be shipping somewhere over 30%.

Okay.

From TSMC.

It will be a while before it is 100%, because of the inventory of the Intel products, so -- it will reach 100% once the inventory depleted -- gets depleted.

Yes, we shouldn't be buying anymore -- after Q2 we shouldn't be buying any more product, Intel product, and we would just be basically burning down the inventory we have.

So longer term is the operating model target still 50% gross margins, and 20, 20%-plus operating margins.

I think longer term, we would like to improve upon a 50% gross margin.

Okay.

It's probably a little too early to put that in stone or anything, but that's -- we want to see how things go, whether or not the improvements we're making we can bake into that financial model, and that -- our operating profit model is actually 24%, but that -- first we're going to try to achieve a 20%, and then maintain our expenses, improve our gross margins, and then with the growth of our business, move into that 24% model, and in addition, we believe that our tax rate should be lower than we have previously used for financial modeling purposes, which was 10%.

We think over the long term that will come down to 8%.

Okay.

Thank you.

Your next question comes from the line of Uche Orji with UBS.

Please proceed with your question.

Thank you very much.

Mike, when you were talking about backlog, I think in response to Shawn's questions.

Are you able to give us a metric, just for us to understand what a strong backlog means?

Can you tell us what a backlog coverage of, say, your guidance is, if you can just kind of give us that metric, just for us to understand.

I don't have that number in front of me, but it's--.

Do you think it's higher than normal level of backlog you'll normally have at this point?

As a Company sales you have forecasted?

Q3?

Yes.

I would say that it is high enough that it makes us very confident in meeting our guidance number.

Okay.

Just give me a metric.

Normally will you have, say 70% coverage?

80% coverage at this -- normally?

Yes, I don't remember that --

Okay.

But -- okay.

My understanding is -- okay, we -- okay.

The confidence level is higher than historical.

Okay.

Fair enough, that's good enough.

Let me just ask you about your inventory.

On line inventory outside of what you build for Intel, did your inventory for your other products go up in the quarter?

If it did, how much you had to do for Intel?

Yes, our overall inventory went up.

I think our inventories went up about 85 million to 90 million, and of that 50 million was the Intel, and the rest was the other products, which, given the amount of increase in sales, it really wasn't unusual, and actually, our inventory turns were the non-Intel-related products have actually improved.

Okay.

That's good.

Thank you.

An other set of questions please, can I just can you, on the the hard drive is there any margin difference between both the (inaudible) desktop, Internet books, and the product to (inaudible) to sell, or do the margins very because of the (inaudible) markets?

Roughly, notebooks and desktop are roughly about the same.

We have similar margins.

And consumer?

Yes, the -- the consumer -- the consumer drive -- are we talking about consumer drives or consumer -- or the consumer products?

Right.

Right.

About the same.

About the same.

Okay.

And let me just ask you a different question.

If I look at your connectivity strategy in general, Wi-Fi has been doing well, can you give us an update as to where you are in Bluetooth and also if I look at GPS, as part of what completes the entire connectivity strategy, is that something you are looking at all?

And all (inaudible) specializing?

We didn't talk to much about it, in the past we talk about Bluetooth, yes.

Bluetooth continues to be -- to be introducing products.

We have famous products, we have Wi-Fi plus Bluetooth, Bluetooths plus FMs, and all the different combinations.

We are being qualified at customer's -- I mean, with respect to Bluetooth.

With respect to -- you mentioned GPS, this is an area that we also looking at, and it's too early for us to talk about the GPS at this point, and we have something to talk about, and we'll talk about it later.

Okay.

That's great.

Thank you very much, sir.

Sure.

Your next question comes from the line of [Shah Rule] with American Technology Research.

Please proceed with your question.

Thanks.

Just two questions.

Could you comment on any 10% customers?

And then second, just on your -- you commented about your SAS business where you are going to start ramping in Q4.

Just to clarify, are those stand-alone controllers and rechannels?

Or are they single, single chip SOCs?

Thank.

The SAS -- I'll take the SAS, the SAS that I mentioned earlier in the call is the host bus adaptor or controller, or sometimes called the HBA.

See, this is a controller that will sit on the -- on an (inaudible) card or on a server motherboard.

Okay?

So this is mainly targeted for high-end computing devices, computing equipments, and high-end, and server platforms.

This is device that will eventually talk to the SAS drive.

With regard to your other question as to our 10% customers, we have two this quarter -- in Q3.

One Western Digital, the other Research in Motion.

And Sehat just to clarify on your SAS comments, so these SAS are on the host bus adaptor side, any comments on the drive side?

And whether they will be discrete or SOCs?

Oh, yes.

So it depends on the customer.

Some of the customers -- or I guess the majority of the customers feel today discrete SOCs -- no, discrete controller plus discrete rechannels, the majority of our customers.

In the future, those will be integrated, so -- just like what has been done in the desktop and mobile.

So the trend of integration is something that will happen, and it is happening.

So we'll talk more about it later, okay?

When some of these products will go in production.

And sorry, just to follow-up on that.

You commented about winning new design wins at your existing hard drive customers.

Is that for kind of -- I mean, is SAS part of that?

Or is that more existing programs in desktop and mobile?

Yes.

I think that's where -- we referred to -- when we refer to the existing markets, okay, where we have practically -- having basically just win all the design wins for the products that are going to go production next year, so that refers to the desktop and mobile devices, as well as the enterprise side.

So basically all of the customers that we have.

Okay.

Thanks a lot.

Sure.

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

Please proceed with your question.

Good afternoon.

I just wanted to get some clarification of the 400 people that are going to be -- jobs are going to be eliminated, it sounded like it's mostly U.S., and Israel, and I was wondering whether this is particular business functions or business areas that these headcounts are coming out of?

And I also have a question about, Mike, you talked about the $17 million fair market valuation adjustments.

How do you, I guess, are these things you look at every quarter and adjust these inventory down, and what metrics do you use to do that?

Can you give a little bit of explanation on that?

Okay.

First, with regard to your question as to the reduction in force, I would say most of it is -- most of the people are from the U.S., and there are some around the world as well; that the -- it involves functions across the board, not any particular kind of function, and we will be announcing this to our -- to the employees tomorrow.

I see.

When I look at these -- the charges for those 400 people, it's about average $20,000 per head, I assume that that tells me that we're not talking about mostly engineers or sales engineers or FAEs, that kind of people?

Well, as I said it's across the board.

It's not one particular group.

We looked at places where we had duplication and inefficiencies and wherever that was, we tried to improve it.

And the amounts that you see there are the actual amounts that we totaled up.

Okay.

Yes, it does not translate, I guess the answer -- the short answer to that is not equal -- the charges is not equal to one-year's salary.

I understand.

I understand.

But it's a young company also.

I understand.

I was just wondering whether it was concentrated in any particular business units, like you actually -- I remember a few quarters ago, Sehat, when you bought the Intel business, you actually kept more people than you originally anticipated, and I was wondering whether those 40 people came out of that business unit or not?

At this point we would prefer not really to discuss that any further.

We could discuss that maybe at a future date.

Okay.

With regard to the fair market value adjustment.

Yes.

What that relates to is -- and this gets a little complicated, but when we acquired the Intel division, there was a supply agreement that's part of that.

Right.

Right.

And that the amounts that we had to pay for the wafers under the supply agreement, they are valued for accounting purposes at fair market value.

Yes.

And when we processed these wafers through sales or go -- they go in inventory, there's an adjustment from the actual price down to fair market value, and only the fair market value goes into the cost of goods sold or into inventory.

So this is done by a unit calculation, and it's a very structured calculation.

It's -- there's no real discretion on our part as to how this works.

And it's audited very carefully by our accounting firm.

Yes.

So the unit -- the price you pay to Intel is not -- isn't that based on quote unquote, fair market price?

No, the price we pay to Intel, that is -- well, the price that was negotiated under the supplier agreement.

Oh, I see.

Yes.

Yes, the fair market value is the price that was determined by an appraisal firm as to what the actual fair market value was.

I see.

Okay.

So those adjustments will continue until you stop -- well, until you finish all your Intel inventory?

Yes, actually we -- after Q3, we have very -- a very small amount of adjustment left, so there will be very small adjustment in Q4.

Maybe about $8 million worth.

I think that's the confusion between -- we have to continue adjustment -- actually what we're saying we have less adjustments in Q3, compared to -- compared to Q2.

Yes.

Oh, I see.

It's coming down.

Yes, that's correct.

In Q -- the amount of adjustment was $17 million less in Q3.

So that -- and in Q4, there will only be $8 million of adjustment.

In total, right?

Yes.

So in spite of the adjustment basically going down--.

Going away.

--going away, that our margins for Q4 will be going up 40 basis points.

Yes.

Well, I assume that that lower adjustment has something to do with that?

Well, the -- well, it's the other way around actually.

What?

Because if we were able to get more adjustment, we would have a higher margin.

So I think what it shows, really, is the strength of our margins.

Oh, I see.

That basically without any of this adjustment -- the adjustment positively affects our margin.

Oh.

Without any of this adjustment or a very small amount of this adjustment, we're basically increasing our margin by 40 basis points, and after that, it virtually goes away, and what we're saying is that on an ongoing basis as we look forward, despite having none of this adjustment, and still having the Intel inventory at full value going through our cost of goods sold, we nevertheless expect to hit a 50% gross margin in the second half of the year.

I see.

Last one is on your revenue guidance of flat revenue essentially, it sounded like storage is going to be up -- gigabit ethernet is going to be up, and the only thing that may not be up is wireless LAN.

Is that right?

I mean it's -- that's the 14 versus 13-week, which that extra week in your fiscal fourth quarter really doesn't do you any good.

Since it has got Christmas and New Year's in there.

Yes, I think our quarter, as you understand our quarter is about one month -- one month off on the regular quarter, so our -- our Q4 ends at -- in the end of January, so it is actually -- it's overlapping with a lower -- seasonally lower rate.

Yes.

Lower -- I mean, seasonally lower part of the quarter of the -- in additional businesses.

Well, I assume consumer electronics, and Wi-Fi, those kind of things probably go down on a sequential basis for Q4?

Well, yes, but as we are saying that that's generally the case, although our wireless LAN business will -- even though we had a very strong Q3, it is going to be relatively flat in Q4.

Okay.

Fantastic thank you very much.

This concludes the question-and-answer session.

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

Sehat Sutardja for any closing remarks.

We would like to once again express our thanks to all of our investors and analysts on the call today.

We are more focused than ever on executing against and achieving the goals set forward in our financial model, while some challenges will remain over the next year, it is our intention to manage our business efficiently and position Marvell for a great close of fiscal 2008, and an even better fiscal 2009.

Thank you all.

Thank you for your participation in today's conference.

This concludes the presentation.

You may now disconnect, and have a good day.