邁威爾科技 (MRVL) 2008 Q4 法說會逐字稿

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  • Operator

  • Good afternoon, everyone.

  • Welcome to Marvell Technology Group's fourth quarter fiscal year 2008 financial results conference call.

  • My name is Antoine, 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 conducting a question-and-answer session towards the end of this conference.

  • As a reminder, this conference is being recorded for replay purposes.

  • I'd now like to turn the presentation over to Jeff Palmer, Senior Director of Investor Relations.

  • Jeff Palmer - Senior Director, Investor Relations

  • Good afternoon, everyone, and welcome to Marvell Semiconductor's fiscal fourth quarter 2008 earnings call.

  • On the call today is Dr.

  • Sehat Sutardja, Marvell's Chairman and CEO; and Mr.

  • George de Urioste, Marvell's Interim Chief Financial Officer.

  • If you've not obtained a copy of our current press release, it can be found at our Company website under the Investor Relations section at www.marvell.com Additionally, this call is being recorded and will be available for replay from our corporate website.

  • Before we begin, we'd like to remind all participants that this call will include forward-looking statements that involve risk factors that could cause Marvell's results to differ materially from management's current expectations.

  • These forward-looking statements may include predictions, estimates and other commentary regarding sales trends, revenue growth, gross margins, operating and non-operating expenses.

  • Such statements are usually proceeded by, but not limited to, such words as expect, anticipate, believes, should, may, will or other forward-looking statements.

  • To fully understand the risks that may cause results to differ, please refer to Marvell's fiscal 2007 Form 10-K and subsequent SEC filings.

  • Please be reminded that the Company undertakes no obligation to revise or update publicly any forward-looking statement.

  • Throughout the call today we'll be referencing certain non-GAAP financial measures, which generally exclude the effect of stock-based compensation, amortization of acquired intangible assets, and other one-time charges.

  • Marvell management believes these non-GAAP metrics are useful as they best reflect how the business is internally managed.

  • While Marvell uses non-GAAP financial measures as a tool to enhance its understanding of certain aspects of its financial performance, Marvell doesn't consider these measures to be a substitute for, or superior to, the information provided by GAAP financial measures.

  • We have posted a historical reconciliation of our GAAP to non-GAAP earnings for your reference on our corporate website.

  • Now I'll turn the call over to Dr.

  • Sutardja.

  • Sehat Sutardja - Chairman, CEO

  • Thanks, Jeff.

  • Today we reported fiscal fourth quarter revenues of $844 million(Sic...see press release), up 11% sequentially from the $758 million reported in fiscal Q3.

  • The growth level achieved substantially beat our previous guidance for a 3% sequential increase in revenues.

  • The better than anticipated results in the quarter was due to strong demand for our system owner chip products for the storage market, better than anticipated demand for our enterprise class communication products, and better than seasonal demand for cellular products.

  • We are pleased with the top line growth we experienced in Q4 and believed Marvell has turned the corner on improved profitability as pro forma gross margins improved sequentially during the quarter.

  • Additionally, the close of fiscal 2008 is a significant milestone as the Company achieved full year revenues of nearly $2.9 billion representing a 29% year-over-year growth rate and positions Marvell to continue to grow at greater than a $3 billion a year annual run rate.

  • George will go into greater detail on the drivers of our business later in the call, but we believe the financial results demonstrate our successful investment in a broad range of technology initiatives and our ability to efficiently integrate these technologies into superior products across many markets.

  • Now we would like to address how investors should think about the potential growth rate for the longer term and several key drivers of our business which should positively affect our business over the medium term.

  • From a longer term view, Marvell is inherently a product cycle Company.

  • Our overall corporate growth rate accelerates to a greater or lesser degree as we enter periods marked by new product adoption and transition.

  • Our focus continues to be on markets with large unique opportunities which are experiencing growth rates better than the overall electronics industries in which we believe can leverage our unique expertise in the areas of mixed signal design, complex IP integrations required for large scale SOC design, and proprietary DSP algorithms.

  • In maintaining this focus, we believe we can deliver growth rates to shareholders in excess of the overall semiconductor industry.

  • Given our current product portfolio and our areas of long-term investment, this focus translates into a business that we believe can grow on a top line basis in the range of the high teens to low 20s.

  • On a year-on-year percentage basis, in years where our product cycles align with a strong economic backdrop we should be able to hit the high end of this range.

  • While in periods of economic uncertainty, with less than ideal product cycle traction, we may trend to the lower end of this range.

  • We would characterize the current period somewhere in the middle of the range.

  • We acknowledge the economic backdrop is uncertain especially in the United States, but we believe we have positive product cycle traction across a variety of end markets, which we believe should help to mitigate, to a certain degree, some of the current economic uncertainty.

  • Our current view of the medium term horizon is generally positive regardless of the economic backdrop.

  • We see several key drivers of growth in fiscal 2009 as follows.

  • One, within the storage segment, the drivers of growth we see are robust ASP expansion within the enterprise hard drives market due to the transition of our SOC platforms from our discrete rechannel products.

  • Additionally, we see clear market share shifts among the hard drive vendors which are benefiting our core customer base.

  • This is especially true in 2.5-inch mobile drive format which continues to rapidly accelerate on a unit basis.

  • As the unit crossover from the desktop to notebook PC accelerates, the inherent differentiations of our products becomes clearer to our customers.

  • This is primarily due to the lower power consumption and the increased storage potential of hard drives based on our iterative digital signal processing technology.

  • This last trend could potentially have long-lasting positive impact on the growth of our storage revenues.

  • Lastly, we see moderate industry-wide HDD unit growth rates in the range of 10% year-on-year.

  • Taken together, we believe the sales of our storage products can grow at least at the upper end of our previously noted growth range.

  • Now moving to wireless, we think our wireless connectivity portfolio, we see our investments in both the embedded space and in the next generation wireless standards as the clear drivers of growth this year.

  • We see growth driven by accelerating tractions of our 802.11 end products as we have key design wins with tier 1 market leaders in both the enterprise and retail access point markets where we believe we'll begin to accelerate into production during fiscal 2009.

  • Additionally, we see positive traction of our combo wireless devices for mobile and handheld devices, including our 11BGA Bluetooth and Bluetooth [AM/FM] chips which are gaining positive acceptance by OEMs.

  • Put out in the year, we are confident that we will be, we will experience design win momentum for our PC client focus 11n products, a market segment where we were not significantly with our stand alone 11a/b/g products in the past.

  • Lastly, we see a long runway of growth for our current base of wireless business in game consoles, digital cameras and multifunction printers.

  • Taken together, we believe the wireless segment can grow at least at the upper end of our previously noted growth range.

  • Now in the area of our cellular communication products, we see continued strong unit shipments for our application processors and communication processors.

  • As we have noted previously, we view fiscal 2009 as a design win year in terms of focus and activities for our cellular team.

  • Consequently, the growth we have anticipate is more in line with our key customers' growth rates coupled with new design win ramps in the latter half of fiscal 2009 offset by some reasonable ASP compression.

  • We'd like to highlight, contrary to some analyst comments, we do not see any appreciable share loss within our cellular handset business during the next 12 months, especially for our communication processors, targeting next generation 3G handsets.

  • More importantly, we believe we have new designs which will begin to contribute to growth of the group as we move throughout the year.

  • We would hope investors understand that we are constrained by confidentiality agreements that limit what we can say about new design wins within our customer base.

  • In summary, we're pleased by the overall results delivered this quarter.

  • We view the revenue trends during the quarter as positive.

  • We see the end of our contractual obligations with Intel enabling us to improve our profitability and we are optimistic about the growth prospects facing Marvell as we head into fiscal 2009.

  • Before turning the call over to George, we'd like to thank all our employees of Marvell for their dedication, focus, and hard work over the past 12 months.

  • Without the tireless efforts of our entire Company, none of the results presented today would be possible.

  • Now I'd like to pass the call to George to provide the financial update and guidance before turning to your questions.

  • George?

  • George de Urioste - Interim CFO

  • Thank you, Sehat, and good afternoon everyone.

  • Today we are pleased to announce fiscal fourth quarter 2008 revenue of $844 million(Sic...see press release), a record high revenue for the Company representing a 36% growth over revenue of $622 million for the same quarter in the prior fiscal year.

  • Furthermore, our fourth quarter results were up a strong 11% sequentially from the $758 million reported in our third quarter and were substantially above our Q4 guidance of $780 million.

  • For the full fiscal year, Marvell reported record revenue of almost $2.9 billion, a 29% growth over revenue of $2.2 billion in fiscal year 2007.

  • Looking at gross margin, non-GAAP gross margin for the fourth quarter was 48.7% in line with our guidance and up 40 basis points from Q3 and up 50 basis points from Q4 of the prior year.

  • Turning to operating expenses on a non-GAAP basis expenses were $310 million which includes $23 million of one-time charges.

  • Included in the one-time charges is a $16 million accrual for an anticipated payment relating to the tentative settlement of a derivative securities suit which awaits a required court approval.

  • Additionally, operating expenses were impacted by a $7.2 million IRS payroll tax penalty related to stock option backdating.

  • If we look at recurring operating expenses, it is important to note that they were less than anticipated, primarily due to two items.

  • First, a lower than planned payroll tax associated with the tender offer of stock to correct mispriced employee options, and, secondly, Marvell had better than anticipated follow-on savings associated with our previously announced reduction in force.

  • Next let's look at interest and other income.

  • The results here increased to $18.9 million due to slightly better investment returns and a one-time positive event attributable to the conclusion of our contractual obligation under the Intel supply agreement.

  • As we had mentioned in previous investor discussions, at the time of the acquisition of the Intel cellular handheld business, a liability balance was created to reflect our obligation to purchase a minimum supply of parts at a predetermined price from Intel.

  • The original liability was determined by the difference between what was to be paid to Intel versus the open market, fair market value of the parts.

  • Two of the key variables in this calculation were estimates for wafer yields and the associated product mix.

  • Now as we have completed our contractual obligations of the Intel supply agreement, the remaining liability balance has been eliminated and recognized as other income.

  • This remaining balance was attributed to actual production results being different from original estimates as related to the product mix and wafer yield assumptions.

  • Okay, please permit me to emphasize a key point.

  • The liability is now zero.

  • Because the contractual obligations have been met, the release of the residual liability created a positive one-time benefit of $22 million.

  • Next, looking at our effective tax rate, a negative 3% rate for Q4 was primarily due to two components.

  • First, the benefit of net operating losses occurred from the merger of several international subsidiaries and, secondly, the reversal of several international reserves as a result of favorable tax audits and the expiration of certain statute of limitations.

  • On a full year basis, our effective tax rate was just over 2%.

  • Please note, since the beginning of last year, Marvell and other public companies have adopted FIN48, better known as the standard for accounting for uncertainty in income taxes.

  • This standard requires us to compute a tax rate for each quarter based upon the income and tax events occurring within the quarter.

  • The impact is that if we complete a tax audit or a statute of limitation occurs within a quarter, these events must be counted for in the quarter the event occurred.

  • The net effect is that our effective tax rate will vary to a greater degree than in past years.

  • Next let's look at non-GAAP net income for the fourth quarter.

  • Our result was approximately $123 million, or $0.20 per diluted share compared to $86 million, or $0.14 per diluted share during our fiscal third quarter.

  • Shares used to compute non-GAAP net income were 627 million, down from the 631 million shares in the prior quarter.

  • The lower number of shares were due to a lower than anticipated share price when using the Treasury method of computing diluted share count.

  • Now I'd like to offer some insights to revenue during the quarter.

  • Our performance clearly came in better than we had anticipated in most areas.

  • Order linearity during the fiscal fourth quarter was balanced and improved both sequentially on a year-over-year basis.

  • Several product areas had strong growth trends, both sequentially and on a year-over-year basis.

  • Revenue associated with the sale of our storage products grew over 20% sequentially and grew over 30% on a year-over-year basis.

  • This performance was due to accelerating industry-wide demand for 2.5-inch hard drives for the mobile products in addition to strong seasonal unit growth of 3.5-inch hard drives for both desktop PCs and consumer PVR products.

  • Furthermore, within the mobile hard drive business, Marvell experienced a 39% sequential increase in unit shipments as shifts in market share among major players in the hard drive industry had a direct positive benefit to our major customers.

  • Nearly all of our major hard drive customers experienced double digit sequential growth on a revenue basis, with Western Digital being the only customer exceeding 10% of our revenue during the quarter.

  • Sales of our cellular products were better than planned as demand for our application processors accelerated in excess of seasonal demands.

  • Sales of our communication processors were healthy on a unit basis, but we did experience some ASP compression during the quarter.

  • Sales of our enterprise connectivity products grew sequentially in the high 20% range on a revenue basis due to strong demand for system controllers and Ethernet PHYs.

  • Additionally, sales of our PC-connected products accelerated roughly 20% sequentially as we benefited from strong unit demand within the PC industry especially for mobile platforms.

  • Balancing the positive product demand trends just noted for sales of our wireless connectivity products being less than anticipated, we had originally guided sales of our wireless products to be flat sequentially after a strong fiscal third quarter.

  • However, demand from our game console and certain consumer wireless customers was worse than we had anticipated.

  • We viewed the down tick in demand as temporary as we have many new designs for both existing and newly announced products charging both the access point and the client side of the wireless market.

  • Our design wins are expected to ramp into production beginning in the second fiscal quarter of 2009 and be a key source of growth later in the fiscal year.

  • Lastly, sales of our printer products were relatively flat on a sequential basis during the quarter.

  • Now, turning to the balance sheet, cash and short-term investments were $631 million, up roughly $100 million sequentially primarily due to better total sales.

  • Accounts receivable were $332 million, down $55 million sequentially highlighting better collections and strong order linearity.

  • Days sales outstanding, or DSOs, were at 35, down sequentially from the 46 days reported in the fiscal third quarter and lower on a year-over-year basis from the 48 days reported in the fourth quarter of fiscal year 2007.

  • Inventories at the end of the quarter were roughly $420 million, up $38 million sequentially.

  • The increase in inventory was due to final receipt of wafers under our now completed Intel supply agreement, continued strong demand for storage products, and new product ramps of wireless products.

  • Days of inventory, or DIO, were 86 days, roughly flat sequentially and equates to an inventory turns of roughly four times, in line with historic norms.

  • On a year-to-year basis, DIO was up due to accelerating inventory purchases tied to our contractual obligations under the Intel supply agreement, again, which have now been completed.

  • Accounts payable were $231 million, up roughly $22 million sequentially.

  • In terms of cash flow, Marvell generated $163 million in cash from operations and used roughly $32 million for capital expenses netting a free cash flow from operations of approximately $131 million.

  • This is a significant improvement on a sequential and year-over-year basis as we netted $8 million in free cash flow during the fiscal third quarter and were cash flow negative in the year-ago period.

  • We would now like to provide guidance for our anticipated performance in the fiscal first quarter of 2009.

  • Please note, we'll not be providing full year guidance on today's call and cannot provide any additional commentary on our full year expectations.

  • We would like to highlight that our guidance today is a result of a bottom up analysis of market demands and actual sales trends in conjunction with ongoing dialog with our customers about their expectations.

  • This is balanced against the awareness of the current uncertain economic backdrop especially within the United States and how this might unexpectedly influence our customers' demand patterns within short periods of time.

  • With that perspective as a background, it should be noted that Q1 is organically a seasonally weaker quarter.

  • We anticipate revenues in a range of $775 million to $785 million which represents a growth rate of 22% to 24% over the same quarter of the prior year.

  • Now to help you calibrate our anticipated revenue, we'd like to share with you our backlog coverage ratio.

  • Such ratio is determined by our 90-day backlog entering the beginning of the fiscal first quarter divided by the mid-point of our revenue guidance.

  • This ratio is approximately 70% and is in line with historical patterns and takes seasonality into consideration.

  • With regards to profit, we anticipate non-GAAP gross margins in a range of 48.7% to 49.3% ranging from flat to up 60 basis points over the prior quarter.

  • Now turning to operating expenses, we anticipate non-GAAP operating expenses in the range of $290 million to $295 million.

  • The slightly higher than anticipated operating expense guidance is due to a variety of factors including increased tape-outs of 65-nanometer products, expectations of seasonality, excuse me, expectations of seasonally elevated payroll taxes, increased costs due to weakened exchange rate of the U.S.

  • dollar and the required annual retirement benefits accruals for some of our international staff.

  • In terms of our tax rate, we anticipate the effective tax rate to range between 8% to 10%.

  • Lastly, diluted share count will approximate 633 million shares.

  • At this time, we would like to invite your questions and request the operator to open the process.

  • Operator

  • (OPERATOR INSTRUCTIONS) Your first call comes from the line of Allan Mishan with Oppenheimer.

  • Please proceed with your question.

  • Allan Mishan - Analyst

  • Hey, guys.

  • Nice job.

  • Can you give us a sense for when you'll be recognizing revenue from 3G basebands?

  • Sehat Sutardja - Chairman, CEO

  • Yes, Allan.

  • Our expectation will be sometime this year.

  • We do have the early generation 3G baseband on a stand alone basis.

  • But in terms of the integration, the integrated baseband plus application processor will be sometime this year.

  • Allan Mishan - Analyst

  • Can you say first half or second half?

  • Jeff Palmer - Senior Director, Investor Relations

  • Probably later in the year, Sehat.

  • Sehat Sutardja - Chairman, CEO

  • Yes, to be on the safe side, I will say the second half.

  • Again, to be on the safe side.

  • Allan Mishan - Analyst

  • Okay, great, and then on the enterprise SOC, how many customers will be shipping enterprise SOCs from you this year?

  • Is it one customer or more than one?

  • Sehat Sutardja - Chairman, CEO

  • For this year it'll be one.

  • For this year.

  • Allan Mishan - Analyst

  • Okay, great and then last question from me, you talked about traction on the Wi-Fi plus Bluetooth, do you have firm design wins for this product just yet?

  • Sehat Sutardja - Chairman, CEO

  • We have several engagements and we have, various different stages.

  • Allan Mishan - Analyst

  • Is that something that could ship this year?

  • Sehat Sutardja - Chairman, CEO

  • I will say second half.

  • Allan Mishan - Analyst

  • Great, thanks very much, guys.

  • Operator

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

  • Please proceed with your question.

  • Uche Orji - Analyst

  • Thank you very much.

  • Two questions.

  • First, how much of TSMC's [soft spots] should we be expecting as the ratio of your whole Xscale exiting 2009?

  • Sehat Sutardja - Chairman, CEO

  • Orji, are you-- okay, I didn't catch the questions.

  • Uche Orji - Analyst

  • If I look at how much of the Xscale products are you shipping coming from TSMC, what will be the percentage when we leave 2009?

  • George de Urioste - Interim CFO

  • I would say, if I understand correctly, probably about 50%.

  • Most of our communication processors will be sourced from TSMC.

  • While, as you know, Uche, we do have our application processor inventory that we do have to burn off over the next four to six quarters.

  • Uche Orji - Analyst

  • Okay, okay.

  • Very quickly on, on interest expense, if I may just look at that briefly, if I look at your debt levels, is there any benefit to carry that level of debt given what's happening here?

  • Do you have any plans to use the cash generated to pay down the debt and how should we be modeling interest expense for next quarter and the rest of the year, if you could give guidance there?

  • George de Urioste - Interim CFO

  • Orji, thank you for asking that question.

  • One of the key components of our debt is that there's a variable rate, interest expense, and it has been resetting to the lower rates as interest rates have trended down in the marketplace, and we periodically evaluate the potentiality of reducing that debt vis-a-vis other operating opportunities and growth investment opportunities.

  • So currently, because we are also benefiting from the trend of lower interest rates, we believe we have some flexibility in choosing the best use of our cash in the near term.

  • Uche Orji - Analyst

  • And then just finally on inventory, if I may, can you clarify how much of the inventory you have now (inaudible) work in progress, raw materials and finished goods just for us to get a sense of what the Company plans for the inventory, please?

  • George de Urioste - Interim CFO

  • Did you get that question?

  • Jeff Palmer - Senior Director, Investor Relations

  • Yes, I think so.

  • Uche, if I understand, you'd like to understand what percentage of our total inventory (talking simultaneously)

  • Uche Orji - Analyst

  • That's correct, yes.

  • Jeff Palmer - Senior Director, Investor Relations

  • It's somewhere in the range between 25% and 40% of our total inventory.

  • Uche Orji - Analyst

  • That's great, thank you very much.

  • Jeff Palmer - Senior Director, Investor Relations

  • Uche, just on a quick note, that is also down sequentially.

  • Operator

  • Your next question comes from the line of James Schneider with Goldman Sachs.

  • Please proceed with your question.

  • James Schneider - Analyst

  • Thanks, very much.

  • I guess the first one is can you talk about your order patterns from customers that you've seen so far this quarter and any strength or weakness from your different customer sets?

  • Jeff Palmer - Senior Director, Investor Relations

  • I'll take that one, Jim.

  • At this point as we mentioned in the prepared remarks, our order linearity has gotten quite good on a year-over-year basis and a sequential basis and it continues to be that way into the first fiscal quarter.

  • James Schneider - Analyst

  • Any strength or weakness relative to the storage or wireless end markets?

  • Jeff Palmer - Senior Director, Investor Relations

  • No, in terms of the end markets, I'd say the hard disc drive market continues to be very strong based on what we see as share shifts going on in the end market.

  • James Schneider - Analyst

  • Okay, and then next one would be, can you comment on the progress towards your 50% gross margin target for the second half of this year?

  • Are you still on track for that?

  • Jeff Palmer - Senior Director, Investor Relations

  • Yes we are.

  • James Schneider - Analyst

  • Okay, great.

  • And then can you just give me a little more granularity on the strengths you noted in enterprise communications and whether you think that will be sustained through this quarter as well?

  • Sehat Sutardja - Chairman, CEO

  • In terms of enterprise, we continue, I guess you noticed we didn't talk too much about the specific new product developments, but I can stress to you that we continue to invest in developing events, communications enterprise products.

  • So, at last quarter we talked about, I think in the press release of design wins, so that will, we hope, over the next year to continue to translate into revenue increases in those markets.

  • And we also continue to adopt our high end application processor, microprocessors to be embedded into some of those products.

  • That will also help our future growth in those segments.

  • George de Urioste - Interim CFO

  • If I could add to that also Sehat.

  • If you look at how the Ethernet products, enterprise specifically, are going to contribute to our Q1 guidance, it's in line with the sequential guidance numbers, Jim.

  • James Schneider - Analyst

  • Okay, great, thanks very much.

  • George de Urioste - Interim CFO

  • You're welcome, thank you.

  • Next caller?

  • Operator

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

  • Please proceed with your question.

  • Srini Pajjuri - Analyst

  • Thank you.

  • George, just a clarification.

  • What was the non-operating line guidance for Q1?

  • George de Urioste - Interim CFO

  • In terms of the interest income--

  • Srini Pajjuri - Analyst

  • Yes, expense or income.

  • George de Urioste - Interim CFO

  • We didn't break it out at that level, but I would say that uh, the trend of the third quarter, the third quarter data point is representative so we'd expect a low level negative number.

  • Srini Pajjuri - Analyst

  • Okay, got it.

  • Got it, thank you.

  • And then on the OpEx, obviously, it's going up a little bit.

  • Looks like you settled some of the backdating lawsuits.

  • I believe you had some legal expenses in the OpEx, though.

  • I'm just wondering as you look out to the next couple of quarters, do you still get a positive benefit from the legal expenses coming down or is it mostly behind us?

  • George de Urioste - Interim CFO

  • Generally speaking that is correct.

  • The trend is declining legal expense.

  • There'll be aberrations in terms of potential timing of future settlements, but with regards to [equal] operating expenses they are declining.

  • Srini Pajjuri - Analyst

  • Okay, but the overall OpEx, how should we think about it?

  • Is it going to grow as we look into the next few quarters or stay at this level?

  • George de Urioste - Interim CFO

  • Certainly the OpEx guidance on the, this quarter's intentionality and you're aware that the Company had a reduction versus the last quarter.

  • The long-term goal is to keep operating expenses close to a low level as in flat.

  • Sehat Sutardja - Chairman, CEO

  • Okay, we made it in the last quarter to be flat, and this quarter basically is to follow our commitment.

  • (echoing)

  • Srini Pajjuri - Analyst

  • Okay, so 295 is the level you want to maintain it at, right?

  • George de Urioste - Interim CFO

  • I would say that would be the upper end, Srini.

  • Srini Pajjuri - Analyst

  • Okay, got it.

  • Great.

  • Sehat, you talked about different businesses and the potential growth rates.

  • I'm just wondering, as you look into your new products, you have a lot of them, for 2008, which ones do you think will begin to contribute and which ones are you less certain about?

  • Sehat Sutardja - Chairman, CEO

  • If you look at storage, continue to look (inaudible)...

  • new technology, second generation, (inaudible) (echoing)...

  • and then in the next generation application, our strengthening the application processors, that is more toward the second half of the year.

  • Srini Pajjuri - Analyst

  • Okay, and then final question, Sehat, as you move from Edge and 2G to 3G HSDPA, should we expect some ASP boost here or do you think ASPs are going to be relatively flattish?

  • Thank you.

  • Sehat Sutardja - Chairman, CEO

  • Certainly, the 3Gs are going to be higher prices than the Edge devices, but on the other hand we have to balance against the transition, how fast the 3G will replace the Edge, as well as at the same time, okay, it depends on our customers continue, continue market share gain in the Edge, okay, after all all, Edge is still the predominant solution in many countries.

  • It's very hard for us to predict at this point when that transition will occur.

  • My guess is our customers will continue to, to deliver our Edge solution as well as deploying our 3G solutions simultaneously.

  • Srini Pajjuri - Analyst

  • Thank you.

  • Operator

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

  • Please proceed with your question.

  • Shawn Webster - Analyst

  • Yes, thank you for taking my question, and also thank you for the clarity on the guidance.

  • Can you talk about the lead times for your storage business, obviously, you saw pretty good growth there?

  • Are things getting tight at all there?

  • Are lead times coming in, going out?

  • Jeff Palmer - Senior Director, Investor Relations

  • In terms of lead times to our customers or lead times from our suppliers, Shawn?

  • Shawn Webster - Analyst

  • The time it takes for you fulfill a customer order?

  • Jeff Palmer - Senior Director, Investor Relations

  • We're not seeing any impact to fulfillment times to our customers at this point.

  • Shawn Webster - Analyst

  • Okay, so no change there.

  • How's the pricing environment for storage right now?

  • Jeff Palmer - Senior Director, Investor Relations

  • Very good.

  • We continue to be share gainers in that space, so we're not seeing any ASP pressure at this time.

  • Shawn Webster - Analyst

  • Okay.

  • Can you, either in terms of ranking it or maybe relative to your midpoint of your guidance, can you tell us which of your key segment storage, Ethernet, Wi-Fi, your Xscale business will grow relatively faster or slower than that for Q1?

  • Jeff Palmer - Senior Director, Investor Relations

  • Into the Q1.

  • Shawn Webster - Analyst

  • Yes.

  • Jeff Palmer - Senior Director, Investor Relations

  • Yes, Shawn, I believe if you were to look at our different segments, drives are definitely strong for us at this period of time.

  • We think we're going through an an usual time in the market as our main customers are gaining share from our not customers, so to speak.

  • We feel that's going to be a real strength abnormally into the first quarter.

  • We believe the rest of the segments will tend to track the sequential guidance.

  • If I look here from a rank ordering perspective, after drives, probably got some decent Ethernet enterprise and also client growth going on.

  • And then after that it's all, it's pretty evenly dispersed.

  • Shawn Webster - Analyst

  • Okay, and then if I could drill down into the Xscale business for a moment, can you talk about the supply [grim] and I think as you left your October quarter you had something like $125 million of wafers you still had to purchase.

  • By you telling us the agreement is over does that mean you bought all those in the quarter, or you altered the agreement in some way?

  • Can you expand on that a little bit?

  • George de Urioste - Interim CFO

  • Shawn, the straight answer to it is we have satisfied that purchase obligation and we have completed the requirement of all of the purchases of the inventory necessary under that agreement.

  • We are now, we are now contractually done with the agreement in terms of the purchase obligations.

  • Shawn Webster - Analyst

  • Okay, and as it relates to your Xscale business, can you tell us at all or give us some kind of clue, you used to talk about the gross margins for the segment.

  • Can you give us an update on where they are right now and how you expect them to evolve this year as you move more of your shipments from TSM into your mix?

  • Jeff Palmer - Senior Director, Investor Relations

  • Yes, Shawn, historically we have not broken out gross margins by our different segments and I think as we did the acquisition of the cellular group we tried to provide a little bit more transparency but occasionally it wasn't always clear.

  • On a go forward basis, we're not going to be breaking gross margins out by the different product lines.

  • Sehat Sutardja - Chairman, CEO

  • I can maybe just give you, as we said in the previous quarters, several faces during the transition from transitioning from Intel to the foundry using exactly the same [clone] process.

  • They will, obviously, help the gross margin, but, but the real, the real, the real help will be further down the road when we completed the transitions where we design things from the ground up in more advanced process technology at the foundry.

  • So those are the Phase 3.

  • We're done with Phase 1, we're done with Phase 2, we are close to finishing up the Phase 3 in terms of the R&Ds, and usually you know very much in this business, it takes time for new products to go into production at the customers.

  • Shawn Webster - Analyst

  • Okay.

  • Thank you for that.

  • Maybe just one last question.

  • You mentioned some pricing pressure on the communication processor side of that.

  • Can you expand on that a little bit for us?

  • Jeff Palmer - Senior Director, Investor Relations

  • Yes, Shawn, it was not any more than abnormal in the normal marketplace.

  • Not going to put a percentage to it.

  • You know, offset by, there was a bit of elasticity there also.

  • We felt a little bit of ASP compression to the downside, but we also are seeing some unit upside.

  • Shawn Webster - Analyst

  • Thank you very much.

  • Jeff Palmer - Senior Director, Investor Relations

  • You're welcome, thanks Shawn.

  • Operator

  • Your next question comes from the line of Craig Ellis with Citi.

  • Please proceed with your question.

  • Craig Ellis - Analyst

  • Thank you, and good afternoon, guys.

  • First, just a clarification on the enterprise storage business, can you provide a little bit more color on how the mix breaks out between the rechannel component shipments and SOC?

  • When will you be shipping 80% to 90% or more SOC?

  • Jeff Palmer - Senior Director, Investor Relations

  • Yes, Craig, I think you can feel confident that we'll be shipping greater than the majority of SOCs into the second half od this fiscal year.

  • You're right, there'll be a tailing off of the discrete rechannel and an acceleration of the SOCs.

  • So it's kind of [mid-yearish] type of crossover points.

  • Craig Ellis - Analyst

  • Okay, so you have the benefit of that steadily through the year is the other way to look at it, Jeff?

  • Jeff Palmer - Senior Director, Investor Relations

  • That's a good way of thinking about it, yes, Craig.

  • Craig Ellis - Analyst

  • Okay, then this next question is probably for Sehat.

  • Sehat, when you look at the communications processor business and just the handset business in general, can you talk about how happy you are, either qualitatively or quantitatively at the operating line with that business's profitability, and if you're not satisfied with current profitability, when do you think you'll be at a point where that business for you will be at a satisfactory level?

  • Sehat Sutardja - Chairman, CEO

  • Sure, Craig.

  • Obviously, as we mentioned over the last one year that when we purchased this business, we knew from the get-go that we can do base challenges in terms of the profitability getting into this business.

  • Not because the business isn't a good business.

  • This is a lucrative business if the business is done right.

  • But when we entered this business, we were handed a business where certain things are not optimal such as, mentioned this earlier, 8-inch fab versus 12-inch fabs, such as lower yield of proprietary processes.

  • So a few number of things that we mentioned earlier.

  • And if you look at this from the financial point of view, of course, nobody can be happy about the financial performance during that time, like during the last year when there were very little things we could do to change the financial performance of the business.

  • But I'm glad that now we've finished Phase 1 transitions.

  • I'm glad we finished the Phase 2 transition where we basically were using the same design, moving to TSMC 65-nanometer process.

  • That will help the next, the end of this year or for sure next year's gross margins and also improve performance at the same time.

  • Once we finish Phase 3, then I'll be really happy.

  • I think I should characterize this as work in progress.

  • A lot of work we need to do and everybody in the group understands that, that the prospect, the future prospect for this business is, is actually very good.

  • We just have to execute it.

  • Craig Ellis - Analyst

  • Can you say when you'd expect the business to be better than break even on the operating line, Sehat?

  • Sehat Sutardja - Chairman, CEO

  • I won't be able to say at this point.

  • I think maybe sometimes, hopefully by next quarter we can clear the picture.

  • But I can say, it's going to be, it's improving, just to get precisely the time, if it, at the end of the day, depends on the volume as well.

  • So getting better understanding about the customer, our customers' ramp up volume increase schedules, okay, will be important data point for us to make their projections.

  • Craig Ellis - Analyst

  • Thanks for the color there.

  • Operator

  • Your next question comes from the line of Craig Berger with FBR.

  • Please proceed with your question.

  • Craig Berger - Analyst

  • Good afternoon, guys.

  • Thanks for taking my question and congrats on the strong numbers.

  • Can you update us where you are with your GPS efforts, whether you plan on pursuing stand alone solutions or just embedding it in cell phone solutions and any other color there you could provide?

  • Thanks.

  • Sehat Sutardja - Chairman, CEO

  • We got this call, Craig, we got this questions, over the last several, I think really the last quarter or two, so there was very little we could talk about except at the time we mentioned that we were looking into it because we know that at some point in the near future, or maybe in the next year or two that the GPS functionality will be needed in a lot of these applications.

  • But at the same time, we also realize that all these things are subject to the cost, the increase of cost structure of adding GPS functionality to low end cell phones.

  • If the increase of cost is significant, then, there'll be huge delay in terms of the adoptions of GPS in the mainstream phones, but if the increase of cost is minimal, then the adoption could be more rapid.

  • So we looked into this, this issue very, very seriously over the last year or so and we came to conclusion that, okay, the only way for us to really benefit of adding GPS functionality into our platform is to focus on rapid cost reductions.

  • So the only thing I can tell you right now is we are focusing on developing technology that will achieve that target, meaning adding incrementally minimal, absolutely the minimal cost to the platform to see a large adoption of this technology into the mainstream products like the cell phone.

  • Craig Berger - Analyst

  • When do you think that might drive revenues?

  • Jeff Palmer - Senior Director, Investor Relations

  • Craig, do you have a follow-up?

  • Craig Berger - Analyst

  • Yes.

  • When do you think that might drive revenues?

  • Sehat Sutardja - Chairman, CEO

  • Let's say next year.

  • Craig Berger - Analyst

  • Next year.

  • So going back to the cellular gross margins, not to beat a dead horse here, but is it basically that you guys are kind of in the low 30s now and you think that can trend up a little bit over the course of the year, but it's not really until next year when your innate 65-nanometer designs hit that you'll see a larger improvement in those margins?

  • Is that the right way to think about that?

  • Jeff Palmer - Senior Director, Investor Relations

  • Craig, you cut off a little bit here.

  • I think I've got the gist of your question.

  • If you're asking is it going to be a step function on the gross margins relative to the cellular group then the answer is, no.

  • It is incremental.

  • Each quarter will get a little better improvement from that business on a stand alone basis.

  • We won't be happy until that business is not dilutative to our gross margins on a corporate level.

  • Craig Berger - Analyst

  • Can I ask one last housekeeping question.

  • I know you beat your revenue guidance by over 8%.

  • Is there some threshold either above or below guidance at which you'd update the financial community or no?

  • George de Urioste - Interim CFO

  • No.

  • Sehat Sutardja - Chairman, CEO

  • Okay, no.

  • I want to add a little bit on the GPS, since you asked for GPS earlier, I forgot to tell you that we do have technology demonstrations in the GPS to some early customers.

  • Craig Berger - Analyst

  • Okay, thanks a lot.

  • Operator

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

  • Adam Benjamin - Analyst

  • Yes, thanks, guys.

  • A couple questions on the storage side.

  • You saw some really good growth in the January quarter.

  • Obviously, you had share gains there, that was helping you.

  • As you look out into your guidance, and you did your bottoms up analysis as you indicated, how comfortable are you with inventory in the channel and what you're seeing out there?

  • Jeff Palmer - Senior Director, Investor Relations

  • Yes, I'll take that one, Adam.

  • At this point, we're feeling pretty good about it.

  • I'm not hearing any commentary from the business unit about any inventory issues out in the channel.

  • We've got a pretty advanced supply chain model to the different HDD suppliers.

  • So we're not hearing of excess inventories, either finished goods or our raw components sitting out in the supply chain.

  • Sehat Sutardja - Chairman, CEO

  • It's also important to note that the supply chains, between us to our customers are very sophisticated in this business.

  • It's a very mature business to us.

  • So it's, the customers will not intentionally overbuild products.

  • Adam Benjamin - Analyst

  • Right.

  • George de Urioste - Interim CFO

  • I would just add to that that we do by manner of mechanics and interactive processes, we do receive formal weekly updates from the customers and the supply chain and in addition to that, there is the ongoing dialog that happens in addition to the formal weekly updates.

  • Adam Benjamin - Analyst

  • The reason why I was asking, there's been some concern out there, just from some folks industry side that with respect to June how things could shape up.

  • I was just wondering how you guys, I know you only give guidance out to the April quarter.

  • But if you have any concerns as you look out a quarter beyond?

  • Jeff Palmer - Senior Director, Investor Relations

  • None that we're going to share here on the call today about June.

  • Sorry, Adam.

  • Adam Benjamin - Analyst

  • Okay.

  • Just a clarification on the enterprise side with respect to the SOC.

  • I think Sehat mentioned you'll be shipping to one customer, the SOC, and then, Jeff, I think you said by midway through the year it will represent greater than 50% of your mix.

  • Is that the one specific customer or is that the total for the enterprise segment?

  • Jeff Palmer - Senior Director, Investor Relations

  • For that one particular customer.

  • That one particular customer, as you probably well know, Adam, is a dominant player in that part of the business.

  • So....

  • Adam Benjamin - Analyst

  • Got it.

  • I was just trying to clarify that.

  • Jeff Palmer - Senior Director, Investor Relations

  • It is the right customer to have as your lead dog, if you will, on the SOC.

  • Adam Benjamin - Analyst

  • Got it.

  • One last question on the cellular side.

  • You mentioned there were ASP issues.

  • As you move to TSMC, with that shift being largely complete how should we be thinking about ASPs?

  • I know you talked about it on the last call about there being a change there, about requalifying some of the carriers with your lead customer there.

  • Should we be looking at any significant change to ASPs on that front, including the effect you get some benefit as you move to 3G?

  • Jeff Palmer - Senior Director, Investor Relations

  • No, no.

  • As you can imagine, we definitely, as Sehat mentioned earlier, our cost model improved incrementally as we went from the Intel fabs to the TSM fabs.

  • We did feel a little bit of a, let's call it one-time ASP pressure, but we think on a go-forward basis, we're right size from a cost perspective, an ASP perspective that is, and we'll do pretty well going forward, Adam.

  • Adam Benjamin - Analyst

  • So going forward, thinking about normal sequential ASP declines of most semiconductor companies are baseband suppliers?

  • Jeff Palmer - Senior Director, Investor Relations

  • Most applications, more complex application communication processor companies.

  • I think basebands might be a little bit more of a commodity than the product we sell.

  • Adam Benjamin - Analyst

  • All right, that's helpful.

  • Thanks guys.

  • Jeff Palmer - Senior Director, Investor Relations

  • I think we've got time for one more call, Antoine.

  • Operator

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

  • Please proceed with your question.

  • Arnab Chanda - Analyst

  • Thanks, just squeaked in.

  • A couple quick questions either for Jeff or George or Sehat.

  • If you look at your gross margin guidance, was there any benefit on mix or was it all a benefit you're seeing from the TSMC transition?

  • George de Urioste - Interim CFO

  • In terms of all of the benefit being on mix versus anything from the TSMC transition.

  • Jeff Palmer - Senior Director, Investor Relations

  • Do you mean this on a sequential basis, Arnab?

  • What was the cause of the improved gross margin sequentially?

  • Is that what the question is?

  • Arnab Chanda - Analyst

  • Yes, your gross margin's going up from Q4 to Q1, and storage is doing better which should have better gross margins.

  • I'm just trying to understand how much of it is because of mix and how much is because of your transition to TSMC?

  • Sehat Sutardja - Chairman, CEO

  • I think it's across the board.

  • We've been more focused in improving yield.

  • Across the board.

  • A lot of our operation is putting extra efforts, our engineers are putting extra efforts, why our yield is not as good as the defect density limit.

  • We spend more time looking into those and, and also, the, also some of the newer products, okay, that over the longer term.

  • Some of the products, the new product definitions that we look into, we're now more focused on not implementing all the bells and whistles that some people needs, just focus on making sure that the features we're implementing are the right feature sets so that we don't have bloated designs.

  • Testing, improving testing times.

  • So they're, in the short term, there were incremental things we have done.

  • In the long-term, a few more things we could do.

  • George de Urioste - Interim CFO

  • I would just add to that that our internal process has evolved where we now have a heightened sensitivity for the review process of determining any, the business justifications surrounding any incremental costs.

  • Particularly noteworthy in the last month and a half I've been here, I've seen the higher degree of awareness and the greater businessman-like sensitivity to make sure there's either strong justifications or we're not going to spend the incremental costs.

  • Arnab Chanda - Analyst

  • Profits are good.

  • Couple other ones.

  • Sehat, you said your Phase 3 plan of moving your design and eventually that to production for your cellular business.

  • Should we expect that in calendar '08 or calendar '09?

  • Sehat Sutardja - Chairman, CEO

  • '09.

  • Arnab Chanda - Analyst

  • Okay, great, and then a couple other ones, question on the Ethernet side.

  • Seems like your main customer Intel on the PC side is gaining share versus their competitor.

  • Is that going to be a benefit for you this year or is it getting offset by ASPs?

  • Jeff Palmer - Senior Director, Investor Relations

  • That's actually in our number, Arnab.

  • We do get some benefit from that.

  • Arnab Chanda - Analyst

  • Okay, and then one last question, Sehat, you didn't talk much about your video effort.

  • You talked in the past about optical storage as well as some other things you were doing on video.

  • Could you update us on that, if you see any potential in this calendar year?

  • Sehat Sutardja - Chairman, CEO

  • Sure.

  • You saw the demo, see the demo at the CES, so I can tell you that we have good progress.

  • We hope that in the next quarter maybe we can talk more about it.

  • Arnab Chanda - Analyst

  • Okay, thank you very much.

  • Jeff Palmer - Senior Director, Investor Relations

  • Thanks, Arnab.

  • I think that's all the time we have everyone.

  • Just in closing we'd like to thank you for your time today, and in summary we're very pleased with the quarter we delivered today.

  • We believe we've turned the corner on profitability and we're going to attempt to improve our profitability as we move forward.

  • We look forward to speaking to you at our next conference call.

  • Thank you very much.

  • Sehat Sutardja - Chairman, CEO

  • Thank you.