邁威爾科技 (MRVL) 2009 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q2 2009 Marvell Technology Group limited earnings conference call.

My name is Antoine, and I will be your operator for today.

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

We will conduct a question and answer session toward the end of this conference.

(OPERATOR INSTRUCTIONS) I would not like to turn the call over to to Mr.

Jeff Palmer, Director of Investor Relations.

Please proceed, sir.

Thank you, Antoine, and good afternoon, everyone.

Welcome to the Marvell Semiconductor fiscal second quarter 2009 earnings call.

I'm Jeff Palmer, Marvell's Senior Director of Investor Relations and with me on the call today is Dr.

Sehat Sutardja, Marvell's Chairman and CEO and Clyde Hosein, Marvell's CFO.

All of us will be available during the Q&A portion of the call today.

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 would like to remind all participants that this call will include forward-looking statements that involve risks and uncertainties that could cause Marvell's results to differ materially from management's current expectation.

These forward-looking statements may include forecasts, estimates, and other commentary regarding sales trends, revenue growth, gross margins, operating, non-operating expenses, timing of new product introductions, new product acceptance by customers, earnings per share and certain items on our balance sheet.

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

To fully understand the risks and uncertainties that may cause results to differ, please refer to Marvell's latest annual report on Form 10-K and subsequent SEC filings.

Please be reminded that Marvell undertakes no obligation to revise or update publicly any forward-looking statements.

During our call today we will make reference to 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 to management and investors as they best reflect one of the metrics of 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 does not consider these measures to be a substitute for or superior to the information provided by GAAP financial measures.

With respect to historic information, the most directly comparable GAAP information and a reconciliation between the non-GAAP and GAAP figures is provided in our second physical quarter 2009 earnings press release which has been furnished to the SEC on Form 8-K.

And is available on Marvell's website in the investor section of www.Marvell.com.

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

Sehat Sutardja.

Thanks, Jeff.

Today we reported second quarter revenues of $843 million, up 28% from the same period a year ago.

And an increase of 5% sequentially.

We exceeded the high end of our prior guidance which, at the midpoint, projected a 4% sequential increase revenues.

Revenue in our second quarter was one of the highest quarterly levels attained by Marvell in our history.

This success reflects our ability to deliver products that meet our customer's needs and enables them to be successful.

This also comes as a result of the excellent performance of our own internal teams, I'm really proud of what our teams have accomplished in achieving these results.

Reviewing our end market performance, I am satisfied with our top line growth in what is typically the seasonally the weakest quarter for many of our customers.

Demand for our DataComm products was robust across the product portfolio, we had a record quarter for sales of our wireless products driven by the launch of one of our customer's hand held product line as well as the continued demand from our existing customers.

We experienced a better than anticipated demand for our Gigabit Ethernet controllers in part due to the increased demand for notebook PCs.

Additionally, we continue to see positive traction for our enterprise switches and system controllers due to the continued build-out of metro Ethernet networks primarily within emerging markets.

Storage products experienced typical seasonal demand during the quarter.

I am also pleased with the improving levels of profitability during the quarter.

Gross margin on a non-GAAP basis improved sequentially by approximately 30 basis points as a result of operational efficiency in our businesses.

I would now like to give you an update on several product initiatives.

As I have mentioned in prior calls, we have great confidence in our opportunities in the Cellular and Mobile device market.

And we are well aligned with the leaders in these markets.

During the quarter, we begin to ramp into high volume productions of our second generation PXA based 3G Cellular (inaudible) efficient processor.

Additionally we have experienced positive demand for our application processors be used in newly announced high end smartphones from a major Asian customer.

And we continue to see adoption by other Mobile device manufacturers.

As you may remember from our last conference call, I discussed that we were in the process of migrating to the third generation of our mobile processors.

The goal of this new family of products is to extend our broad base best in class application processor franchise to new and emerging markets.

These new products will benefit from the improved performance and speed characteristics, while taking full advantage of the existing ecosystem and software infrastructure of the legacy XScale architecture.

This family of next generation moble processors has more than doubled the performance over the prior generation of PXA products.

These processors now have the equivalent integer computing performance of a mainstream laptop PC.

Yet the power consumption that you would normally find on a smart phone.

This new family of mobile processors is based on our ARM-instruction set compatible Sheeva core.

This core designed by our internal CPU architecture group its truly world class.

Based on early testing we believe it delivers best in class power consumption and significant computing performance advantages.

We believe this new family of processor will give us a strong competitive advantage in the smart phone, MID and advanced home entertainment markets.

Our road map for mobile processors over the next two years will follow the kind of trajectory that you have seen in the other parts of the microprocessor industry.

So we expect to move to multi-core processors that will of course, further greatly increase performance while continuing maintaining low power consumption.

Now, turning to our storage business, I would like to update you on our solid state storage or SSD efforts.

Since announcing our entry into this market at cComputex last quarter, the interest and response from potential customers has been very positive and we believe the SSD market is a clear TAM expansion opportunity for Marvell.

Clearly, our ten plus years of system level experience and know how in the hard disk drive SoC, will enable us to build a new product franchise.

I would like to take a moment to explain to you our perspective on the SSD market opportunity because we believe it is a huge opportunity for Marvell.

We see the SSD market expanding but we believe the fear of it replacing the HDD market is vastly exaggerated.

Rather, we believe it will create new market opportunities.

There are two main reasons.

First, SSD performance will always come at a price premium.

So, customers will want both HDD for high capacity and SSD for high performance.

Secondly, while today there is an oversupply of flash memory chips, this is primarily due to the end market applications which are driving today's flash demand such as MP3 players and digital still cameras.

However, if we look out several years from now to when SSDs are more widely adopted in PCs, even as a secondary storage medium - let alone as a primary storage medium, there is clearly not enough flash manufacturing capacity online today or in the near term to support this expected adoption.

So, while we were positive on the longer term growth of the SSD market, we believe this will require a significant investment in flash manufacturing capacity.

Which will take years, not months, to bring on-line, assuming that the flash manufacturers take the risk of a significant up front investment ahead of the market development.

At the same time we see HDD technology continuing to rapidly improve and our own product roadmap will allow our customers be able to build a terabyte Mobile drive within the next couple of years.

The balance between the economic investment needed to support a significant SSD market and the continual advancement in HDD technology will result in a co-existent of SSD and HDD for many years to come.

Setting aside the manufacturing supply issues for a moment, what will accelerate the demand for SSD in the marketplace are total system costs and the overall through put performance of the SSD.

We want to stress to investors that performance and reliability of what we believe are our distinct advantages.

We have focused on delivering the highest performance controller which will simultaneously maximize both the performance and the reliability of flash memory SSDs.

We see three distinct vertical market opportunities for SSD devices.

First, enterprise class storage and service.

Second, full featured notebook PCs in which the solid state drive is a secondary storage medium.

And thirdly, small form factor MIDs, where solid state memory will be the primary storage medium.

The products we are sampling today address both full the feature notebook and the MID segments and we have strategic engagements in place to address the enterprise data storage market.

We anticipate beginning to see early revenues from our SSD efforts later this year, but due to the dynamics we discussed earlier it is natural that the volume ramps will follow much later.

So, in summary, during the last quarter I believe Marvell continued to expand its presence and share in many target markets.

Our technology investments continue to gain traction in the market and encourage us that we have made good investment decisions.

Now, I would like to pass the call to Clyde to provide the financial update and guidance before turning to your questions.

Thank you, Sehat, and good afternoon, everyone.

I will start by reviewing the non-GAAP results for Q2.

Revenues came in a $843 million representing a 28% growth year-over-year, 5% sequentially and slightly above our Q2 guidance range of $830 to $840 million.

As Sehat mentioned earlier, we are pleased with the progress we have made to improve in our profitability and free cash flow.

Our non-GAAP gross margin for the second quarter was 52.3%, an improvement of approximately 30 basis points sequentially.

An increase of over 287 basis points from the same period a year ago and better than our prior guidance of 51% to 52%.

Our overall operating expenses on a non-GAAP basis were $279 million which is slightly better than our prior guidance of $280 to $285 million.

Expenses in our last reported quarter included a benefit of about $15 million from various settlements.

Adjusted for this, our overall expenses were about up about 3% reflecting increases in product specific development costs.

R&D expenses for the quarter were $217 million.

Up approximately $8 million sequentially due to increased tape-out expenses and headcount additions in strategic development areas.

SG&A expenses for the quarter was $62 million, up approximately $15 million sequentially.

However, when adjusted for the one time benefits received last quarter, SG&A expenses were essentially flat.

Interest expense and other income was approximately $2.7 million, and tax expenses were approximately $5.1 million.

With our effective non-GAAP tax rate at 3.2% for Q2, as compared to our non-GAAP tax rate of 5.4% in Q1.

Our non-GAAP net income for the second quarter was $154 million or $0.24 per diluted share compared to non-GAAP net income of $150 million or $0.24 per diluted share during our first quarter.

As a comparison, on a recurring basis non-GAAP net income in Q1, without the benefit of the credits, was $136 million, or $0.22 per share.

The shares used to compute non-GAAP net income during the quarter was 640 million, up from 624 million shares in the prior quarter due to higher average share price and using the treasury method of computing diluted share counts.

Let me now summarize our results on a GAAP basis.

We are pleased to report GAAP net income of approximately $71 million or $0.11 per share in the July quarter.

This is essentially flat for the last quarter but up significantly from the $0.10 loss recorded in the second quarter of the prior year.

The difference between our GAAP and non-GAAP results during the second quarter, was due to stock option compensation expense of approximately $48 million or $0.07 per diluted share and amortization of intangibles represented $35 million or $0.06 per diluted share.

These non-GAAP adjustments are essentially flat sequentially and an improvement of $0.02 per share on a year-over-year basis.

Now, I would like to offer some additional insights on our revenue results during the quarter.

Our performance was better than anticipated, considering the seasonality of the quarter.

From an end market perspective, the quarter played out modestly stronger than our original expectations with sales of Datacom products better than planned and sales Storage products in line with seasonal expectations.

Sales linearity during the second quarter was back-end loaded but improved on a year-over-year basis.

Sales of our embedded wireless products were better than we had anticipated due to the launch of a key consumer product by one of our customers and the continued strength from existing customers.

The sales of wireless products were up sequentially and up greater than 75% year-over-year highlighting the strength and market acceptance of our low power embedded wireless offerings.

Sales of our Ethernet products increased both sequentially and on the year-over-year basis better than we had anticipated due to the continued build-out of Metro-ethernet networks within emerging markets as well as the continued demand for network PCs.

The sales of enterprise products that is switches system controllers and processors was up over 16% on a year-on-year basis.

The sale of client based Ethernet controllers was robust with greater than 30% year-on-year growth.

Sales of our cellular products were in line with our expectations and declined modestly both sequentially on a year-over-year basis.

Demand for our application processes accelerated during the quarter, on both a unit and revenue basis as a new series of smart phones from a major agent customer gain market traction.

As Sehat mentioned, we are very encouraged about our opportunities within the cellular and mobile space.

Sales of our communication processors were slightly lower than expectations during the quarter as we believe some inventory rebalancing is occurring ahead of new product launches at one of our major hand set customers.

Revenue from our storage product declined sequentially as anticipated and was in-line with normal industry seasonality.

Notwithstanding the modest sequential decline, revenues from our storage products grew over 30% on a year-over-year basis.

During the quarter, unit shipments of mobile hard drives increased sequentially in the high single digits.

These positive trends were partially offset by seasonal declines in desktop HDDs and enterprise read-channel products.

We continue to see our major hard drive customers benefit from our strong product portfolios which are allowing them to gain share particularly in mobile drives.

During the quarter, Western Digital was the only customer exceeding 10% of our revenues.

Lastly, sales of our printer products were better than anticipated especially for ink based printer systems.

Revenues for printer products were up both sequentially and on a year-over-year basis.

Now, turning to the balance sheet.

Cash equivalent and short-term investments were $889 million, up approximately $115 million sequentially.

We generated $183 million in cash from operations, spent $16 million in CapEx.

Resulting in a $167 million in free cash flow or 20% of revenues.

We generated approximately $51 million from employee stock programs, and paid down $100 million of our outstanding debt.

Accounts receivable was $471 million.

Up about $100 million sequentially.

Primarily due to linearity and timing of customer payments.

DSOs were 51 days an increase of nine days from the first quarter.

Net inventories at the end of the quarter were $327 million, down $43 million sequentially as we focused on improving our operational efficiency.

Days of inventories was 78 days, down sequentially from the 92 days reported in the previous quarter.

Accounts payable were $237 million, up $69 million sequentially due to the improvement in timing of payments made to suppliers.

Now, I would like to provide guidance for anticipated performance in the third quarter of 2009.

We currently anticipate third quarter revenues in the range of $860 million to $880 million which represents a growth rate of 13% to 16% year-over-year and 2% to 4% sequentially.

We anticipate non-GAAP gross margins in a range of 52.5% plus or minus 50 basis points.

We anticipate non-GAAP operating expenses to be approximately flat plus or minus $5 million.

R&D and SG&A should be essentially flattish on a sequential basis.

Interest expense and other income should be in the range of negative $1 to negative $2 million and effective non-GAAP tax rate should range between 6% to 8% with diluted share count of approximately 645 million.

We project non-GAAP EPS to in the range of $0.24 to $0.26 per share.

On the balance sheet, we currently expect to generate $160 to $170 million in free cash flow during the quarter which would result in an ending cash balance of just over $1 billion.

This projected cash balance excludes the effects of any debt repayment or employee stock activities.

We currently expect GAAP EPS to be lower than our non-GAAP EPS by about $0.13 per share, plus or minus $0.01.

About $0.06 of this is related to amortization of intangibles and about $0.07 in stock option expenses.

Before we take your questions, I would like to turn the call back over to Sehat, for a couple of strategic announcements.

Sehat?

Thank you, Clyde.

Today I am pleased to announce two agreements in our storage business.

First, the evolution of our long-standing supply relationship with Seagate.

As many of you know, Marvell has had a long history in supplying advanced enterprise class read-channel products to Seagate.

More recently, we started supplying enterprise class SOC products to Seagate.

Seagate and Marvell have now agreed to expand that relationship.

I am pleased with the expanded long term commitment to Marvell technology.

Second, I would like to share with you an update on our relationship with Fujitsu.

We were pleased to announce Fujitsu has awarded Marvell the SoC design for its next generation SAS enterprise drives.

This design will begin to ramp into production in our fourth quarter.

These two new agreements demonstrate that Marvell has been successful in the hard drive market because we have consistently delivered SoC products with the industry's best signal-to-noise ratio, enabling our customers to build the highest density drives and with superior manufacturing yields.

These features have directly enabled our customers to enter the market sooner with higher density products leading to better profitability.

Additionally, we have a very long history of introducing the lowest power read-channel technology versus our competition.

This continues to be a distinct advantage especially with the continued transition toward mobile platforms.

Our low power consumption is also a clear advantage for the data center drive applications, due to rising energy costs.

In closing, we are very pleased to see Seagate and Fujitsu adopting our technology more broadly.

Now, I would like to turn the call back to the operator begin the Q&A portion of our call.

(OPERATOR INSTRUCTIONS) Our first question comes from Allen Mishan with Oppenheimer.

Please proceed with your question.

Guys, can you talk about the content that you would get in a SSD controller?

Would that be higher or lower than what you get today in a hard disk drive?

I will say that depends on the target market for lower capacities for very, very low capacities probably either similar or slightly lower in the long run.

But initially it will be higher.

Again, it all depends on the volume.

But in the very high end I will say quite a bit higher than the traditional hard drive SoCs.

Okay, great.

On the Fujitsu win is that for a hard disk controller or for an SOC?

Its an SOC.

Specifically fast.

(Inaudible) so a very high enterprise class application.

Okay.

And does Marvell supply fast hard disk controller to Fujitsu today or is that all being supplied by another supplier?

Supplied by another supplier at this point.

Okay, thanks very much and congratulations on that win.

Thank you.

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

Please proceed with your question.

Thanks, guys.

Clyde, I'm hoping that you can help us understand as you come aboard and you look at operating expenses, what opportunity is there to control operating expenses to an even greater level than what we have seen in the last few quarters?

I think it's still early for me to describe what those areas are.

The thing that I found impressive is the revenue growth opportunities.

And I think you'll see that in the next few quarters for Marvell.

Even within that other than some quarter fluctuations or intentions -- current intentions is to keep OpEx flat and leverage with the revenue growth.

Okay and then switching to the top line and the outlook, as we think about the sequential guidance that you provided, how should we think about what the relative strengths and weaknesses are on a product line basis, Clyde?

The -- typically we'd see improvements in communications and storage.

We still currently see that.

Our embedded wireless is still growing.

So, pretty much all of our segments are growing albeit I think most are subdued in the light of broad economic concerns.

I think our customers -- we have seen that in some of our customer -- in most of our customer areas.

So, I don't think any specific area has grown much better than the other ones.

But we are seeing embedded in our forecast is tempered down for economic head winds going in.

Okay, fair enough.

Thanks, Clyde.

Thank you, Craig.

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

Please proceed with your question.

Good afternoon.

And thanks for taking my question.

Sehat, in the past you've talked about the fact that proxy developed two to three years ago contribute to today's revenues.

So, as you look our into calender '09 what wer the products you've introduced in the past couple of years that you expect to drive most of your revenue growth next year?

If you look -- we talk quite a bit on application processors, moble processors.

So, that's -- that was a significant investment over the last couple years.

There are a lot of new applications that take advantage of the performance of the XScale types of devices and taking advantage of the software and infrastructures.

And I will say from that area it could be a very significant drive growth in the next year or two.

Now, we -- obviously we continue to invest heavily on -- heavy, heavy investment on advanced re-channels for disk drive.

So, we are positive that our customers will gain traction -- more traction in the marketplace and that will drive, also, higher unit volumes for us in the next couple years.

A few other activities that we will be talking about, we invested in opticals.

We didn't spend much time today about it.

But, you know, we -- this is a -- a significant investment.

Now, of course not in the same scale as the HDD investment but none the less, feel significant -- we have good tractions right now on the Blueray side, but they will (inaudible) sometimes a second half or so of next year when we see the more revenue on that side.

And a few other little things here and there.

We talk about how management and we don't have time to talk more about it.

But there will be more traction also there.

Fair enough.

Thanks.

And then maybe one for Clyde.

I think on the last call there was an allusion to an update this quarter on the target operating model.

Can you share with us a little bit of your thinking specifically with respect to gross margins and how we should view those going forward and any other comments you want to make around OpEx as well.

Thank you.

I think it's still early.

After eight weeks, it's still early to -- for me to put out the model that would be embedded into the fabric of Marvell.

But if you look at -- the track record, at least I have, is to continue to drive the business to improve gross margins.

The most recent quarter we announced we show 30 basis points of growth and you'll see similar amounts in the next quarter.

So, I think you can continue to see us to drive sequential improvement in gross margins.

I do expect that to continue.

As I discussed earlier on the expense side, I think most of our focus right now is to keep expense flattish.

We will see how economic conditions play out.

But in the current economic environment I'd say we it flattish but drive a significant amount of top line growth.

So, you improve in your expense ratios that way.

That -- I think that continues to be the strategy.

And then finally I think again my track record is to focus a lot on cash flows and I think Sehat and I intend to continue to drive that.

So, we will see improvements in that.

I know that's not giving you guys a lot of specifics right now.

But I think the best time to look at that is at the end of the fiscal year when report results is a good time to talk about long-term models.

Hopefully, I think we'll have -- all of us will have better clarity on the economic environment at that point in time.

So, I think that's a good point for us to lay that out for you.

Fair enough.

Thanks.

Your next question comes from the line of [Uchi Orhei] with UBS New York.

Please proceed with your question.

Thank you very much.

Clyde, just make sure I understand, you talk about how to expenses flattish.

Is that off the base of this current quarter and say for how long, say 12 months, is there anyway to make that come in -- a little bit more specific?

Yes, from this quarter I think you'll see -- I think we have $280 million-ish.

Uchi, you'll see some quarter-over-quarter fluctuations that are primarily product specific.

Tape out and so forth.

But we aren't intending to add to the structure unless -- short of an acquisition or something.

But I think structurally our intention is to keep it essentially where it is right now.

Like I said, we revisit that if we have to, depending on economic conditions.

But out current view is to keep the structure are it is right now and we'll, of course, keep investing in product specific areas.

Sure,alright.

Just on the HDD, first of all, congratulations on the win for Fujitsu.

Can you just give me a -- any insight on whats your view on the current (inaudible) hard disk drive are.

And -- because there have been comments and concerns out there about (inaudible) and inputting your customer base.

Any insight there will be helpful.

So, if I understood the question, if it's related to our design wins.

Our market share, I can say (inaudible) I am very, very happy with the progress.

With the -- actually with the engagements that we have with all of our customers.

So, if the economy is not as -- it will stay in good health, I think we will tremendously benefit from that side.

Now, if we talk about the economy, and it's hard for me to tell you what's the effect of a downturn economy -- a potential downturn economy to that market,obviously there will be some impact if it happens.

I mean, Sehat, I'm asking are there any customers that you think have excess in venture now and is that resulting in any type of push out or consolations from those customers that's really what I'm asking.

Are there any comments around the level of inventory now, especially related to normal seasonality, do we have a slightly higher level of (inaudible) inventory from what you can see with your customer?

Not that I know of.

I think I mentioned many times in the past that, many times when we ship products to our customer we ship on almost like -- on the short term notice basis.

So, we have -- of course forecast.

But okay, but a lot of times our customers are not in the habit of building things beyond what they can sell.

Sure.

Okay thats helpful.

Just one last question.

In it terms of -- we sent licensing agreement with (inaudible )for GPS, where does that place your capabilities for delivering a complete GPS solution?

And given the level of competition in this market, how -- what gives you confidence to get in that at this point and how successful so you plan to be in terms where this will rank in terms of gross margins or -- so, if you have any insight as to this arrangement with (inaudible) and your strategy for GPS.

Sure.

So, the short answer to that question is yes.

We look into how to incorporate GPS technology functionality into our products.

Across the board from hand held devices to non-hand held devices.

And we study the pro and cons of doing different things, different implementations.

And we came to the conclusion that to pick a certain direction and the agreement with (inaudible) is a hint of what we were planning to do to incorporate GPS into our products.

They will allow us to build those GPS functionality at the lowest possible cost to allow more products to incorporate GPS down the road.

Okay, alright.

Great.

Thank you very much.

Your next question comes from Romit Shaw with Lehman Brothers.

Please proceed with your question.

Yes, thanks for taking my question.

Just wanted to follow up on, Uchi's, questions about storage.

You know, if you look at one of your largest hard drive customer, I believe they guided units to grow over 10% in Q3.

So, if we could just get a little help on how we reconcile that versus your expectations for growth in the storage business this quarter.

Thank you.

You know, we don't comment as a company policy on specific customers.

I think we want to stick to that.

What I will tell you is if you look at this quarter and you look at year to date, our trends in storage is consistent with the overall industry trends.

So, there is nothing in there that concerns us.

Design stickiness is a consistent throughout and Sehat mentioned some improvements which you will see in the next several quarters.

So, I think on a year to date or even a quarter basis from an industry level we see inconsistent stuff and I really want to avoid commenting and put specific customers.

Sure.

I do think as we said earlier, I do think the economy does have some effect on overall customer demands.

But there is no disconnect between the trends that people are seeing on a cumulative basis.

Okay.

And then, Clyde, just on stock option expense, it's a fairly large percentage of your pro forma earnings.

Can you talk a little bit about that and is that a number that you expect to come down over it time?

You know, we value stock options as one of the key retention programs for employees.

And plan to continue that.

It's about $0.07 per share.

And if I recollect, that's probably mid single digit-ish is consistent with our pay group you haven't updated to look at Marvell's pay group.

I think we intend to continue it.

But it's obviously something to look at.

Thank you.

Your next question comes from the line of Sumit Dhanda with Banc of America securities.

Please proceed with your question.

Yes, hello, Sehat, first question on Seagate, you talked about and expanded relationship.

Could you shed more light on exactly what it is you are talking about.

Is it on the client's side?

Is it SSDs?

So, at this point I can only say that I am very pleased with the expanded relationship.

I mean, I'm really, really pleased.

This is a long-term commitment to technology from Marvell.

In terms of specific details, I think I will defer that to some of the time when it is appropriate to do so.

Okay.

Second question again, sort of relates back to Seagate, your storage business was down seasonally.

You noted high single digit growth in your Mobile segment and, of course, desktop and (inaudible) was down.

So, I guess my question is, when (inaudible) expect to see the benefit of the enterprises you'll see ramp with Seagate, it really started to show up in numbers because given the decline last quarter and then clearly an outlook for somewhat tepid growth I suppose, in Q3 in the October quarter, I'm having a tough time reconciling your outlook despite your concerns on the macro.

So, I will take that one.

In the July quarter, you are right.

To clarify, a storage with (inaudible) Mobile was up consistent with what you see intue Mobile PCs.

But that's consistent with typical seasonality and trends.

To the second part of your question as to when you'll see the benefit of this.

These are architectural designs that will take probably one year to 18 months before you'll start seeing it showing up.

Then the good news of it is it's sticky and it will last several years after that.

So, you won't see at least to your question on the Seagate side any near term (inaudible) announcement.

You might see it a little bit earlier on the Fijitsu side, probably a couple of quarters from now.

Just to clarify, I'l talking about (inaudible) enterprise SOC which I thought was supposed to ramp this year.

I'm not talking about your expanded relationship you announced today.

Yes, the product is shipping and will continue to ramp typically in the enterprise business.

The ramp is not as fast as the, let's say as a desktop or Mobile, so -- but it's a sure ramp.

So, maybe that's the reason why probably you -- one of them, many recently why maybe you have questions about why your ramp is not -- why you don't see faster increasing revenue.

The other part is an enterprise revenue is just a smaller portion of Marvell's revenue today.

Okay, we have we have a much bigger revenue.

A number -- total number.

So, as a percentage also, the impact is also smaller.

And more importantly as a company we also are now more concerned with the potential outlook of the economy and every time people ask questions about why we are not worrying about the economy.

We are -- we are making the outlook with somewhat thinking but worry about the economy especially when every investor (inaudible) asking us, okay, why we are not worry being the economy.

I'm sorry to belabor this point.

But let me ask you this question differently.

If you listen to what your competitor LSI has to say on the call, they make it obvious that they're expecting to lose a quarterly run-rate of business close to $30, $35 million a quarter which I would assume should show up in revenues sooner rather than later.

And I guess my question is if that's indeed the case, then effectively what you're suggesting is that what's a seasonally strong market for PCs in Q3, the rest of your drive business is going to be flat.

Or am I really missing something in this equation in it terms of real trajectory of the ramp of the enterprises we'll see with Seagate?

Yes, okay.

So, without going into specifics.

Okay, if you -- okay, any single questions that you ask, we don't know.

I don't know what exactly what LSI charging for what the revenue they are out there losing in terms of the Seagate enterprise.

But it could be that some of the older products, I'm speculating, so it could be some of the variable from the older products there, they are charging higher price compared to the market price today that they are losing.

So, that could be part of the explanation.

But in terms of historic spaces, we are -- you need to understand we have a huge market share in the storage business.

Okay, so, we're not looking at individual specific customers as a metric on what will be the outlook of the storage business.

So, we are looking at the storage business outlook more in terms of the market outlook.

So, that's what we need to judge our business at this point.

When we were a much smaller company, when we were serving only 0.25 or 0.20 of the revenues that we were doing today, we did not have to worry about the market outlook.

But to be -- we need to be more sensitive to the market outlook at this point especially in the next quarter, too.

Until the economy turns back to normal.

Okay, one last question and I will go.

Back to your expanded agreement with Seagate.

Maybe I asked the question differently.

Can you tell us whether the revenues are going (inaudible) from existing markets or new ones?

I can only -- I'm not at liberty to go it to any more specific than what I have said already.

Okay.

Thank you very much.

All right, thank you.

(OPERATOR INSTRUCTIONS) Your next question comes from the line of Craig Berger with FDR.

Please proceed with your question.

Thank you for taking my question.

Just getting back to the guidance, I'm having trouble understanding it.

You know Intel's guiding for 9% sequential growth.

LSI says the PC market is good.

HP says the PC market is good.

You've got a large Wi-Fi ramp into a smart phone.

You've got a large com processor ramp into the smart phone in Q3, so why isn't the storage growth better?

I think we've got an extra month in October there.

And as Sehat, pointed out, you know a concern goes into the fourth quarter one of our months, in linearity that's one of our bigger months.

So, that's where I think the concern is.

It's not -- it's not -- as you pointed out there's no design changes during the quarter.

I think our forecast reflects more conservatism than some of the other ones that ends in September.

Might you be being too conservative right now?

Well, if we are, I think there's potentially upside.

We've got to make a judgement call as we sit here and our forecast for the next few months.

So, if we are wrong, we'll deliver much better results.

Moving on to the cellular business, you said that business is down year-on-year, can you: A) walk us through the inventory issues going on right now; and B) as you look out into 2009 you should have pretty good idea just given the length of time it takes to ramp products into the cell phone you should have a pretty good idea for what your growth trajectory looks like in base bands and apps processors, can you help us understand how 2009 is unfolding?

Yes.

So, the -- I think we have -- actually I feel positive about the outlook in 2009.

As it unfolds.

Our new products are doing well.

Products shipping from TSMC instead of the Intel fab, our application -- that's on the communication processors.

That's the integrations of base bands and application processor.

On the stand alone application processors, we have very good traction.

Our customers continue to see the advantages of our low power, high performance application processor.

As I mentioned on the -- we've been working up with a -- lets say a year or so, of moving toward the third generations of the application processor and we have completed the design of that application processors and we are seeing significant as I mentioned, dabbling the performance compared to the existing ones.

And new even more advanced process geometry.

So, -- and it's fully compatible software, fully software compatible.

So, any applications, video or whatever it is that runs on the existing application processor will run on this processor.

So, I feel that there will be -- we will continue to get more design wins in that site in 2009.

Especially in 2010 it will be even better.

Can you walk us through the inventory issues and also tell us whether you think you'll be able to get a second COM processor customer next year?

On the inventory, I think without getting into customer specific, I can say that there are some supply chain changes not related to us to their supply chain.

That should work itself out probably in a month or so.

Certainly this quarter.

And that's probably the best with our given customer specifics on that issue.

As far as -- could you repeat the question on the --

Do you guys expect to be able to get a second or more base band plus apps processor, com processor customer -- you guys have one comms processor right now -- that raises a lot of concentration risks among the investment community and we want to know what it's going to take for you guys to get a second customer there.

I think it's too early for us to mention anything about it.

That one sort answer.

The second answer is, okay, I can tell you in terms of the risk I'm very, very comfortable.

I really, really feel comfortable with -- dealing with that risk that everybody perceived to be a risk.

If this -- this is not a risk that I am going to worry about loose sleep on.

In fact, like I say, I feel very comfortable.

Thank you.

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

Please proceed with your question.

Thank you, first question is for Sehat.

Sehat, could you clarify a little bit of what the Seagate relationship that you are announcing.

Are you going to be selling into desktop and laptops and are you going to be single or dual source?

Could you explain that a little bit with some idea about the time frame?

Thank you.

Okay, I mentioned earlier -- fortunately I am not at liberty to expand beyond what I've said.

I think in due time we will talk more about it.

The only thing I can re-iterate is I'm very happy about it.

Okay.

I have a question for Clyde then.

You know, you were talking about if you look at all of the different drivers in your business, I think this line was kind of explored a few earlier too, but I'm just going to try it again.

It seems like you do have a couple of pretty significant product ramps.

You have the Seagate enterprise sharing as well as 3G ramp from your top customer.

Yet you are talking about growth that's significantly below seasonality.

Could you describe this to -- could you sort of tell us how much of this is economic concern that you have versus what you see in your order books or is it, you were talking about some kind of supply chain efficiencies had an inventory issue.

Or are there some other factors such as some other businesses that are not doing so well.

That will be great.

Thank you.

Yes, some of the ramps, especially at enterprise, we talked about.

Doesn't necessarily come into play this quarter.

Part of it would be, but not enough to move the needle.

A lot of these things we talked about are for future quarters beyond our Q3.

And in terms of core business or growth business I'm very excited about that.

But I think in the near term, I have been concerned about the economy before I came to Marvell and continue to be that way.

And I think Sehat shares my view.

So, I think this is more of a near term thing.

We are very excited about our business and growth prospects.

We just posted 28% growth year-over-year in the July quarter, and 14%, 16% in the next quarter.

That is much better than the industry.

So, let's not -- let's put that in complete perspective here.

Even with our tempered view, this is an excellent growth story and I assure you it will only get better.

I just want to add a little bit more color here with our outlook.

So, our outlook -- it's influenced by the outlook of the economy.

So, every time I look at the outside the window of the office when I see there are fewer cars driving on the road, it concern me a little bit.

So, we are trying to be -- we are just trying to figure out to reflect the reality in the market.

Of course, we could be wrong.

There is a potential that we are wrong.

That the market is just fine.

And all our design wins, all our engagements will pull in more revenue.

That's always a possibility.

Just one last question, Sehat.

Obviously we are all trying to figure out what the gas prices mean and our cars mean for the economy.

But if you look at what you can control and what you are working on, could you list for us in 2009 what the major growth drivers would be?

Thank you.

Yes.

I mentioned that earlier.

So, we spend a lot of time on application Mobile, application processors.

Anything related to that is a good growth in 2009.

I mentioned about -- that we -- our advanced storage technology will continue to contribute into share gains into our customer base.

The SSO mentioned the auditings that we are working on that over the next one year we will get market tractions and starting to generate revenues.

Thank you very much.

Antoine, I think we have time for just one more question.

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

Please proceed with your question.

Yes, thank you for taking my question.

Clyde, can you - in the last couple of quarters you guys were talking about your backlog as a percentage of your guidance.

Can you give us an update and anyway you like to look at it in terms of turns required or what your backlog coverage is for Q3?

Yes, I can do that for you Shawn.

Going into this quarter, our backlog was about 5 points higher than it was in the last quarter.

So, to hit the midpoint of the range we guided to obviously would require less turns at the beginning of the quarter.

So, like I said, it's -- order backlog is in pretty decent shape.

Okay and in terms of the, I guess, I don't remember you guys talking so much about economic weakness and macro weakness in your last conference call.

Was there anything specifically that changed as far as what you are seeing?

Or is it a simple matter what your backlog is doing?

Well for one, they got a new CFO.

For sure.

And I think, Shawn, if you had known me it's been a concern, thats (inaudible).

I don't think there is anything specific.

There's no customer specific issues.

I think we're just being cautious and I think you will see Sehat and I being cautious as we go through this.

The things we control in our business, Sehat, just answered is the ability to influence customer technologies.

And that is us optimistic and certainly as I have ever seen, we just announced a couple today and we'll announce a lot more in the future.

So, the things we control, technology, design, design wins and Marvell team is doing a superlative job with that.

Our view in the near term is cautious.

And we admit it's cautious.

Okay.

And your gross margin percent seemed like it came in quite a bit better than your initial guidance.

Can you reconcile what went better versus your expectations in Q2 and what is driving the incremental gross margin growth in Q3?

That's a very good question Shawn, because that's something we could control.

Unlike some other things.

(Inaudible) costs, for example, were incrementally better and we expect that to be incrementally better again in Q3.

And the yields in some of our products were also better.

So, we are executing very well in those areas and that's the principal difference between the two.

There are some minor things like oil prices being less, but thats a minor thing.

The broader issue is a way for pricing and a ways for yields are much better than we --

Okay and what was your head count in the quarter?

I think it was up about 100 people sequentially.

So just --

Its about 5300 Shawn, I can give you an exact number a little later on.

And can you characterize a pricing environment right now for storage?

Stable.

Alright, thank you very much.

Thank you, Shawn.

Ladies and gentlemen, thank you very much for joining us today.

We appreciate your interest in Marvell and we look forward to seeing you at our investor conferences coming up in the next several weeks and speaking with you at our next earnings call.

Thank you very much.

Alright, thank you.

Thank you for your participation in today's conference.

This concludes the presentation.

You may now disconnect.