邁威爾科技 (MRVL) 2009 Q3 法說會逐字稿

Good day, ladies and gentlemen.

Welcome to the Marvell Technology Group Limited third quarter earnings conference call.

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

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

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

(OPERATOR INSTRUCTIONS).

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

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

Jeff Palmer, Senior Director of Investor Relations.

Please proceed.

Thank you.

Good afternoon, everyone.

Welcome to the Marvell Technology Group fiscal third quarter 2009 earnings call.

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

Sehat Sutardja, Marvell's Chairman, President and CEO, and Clyde Hosein, Marvell's CFO and interim COO, all of us will be available during the Q&A portion of the call today.

If you have 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 your 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 expectations, including the near term demand for our products, the development of new products, and our expectations about revenues, gross margins, operating expenses, interest income, tax expenses and non-GAAP earnings per share during the fiscal fourth quarter of 2009.

To fully understand the risks and uncertainties that may cause results to differ, please refer to Marvell's latest quarterly report on Form 10-Q, 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 many investors, as they are consistent with some of the metrics utilized internality to manage the business.

While Marvell uses non-GAAP financial measures as a tool to enhance it's understanding of certain aspects of it's 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 third fiscal 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 Relations section at www.marvell.com.

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

Sutardja.

Sehat?

Thanks, Jeff.

Today we reported third quarter revenues of $791 million, reflecting a 6% sequential decline due primarily to the industry-wide economic downturn.

Even with the severe economic downturn, Marvell still delivered a 4% year-on-year growth.

Our results were in-line with our revised projections presented on November 3rd.

As we reported during our preliminary conference call, and as we are all now acutely aware, the effects of the current financial crisis are having a direct impact on the technology industry as a whole.

What we are observing is an increased level of hesitation by our customers to make any long-term order commitments, and the depth and duration of the current economy current economic downturn is still unknown at this time.

While a portion of the turmoil seem in the semiconductor supply chain is real demand erosion, we also believe a certain amount could be due to overreaction.

Our ability to predict when through end market demand will reflect the natural consumption level is therefore limited.

However, we do see inventories relatively lean on a historic basis, and believe when consumption and order demand realign, there should be a fairly robust improvement to the supply chain.

Regardless of when this snap back may occur, we at Marvell are adapting our business to the realities of the current economic environment.

As we have done in the past, we will focus our efforts on the opportunities and challenges that we can either control or directly influence.

Our immediate focus is to actively tighten our expense profile, and look for opportunities to squeeze any inefficiencies from our operations.

Our results for the third quarter reflect the initial benefits from these actions.

For example, on a non-GAAP basis, our gross margin for the third quarter came in within the range of our original guidance, and our operating expenses were well below the low end of our original guidance.

These resulted in non-GAAP earnings of $0.23 per share.

I am proud to report even in these tough times, we also generated $246 million of free cash flow during the quarter.

The highest amount of quarterly free cash flow generation in the history of the Company.

Marvell reacted quickly to the early warning signs of the end market slowdown, and our cash flow results in part reflect this response.

We still have much work to do, but even in the current environment, we are profitable, and are generating excellent cash flow.

I believe Marvell will come out of this challenging period a stronger and more competitive company.

Supporting this belief is our new engagements with customers opening the door to Marvell, to participate in areas that we have not historically been involved with.

We believe this is due to the value placed on our intellectual property, our strength in mixed signal design, and our ability to effectively integrate embedded multicore gigahertz plus CPU technology with other functions, into very complex single chip solutions.

As an example, I recently met with several large potential customers, these potential customers made it clear that Marvell Technology leadership, financial stability, and ongoing commitment to R&D investment, were clear differentiators which will provide them with a long-term competitive advantage.

Now I would like to highlight a few product announcements, and provide some end market commentary.

During the third quarter, we announced a series of new products in our Prestera ethernet switching family.

The new Prestera CX family is targeted toward next generation data centers and club computing applications, especially those for interserver and interstorage system links.

The Prestera CX family is based on a single chip, 480 gigabit per second packet processing engine.

The CX family of devices leads the industry by supporting up to 48 ports of 10-gigabit ethernet on a single chip, as well as devices, which support multiples of 40-gigabit ethernet ports.

These products address the fastest growing segment of the 10-gigabit ethernet switch market, a market expected to grow to hundreds of millions of dollars over the next few years.

We are already engaged with customers in the space, and should see benefits from these investments by the second half of 2009.

Now moving to the Storage group, we began shipments of the enterprise class system on a chip solutions to Fujitsu, several months ahead of schedule.

Fujitsu, the second largest enterprise storage vendor in the marketplace, chose Marvell because of our industry leadership in very low power ultra high performance read channel technology, coupled with our high performance yet very low power multicore CPU technology.

Now within our Cellular group, we experienced strong demand for our third generation communication processor.

The strong sequential increase in demand was due to the successful launch and robust customer demand for the new RIM Bold smartphone.

We would like to congratulate RIM on the successful launch of the Bold, as well as the other newly introduced products, which are getting very positive reviews.

I would now like to say a few words about the opportunities of the convergence of the notebook PCs and smartphones, what some may term the mobile convergence market.

Over the last year or so, we have witnessed the emergence of the net book marketplace.

We see these devices as early examples of a larger trend, which offers Marvell a high volume market opportunity.

This new convergent devices are not viewed as notebook PCs by the end users, in the traditional sense point of view.

Users are not looking to run complex business applications on these new devices, but rather they want a device to provide access to rich online content.

What users want is also e-mails and an internet access experience like a traditional PC, yet additionally they want an entertainment device to watch videos, in fact, maybe even HD videos, or play games while on the go.

Equally important to users is a device which has the power consumption, and the instant on capability of a smartphone, coupled with the computing performance and storage dev c of a notebook PC.

We want to express that today Marvell has all of the building blocks to address these market evolutions.

This includes higher performance low power Linux compliant embedded CPUs, integrated Wi-Fi, Bluetooth, FM, GPS devices, or even 3G cellular access technology, as well as a complete power management solution.

Effectively Marvell can provide a complete solution.

In our view, the potential to develop a converged mobile product which would sell between $100 to $200 US, is only less than 12 months away.

At this price point, we believe consumers within emerging markets will drive significant volumes, far in excess of the current notebook PC market, and likely equal or greater volume than smartphone markets.

The one area which may still present a slight challenge is the storage subsystem of this device.

Depending on the price point, we believe users will have a choice of either traditional hard disk drive, or solid state drive technology.

We know the hard disk drive vendors are really actively developing ultra low power single-head, single flat mobile drives, which will address the needs of these emerging markets.

For the solid state drive vendors, the key to addressing these markets are high performance as well as high reliability devices, using MLC Flash, which will replicate the user experience of hard disk drive, while delivering a reasonable cost delta increase over traditional storage options.

Regardless of whether hard drives or solid state drives ultimately become the preferred storage configuration for the emerging markets, I am confident that Marvell is ideally positioned to participate and exploit the opportunities.

In summary, even with this challenging environment we are operating within, I am confident Marvell will continue to expand it's shares in many new and existing target markets.

Our technology investments continue to gain traction in the market, and serves to encourage us to continue making such investments going forward.

Now I would like to turn the call over to Clyde, to review our financial results for the third quarter, and provide our current outlook for the fourth quarter of fiscal 2009.

Thank you Sehat.

Good afternoon, everyone.

As Sehat mentioned, fiscal Q3 revenues came in at $791 million, representing 4% growth year-over-year, but due to the recent economic downturn, this translates to a decline of 6% sequentially.

This result was in-line with the revised revenue range we provided during our preliminary conference call on November 3rd.

Our non-GAAP gross margin for the third quarter was 52.3%, an increase of 400 basis points from the same period a year ago, essentially flat with the second quarter, and in-line with our prior projected range of 52 to 53%.

Our overall operating expenses for the third quarter on a non-GAAP basis were $266 million, which was slightly better than our prior projected range of 275 to $285 million.

R&D expenses for the quarter were $204 million, down approximately $13 million sequentially, due to continued tight expense controls, including control head count management, improved control of our outside services costs, and lower NREs associated product tape-out expenses.

SG&A expenses for the quarter were $63 million, up approximately 1 million sequentially.

This resulted in non-GAAP operating margins of approximately 19%, up from 12% in the same period a year ago, and down only about 60 basis points from the prior quarter.

Net interest expense and Other income was an 11.5 million benefit during the third quarter.

This was an improvement of approximately $18 million year-over-year, and a sequential improvement of approximately $14 million.

These improvements were due to a combination of lower interest payments on our standard debt, and currency benefit in our foreign tax reserves that are settled in local currencies.

Tax expenses were $13.4 million, with an effective non-GAAP tax rate at 8.5%.

Our non-GAAP net income for the third quarter was $145 million, or $0.23 per diluted share, compared to the non-GAAP net income of $154 million, or $0.24 per diluted share during our second quarter.

I would like to highlight that even as our revenues declined by over $50 million sequentially, due to the challenging economic environment, we were able to quickly control costs and expenses, such that we only experienced about a $0.01 decline in our non-GAAP EPS.

The shares used to compute non-GAAP net income during the third quarter were approximately 633 million, down from 640 million shares in the prior quarter, due to the lower average share trading price in Q3, reflected in the Treasury method of computing diluted share count.

Let me now summarize our results on a GAAP basis.

Given the challenging economic environment, we are pleased to report GAAP net income of approximately 71 million, or $0.11 per share in the third quarter, up significantly from the $0.01 loss recorded in the same quarter a year ago, and essentially flat with the prior quarter.

The difference between our GAAP and non-GAAP results during the third quarter of fiscal '09 was due to stock-based compensation expense of approximately 40 million, or $0.06 per diluted share, and amortization of intangibles representing approximately 35 million, or $0.06 per diluted share.

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

As we mentioned during our preliminary conference call, we believe the revenue challenges we face are primarily end market consumption or economic related, and that share loss are related to significant excess inventory at our customers.

As such, during Q3 we experienced weak demand across our entire product portfolio.

Provide a bit more color on end market weakness we experienced, we estimate that about half of the shortfall of our original projections, was due to the PCN market, with approximately another 20% due to embedded wireless.

Approximately another 20% due to handsets and mobility, and about 5% due to enterprise networking products.

Sales linearity during the third quarter was front-ended loaded, as we experienced order push-outs and cancellations late in the quarter, to a far greater degree than we had originally anticipated.

Sales of our embedded wireless products were down sequentially, but grew year-over-year basis by approximately 17%, reflecting the increased usage of wireless connectivity and Marvell's strength in embedded wireless products.

Overall sales of our ethernet products grew approximately 5% in aggregate on a year-over-year basis, but declined sequentially.

The sales of enterprise product, switches, system controllers and processors, were up over 13% on a year-over-year basis.

The sale of client based ethernet controllers declined sequentially, and essentially flat on a year-over-year basis.

Sales of our cellular products were below our original projections, and declined both on a year-over-year a base and sequentially.

Overall sales of our communication processors were below our orignal outlook in the third quarter, primarily due to product transitions, coupled with ongoing inventory balancing, at one of our major handset customers.

However this is partially offset by demand for newer 3G communication processor products, which experienced initial end customer acceptance during the quarter, and is expected to grow in subsequent quarters.

Revenue from sales of our storage product grew over 16% on a year-over-year basis, but declined sequentially.

During the quarter, unit shipments of mobile hard drive SOCs on a percentage basis, declined sequentially in the range of low double digits.

The unit shipment of enterprise class hard drive SOCs were up in the mid-teens percentage wise sequentially, due to the ongoing ramp of design wins at Seagate, and the initial ramp at Fujitsu.

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

Now I would like to review our balance sheet as of the end of our fiscal third quarter.

Cash equivalents and short term investments was just over $1 billion, up approximately 156 million sequentially.

We generated approximately $259 million in cash from operations, and spent about $13 million in CapEx, resulting in approximately $246 million in free cash flow, or the equivalent of a 31% free cash flow margin.

While we are excited by this level of free cash flow generation, and expect to continue to generate Best-in-Class free cash flow margin, the level achieved during fiscal Q3 was unusually high, primarily due to improved working capital management, including Accounts Receivable.

We generated approximately $13 million from Employee Stock Programs.

During the third quarter, we also paid down an additional $100 million of our outstanding debt, resulting in a balance of approximately 192 million at the end of the fiscal quarter.

However investors should note we repaid this entire amount at the beginning of our fiscal fourth quarter.

Consequently our actual cash balance will reflect this change when we report our fiscal fourth quarter results.

Accounts Receivable were $398 million, down about $73 million sequentially, primarily due to improved collections of customer payments and lower revenues.

Days of Sales Outstanding was 46 days, a decrease of 5 days from the second quarter.

Net inventories at the end of the third quarter were 340 million, up approximately $13 million sequentially, due to erosion of demand later in the quarter.

Days of inventory were about 80 days, up sequentially from the 78 days reported in the previous quarter, due to weaker than anticipated sales later in the quarter.

Accounts Payable was $224 million, down $13 million sequentially, due to the improvement in time and payments made to suppliers, and lower purchasing volumes.

Now I would like to provide our current outlook for our anticipated performance in the fourth fiscal quarter of 2009.

As I previously mentioned during our preliminary conference call on November 3rd, we are observing significant contraction in order rates from our customers.

We see our customers taking actions to minimize the inventory exposure, as the visibility into end market sell-through is very limited.

We are actively monitoring the situation, and keeping in close contact with our customers, and incorporating updates into our forecasting process on a real-time basis.

We remain confident of our ability to control of the opportunities and challenges presented to us during this difficult period, to improve the operational efficiency of the Company.

In our view and history has shown this to be true in past contractions, those companies that take quick and decisive action to control costs, stay aligned with customer requirements, and continue to invest in new products, are more likely to emerge from the downturn in a stronger position.

This is our strategy, and Sehat and I would like to thank all Marvell employees for their support and dedication during this challenging period.

With these observations as a backdrop, we currently project our fourth quarter revenues in the range of 690 to $730 million, which represents a decrease of 14 to 19% year-over-year, and an 8 to 13% decline sequentially.

This range is slightly worse than our preliminary guidance provided on November 3rd, reflecting the erosion primarily in our PCN markets.

We currently project non-GAAP gross margins in the range of 52.8%, plus or minus 50 basis points.

We are currently expect non-GAAP operating expenses to be approximately $260 million, plus or minus 5 million.

Currently we expect R&D expenses to decline sequentially to approximately 197 million, plus or minus 3 million.

We anticipate that SG&A will be essentially flat on a sequential basis, plus or minus 1 million.

Interest expense and other income together should be a net zero, this reflects interest income of approximately 2 million, offset by the expensing of the remaining debt issuance cost, related to the full payment of the bank debt.

The effective non-GAAP tax rate should range between 7 to 8%, with diluted share count of approximately 630 million shares.

We currently project non-GAAP EPS to be in the range of $0.14 to $0.20 per share.

On the balance sheet, we currently expect to generate 110 to 120 million of free cash flow during during the quarter, and as I indicated earlier, we paid off the remaining 192 million in bank debt during the early part of fiscal Q4.

This should result in an ending cash balance of just under $1 billion.

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

About $0.05 of this difference is related to amortization of intangibles, and about $0.08 in stock-based compensation expense.

Now I would like to turn the call over to the operator for the Q&A portion of the call.

(OPERATOR INSTRUCTIONS).

The first question comes from the line of Romit Shah from Barclays Capital.

Thanks for taking my question.

Clyde just on the backlog it looks like you lowered revenues by a couple of percent versus the beginning of November.

Can you give us a sense on how much backlog has declined since you last give an update to guidance?

Probably by almost the same percent.

So the backlog going into the quarter, if you reflected as compared to the mid-point of our range we just provided, is about just over 70%, but the same level as previous quarters may be a tad better, but it certainly has eroded a little bit since our last call.

And then just on the OpEx, you guys have been bringing down R&D for the last couple of quarters, but I noticed that SG&A has actually been flat or increasing.

I would have expected it to be the other way around.

Can you just provide more color on how you are reducing below the line expenses?

Well, I think every itemizable expense profile is a target for reductions, but obviously the opportunities R&D is much, much bigger.

Our SG&A expense as a percent of revenue I believe is amongst Best-in-Class.

We want to maintain it that way, but I don't think any stone is unturned in any part of our financial profile for us to reduce.

And Clyde when we get through this downturn, how should we think about Marvell's target operating model?

That is a good question, Romit.

As Sehat and I said, we will provide that at the end of our fiscal year.

So in a few months we will give you our target is.

Our practice would be as we report our full fiscal year results, we will provide that to you guys We have given a lot of indications, we focus in on our very tight operating expenses, even in this environment, we have 19% operating profit on a non-GAAP basis, and significant cash flow.

So that is a good hint of where at least we want to improve from.

Thank you.

Next call, please.

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

Please proceed.

Thank you very much.

Let me just ask you about just in general, what your sense is of what target level is within your customer right now, in light of the guidance you have given, what is your sense about determined inventory, both for you and through how much you think your customers are holding right now, and is there any risk that as we go into early next year there could be a write-down on the inventory line for you guys?

I know you have done a good job of managing working capital in general, but just a sense of what you think inventory levels will be, and what do you think is optimal at this point to avoid write-downs early next year?

I will answer some part of it, and I will let Clyde answer the rest.

If the majority of our customers are already pulling products on the a real-time basis, of course they give us a forecast, so that we can build those products and have them in inventory, and what I want to stress is that a lot of things are single sourced products.

They are generating, we have 100% design wins on many, many of these products.

So in terms of the risk for the majority of these projects are quite minimal.

Typically what I have said mostly during the product transition is when the customers are moving from one generation product to the next generation product, that is when we have to be a little bit more careful about the inventory, otherwise, the risk of the inventory on our side is quite minimal.

And this is the reason why we also said that we believe that the inventory levels at our customers are lean, are quite lean compared to historical levels, so this is really a reason why we believe these end markets are related, and we do not have any, actually we don't feel like, think it is related to anything other than that, and for sure, it is nothing to do with a market share loss or design win issues.

In fact in some of these markets we can also get, we have new design wins that are fortunately will not see like with server storage, the result in terms of ramp, would not see it for another nine months to a year or so, but we do have those new design wins in fact.

I don't know Clyde, you might want to add more color about inventory issues.

Like everybody else, we are chasing a moving target, a moving declining target, as you obviously know a few months ago no one was predicting where we would be.

We are supporting our customers, so obviously at 82 days of inventory where we ended fiscal Q3, that is probably a little hight than I would prefer it to be, but I understand why we ended up here.

I agree with Sehat, I think the risk is of any write-off is small at this time.

I don't spend any nights worrying about it, although we will act and continue to tighten things up.

I think that is one that is out there.

But from a target point of view, it is hard to give a target in this current environment, but on a stable basis I would like us to be in the low 70s, high 60s in terms of days of inventory, and a lot of that is probably customer specific.

Right.

Thank you for that.

One other question from me, when I look at your R&D cutback, there are two questions I want to ask on that.

The first question is, what are you doing in terms of being able to reduce R&D so significantly in the quarter?

And an expansion of that is how much of your product over the next two quarters will be coming from new products, and are you able to maintain your ability to keep turning out new products on this level of R&D?

And then finally, if I look at the head count level across Marvell, do you think that, across the rest of your OpEx, is there some more room to take head count down?

Those are my questions.

Thank you.

I will answer the first part of the questions here, R&D is something that I have managed very tightly.

I am very involved in very much all of the aspects of R&D.

To an significant extent, compared to most other CEOs in the field, if you look at the R&D the cost reduction in R&D, is mainly through the last quarter, is mainly due to the better expense control, in terms of developing, limiting the number of different products that we do, so basically, another way of saying that instead of building multiple different chips, okay we build fewer chips to address those multiple segments.

We reduced the amounts of the prototypes, the APGAs, the tape-out costs, the test costs, the mask costs, so and as well as in terms of new hires, okay it has been very, very tightly managed.

We mentioned it earlier, and so in the long run, we also are looking how to further, further reducing the number of many different chips that we historically built, we are thinking about about where the different segments we play in, and now we are being a lot more careful and make sure those products address truly, truly the highest volume opportunities.

So I mentioned about, okay some of the highest opportunities in the call, I mean in the prepared call, is the new emerging markets for our application processors, our multi-gigahertz application processors for this emerging market.

So I mean I am very optimistic that our investment, continued investment in R&D are not slowing down, we are just doing a better control on the spending.

Clyde, do you want to add something?

No, I agree Sehat.

I think two ways, one is strategically, I think that is driving leverage in our investments so that you can leverage technologies across multiple platforms, and I think, he is probably the best I have seen at that, and you will see that continue at Marvell, that is probably the biggest opportunity out there.

On the other hand, is trying to bring efficiencies out of our excess.

That is where we both work together, and drive that, that is the benefit you see, and I expect you will see that to continue, and obviously we do that without affecting the products we bring to market, we still intend to be the leading providers of semiconductor solutions out there.

Thank you very much.

Operator, we will take the next call, please.

The next question comes from the line of Shawn Webster, JPMorgan.

Please proceed.

Yes, thank you.

Sehat, at the beginning of the call you had talked about your belief that this could be a short lived or there will be a snap back, because your characterized your customers as potentially overreacting.

Is there anything that you are seeing in terms of behavior, that makes you confident or causes you to speculate that this could just have a sharp turnaround down the road soon?

And then I have a couple of follow-ups.

Sure.

I mentioned that obviously, the downturn is caused by the end market demand, and at the same time I also mentioned that some of this is also due to overreaction, and I am sure everybody will agree that would be the case.

In specific, just very early indications, just very early indications, that just a limited number of customers are making a last call trying to get products, either they forget the forecast or they are being very conservative early on.

It is hard to say, this is just a gut feeling, whether this is a one-time event, or if there are more and more of these types of customers, they will come at the last minute, and they need the products earlier.

But the good thing is okay our operations machines continue to improve, so that when this thing happens, when the customers come back on the short notice, we should be able to produce those parts on the fast track basis.

We are preparing on the both sides, we are preparing on the expense side to manage the expense to be more efficient, and at the same time we are preparing to be more efficient in terms of the cycle times to respond to this last minute call.

What was the head count at the end of last quarter?

Clyde?

Headcount at the end of the quarter, Shawn, was 5,541, it was up 88 from the end of Q2 and down 212 heads on a year-on-year basis.

Okay.

As we go into Q4, what are going to be, I recognize there is a large variance range with the guidance you gave, but what is the relatively stronger or the weakest product segments as we go into Q4?

You know, it is hard to say, I mean there is volatility across it, I think in the infrastructure space, I think is probably where we are seeing probably lesser of the volatility.

So that would probably be my best guess, and in cellular, that seems to be recovering fairly well, so I think there is some the strength there.

Shawn, we are splitting hairs here.

Okay.

And you said your backlog coverage for your mid-point was about 70%, is that what you said?

Yes, just over 70.

So the gross margins coming up 50 basis points in Q4, can you walk us through the moving parts there to drive that?

Yes.

I think it is again it is continue to drive efficiency, driving costs from our business, and it is a fair amount of blocking and tackling.

But not mix or pricing or other things?

No, we have seen any draconian price.

Pricing isn't obviously as good in good times, but it is not, the improvement is not from pricing.

Let's be clear.

How is the pricing environment broadly speaking in your drive through chain right now?

In the drive through chain across the--?

-- drive components rather at your customer, the competitive pricing environment?

It is competitive.

I mean it is not a cakewalk, but there is nothing unusual either way that we see in it.

Okay.

Thank you very much.

Thanks.

Next question, please.

The next question comes from the line of Quinn Bolton with Needham and Company.

Please proceed.

Just wanted to come back to this 70% backlog coverage you talked about in the prepared comments, seeing erosion especially late in the quarter in that backlog.

So sort of wondering if you can talk about the turns order environment that gives you comfort heading into the quarter, with 70% backlog coverage, have you seen a shift from longer lead time orders to very short turns business?

Or a pick-up in pulls from consigned inventory hubs, but could you talk a little bit about the turns order business environment?

A couple of things Quinn, on a background basis, about half of our revenues have as pointed out is on a consignment basis.

So you are really dependant on a customer forecast to predict it, and that is one of the concerns we had back on August 28th.

So part of it is pulled from consignment hubs.

So that is not the traditional book to bill stuff.

And customers are you not a whole lot more clairvoyant as we are.

On the turns basis, as I pointed out, there are times we see customers pulling in stuff.

So it is certainly improved from the October timeframe in terms of the volatility, and we have seen some push-outs, we have seen some customers doing, asking us for better than what they asked a few weeks ago.

There is no consistent story I can tell you on that part.

Just to clarify, did you say the volatility has come down a bit since the October level, still volatile but not as bad as October?

It has improved substantially since the month of October, correct.

Okay.

A question on the consignment basis.

You say you have 70% backlog coverage, does that include your forecast pulled from the consignment hubs, or what gets pulled from consignment hubs sort of all flows through that other 30% that is not in backlog?

It is in aggregate.

Okay.

Okay.

So it includes it.

Okay.

Great.

Thank you.

Next question, please.

Next question is from the line of Craig Berger from FBR, please proceed.

Thanks for taking my questions.

Just on the operating expenses as we move past the fourth quarter here, did you say that there is more to give back in that area, are there more cuts coming in Q1 and beyond?

I think some of the actions we have taken will still show some improvement in the April quarter.

So I think if you mean give backs, if you mean improvements I would expect to improve a little bit again in the April quarter.

A little bit more in April and then that is the bottom for OpEx?

No, we have to watch the economy.

Sehat and I are very laser focused on where things are.

I would not say that is the bottom, but if you ask me today, that is my answer today.

Okay.

Can you guys confirm that you are in the storm, and can you also update us as to what other new competitors you might be seeing at that customer, new design win battles, and just your status at maintaining that customer as an important customer?

I think you are probably misspoken.

We are in Bold.

So they are our 3G solutions, and according you probably read some of the articles about the troopers of the Bolt is, it is I think it is the highest performing 3G phone in the market.

So in terms of competitiveness of 3G, there are not so many players that are providing 3G solutions in the open market.

So I mean obviously, the biggest competitors is realize, Qualcomm is in the 3G space.

Other than that, we are considered the early player in this market in the 3G space.

And I said earlier, there are new market opportunities, historically we have put a lot of emphasis on just the smartphones, but our application processor technology, okay, now we are looking into the opportunities in equally or even bigger market opportunities for the MIDs, or the netbook markets, which I already spent quite a bit of time talking about.

Can you talk about your confidence in maintaining share at your top cellular customer?

I am confident.

Do you see new competitors coming in there, or any share losses to existing competitors?

No, no.

Can you just provide us a brief update on your design efforts, with respect to Bluetooth optical drives, some of the other nascent future products?

Sure.

Okay.

Maybe my answer before was too short, I want to go back a little bit.

I say no, but at the same time, we have new engagement on newer technology in the more advanced 3G technology with our customers.

So moving to the optical, I didn't spend time on talking about optical.

We have a couple of very important engagements.

I didn't mention too much about it, because there are other things to talk about.

So this is the area of both Blu-Ray as well as the traditional light laser.

We are only delivering complete platforms to the customer base, to support them, to port into their specific OPUs, they plan to choose.

So I think I can say it is progressing quite well, after some pick-up a year ago on the software development efforts on our part.

But we are incurring quite well there, and performance in fact actually some data shows that we are superior in performance in SNRs, especially in the Blu-Ray side.

I think Bluetooth we are engaging with several customers, in fact I think we are already shipping some shipping, or about to ship some very high volume products to some new platforms, and they are integrated Bluetooth with Wi-Fi capability.

Thank you.

Operator, the next question, please.

Thanks, Craig.

The next question comes from the line of James Schneider with Goldman Sachs, please proceed.

Good afternoon.

Thanks for taking my question.

I guess first off, Clyde I believe you mentioned infrastructure and cellular were two of the better products you expect in the next quarter.

Can you comment on which ones would be lagging?

When you say next quarter first of all, we are talking about the current quarter which is the January quarter, I think I said in my earlier prepared remarks, PCs eroded further than when we gave our initial update about a month ago.

That is probably the biggest volatility, followed by end consumer type products, would be the second area that is probably the most worrisome for us.

Fair enough.

Thanks.

Then in terms of gross margin improvements, you have talked before about both operational and mix factors contributing to your better gross margin, how much of each of them contributed in the quarter, and what additional headroom do you expect, in terms of the operational piece of that in 2009?

I mean mix is, you have just got to watch it happen.

I think most of the improvements we are looking at, is to drive efficiencies in our internal operations, and our overall costs.

So most of it, I think would be improvements.

In next year, we are driving the management team to continue to make improvements in gross margin, and I think there are good opportunities to do that, even in the current environment.

Great.

Thanks very much.

Operator, next question please.

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

Please proceed.

Thank you.

Clyde first one for you, you are approaching almost $1 billion in net cash, I am just wondering, what are your plans for that?

I was waiting for that question.

First order of business was to pay off the debt.

I mentioned earlier just at the beginning of this fiscal quarter, we paid it off.

So we can check that box.

As we mentioned before, we generate significant amounts of free cash flow.

It is something Sehat and I are laser focused on.

So the next step we have already said, is to look at investing and obviously share buy backs, those things become with the debt out of the way, those things become in the forefront, and we will keep you guys informed when we make those decisions.

What is the minimum cash balance that you would like to have on the balance sheet?

In this economy, the way it is moving, I would say not a fair question, who knows, but $1 billion, take out 200 million.

So 800 million net of the pay back, I would never argue with you that is a safe bet.

So we should be putting back some of that back to shareholders.

It is an appropriate thing given where we are.

The comfort we have with the efficiency of Marvell right now, and the margins we generate give us more comfort that we can function, even at lower than the net 800 million.

And also the comfort zone is the fact that taking a lot of the buildings that we occupy, okay, we own, and we are fully paid for.

So there goes another comfort that those will translate into additional, to offset the debt and cash flow.

Okay.

Great.

And then Sehat one for you.

You talked about, targeting the netbooks that are going to sell for $100 to $200, I am just wondering where is Marvell in terms of getting design wins, and maybe even showing some revenues, how far do you think we are?

Thank you.

Yes.

I spent quite a bit of time talking about this.

I am very optimistic about this market.

This is the market that I personally spent a lot of time in.

I believe this is one of the biggest market opportunities of the semiconductor market, to address the next 1 billion to 2 billion of customers, these are the customers that can only afford to pay around $100.

I say $100 to $200, I just want to cover slightly more markets.

But there are significant markets that will fall in the around $100, and those markets the integrations of all of the functionality into a single chip, gigahertz or even multi-gigahertz processors capability, give you HDTV capability, and very low power solutions.

So, we have everything, we have been working on this for a number of years, and we are also leveraging the software infrastructure of the X scale, so all of the software on wireless MMX2, these are the things that normally you need to run Flash, like Adobe Flash, to run transparently into the platform.

So as I said we have complete solutions, now we have a number of designs in the wake, so we are very, very optimistic.

Any timeline on when we will see initial shipments?

As I said, I believe the market is $100 to $200 will emerge in less than 12 months.

Thank you.

Operator, we will take one last question, please.

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

Thank you.

I have two questions.

First of all, can you talk a little bit about in the next 12 to 24 months, what are the areas you expect to see your business or design wins outperform what is happening in the market, and then I have a follow-up question.

I think it sounds like you guys think maybe this is something short, but all of the indications are this could lost for a long time.

Are you prepared for declines in revenue that you have seen in the semiconductor industry, in say '01 or '02, and what kind of actions are you taking to sort of horde your cash, or other strategies?

Thank you.

I will take part of it, and the maybe Clyde you will take part of it.

This is like an open-ended question, is what it sounds like.

Of course we are concerned, if the economic downturn is longer than expected.

At the same time, we say that we must focus ourselves on the things that we can control and influence.

There are a lot of market opportunities that we have not played today, okay, and interesting market opportunities, and we just have to finish the last mile, the last 5% of development efforts, okay.

There was a question before on the optical, we just have to be up that 1%, the final qualification, everything is ready, just the final qualification we must get through.

We are almost at the end of developing our HDTV, Blu-Ray player.

We can demo everything, you can come, stop by and look at all of the demonstrations.

So we just need to get the last things, the last miles to finish, to make sure that we completely play into the segments there we have not played before.

I said earlier, there are new market opportunities, there are things we can influence, the next 1 billion users opportunities for the netbook or MID devices, okay this is a completely new opportunity, that we can control, we can play.

This is, okay, the market is there, it will be there, and okay, we control, we can decide what products to build, what is the price to build, how much to integrate, okay.

And whether to build one product to address the $100, another product to address $150 segment, or another product to address the $200 segment, or even another product to address the sub-$100 segment.

These are the things we can control.

We cannot control the length of the downturn.

Let me stress, this is something that we have prepared, okay.

We know that this is part of the job, part of our job to manage the Company, is to deal not just with the economy here, bullish upside all of the time, but once in a while when the economy is down, okay we need to have the guts and the ability to put focus on controlling costs, managing our expenses, looking at what products to trim, to cut costs, removing things that are erroneous.

So we increase to keep our margin high, or increase the margin, and there are a few other products here and there, that are not ready to talk about yet, to address market steps, completely, it has nothing to do with stuff, like mixing DSP CPU technology, okay.

We are known as the leader in analog mixed signal technology.

We are also looking into building, completely just purely mixed signal products, that has nothing to do with DSP or CPU.

They have billions of opportunities, and the more we look into it, the more an opportunity, and also requires a lot fewer resources to break into.

In that past we tended to be too overexcited about complicated stuff.

It is good to build complicated stuff, because that is why our customer wants, there are things that are less complicated that people do not talk about, but we have advanced technology to solve, and some of these things we will be introducing in the near future.

The first question, the opportunities for the next 18 to 24 months, where you see the growth coming from?

If you look at the existing business, we have multiple design wins, even in storage alone, for customers that we used to not to play ball in, so that is a huge opportunity, even if the market continues to have prolonged impact.

It will be positive to us.

Integrations in enterprise, okay, we are the only one that can do enterprise integration.

There is not a single other company out there that can demonstrate the capability, they can talk, but they cannot demonstrate the capability to integrate.

We are shipping, and continue to innovate in the 3G space, we have very good performance.

So we just have to work even harder to make sure that we continue to make things better.

You are asking for 12 months to 24 months.

I am convinced that we will be in the Blu-Ray player in the a significant way, and in HDTV in a significant way at that time.

Operator, I think that is was our last call, please.

Ladies and gentlemen, this concludes the question and answer session of this conference.

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

Jeff Palmer for closing remarks.

Thank you, everyone.

In closing, we would like to thank you for your time today, and appreciate your interest in Marvell.

We look forward to speaking with you at our next coming call and seeing you at upcoming investor events.

This completes our call today.

Thank you very much.

Thank you.

Thank you for your participation in today's conference.

This concludes the presentation.

You may now disconnect.