邁威爾科技 (MRVL) 2009 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the fiscal fourth quarter year end 2009 Marvell Technology Group earnings conference call.

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

We will conduct a question-and-answer session towards the ends of the conference.

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

Now I'd like to turn the call over to your host for today's conference, Ms.

Jeff Palmer, Senior Director of Investor Relations.

You may proceed, sir.

Thank you, Geri, and good afternoon everyone.

Welcome to Marvell Technology Group's fiscal fourth quarter and fiscal year end 2009 earnings call.

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

Sehat Sutardja, Marvell's Chairman, President and CEO, and Mr.

Clye Hosein, Marvell's Chief Financial Officer and Interim Chief Operating Officer.

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 web site under the Investor Relations section www.marvell.com.

Additionally, this call is being recorded and will be available to replay from our corporate web site.

Before we begin, we would like to remind all participants that this call will contain forward-looking statements that involve risks and uncertainties that could cause Marvell's results to differ materially from managements current expectations, including forward-looking statements regarding our outlook and response to the current economic environment, our ability to expand market share in new and existing markets, our expectations about revenues, non-GAAP gross margins, non-GAAP operating expenses, free cash flow and GAAP and non-GAAP earnings per share during the fiscal first quarter of 2010.

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 exclude stock-based compensation expense as well as charges related to acquisitions, restructurings, gains and other charges that are driven primarily by discrete events that management does not consider to be directly related to Marvell's core operating performance.

Marvell management believes these non-GAAP metrics are useful to many investors as they are consistent with some of the metrics utilized internally to manage our business.

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 our non-GAAP and GAAP figures is provided in our fourth fiscal quarter and fiscal year end 2009 earnings press release which has been furnished to the SEC on form 8-K and is available on Marvell's Web site in the Investor Relations section.

Now we'd like to turn the call over Dr.

Sutardja.

Sehat?

Thanks, Jeff.

Today we reported fiscal fourth quarter 2009 revenues of $513 million, reflecting a 35% sequential decline and in line with our revised outlook communicated to you on January 22.

Despite the impact of the current economic environment on our revenues, we continued to demonstrate solid performance, financial performance in the areas of profitability and cash flow generation.

During our fourth quarter on a non-GAAP basis we reported gross margin of 51.3%.

We aggressively lowered our operating expenses and delivered about $95 million dollars in free cash flow, or the equivalent of 19% free cash flow margin.

We believe these results clearly demonstrate our continued focus to achieve best in class financial performance.

Marvell, as with most of our peers, continues to be severely impacted by the unprecedented industry-wide erosion in end market demand.

Based on our concerns shared on prior earnings calls to you, we began to undertake actions in the fourth quarter to realign and improve the efficiency of our business.

We continue to believe the best course of action is to focus on those areas of our business we can directly control, influence or positively impact.

Consequently, today we announced additional measures to align our business with the current and the anticipated economic environment.

These actions, combined with certain cost reduction measures we took in the fourth quarter, include the reductions of approximately 15% of our worldwide workforce.

We regret parting ways with many of our colleagues but believe these actions are prudent at this time.

We wish our departing employees all the best.

In addition to the headcount reductions, we have also implemented other significant corporate-wide initiatives to lower our costs and expenses.

Clyde will provide more details later in the call.

The actions we are implementing are painful.

But necessary for to us maintain the financial health for our company, for our shareholders, customers and remaining employees.

We believe this will make us stronger, more competitive and much better able to deal with the potential of a prolonged global recession.

Despite the challenging economic climate we believe the time is right for Marvell to be very proactive in streamlining our business and we see the semi-conductor industry in the midst of revolutionary changes.

In our view, there is an accelerating trend towards architectural convergence in advanced system-on-chip designs.

At Marvell we believe we are uniquely positioned to take advantage of this convergence as we serve and have visibility into many different end markets, some of which are well known to you, but some of which we have not yet brought to market.

When we look across the broad end markets we service, we see many similarities in the technical requirements for many of the system-on-chip that we design.

From a high level perspective, the trends we see in the specifications for next-generation devices is the need to integrate multiple high performance, low power embedded CPUs, supports for event 3D graphics, support for wired and wireless communications standards, and lastly a clear shift toward fewer and standards-bases high performance interfaces.

Of course there will always be the need for market specific functionality.

This is after all what differentiates a product like a set-top box from a smart phone.

But this is becoming a less dominant portion of the overall die site.

However it is clear to us that a key element of success is a deep knowledge of high performance embedded CPUs and the ability to execute complex system-on-chip designs.

All Marvell, one of the unifying technologies across our entire product portfolio is our long history of developing our own high performance embedded ARM instruction set CPUs.

We believe that in the future fewer companies will have the breadth and depth of expertise needed to do address this coming architectural convergence.

A clear case in point is the cellular industry.

Many vendors can address one, or possibly two, portions of the overall design.

However, with handset functionality converging around two-point, that is, the entry level phones and the smart phones, the differentiating factor for success in the fastest growing portion of the smart phone segment is the ability to support a broad portfolio of advanced intellectual property.

In our view, the linchpin to success is high performance, low power application process, in addition to proven 3G baseband technology, integrated graphics, HDTV and complete platform devices including power management and multi-radio wireless connectivity.

We believe Marvell has the IT, the intellectual property portfolio and expertise to be ideally and uniquely positioned to capitalized on this convergence, not only in smart phones but also in other markets we serve.

Throughout the Company, as we are doing in our cell phone business, we are looking two to three years in the future anticipating where our industry will be, not where it has been or where it is today.

As we continue to streamline our business, we will make conscious decisions to align our resources to take full advantage of the architectural convergence that we believe lays ahead.

In summary, even with the challenging economic environment we are operating within, I believe Marvell will continue to expand its shares in existing and many new target markets.

I'm proud of our performance to date and optimistic about the near and long-term future of Marvell.

We have always been an engineering powerhouse.

I expect this trend to continue and that Marvell will emerge even stronger.

Now I would like to turn the call over to Clyde to review our financial results for the fourth quarter and fiscal year end of 2009 and to provide our current outlook for the first quarter of fiscal 2010.

Thank you, Sehat, and good afternoon everyone.

As Sehat mentioned, fiscal Q4 revenues came in at $513 million, representing a 35% sequential decline and down 39% from the same period a year ago.

This result was in line with the revised revenue range we provided on January 22.

Our non-GAAP gross margin for the fourth quarter was 51.3%, a decrease of 100 basis points from the third quarter and an increase of 260 basis points from the same period a year ago.

This was slightly below our prior projected range of 52% plus or minus 50 basis points that we provided last November and prior to the most recent revenue decline.

The sequential decline in our gross margin was primarily due to lower revenues offset by improvements in spending.

Our overall expenses for the fourth quarter on a non-GAAP basis were $235 million, which was significantly better than our previously projected range of $255 million to $265 million.

As Sehat indicated, our preparedness for the economic downturn started earlier and our results, in part, reflected this.

We have recently taken aggressive actions to reduce expenses including cancellation of bonuses, headcount reductions, salary freezes, consolidation of certain of our facilities, and reductions in discretionary spending.

Our results in Q4 reflect our preliminary steps in this regard including about $15 million in non-recurring items.

R&D expenses for the quarter were $178 million, down approximately $26 million or 13% sequentially, and down $19 million from the same period a year ago.

SG&A expenses for the quarter were approximately $57 million, down approximately $6 million, or 9% sequentially, and a decrease of about 36% from the same period a year ago.

This resulted in a non-GAAP operating margin of approximately 5%, down from the approximately 19% reported in the prior quarter, and the 12% reported in the same period a year ago.

Net interest expense and other income was an expense of about $440,000 during the fourth quarter.

This was a sequential decline of approximately $12 million on a year on year decline of approximately $15 million.

We realized a tax benefit of $4.7 million during the quarter which is the result of a favorable tax ruling in one of our foreign jurisdictions.

Our non-GAAP net income for the fourth quarter was $32 million, or $0.05 per diluted share, compared to a non-GAAP net income of $145 million, or $0.23 per diluted share during the fiscal third quarter, and $123 million or $0.20 cents per diluted share reported in the year ago period.

The shares used to compute diluted non-GAAP income per share during the fourth quarter were approximately 629 million, down from 633 million shares in the prior quarter, and slightly higher than the 627 million shares reported in the year ago period.

Changes in share count are primarily due to the variations in the average trading price in the reported periods reflected in the treasury method of computing diluted share count.

This being our fiscal year end, I would like to also summarize our results on a full year basis.

Our revenue for fiscal 2009 was $2.95 billion, a 2% increase over the $2.89 billion reported for fiscal 2008.

On a non-GAAP basis full year gross margin for fiscal 2009 was about 52% versus the 48.8% reported in fiscal 2008.

An improvement of nearly 325 basis points year over year.

Non-GAAP operating income increased to $500 million, or [70%] of revenues, 700 basis points better than the 10% reported in fiscal 2008.

Non-GAAP net income for fiscal 2009 was $482 million, or $0.76 per diluted share, an improvement of 72% as compared to $280 million or $0.44 per diluted share reported in fiscal 2008.

Turning to cash flow metrics.

Our full year cash flow from operations for fiscal 2009 was approximately $680 million as compared to the $177 million reported for fiscal 2008.

Free cash flow for fiscal 2009 was $607 million representing a 21% free cash flow margin, an improvement of about 850% from the $64 million reported in fiscal 2008.

Let me now summarize our quarterly results on a GAAP basis.

We experienced a GAAP net loss of approximately $65 million, or $0.11 per share in the fourth quarter as compared to the $0.11 per share profit we reported in our third quarter of fiscal 2009, and below the break even level we recorded in the same quarter a year ago.

The sequential decline in our GAAP earnings was principally the result of the worsening economic climate, approximately $10 million in charges related to the reduction in force and facilities consolidations, and approximately $15 million of intangible asset impairments taken in fiscal Q4 '09.

The difference between our GAAP and non-GAAP results during the fourth quarter of fiscal 2009 was primarily due to stock-based compensation expense of approximately $45 million, or $0.07 per diluted share.

Amortization and impairment of intangibles represented $48 million, or $0.08 per diluted share.

Restructuring and facilities consolidation expenses represented $10 million or $0.02 per diluted share.

And a reversal of withholding and payroll tax accruals of approximately $5 million reflected in our operating expenses or $0.01 per diluted share.

Additionally, our amortization of intangible expenses reflect approximately $15 million in write off of certain purchased intangible assets related to prior acquisitions.

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

From an end market perspective, nearly 75% of the revenue shortfall versus our original expectation was due to erosion in the PC end market, approximately another 15% due to consumer products including embedded wireless, handset and mobility related products, and another about 10% due to enterprise networking products.

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

Now I'd like to review our balance sheet as of the end of our fiscal fourth quarter.

Cash, cash equivalents and short term investments were $952 million, down approximately $93 million sequentially.

We generated approximately $109 million in cash from operations and spent about $14 million in Capex; resulting in approximately $95 million in free cash flow, or the equivalent of a 19% free cash flow margin.

At the outside of the fourth quarter, we fully retired our term loan, paying down the remaining balance of approximately $192 million.

We are now debt free.

We believe a good position to be in for the current market.

Accounts receivable were $222 million down about $176 million sequentially primarily due to lower revenues.

DSO was 40 days, a decrease of six days from the third quarter, primarily reflecting the lower revenue levels in the month of January.

Net inventories at the end of fourth quarter improved $29 million or about 9% sequentially to $311 million.

Impressive when considering the significant revenue decline.

However, due to the lower revenue outlook, days of inventory were 117 days, up sequentially from the 80 days reported in the previous quarter.

Accounts payable was $139 million, down $85 million sequentially due to lower purchasing volumes combined with the timing of payments made to suppliers.

In summary, I would like to highlight that even with the recent revenue decline we delivered solid gross margins, we were able to swiftly lower operating expenses, and we quickly improved our working capital management which resulted in better than expected bottom line profitability and cash flow.

Now I would like to provide an update on our anticipated performance in the first fiscal quarter of 2010.

As previously mentioned on prior conference calls, we are observing an unprecedented compression as compared to last year in end market consumption patterns across our entire product portfolio.

We are as uncertain as everyone else about the duration of the current economic environment.

However, we believe the business climate demands that we make hard decisions to better position Marvell to emerge from this challenging period a stronger, more competitive and efficient organization.

As Sehat previously mentioned, we have taken decisive action to strengthen Marvell's long-term health both financially and from a competitive product perspective.

These actions include the difficult but necessary decision to reduce the overall headcount of the Company.

The announced reduction in force will lower our headcount by approximately 15% when completed later this calendar year.

The headcount reductions are across all geographies and all functional areas of the Company.

Although we did not exit any businesses.

As I indicated earlier, we have implemented a Company-wide salary freeze as well as implemented selective salary reductions and reduction in work hours in certain locations.

Additionally, we have made significant progress in lowering various business support expenses such as our travel and outside professional service costs.

Furthermore, we have suspended all bonus award programs both for executives and individual contributors until such time as our business improves.

We currently anticipate the restructuring charges associated with the specific actions taken today will be approximately $20 million, including approximately $14 million related to severance benefits and approximately $6 million related to facilities consolidations.

We anticipate that the announced restructuring process to be completed by the end of 2009 with the majority occurring in the next few motion and will require us to record additional charges.

In our view, we believe we are positioning the Company for the long-term both technically and financially.

We are not making tactical decisions just to react to the current economic environment.

But are attempting to be proactive in our actions.

As Sehat mentioned, we see a common wave of convergence which will create competitive discontinuity in our primary markets.

We have taken the painful but necessary steps to be well-positioned for the future.

With these observations as a backdrop, we currently project our first quarter revenues in the range of $490 million to $530 million, or down 4% to up 3% sequentially.

Essentially flattish at the midpoint of that range and a decrease of 34% to 39% year over year.

We currently project non-GAAP gross margins in a range of 51.5% plus or minus 50 basis points.

At the midpoint, an improvement of 20 basis points from the previous quarter.

We currently anticipate non-GAAP operating expenses to be approximately $235 million plus or minus $5 million, flat with our expenses reported last quarter but an improvement 6% sequentially when we adjust Q4 for the one time benefits such as holiday shutdowns.

An improvement of 8% on a year over year basis.

We currently anticipate both R&D and SG&A to be essentially flat.

Interest expense and other income together should be just about $1 million benefit.

The effective non-GAAP tax should be approximately $2 million to $3 million with diluted share count of approximately 632 million shares.

We currently project non-GAAP EPS to be in the range of $0.03 to $0.05 profit per share.

On the balance sheet we currently expect to be slightly free cash flow positive during the quarter.

We should generate slightly positive operating cash flow but this is expected to be largely offset by the cost of our restructuring progress.

The cash balance should be at about $950 million.

We currently expect our GAAP EPS to be lower than our non-GAAP EPS by about $0.14 per share plus or minus $0.01.

About $0.05 of this difference is related to amortization of intangibles, $0.07 in stock-based compensation expense and about $0.02 to $0.03 related to our restructuring measures.

Before I turn the call over to the operator, I would like to once again thank our employees for the hard work, dedication and support throughout this period.

The executive team, Sehat and I, sincerely appreciate it.

Now I'd like to turn the call over to the operator to begin the Q&A portion of the call.

Geri?

(Operator Instructions).

Your first question comes from the line of Craig Berger with FBR Capital Markets.

You may proceed.

Hey, guys, thanks for taking the question.

I just wanted to understand how does this reduction in R&D affect your investment profile for some of your businesses, cellular, some of the other up and coming products, optical?

And then I have a follow on.

Thank you.

Yes, this is Sehat Sutardja answering.

As we said in the prepared statement, we spend a lot of effort to look into two to three years down the road where the convergence are happening.

Many of our products, whether it's cell phones, whether it's in HDTV or whether it's in application processors or MIDs and netbooks type applications they all seem to have similar requirements.

So by looking ahead we realize that we could reduce a lot of inefficiency and redundancies.

And, as a result, those reductions will not impact our current projected programs we will be working the next few years.

And then as a follow up, just on the cellular business here, a few questions.

It seems like it's been a challenging business from a revenue perspective.

You could say you've been losing share in processors to [Omat] and possibly coming up to Snapdragon.

You have one baseband customer.

Do you believe you've got sufficient scale in that business?

Do you still intend on going after the mainstream portion of the market in coming years?

What's the strategy in cellular right now?

Thank you.

Sure.

Actually the cellular business is very important for us to address.

This is a lot, extremely large market for us to tap into and today we have the best class application in the market, bar none, compared to anybody else in the business.

We have, obviously, we believe in smart phones.

We believe the market for phones are converging into entry level phones and the rest will be smart phones including even feature phones being replaced by smart phones.

So this is a huge, huge big piece of pie of semi-conductor consumption that we are targeting.

We have numerous engagements and we are very positive about the outlook.

Operator, we'll take the next call.

Your next question comes from the line of Romit Shah of Barclays Capital.

You may proceed.

Thanks for taking my question.

Clyde, it looked like you had a $5 million benefit from the reversal of the payroll tax liabilities.

Does that hit in the April quarter as well?

You are talking about on the tax line, Romit?

Under operating expenses you had a footnote, I think it was B, and it was about $5 million.

It looked like that was incremental to SG&A and R&D.

There were two tax effects in our GAAP only results, so we did not include it.

We had a benefit of $5 million from the stock limitations expired and so we had a reserve that we were allowed to reverse.

We did not include that in our non-GAAP results.

That benefit stayed in GAAP only.

Separately we had a favorable tax ruling in a foreign jurisdiction that allowed us to get a credit of, I believe, $4.7 million in our tax.

It's a tax line not an operating expenses line.

Thanks.

My follow-up question was just on the 15% headcount reduction.

How much is that going to save Marvell?

Can you just give us a feel for how it would flow through in the subsequent quarters in fiscal 2010?

Yes.

Fair point.

The program that the executive teams engaged on started several months ago, and it's a broad program to improve our financial health, as well as our competitive position.

And so we believe we get a two-for with that.

But it included, as you said, headcount reductions, it included some other compensation reductions.

It included spending reductions across every part of our business.

Entire management team and employee base are all working diligently to improve it.

I don't want to characterize it just as headcount reductions.

We are focused on every part of our business.

But to your question, collectively this should save us about $100 million a year just in OPEX and that should be, it's implemented as we get to the end of the year.

Specifically in Q1, the quarter we just provided forecast or guidance to, it included $15 million of benefit.

You should see $20 million in next quarter or incremental $5 million in Q2, $25 million or incremental $5 million again in Q3, and that gets you to the $100 million a year benefit, so I think that's pretty clear.

That's helpful.

And just a final question for me.

When you factor in this headcount reduction and everything else you guys have executed on, can you give us what you think the target operating model, gross margins, operating margins are for this Company, and if it's possible at this point just a revenue run rate to get to that target?

You know, in this environment to talk about long-term operating model, there's some companies that are not even giving near-term targets.

It's difficult.

We spend more time improving our near term on implementing technologies.

But I'll try to tell you where we think we want to drive this business to.

We think, today we are in gross margins, we are about 51%, 52% in this economy.

We think that as the economy improves that should give us an improvement.

Sehat and the engineering team is driving a number of significant design wins, some of which you guys are aware of, some of which we have not yet announced but in the mixed signal space, mixed signal space is where our strength is and you should start seeing that in the next couple of years of bringing in a number of areas, SSS, power management and the like, a number of growth areas.

That would improve our mix.

Net is when that happens and the time frame would be the factor here but you should be about 53%, 55% gross margins as a result of combination of those.

Our R&D target is to get to about 20%, 22% of revenues.

We are obviously higher than that today so there's some improvement to come, and part of that would be from the programs we announced, a part of that would come from what we think are some exciting products that would come out in the market.

At SG&A we are probably in very good shape with that.

The long-term target would be in the 8% to 10% range.

Romit , what that leads to is operating margins of 20% to 25% and free cash flow margins of 20% to 25%, as well.

The timing, of course, is a question, and like I said, I think everyone would understand the ability to forecast the future right now is very difficult.

I don't think we will get there this year in the current environment, although, as we implement the reductions we described combined with some significant share and design wins we've got, I think we've got a good chance of closing that gap exiting this year -- so not for the whole year -- but exiting this year about midway through that, and hopefully continued improvement.

We need some benefit from stabilization of the economy, maybe a little bit improvement from there.

But certainly not back to where it was, say, a year ago period, our model doesn't depend on that.

And that's the best forecast and timing I can give you

That's very helpful.

Thank you.

Thank you.

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

You may proceed.

Yes, thank you for taking my question.

First one is what was your headcount at the end of Q4?

Shawn, that was roughly about 5,500.

It was up about 11 persons sequentially.

Thank you.

Then as it relates to your segments, can you tell us at a high level what your storage business did sequentially in Q4, what the size of it was?

And for your outlook for Q1, can you walk us through your thought process in coming up with the guidance, maybe share with us what your backlog is doing and what gives you the confidence to guide for flat in Q1 when so many other PC chip companies are guiding for down?

Thank you.

So, on the segmentation I don't think we provided any of that.

We might have to defer on that.

In terms of backlog, the second part of the question in backlog, we started the quarter at about 65%, which is about average.

That has stabilized, improved and it's probably on track to get to the midpoint of our target.

I want to caution, while we say that, the economy varies, the demand pattern varies, so I don't want to take all of that, but that's the current status.

I think we are well on track to the midpoint of the range and we started off the quarter very well.

I think most of the areas have grown, or flattish I should say.

There's nothing that jumps out in any particular area.

I think we've seen some rebound from the January quarter.

I think we feel that the January quarter from a revenue point of view is all (inaudible).

I think that's our best guess today, understanding.

And I think we intend to, like I said, at mid point it's flattish, nothing jumps out.

Our intention right now, I think will be, hopefully January is the bottom.

That's our current view, and we will improve our profitability from there.

Beyond that, Shawn, that's the best color I can give you.

Okay.

Thanks.

Can I ask one more?

Sure.

Okay.

Can you give us a quick update on how you see channel inventories right now?

Yes, you know, visibility is very tough so I will give you our best guess but I don't want to be portrayed as an expert on channel inventory.

You guys on the sell-side write enough about that.

But our sense is it's probably on the tighter side, especially in the (inaudible) channels.

We feel that that is true, especially some of the more mature technologies we are seeing some expedites and so forth in that area.

Our sense is probably because of availability of lending probably tightened up a little too much.

I wouldn't characterize that as a trend and I wouldn't want to get too excited over that.

But ut to answer your direct question I think it's probably lien.

Our inventory, as you know, declined about 6% or so, even as our revenue did.

So our inventory we feel is fairly lean and we will keep managing that tightly again and our sense is in the channel it's probably the same.

Thank you.

Thanks, Shawn.

Next call please.

Your next question comes from the line of Uche Orji.

You may proceed.

Thank you very much.

Can you hear me?

Yes, Uche.

First question, let me just follow up on the inventory comments.

Looking at your inventory on the balance sheet, you had that down on dollar terms sequentially.

But looking out over one-hundred days now in terms of days of inventory, we are looking at 110, if my math is correct.

Can you answer two questions for me here.

First is what is the mix of that inventory and do you have a target of bringing that nearer what is I think an historical average of somewhere between 75 and 80 days of inventory?

So can you start with that, please?

Yes, mix, are you talking finished goods?

Finished goods, work in progress and also by product area, say if you know how much (inaudible), LAN, wireless, that's just what I'm looking for.

Either way, I don't have any one of those answers if front of me.

If it's important we will probably have to get some of that for you.

in terms of what our target is, it's obviously less than (inaudible) is the number I mentioned to you earlier.

Probably I would say the 70, 80 range if you look at a model for us is where we probably want to be.

It grew from 80 days in the last quarter to 170, primarily on the subdued broader environment here.

As we indicated, our absolute levels went down.

So we will keep tightening that and adjusting that.

I don't sense that we have a lot of risk in inventory.

I guess the net of what you're trying to get to probably is do we think there's a lot of risk in there, and I think there's lesser so, there's always that chance but I don't feel uncomfortable at the level of inventory that we have from a risk point of view.

We have to manage our supply chain obviously carefully but I don't really lose sleep much about our inventory risk.

But if you met the midpoint of your guidance, should we expect the inventory to come down substantially towards the target level by next quarter?

I wouldn't say substantially.

It's probably going to be flattish, maybe slightly down.

Let me just switch gears and talk about netbooks.

What's been the reaction from the ODM customers in terms of your netbook product?

And do you think Linux is a viable within the netbook markets given that that's what you have been driving with your product?

The reaction has been very positive.

We've been doing demonstrations at the CES as well as the Mobile Congress, so a lot of people have seen it the first time are very shocked about the capability of the device.

And obviously the majority of the software is running on Linux.

We are focusing on instruction based CPUs.

But we build our own CPUs so we give it a very powerful gigahertz, beyond gigahertz class of processors.

So I think the markets to address the next billion users, I think is huge, very, very huge.

These are markets where people need the functionality of, let's say, of a PC but they cannot afford to pay more than $100 or so to pay for this kind of devices.

So you see a lot of discussions in the news and you can see yourself a lot of people are working on this.

They are going to be seeing the same huge market opportunity.

Our solution, today from what I hear from our from people that we show to them, they clearly say that we absolutely have the leading edge solution today.

Very good.

Just one more question, please, if I may ask you.

It's just remarkable that your revenue has been cut so significantly and yet your gross margin has remained above 50%.

How much more room do you have to continue to improve gross margins, and if revenues were to return to the $700 million run rates what type of gross margins should we theoretically start expect you to push?

Yes, Uche, if you go back a few minutes ago, I described what our long-term model is, and I think that gives you pretty good clarity on where we think the opportunities are.

In the near term, managing gross margin is very tough.

We need to push cost.

Our customers, of course, are trying to push cost on us so it's near term tough.

But I think two questions ago, three questions ago, we described our long-term model.

You probably can pick up on that.

Great.

Thank you very much.

Next question, please, operator.

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

You may proceed.

Good afternoon, thanks for taking the question.

First of all, Clyde, can you talk about the recovering gross margins?

How should we think about the profile as we move up from what you guided in Q1 towards your target range, and specifically in that can you address the pricing environment you see right now both on the storage and wireless/apps processor side?

So on gross margins.

I think we guided 51%, 52%.

In this economy, as long as it stays at this revenue level, I think that's probably a reasonable level for us and it's a struggle to get there.

We have to keep fighting to get there so it's not a cake walk.

And we talk about long-term.

As far as pricing goes, as you would expect it's a challenging environment.

Our customers are of course pushing on us.

Our defense always has been the value creation we create for them and that's always been pretty good.

Separation from wireless, it's always been a tough market in pricing.

It was tough six months ago, nine months ago it was pretty tough so I don't know if I see anything materially different there.

Understood.

And then as a follow up, could you address, I think you've talked about several times before the opportunity you have with Seagate in the PC hard drive space in the future.

Could you address for us your current view in terms of the magnitude of the opportunity for you as well as the timing as to when you might see some revenues there?

Yes, actually I don't think we mentioned specific names, I don't know whether we mentioned specific names, but we did mention that we have opportunities on the desktop and mobile on actual two of the customers that we do not have market -- we don't have any revenues in those segments.

So we do have engagement.

In terms of engagements moving, it's quite well.

Obviously I would like to see it faster than the way that it moves.

But as you know, in this industry people tend to move, if it takes nine months to 15 months for people to come up with the design, implement the product, (inaudible) into the product and go into production and return revenue to us.

So that is moving very well.

In terms of opportunity, I think you should look at the size of the market share for the two customers that we do not have, the percentage, and maybe just divide that by two, that's a good target number.

Understood.

Thanks very much.

Thanks, Jim.

And your next question comes from the line of Randy Abrams with Credit Suisse.

You may proceed.

Good afternoon.

I want to see in your guidance for down 4 to up 3 if you could go a step further and maybe talk between PC, cellular, consumer, what you are seeing in terms of relative strength or weakness within that?

I think it's essentially flat and I think for the most part, I don't think we provided color or are prepared to provide any color on the specific areas.

There is dynamics between the two but it's a long road between here and there and I think we might mislead people in terms of reading if there is any particular segment is doing better than the other one.

I'm sorry, I can't provide any more color on that.

On the OPEX, if you could clarify, I think you guided the OPEX flat sequentially but talked about a $15 million benefit.

Is there other parts of the business that are stepping up on OPEX?

And then to clarify, should we take that flat OPEX and then take it down $5 million the next couple of quarters off the base you are guiding to in April?

Yes.

That's what we said earlier, take it down $5 million a quarter for the next couple of quarters.

I'm not sure if I understand, Randy, your question about parts of the business stepping up.

Every Marvell employee is stepping up to the plate.

We are very grateful for all what they are doing.

So I don't think there's any area that needs, I think every employee is contributing.

Maybe I misunderstood the guidance.

If you are having a $15 million sequential benefit from the OPEX reductions, why are you guiding flat?

Shouldn't we expect OPEX would take a step down with the headcount reductions?

Yes, fair.

I said December results was 235.

I realize it's all fresh in people's minds but I did say there was about $15 million of one time benefits in December, specifically that was a shut down over the holidays and cancellation and therefore reversal of previous accrual for bonuses.

Both of those events you can't replicate every quarter.

So if you look at the normalized basis, it was about 250, and that 250 goes to 235, and that's probably a steady state there.

There's a number of puts and takes.

Obviously you pay more payroll taxes, you have to reset that, but that's, in a nutshell, that's how you should think about it.

250 going to 235, and there's your $15 million.

Thanks for clarifying.

Your next question comes from the line of Sumit Dhanda with Bank of America Merrill Lynch.

Please proceed.

Hi, I just have one question.

Sehat, on your prospects, Broadcom is touting its leadership in the combo chip market with the integration of their wireless connectivity solutions.

Can you talk about your road map a little bit, where you see yourselves positioned, and in general what you think their first mover advantage is or isn't within that market?

Maybe I don't really understand when you say the combo of what?

For instance, their integrating functionalities of Bluetooth, FM, WiFi onto a single piece of silicon.

Okay, yes.

So we do have products that integrated those functions, different products.

We happen to integrate certain products, maybe just Bluetooth plus WiFi.

In some products we integrate Bluetooth plus FM.

So we have several different combinations targeted for different markets with different level of integration.

We do have, obviously we have the roadmap to integrate everything in the very near term but I don't expect those things will be, at the end of the day, will be the highest volume compared to, let's say, just the two functioning integration or three functioning integration.

But if we are wrong, I'm okay because we have all the integration as well.

We are trying to optimize the die size for different markets.

So we don't see that as an issue.

We also have chip integration with different interfaces.

Some chips we have USB, some chips we have SDIOs.

And could we put all the interfaces in one chip?

Yes, but then we make the chip bigger.

So we trying try to balance between integrating more functionality versus cost structures.

Fundamentally, there's no reason why we cannot integrate everything, just whether it make sense or not to do it, or the timing to do it when at least 50% of the customers are asking for it.

I guess part of Broadcom's contention, first I understand you have integrated products but they are talking about integrating more than just two functionalities under a single piece of silicon, so from your comments it seems like integrating more isn't necessarily an advantage, but their thought also is that having all the radios work together is non trivial.

Do you describe to that notion?

Plus they suggest they've won a lot of design share with their triple play part to integrate Bluetooth, WiFi and FM.

Do you not see that as a major?

We agree that integrating all the functions are not challenging.

In fact there's a reason why we have the best radio in the market.

We have the best sensitivity.

If you look at our FM functions that we integrate, it clearly has many several dBs better sensitivity compared to anybody else in the industry, and last time with the MCDS or the Mobile Congress we did demo and people that saw our solution clearly agree that our solution works where other people's do not work.

So if you say that integration is hard to do, I absolutely agree.

And in terms of integrating everything, we have a product that integrates everything, just I don't think it's in terms of the cost structure is what 50% of the people want.

Remember, we have a huge market, we have a large market share in this area and not everything that people want all the functions.

In hand-held gaming devices, if the customer does not ask for FM radio we don't want to integrate FM radio.

It's at the entry segments where people do not want WiFi.

We integrate only just Bluetooth plus FM because if they don't want to pay for the WiFi in those markets we don't have to stick to them the WiFi functionality.

I don't see any concern about technology on our side.

And also, if you look at the die sites that we have on our chip, our die sites typically are about 30% to 40% smaller compared to the guy that claims they have everything to be integrated.

Okay.

I just had a quick question for Clyde.

You seem to be reluctant about breaking out your outlook by segment.

My recollection is that you used to give more visibility by end market segment.

Is it just that the end market environment is very cloudy?

What's the reason for not giving more disclosure by segment?

Exactly that, you said it, the end market is cloudy.

Any given day something looks great and a week later it's more so.

So I think it's unfair for to us give guidance because it implies we clearly know where we may end up and I don't think that's fair.

Does the composition of your backlog not give you a clue since you are so heavily booked going into the quarter, 65% to start the quarter?

It gives you a good clue.

You're right, there is a reluctance given the environment, given the environment we are in.

And what about the prior quarter?

Could you give us some sense on how the various segments performed in Q4?

In our presentation I think I gave color on where the declines were so I think we can deduce that, but if you want we can have Jeff walk you through that.

But I think in my prepared remarks I described where the --

Magnitude of the shortfall was significant.

Yes, yes.

All right.

Okay.

Thank you.

Geri, we will take one last call now, please.

Your last question comes from the line of Nicholas Aberle with Caris & Company.

You may proceed.

Good afternoon, thanks, guys.

I just wanted to ask, in terms of revenue drivers, looking out over the next couple of quarters, irrespective of what's going on with the economy overall, what do you guys see as your key catalysts to help Marvell grow the top line on a Company specific basis?

We're talking about the next year or so?

Correct.

There are several I can think off in my head here.

Market share gains in HDTV.

We are clearly the leader in this segment.

The emergence of the solid state disk controller.

Again we are the leading solution in this market, leading highest performance across the board.

More deployments of WiFi in the gaming, printers, cameras, cell phone, obviously.

We have been working for several years in multi-standard HDTV decoders targeting for Blu-ray player and set-top boxes.

So we are at the final stage of deploying the software packages for those markets.

So we are very optimistic about that opportunity for revenue for next year.

The MID, talk about the powerful application processors.

In some areas at the low end, standalone application processor, in the higher ends maybe we integrate HDTV functionality.

So that's a very promising large market opportunity.

I think sometime next year could be very, very big market opportunity for us.

Energy management, we've been working on energy management, green energy management, such as power factor collections where we developed technology to reduce the energy for AC adaptors by a factor of around 40%, 50%, meaning that the power consumption will reduce drastically through our DSB based mixed signal solution there.

And more and more of our new generation or application processors are gaining market share.

I guess people talk about (inaudible), we clearly have the best technology in this area.

Our solutions is typically about half the power.

For any given megahertz or gigahertz, assuming they could even get good gigahertz, we are about half the power.

But in our 14-point performance, we have about four times the performance of (inaudible).

So anybody who needs high performance solutions will use our solutions.

We look at, we continue to develop new solutions in the cellular, of course targeting our existing customer, RIM, we want them to be more successful.

We continue to develop even more advanced solutions, lower power solutions, better radios, better application processor, better audios, and so on, as well as working with several large potential new customers outside the non RIM.

Those are the areas that I think will be very, very, that we could think about the potential growth opportunities for Marvell in the next 12 to 24 months.

Perfect.

And then just as a follow up, everybody likes to talk about RIM so can you just give us an update on your relationship there and do you expect to see additional products from RIM launch with a Marvell product by the end of this year?

Yes, definitely.

I think our relationship is very strong.

If the Mobile Congress, if you look at some of the demo of new technology that RIM showed, those are using our next-generation communication processor that's not even in production yet.

So they were showing prototypes of some of the new technology even in the cell phone contactor..

Our engineers are working very closely with their engineers so have road maps of several years ahead.

Our people are very busy.

Our engineers are very busy trying to look, trying to meet with all the different classes of new products that are requested from us.

Thanks, Nick, appreciate it.

Geri, and everyone on the phone, in closing we would like to thank you all for your time today and we appreciate your interest in Marvell.

We look forward to speaking with you on our next conference call and seeing you at upcoming investor event.

Thank you very much, everyone.

Have a good day.

Thank you for your participation in today's conference.

This concludes your presentation.

You may now disconnect.

Good day.