邁威爾科技 (MRVL) 2010 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q2 2010 Marvell Technology Group Ltd.

earnings conference call.

I'll be your operator for today.

(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, Anita, and good afternoon, everyone.

Welcome to the Marvell Technology Group's fiscal second quarter 2010 earnings call.

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

Sehat Sutardja, Marvell's Chairman, 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 on our company website under the investor relations section at www.marvell.com.

Additionally, this call is being recorded and will be available for replay from our corporate website.

Please be reminded 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 our expectations about our product sales and general market trends, statements regarding our financial projections for the third fiscal quarter 2010, our expectations regarding the current economic environment, and impacts to industry demand.

To fully understand the risks and uncertainties that may cause results to differ from our outlook, please refer to Marvell's latest annual report on Form 10-K and subsequent SEC filings for a detailed description of our business and associated risks.

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, restructuring 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.

Pursuant to Regulation G, Marvell has provided reconciliations of the non-GAAP financial measures to the most directly comparable GAAP measures in our second fiscal quarter 2010 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.

At this time I would like to turn the call to Dr.

Sutardja.

Sehat.

Yes, thanks, Jeff, and good afternoon, everyone.

Today we reported fiscal second quarter 2010 revenues of $641 million, reflecting a 23% sequential increase, better than our revised guidance provided on June 22.

We are pleased with the revenue growth we delivered in the second quarter as we experienced improving order momentum throughout the quarter.

Our visibility into future demand is beginning to incrementally improve and we are encouraged by the level of order stabilization.

Our results within the second quarter demonstrate our continued focus on financial discipline as nearly all profitability metrics and cash-flow generation improved significantly.

During our second quarter, on a non-GAAP basis we reported gross margin of 55%, the highest level we have reported since the first quarter of fiscal 2003, and that is nearly seven years ago.

We continued to keep discretionary operating expenses under tight control, delivering operating margins of about 20% and generated $175 million in free cash flow or the equivalent of 27% free cash flow margin during the quarter.

These are excellent results which we believe clearly demonstrate our focused efforts to achieve best in class financial performance.

We are ahead of plan on achieving our stated long-term operating targets, a significant accomplishment, given the challenging economic environment we have operated within over the last 12 months.

I would now like to review the performance achieved in our various addressable markets.

During the second quarter, 25% of the sequential revenue growth came from new products and made up approximately 5% of our total revenue.

To be clear, we are defining new products as complete new devices launched during this fiscal year.

Looking out into our third quarter, we anticipate this trend will accelerate as new products should contribute nearly half of our sequential revenue growth and represent just over 10% of our total revenue.

The sale of products in our storage end markets grew over 20% on a sequential basis, contributing approximately half of our total revenues.

We anticipate the sale of products to our storage customers should improve sequentially by low to mid-single digits during our third fiscal quarter.

In line with the projected unit growth rate of the overall hard disk drive industry, we continued to make very good progress, expanding our market share with new and existing storage customers.

Within the hard drive market, our customers continued to provide very positive feedback on the performance of our LDPC rechannel technology.

This is a critical technology for the production of high density and next generation 2.5-inch mobile drives.

We continue to believe the timing of the incremental share gains of new customers which we previously announced will begin to materialize some time beginning in the mid-calendar 2010.

Within the emerging solid state drive market we are on track this year to nearly double our annualized revenue from the sale of solid state or SSD controllers.

However, we believe it is important to keep in perspective the size of the SSD market which this year is forecast to be less than 1% the size of the overall [HDD] market on a unit basis.

Another point which is often overlooked when discussing the SSD market is the cost of the raw NAND flash which has been and will continue to be volatile.

Over the last year because of the cost of per-gigabyte of NAND flash has been at unsustainably low levels and has only recently returned to more justifiable levels.

This variability in flash memory pricing will continue to have a direct impact on the price and, therefore, the adoption rate of solid-state drives within the various consumer markets.

On the other hand in the enterprise side of the SSD market where the performance benefits delivered can justify the cost, almost all major storage system OEMs have announced SSD-based products.

We're well positioned to participate in both of these markets and we continue to see interesting applications for our SSD controllers.

Now turning to products in our mobile and wireless end market, the revenue was up about 20% sequentially and contributed approximately 20% of our total revenues.

We expect revenues in this end market to grow by at least another 20% in our third fiscal quarter, highlighting the clear market acceptance of our embedded wireless applications and communication processor products.

During the quarter, we experienced over 100% growth in the demand for our 11n WiFi devices in the printer and enterprise end markets.

Additionally, we experienced significant growth during the quarter for our new wifi plus Bluetooth devices and we continue to introduce additional variants of multifunction combo devices, yet demand for our mature and industry-leading embedded 11G devices continues to -- continues both for the new as well as the existing designs.

An example of a unique application is the Novatel Wireless MiFi 2200 which is the world's fist mobile intelligence hot spot.

This device is just slightly larger than a credit card and allows the user at the touch of a button to create a personal cloud of high-speed wireless internet connectivity, connecting simultaneously up to five WiFi enabled devices.

The MiFi 2200 is an 11G WiFi based device with a 3G cellular baseband chip that allows users to connect to 3G wireless networks to access the internet while on the go.

Within our application process portfolio we are making excellent progress with our product road map of high-performance application processors.

Customer acceptance and interest is strong in various end markets, including digital picture frames, multi-function printers, electronic books or E-books, smart books and video telephone systems.

We believe we are only beginning to scratch the surface of the opportunities of our application processors can address.

Within our communication processor portfolio we are making great progress winning new programs with existing customers, executing to our new product roadmap and in our new customer engagement efforts.

While our position to not pre-announce products or customer engagement may seem unusual, we would rather be prudent in our public statements until our customers announce their products first.

I continue to stress that the cellular business is a market where success cannot be measured in months or even quarters.

Regardless, we continue to believe we are implementing the right strategy which will lead to long-term market success for Marvell.

Now I would like to discuss our efforts in the networking end markets.

The sale of our networking products increased greater than 10% sequentially and represented approximately 20% of total sales.

As we have mentioned previously, we are in the early stages of a long-term growth period for our networking business.

Consequently, we anticipate sales of networking products during our third fiscal quarter should grow again in the low double-digit range.

We see our market share increasing in multiple areas.

We are experiencing very positive tractions with our flagship Prestera switching product family which delivers excellent performance relative to competitive solutions.

Additionally, with our Kirkwood and Discovery innovation series of single and multi products we are experiencing strong adoption rates.

As an example, our low-power gigahertz class single core Kirkwood processor is at the heart of a revolution in small-form factor computing.

These small platform computers are enabling cloud-based applications by the thousands.

We have already shipped several thousand computer development systems with the application development community expanding at a viral rate.

This is a unique CPU platform which, in the reality, a mini home server.

What computers deliver PC-like performance, connectivity to a network, and peripherals combined with embedded memory all within practically the size of a cell phone AC adaptor while consuming less than 2 watts?

The application's possibilities are only limited by the imaginations of the developers.

In summary, I believe Marvell continues to expand its share in existing and new target markets.

I am proud of our performance and of our employees in this challenging period, and I'm optimistic about the future of Marvell.

Now I would like to turn the call over to Clyde to review our financial results for the second quarter and to provide our current outlook for the [third] quarter of fiscal 2010.

Thank you, Sehat, and good afternoon, everyone.

As Sehat mentioned, fiscal Q2 revenues came in at approximately $641 million, representing a 23% sequential increase over fiscal Q1, 2010, and a reduction of 24% from the same period a year ago.

As Sehat mentioned, our overall revenue performance was better than we had anticipated in our initial guidance as well as when we updated our guidance on June 22.

Our non-GAAP gross margin for the second quarter was 55.3%, an increase of 375 basis points from the first quarter and up 305 basis points from the same period a year ago.

This was higher than the mid point of our earlier projected range of 51.7% to 52.7%.

This result also puts us above our long-term gross margin target of 53% to 55% which we provided to you only six months ago.

The sequential improvement in our gross margin is a reflection of the cost-reduction programs we initiated during the downturn combined with ongoing improvements in operational execution and to some degree product mix.

This is the highest level of gross margin since the first quarter of fiscal 2003, seven years ago.

Our overall operating expense for the first quarter on a non-GAAP basis was $228 million, which was in line with our earlier projected range of $220 million to $230 million.

R&D expenses for the quarter were $172 million, a decline of about 3% on a sequential basis, and a reduction of over 20% from the same period a year ago.

SG&A expenses for the quarter were approximately $56 million, down 1% sequentially and a decrease of about 10% year on year.

This resulted in non-GAAP operating margin of approximately 20%, up about 13 points from the approximately 7% operating margin reported in the prior quarter and slightly better than the same period a year ago, albeit on lesser revenues.

Net interest expense and other income was a benefit of approximately $2 million, better than our prior expectations.

Tax expense was approximately $9 million during the second quarter, above our prior guidance of $4 million to $6 million expense.

The increase in tax expense was due to a combination of improved revenues and a change in the tax rate in one of our foreign operating jurisdictions.

Our non-GAAP net income for the fiscal second quarter was approximately $119 million, or $0.18 per diluted share, an improvement of $0.13 or nearly four times our performance in the last quarter.

During the same period a year ago, we earned $154 million or $0.24 per share.

The share used to compute diluted non-GAAP net income per share during the second quarter was approximately 652 million up from 637 million shares in the prior quarter and higher than the 640 million shares reported in the year-ago period.

Changes in diluted share count are primarily due to shares issued in the periods, variations in average and ended share trading prices in the reported periods reflected in the treasury method of computing diluted cash share count.

Let me now summarize our results on a GAAP basis.

We generated a GAAP net profit of approximately $58 million or $0.09 per share in the second quarter as compared to a loss of $0.18 per share we reported in our first quarter of fiscal 2010 and lower than a profit of $0.11 per share we reported in the same period a year ago.

The sequential improvement in our GAAP earnings was a result of a better-than-anticipated revenue growth, improved cost control, yielding better gross margin and solid operating expense control.

The different between our GAAP and non-GAAP results during the second quarter of fiscal 2010 was due to stock-based compensation expense of approximately $30 million, or $0.05 per diluted share, amortization of intangibles representing approximately $26 million or $0.04 per diluted share, approximately $5 million in restructuring charges, or less than $0.01 per diluted share.

Our stock-based compensation during the quarter was lowered by approximately $2 million or 5% on a sequential basis, and down nearly $18 million, or 37% on a year-over-year basis.

On a rolling four-quarter basis, we have lowered our stock-based compensation expense by approximately $72 million, or 33% versus the prior four-quarter period.

We continue to believe our ongoing stock option expense should be in the range of $30 million to $35 million per quarter over the remaining of fiscal 2010 as compared to $40 million to $45 million per quarter in the last fiscal year.

Further, we anticipate amortization of intangible assets to average approximately $25 million per quarter over the remainder of the fiscal year.

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

Cash, cash equivalents, and short-term investments were approximately $1.3 billion, up approximately $196 million sequentially and up $390 million from the same period a year ago even as we paid off almost $300 million in debt during that same period.

Cash flow from operations for a second quarter was approximately $182 million as compared to $145 million reported in the first quarter and essentially flat from the same period a year ago even under lower revenue levels.

Pre-cash flow for our second fiscal quarter defined as cash from operations, less CapEx, and less acquisition of acquired IP, was $175 million, representing a 27% free cash flow margin, an improvement of 33% sequentially from the $132 million in the first quarter of fiscal 2010 and 6% improvement from the $166 million in free cash flow reported in the year-ago period.

In the last four consecutive quarters, we generated an impressive $644 million of free cash flow or approximately 26% of revenues.

Accounts receivable was $328 million, up about $43 million sequentially, reflecting the higher revenue levels and down approximately $142 million from the year-ago period.

DSO was 44 days, essentially flat sequentially and down two days from the same period a year ago.

Net inventories at the end of the second quarter, were $211 million up from the $204 million reported in the first quarter, a 4% sequential increase.

Net inventories declined $116 million, or 35% on a year-on-year basis.

Days of inventory was 66 days, down 25 days sequentially from the 91 days reported in the previous quarter and down 13 days from the year-ago period.

We expect to increase our absolute net inventories in the third quarter due to improved order patents, better confidence in the end markets as well as to improve our serviceability.

On the days of inventory basis, this is the lowest inventory level we have had since the third quarter of fiscal 2006.

Accounts payable was $269 million, up $102 million sequentially due to increased volumes and extended payments to suppliers as we look to improve our working capital management.

This was up $32 million on a year-on-year basis.

Days payable was 69 days, up approximately 15 days sequentially from the 54 days in Q1 and up 23 days from the 46 days reported in the year-ago period.

I would like to thank all employees of Marvell for their dedication, focus and execution as these results are a clear testament to the hard work and financial discipline of all of our employees.

Now I would like to provide an update on our current projections for the third fiscal quarter of 2010.

We currently project third quarter revenues in the range of $680 million to $730 million or sequential increase of 6% to 14%.

At the mid point of this range, this represents an increase of about 10% sequentially.

We currently anticipate our revenue from all of our addressable end markets to grow sequentially.

At the mid point of our guidance, about a third of the sequential improvement will come from the mobility market, about a quarter from the networking market, and about a quarter from the storage market, and the remainder from our other addressable end markets.

We currently project non-GAAP gross margin in the range of 55% plus or minus 50 basis points, sustaining the levels achieved in the previous quarter, and in line with our target model.

We currently anticipate non-GAAP operating expenses to be approximately $235 million, plus or minus $5 million.

At the mid point of our guidance, this is an increase of about $7 million or 3% from the last quarter and a decrease of 12% from the same period a year ago.

At the mid point of our guidance, we anticipate R&D expenses to be approximately $185 million, and SG&A expenses of approximately $50 million.

As we move forward, the moderate increase in operating expenses we must incur are not structural additions to our business.

We are approaching our operating expense expansion as variable based contingent on improved revenue growth and improved operating leverage.

As this view pertains to the mid-point of our Q3 guidance, we are guiding to revenues to increase 10% sequentially while operating expenses are only increasing 3%, which in turn should drive better than a 20% sequential improvement operating profit and improvement in operating margin.

This is a clear demonstration of the strong long-term operating leverage our business model can deliver.

The combination of interest expense and other income together should net out to approximately zero as the effects of fluctuations in foreign exchange rates offset earned interest in our cash balance.

The effective non-GAAP tax expense should be approximately $6 million to $9 million.

We currently believe the diluted share count will be approximately 660 million shares.

We currently project non-GAAP EPS to be in the range of $0.18 to $0.26 income per share.

On the balance sheet, we currently expect to generate about $50 million in free cash flow during the quarter, primarily as we increase working capital to support the improved demand environment.

We anticipate the cash balance to be about $1.3 billion, excluding any special items or M&A activities.

Our anticipated cash balance in the fiscal third quarter will reflect the payment of approximately $88 million in conjunction with our previously announced settlements of historical derivative shareholder lawsuits.

We currently expect our GAAP EPS to be lower than our non-GAAP EPS by about $0.09 per share, plus or minus $0.01, about $0.04 of this is related to amortization of intangibles and $0.05 is stock-based compensation expense.

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

Anita.

(Operator instructions).

Our first question comes from the line of James Schneider of Goldman Sachs.

Please proceed.

Good afternoon and thanks for taking my question.

I guess first off from the structural standpoint on the gross margins, is there any reason why we wouldn't expect gross margins to kind of hang in there towards the higher end of your target range of 53% to 55% for the foreseeable future?

How should we think about that in terms of cost benefits or any mix changes you might see going forward?

Thank you, Jim.

I think the management team, and our operation team has done a terrific job at getting it here and the intention is to keep it there.

The things that would, as you know in our guidance, we guided essentially flat plus or minus, so we are sustaining that.

Our intention is to keep it there.

The things that keep -- would fluctuate would be mix, a wide variety of products have a range, some products higher, some products lower.

That's probably the biggest impact on our gross margins in the foreseeable future.

Fair enough.

And then on the OpEx side, for R&D do you think you have enough R&D spending at this point to finance the development initiatives you have in mind right now?

I know you talked about certainly growing revenues and margins faster than OpEx, but do you think you have roughly the right level of R&D at this point?

Yes, I think one could argue that we have one of the largest R&D investments in the industry, so I will say that we have plenty of R&D.

Are we are missing a few things that we could invest?

Yes, of course.

There are always things that additional stuff to invest and we continue to look into that and as we see the opportunity to acquire the right talent we will do so but, in general, you should feel comfortable that we practically have everything that most of the things that we need in the business that we are in.

Understand.

And maybe if I could just sneak one last one in.

Can you talk about the total level of enterprise exposure you had in the current quarter?

And what you are seeing from your enterprise customers with respect to their outlook heading into the end of this year, essentially into 2010?

Why don't you take over?

Yes, enterprise is included in that end market, Jim, about 20% of our revenues.

We guided up 10%, or low double digits, like better than 10% this quarter.

So we continue to see that.

Beyond that, I think it's hard for us to say.

Having said that, a fair amount of the growth we have experienced in the last two or three quarters is really the reflection of technology and development we have been working on over the last few years and acceptance of the technology in the enterprise space.

So I think regardless of end markets, you should see continued growth from the acceptance of these excellent products in the market space.

Great.

Thanks very much.

Our next question comes from the line of Craig Berger of FBR Capital.

Please proceed.

Thanks for taking my question, guys, and congrats on the strong results.

I guess I had a question on the combos.

Can you talk about whether you are getting revenues for those products now, maybe who some of your customers are or what type of products you are selling into and kind of growth expectations there?

Sure.

The combos that we have mentioned ramping up was the WiFi Bluetooth device.

We also mentioned that we continued to introduce additional variance of combo devices, things that include FM radios and so on, for example.

So those things will ramp up in the next -- in obviously the next six months to a year.

So in terms of customers, we cannot be specific -- we do not want to -- we don't want to be pre-announcing those customers.

Anything else that you want to add, Clyde?

No, I think that business has grown very well for us, 20% last quarter in mobility and wireless, and I think it is expected to grow by the same rate in the coming quarter, so excellent growth rate.

Unfortunately, a lot of these new things are from new products and consistent with our policy we don't disclose customers unless they agree.

Great, and just as a follow-up question, can you talk about whether you are seeing shortages for hard drives or hard drive chips out there, and potentially what the implication might be as we look to the fourth quarter?

I know it's a little early on Q4, but any visibility especially on the hard drive side.

I'll answer a little bit of that, and Clyde can follow it up.

I think in the last quarter or so, during this -- when the economy started to recover we did see a tightness obviously in our supply chain because a lot of our people -- a lot of customers did not disappear the strength of the recovery, so the good thing is that we were able to, in most instances, practically be able to shift our customer last-minute requirements.

So that's good actually because we continue to show the strength of our operational team.

Do you want to add on top of that?

Yes, Craig, it's hard for us to comment about shortages and drives, but I completely agree with what Sehat said.

We have had some spot shortages here and there, we indicated in my presentation we could increase our wafer starts in anticipation of this continuing and grow some inventory, but the spot shortage that we don't believe affected our customers, I don't know what the story is on the end market hard disk drive inventory.

Thank you.

Our next question comes from the line of Randy Abrams of Credit Suisse, please proceed.

Yes, hi, good afternoon, guys.

Hey, last year at this time you were conservative on the holiday outlook.

I'm curious with the higher base going in to October, are you trying to keep expectations or assumptions conservative beyond that into the slow season.

I see you are building inventory.

Is that in expectation for any company specific or market ramps going into the slow season?

I was waiting for that question, Randy.

We feel much better about it this year than from the same time a year ago.

From a macro point of view, we are coming off lows in the first half as opposed to a year ago where we headed into the storm we feel like the storm is behind us now as opposed to ahead of us a year ago, so that makes us feel good.

It seems to us that consumer sentiments are improved even here in the US where it is probably the bigger hit.

There is still the question of the timing and trajectory of the recovery but we think it will continue until people see sustained concrete evidence.

From a models point of view, we feel very good, even better.

First, we are coming off of a quarter where we posted over 20% sequential growth and we feel good about double-digit growth again in the next quarter.

In the last year we have adjusted our cost structure substantially at -- our team has done an excellent job delivering excellent growth in operating margins and free cash flow margins, so we feel good about what we have done.

We feel good about the structure we have.

We believe as we grow revenues we have good leverage in the business model and our margins can expand as we described in Q3.

And, finally, our technologies and products are getting great customer acceptance and we are seeing the benefits of this in the current environment.

So when you aggravate everything, the improvement in the external environment and the significant improvement we have made here at Marvell, we feel very good, but beyond this quarter I think not much more we can add other than I think sentiment this year is better than a year ago.

Okay.

Maybe a follow-up on the hard drives.

I think earlier on the call you said you expected low mid-single digit growth.

And I was curious about that outlook if it's a timing difference where you grew potentially ahead of the PC market as a number of companies in the supply chain are still talking about double-digit growth in their forward outlook.

Yes, I think we are just projecting the growth rate of the market, HDD overall.

So the market includes the PCs and the non-PC markets.

So the markets may grow bigger than that, but we don't know until it happens, until it materializes.

If it happens, we just have to make sure we have enough inventories on hand to take care of those possibilities.

Craig, if I might add, keep in mind we have a slightly different quarter close than some of our customers, so I wouldn't expect to see an exact correlation between storage and some of that.

Second thing, we are on consignment so customers pull on demand and that makes it difficult to project exactly.

But as Sehat mentioned, it's consistent with what we are seeing and we're preparing for it in case it is better we can respond to our customers.

Okay.

One final question on the OpEx, you mentioned you are expanding it back a bit.

How should we think about it over the next few quarters?

You mentioned contingent on revenues, but is there a baseline projection, 4% growth or so per quarter, as you start to ramp back up?

No, I don't think there's any baseline.

I think as both Sehat and I indicated, we feel good about the structure we have now, we'll invest opportunistically.

But as you grow your revenues, if that happens beyond the next quarter, there will be some variable improvements that we need to make, and then we need to reward employees as well as we go along that space.

But there's no formula to use.

You could probably use formula in this next quarter as best.

It does fluctuate, tends to be some quarters you have a lot of tape out, some quarters you may not.

So around this structural level I think is where we want to keep it.

Thanks a lot, guys.

Operator, we'll take the next question, please.

Our next question comes from the line of Sukhi Nagesh of Deutsche Bank.

Please proceed.

Thanks for taking my question.

Hey, Clyde, just a question on the gross margin there.

As you come out of this recession, is there a new way that you will be thinking about your long-term gross margin targets?

The reason I ask that is as you look across the spectrum of the competition on the hard disk drive side or on the (inaudible) side you have a shrinkage of capacity, is there, do you think that coming out of this recession, that you may have to revisit your gross margin levels upwards or leave it where it is?

Any comments there?

Thank you.

We gave -- our policy is to give this at the beginning of the fiscal year when we report our results, so we'll stick to that change.

We provided this range six months ago, and we have already achieved it which is, I think, a testament to our operational team.

I think we will stick to that.

We need to watch the space.

There is a lot moving.

Six months ago, I think things were a lot different.

It has been six months, but only six months, so I think we need to watch that space.

We need to help our customers, help them drive in their improvements as well, so I don't think right now we'll update that model.

We'll update you in about six months again.

In terms of R&D, our goal is to always build products that can integrate more functionality, so the overall cost to our customers will continue to go down.

Okay?

As long as we can -- we're able to give more value for our products to our customers, then we can maintain the gross margin levels that we have today.

So Marvell, as you know, is very focused on the technology -- driving the technology, driving the integration, so those are the most important parts year to date to our customers and the rest of the stuff it just falls through naturally.

Right.

In that contest, Sehat, you mentioned earlier on the call that about 5% of your total sales in the quarter was from new products and you expect that to double in the current quarter.

Can you maybe expand a little bit and talk about what these new products are, what areas they are targeting and how you see that?

One example of things we talk about already, that we have new combo devices that we are introducing and sampling to customers, or even things that are still in the pipeline that we are just about to tape out, the other devices or the next-generation application processors, different types of application processors for different markets for cell phones, for digital picture frames, for -- just for all of the different markets, MIDs, smart books, E-books.

So some of these devices have been introduced, have been sampled, some of them are in the pipeline waiting for tape outs.

So those are the things that will drive our new -- that we consider new devices and there will be other parts of devices that probably is not up -- that I don't want to talk about yet at this point but, okay, we are busy working on those devices and those will be something that typically would be important for our revenue growth like two, three years down the road.

So we're building pipelines of new devices as a company because we want to make sure that Marvell, when we talk to our customers, they will think of us as a single-stop, one-stop shop for hopefully for everything with exceptions of components that we don't build like D-RAMs or LCDs or something like batteries.

But if it is electronics that we can integrate, that is why we want to provide all the solution to them.

So this is why we believe the opportunities for growth for us is actually very good in the next several years.

Okay.

One final question I have on the mobile side of things.

There is some recent chatter about one of your competitors getting back into RIM in most recent product refreshes there at your expense.

Do you have any comments on that?

Could you be more specific into like what are the chatters -- ?

Just in terms of some of the newer products that were introduced on Sprint or Verizon which previously had your product in there, refreshed with your competitor product.

That's a misconception.

Verizon is on its own CDMA network, so we do not build any products for RIM on the CDMA network, so we do build, okay, products, basically on the 3G networks, the worldwide 3G network and that's -- we are very well positioned on the worldwide 3G network solution for RIM.

On the CDMA side, since we don't play in that market -- so I don't know how can we lose that.

Operator, we'll take the next question, please.

Our next question comes from the line of Shawn Webster of JPMorgan.

Please proceed.

Yes, thank you for taking my questions.

Hey, Clyde, last couple of quarters, you talked about your entering backlog in the quarter.

Do you have an update for us there?

Yes, typical backlog in a typical quarter, if you want to call these times typical, is about 65% to 70% coverage.

We entered this quarter a little bit -- about 10%, maybe a little bit better, higher, and that's sustained since then, so that's pretty much what we laid out.

So 75% to 80%?

Yes, 65% to 70% plus 10%.

Okay.

Got it.

And then if you will permit me, I would like to dissect the gross margin change a little bit more.

You guys obviously did a very good job and it was significantly better than what you thought at the start of the quarter.

It sounds like mix was not a big part of it.

Can you help us understand what specifically drove the upside relative to your expectations?

Was it lower wafer costs or maybe even segment color on which segments drove the gross margin upside?

Thank you.

It was operational performance, as we described on our prepared statements, you are correct, mix was less of an issue.

As far as to the forecast, good question, but when we gave our forecast three months ago, revenue projections was, what, 540 to 580, so if you think of it, we flushed out a lot more of the good inventory, the reductions we made earlier in the year came through and they are coming through now at higher costs.

That is one of the reasons why we are able to sustain that.

That explains why from our earlier forecast three months ago that higher revenues flushed out some of the -- allowed some of the newer cost inventory to ship to market.

Okay.

And then on the wireless segment, is there any sense you can give us on the size of your WiFi relative to your apps processor and combo baseband chip business there in that 20%?

Yes, we're not splitting that.

Okay.

Thank you very much.

Our next question comes from the line of Sanjay Devgan of Morgan Stanley.

Please proceed.

Hi, guys.

Thanks for taking my call.

Just a quick question, I wanted to touch base more on some of your new products again.

As you kind of look over the coming years, let's say in 2010 -- calendar 2010 you talked about some of the combo chips as well as new refreshes of your apps processors.

What do you think is going to drive the biggest incremental growth next year or what should we look to in terms of meaningful growth drivers for 2010 just qualitatively if you can touch on that.

And then I was wondering if you could touch on some of your initiatives in digital TV and Blu-Ray and how should we track -- expect the trajectory, growth trajectories, for those product lines?

So the way we look at it is actually quite straightforward.

The consumer markets, the growth of opportunity for semiconductors and the season for that is because the process technology nowadays are to the point where we can integrate a lot of functionality into a single chip or maybe two chips at most, so at very reasonable costs.

So we can integrate powerful processors like gigahertz or multi-gigahertz, single or dual core or quad core CPUs, 3D glass (inaudible) HDTV, Blu-Ray player, set-top boxes or TV or smart TVs.

At the end of the day, the differences between all these different applications are quite small.

We are talking about a difference of maybe two to one or maybe even slightly more than two to one difference in cost in terms of the silicon requirements for the different markets, so we're talking about single digits or slightly upper two-digit types of cost solutions for those -- for the different markets.

So the opportunities is really -- it's the same actually is to have all of those capabilities in every devices.

The difference between -- okay, I don't want to add maybe.

Even in certain applications that do not need certain functionalities, a year later they will need those functionalities again because we can do it, because we can do it we can implement those functions at reasonable costs.

So you already mentioned about TV or Blu-Ray, clearly, okay, this is one area of opportunity for us to grow into as well in the next several years and we do have devices that we're sampling into the market, just not projecting revenue yet at this point.

Okay.

And just as a follow on, I think earlier you mentioned in your networking business we're just at the beginning of a multi-year product cycle within the networking product line.

I was wondering if you could just remind me, given that your networking products have traditionally, or the newer networking products likely have higher than average gross margin products, is it reasonable to assume as that product cycle starts to kick in that will be added to margins kind of down the line?

Yes.

Okay, we have had this type of questions for the last -- as long as I can remember.

The answer is that -- is this, okay.

We are -- at this point the company is quite diversified.

Marvell is a company not relying on a single market that can change, drastically change the overall outcome of our gross margin even though in certain areas we have higher or lower gross margin.

Okay.

It can go up.

If everything is the same, it can go up one or plus, minus one, one way or the other.

Depends on yield factors, depends on complexity of products.

Depends on how well certain products are being designed or the die size is as small as we would like it to be or slightly bigger than what we like it to be.

So in general, we cannot predict, okay, with very good accuracy what they are going to be, but what we do know is if we continue to push for excellence in our product developments, push for high integrations and build products that not too many of our competitors can build or none of them can build at all, we will continue to get value for products that we built.

So -- and I'm not to consider it -- it's going to be 55 or 54 or more than 55.

If it's going to be more, we'll be happy, but we're not driving the numbers.

We're driving the product, the superior product.

If it happens, it will get wider acceptance, as a result of that, we will trade off.

We will trade.

I will personally trade much higher volume for slightly less gross margin.

But then again, I don't drive that, so that's -- when it happens, again, we'll deal with it.

Okay.

Thank you.

Our next question comes from the line of Nicholas Aberle of Caris and Company.

Please proceed.

Thanks, guys, good job on gross margin.

On the hard disk side, any granularity you can provide on maybe what segments were strong with respect to 3.5 inch, 2.5 inch, basic consumer business enterprise, any granularity there?

I would like to be able to say -- to know exactly where those products goes because I think we won't be able to know exactly where they go.

A lot of our products we built actually same chip that -- the same chip can go in the desktop and mobile.

This is actually our strength.

Our chip can go to high-performance, high-speed yet to be very low power, so our customers can use exactly the same device into those two markets.

But having said that, I keep say saying over the last few years that I personally believe that the mobile market, mobile computers, growth is good to drive the growth of the driver market specifically in the PC industries.

It is because of the processors that goes into these laptops are low-power, high performance already so that people really do not need much of a PC except for the craziest -- okay, like my kids that want to have crazy graphics to play games.

So other than that I think everybody should be happy just to have laptops for the future growth of the drive business.

Got it.

On -- in your prepared remarks you talked about some new hard disk drive customers and the big ramp starting in the middle of calendar 2010.

Is that the same time frame you guys have been thinking or is that a little later?

No, that's consistent.

Got it.

The baseband business has been a little bit of a headwind for the last two quarters.

Do you guys feel confident that business has troughed in Q2?

Yes, that's pretty much behind us, so we feel comfortable and very happy that our 3G solutions are really very, very strong.

Okay.

That's great.

And then just lastly, over the longer term, I think a little over a year ago, Sehat, you were talking about product portfolio being strong product cycles ahead of you and year-over-year you thought, high teens to low 20s percent revenue growth in a normalized environment.

Assuming we're back in a normalized environment, is that the type of range for revenues we should think about you guys growing over the long term?

Thanks.

Yes, I think that we still feel the same, okay, in the normal environment where we continue to -- as we have not stopped R&D development even during the downturn.

In fact, we can argue we have accelerated some of the R&D, some of the things that we were planning to do a little bit on, okay, we actually pull in to the -- on the earlier schedule, so I don't feel that if the economy goes back to normal pace, we will do what we said earlier.

Great.

Operator, we'll take one more caller, please.

Thank you.

Our next question comes from the line of [Ushay Orji] of UBS, please proceed.

Thank you very much.

Clyde, let me just ask you about -- obviously it looks like your visibility has improved, but can you just give us some numbers as to how much of your guidance was covered by backlog?

I think I said that earlier.

Sorry, I missed that.

Yes, typical -- we usually go into a typical quarter at about 65% to 70% coverage and we are about 10 points -- or better than 10 points better than that going in, and that has kept that same pace since the quarter began.

Right.

Let me switch gears a little bit to the (inaudible) business.

In terms of where the margin of that business is now, are you kind of optimal in terms of the margins and what are you going to be -- if not, how much more efforts or by what specifics, what are you going to do to try and drive margins to become more optimal in that business?

As you probably know, okay, we never talk about any specific gross margins or any specific products, but just to give you more color but in every business we are in we do want to have normal margin for that business.

So in the application processor or communication processors, we have been aggressively revamping our product lines over the last year in building products with more integrations with -- for example, putting powerful 3-D graphics capabilities in some devices, HDTV capabilities.

So all those things are steps that will give us better margin in the long run.

So if the concern is that margins of that, okay, in the long run will be worse than our competition, I think you should not be worried about that.

Okay, so we are on the path to basically have the normal margins for the business.

It's the same thing with every other businesses.

Sure.

Just one last question, Sehat.

A couple of conference calls ago, you talked about the progress you were making on net books on the targets in terms of how you intend to penetrate the notebook market.

I missed it.

Any update as to are you able to kind of cast your mind back to that call I remember in terms of what you are doing in that market and in terms of the new products you talked about, is this going to be one of those and if you can also talk about some of the drivers of your ability to penetrate that market?

There have been concerns about on-base products and not being able to run Microsoft and that being a concern in general.

So anything you can talk about your progress in this market and your view as to the evolution of on-base applications that would be helpful.

Thank you.

That's my last question.

Sure.

We are very well positioned actually in what you call a net book, or some people call it something else.

I call it -- consumer -- anything that falls in to the consumer devices is a clear opportunity for our gigahertz multi-core, single-core or multi-core arm, multi-gigahertz processor solution that we have in our portfolio.

So the thing that drives the opportunity besides from the silicon side, we drive the opportunity building all of this integrated.

Everything that you need, okay, all of the peripherals, the USB, the ethernet, the PCI-E, I should say 3D graphics, all this functionality into a single device, a single-chip device.

But equally important to what is driving this opportunity is the low-cost LCDs, cost of the LCDs have been dropping rapidly over the last several years and to the point now that things are so affordable that you can build a lot of these kind of devices below $50 to $100.

Okay.

On top of that, okay, the reasonable costs of small flash, and we mentioned about flashes going up and down for SSD, but if you look outside of SSD for things like 8 gigabytes or 16 gigabytes requirement, these are bery reasonably priced so now we can build a lot of these functions again for less than $100.

So this is what drives the -- well, I forgot to mention -- not to mention the availability of open platform software like the Androids.

They practically cost nothing.

It doesn't cost nothing, you have to port it to the platform, but in the big picture, okay, when you are talking about huge volume, it practically comes for free.

So all of these events create a huge opportunity for the arm-based consumer devices whether it is hand-held devices or even a smart TV.

They are the same to me.

They have just slightly different integration factors.

So -- I guess, okay, we can give you more -- (inaudible) has some of these products introduced by our customers, then we can -- if we are allowed to elaborate more on it we will give more color at that time.

Okay.

Thank you very much.

That concludes our question and answer portion.

I would now like to turn the call back over to Jeff Palmer for closing remarks.

Great.

Well, thank you everyone, we appreciate your interest in Marvell.

I would like to highlight that we will be attending several investor conferences over the next several weeks.

On September 9, we'll be at the Kaufman Brother's investor conference in New York City; September 10 at Citibank in New York; September 14 at the Deutsche Bank in San Francisco; and September 16 at the Jefferies Conference in New York.

We look forward to seeing you then and in other investor meetings.

Thank you for your interest in Marvell.

Thank you.

Thank you for your participation in today's conference.

This concludes the presentation.

You may now disconnect and have a great day.