邁威爾科技 (MRVL) 2010 Q4 法說會逐字稿

Good day, ladies and gentlemen, welcome to the Q4 2010 Marvell Technology Group, Ltd earnings conference call.

I will be your coordinator for today.

All lines have been placed on mute to prevent any background noise.

After the speakers' remarks, there will be a question-and-answer session.

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

I would now like to turn the presentation over to your host, Mr.

Jeff Palmer, Vice President of Investor Relations.

Please proceed, sir.

Thank you, Deanna, and good afternoon, everyone.

Welcome to the Marvell Technology Group's physical fourth quarter 2010 earnings call.

I'm Jeff Palmer, Marvell's Vice President 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 at our Company website under the Investor Relations section at www.Marvell.com.

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

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.

The risks and uncertainties include our expectations about sales of new and existing products, and general market trends.

Statements regarding our financial projections for the first fiscal quarter of 2011, our expectations about long-term growth, as well as 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 quarterly report on form 10-Q 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 fourth physical quarter and physical year end 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.

Now I'd like to turn the call over to Sehat.

Thanks, Jeff, and good afternoon, everyone.

Today we reported fiscal fourth quarter of 2010 revenues of approximately $843 million, reflecting a 5% sequential increase, and a 64% increase over the same period a year ago.

For fiscal 2010, our revenue was $2.81 billion, down approximately 5% versus fiscal 2009.

This is impressive performance given the 30% decline in revenue we experienced during the first half of fiscal 2010.

Even on this lower revenue base, full-year non-GAAP EPS increased 30% to $0.99 per share, from the $0.76 per share in fiscal 2009.

We accomplished this by improved operational efficiency and actively controlling expenses, which led to a 32% improvement in operating income, and operating margin of about 30% over the last two quarters.

Full-year free cash flow was $756 million, up 26% versus the year ago period, representing a 27% free cash flow margin.

During the fiscal fourth quarter, we achieved several notable financial performance metrics.

Gross margin increased to approximately 60%, over 860 basis points of improvement from a year ago.

Additionally, we achieved record operating margin and cash flow metrics during the quarter.

Operating margin on a non-GAAP basis was nearly 32%, while free cash flow was over $250 million or 30% of revenue.

These are both record levels for Marvell, and a reflection of the hard work and fiscal discipline of our employees.

I am very proud of our employees for these accomplishments, and want to thank them for their support.

During the fourth quarter, the performance across our end markets was in line with our original guidance provided to you in December.

The sale of new products during the quarter was approximately $100 million, or about 12% of our total revenue.

This was about a 30% improvement on a sequential basis, as demand accelerated for our new products during the quarter.

Of particular note was, we increased the demand for new 3G cellular communication processors, with revenue more than doubling during the quarter.

Additionally, we experienced significant traction with our networking products, our new product revenue more than doubled for both our enterprise switches and embedded CPU products.

Looking out into our first quarter, we anticipate revenue from new products to represent approximately 15% of our total revenue.

Please note, due to the long design cycles of many of our products, we believe defining new products introduced in the last 12 months is a better measure of new product traction.

The previous information and comparisons reflect the new methodology for all periods noted.

Beyond just revenue performance of new products, we have many positive new product announcements during the quarter.

Within the mobile and wireless market, we announced several Armada based reference platforms co-developed with market e-book market leaders including, skiff, plastic logic, E Inc, and AU Optronics.

We believe the Armada family of embedded application processors positions us for a leadership position in the emerging and exciting field of next-generation e-books.

Many of these new platforms are close to being launched into mass production, and should change consumer expectation for the functionality and performance of next generation e-book readers.

Furthermore, over the last quarter our design win rate for all Armada products doubled to over 100 confirmed design wins.

At CES in January, we unveiled our next generation wireless family called Avastar.

The Avastar family is based on the 802.11 Wi-Fi standard, and includes signal antenna and (inaudible) devices, as well as multi-radio combo devices.

We are already seeing good traction with customers with the one by one, as well as three by three devices contributing to our revenue growth, and we anticipate revenues from Avastar base combo devices to come online later this year.

Within the networking market, we announced two significant new products, the first being the introduction of the Armada 300 family of embedded application processors.

The initial device, the 55 nanometer Armada 310, sets new performance standards for an on base CPU, achieving 2 gigahertz performance.

And under normal load, this device operates on average in less than a one watt power (inaudible) envelope.

This device is targeted at both enterprise class control applications and next-generation converged media platforms for the digital home.

Further extending Marvell's lead in this embedded CPU development, we also announced our first 40 nanometer quad core Armada device.

This family is based on the same Marvell design on the seven core use in our Armada 500 and the 600 series devices.

The second major networking product announcement we made during the quarter was our unveiling of Avanta PON family.

Several of the unique features of the Avanta family, its ability to support both the EPON and GPON standard in a single device.

Thus enabling OEMs to build a single product and to leverage single software code stream for various geographic markets.

The Avanta devices are highly integrated SOCs based on our 2 gigahertz CPU, which also integrates our successful multi-port gigabit ethernet switch, our five, and a high throughput IP packet processing engine.

The AVANTA line will include single core CPU devices for single-family units, and dual core CPUs targeted at multi-dwelling units.

We believe the AVANTA family is ideally suited to the large scale PON build outs taking place in China, other parts of Asia, the US and other emerging markets.

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

The sale of products into the mobile and wireless end market contributed approximately 20% of our total revenue, and was in line with our prior guidance, with sales down sequentially in the range of low single-digits on a percentage basis.

During the quarter, we experienced growth from cellular customers as new Smartphone programs continue to ramp.

Highlights include initial shipments of products to support the China Mobile OPhone launch, currently Marvell is shipping silicon into nearly 90% of all OPhone models available for sale, including models from tier one handsets OEMs.

And as best as we are able to determine, initial market acceptance has been very positive.

Additionally, new design activity of OPhones is progressing very well, and Marvell should continue to benefit proportionately, either in the second half of this year or early next year.

Continuing the trend began last quarter, our business with REM continued to rebound strongly during the fourth quarter, due to robust end market demand for the bold product line.

(inaudible) this stream was anticipated normal slowdown in seasonal ordering patterns in the wireless market, particularly in the gaming market.

Overall, the fourth quarter was another positive step toward realizing returns on our long-term investments in the mobile and wireless market.

Looking to the first quarter, we expect a balance growth across the whole mobile and wireless product portfolio, which should result in revenue growth in the range of low single-digits.

Beyond Q1, we anticipate new design wins, especially those in the cellular end market to continue to accelerate.

We expect these design wins to ramp later this year or early next year, but the precise timing is always difficult to predict.

Moving onto the results within the networking end market, sales in Q4 increased by greater than 10% sequentially, and represented approximately 20% of total sales.

The results exceeded our prior estimates of growth in the upper single-digit range.

We experienced strong growth within both ethernet client and excess end markets, as seasonal sales of PC, SoHo and excess networking products drove demand.

As we progress into the first quarter, we believe Marvell's specific share gains in the networking area will continue.

However, after four solid quarters of growth, we anticipate our networking business to be down in the range of middle single-digits primarily due to normal seasonality in the client portion of our business.

Lastly, the sale of products into the storage end markets grew approximately 5% on a sequential basis, and contributed over half of our total revenue.

This was both in line with our prior guidance, and in line with the overall unit growth rate of the HDD industry.

We experienced strong demand across all direct pipes, particularly in the desktop and enterprise direct market, while our growth within the mobile drive market was in line with the overall industry.

Looking forward to our first fiscal quarter, we anticipate the sale of products to our storage customers should track the unit growth rate of the overall HDD market.

In the range of flat plus or minus a few percentage points, higher than typical seasonal patterns.

In summary, the results for our fourth quarter and fiscal year bring to a close one of the most challenging but successful years for Marvell.

I am very pleased with the progress we have made over the last 12 months.

During the last year, we have transformed our organization to improve the efficiency of product development, we have refined our business model to deliver world class financial performance, and we have laid groundwork to accelerate our growth in the coming years.

We have gained significant traction in our mobile and wireless business, realized share gains in both our networking and storage business.

We believe within the next 12 months we will be at an inflection point in our revenue growth.

Our customers are delighted with our new solutions, and we have significant design wins completed and in process.

We expect these design wins to increase our revenue growth over the next 18 months, and perhaps even as soon as later this year.

As a result, we feel confident increasing the investments needed to accelerate our growth.

The areas you will see us make continued investments in include next generation process technology, the expansion of our software capabilities, expanding our product portfolio as well as field engineering support to ensure our customer success.

We believe these investments are appropriate given the strong financial base we have established, and will provide the strength to support our continued growth.

While I'm proud of the progress we have made, we continue to be mindful of the challenging economic environment we operate within.

We are clearly aware of the effect of macroeconomic events could potentially have on our business.

Consequently, we are approaching the next fiscal year cautiously optimistic on the overall broader economy.

We are mindful of the recent investor concerns about inventory buildup, but believe the challenge the industry faces is more than likely supply constraints.

While we are not expert on these issues, we will approach the year cautiously both on trends on the broader economy, as well as on those issues that could potentially limit our growth.

We believe we are ideally positioned for upside should it happen.

Our continued focus will be on the aspects of our business we can control and influence.

Now, I would like to turn the call over to Clyde to review our financial results for the fourth quarter, and to provide our current outlook for the first quarter of fiscal 2011.

Thank you, Sehat.

Good afternoon, everyone.

As Sehat mentioned, fiscal Q4 revenues came in at approximately $843 million, representing a 5% sequential increase over fiscal Q3 2010, and an increase of 64% from the same period a year ago.

Our overall revenue performance was in line with our initial guidance, and with the end market drivers of the business playing out, as we had originally anticipated, which is better execution and gross margin.

Our non-GAAP gross margin for the fourth quarter was approximately 60%, an increase of 219 basis points from the third quarter, and up 864 basis points from the same period a year ago.

This was higher than the midpoint of our earlier projected range of 58% to 59%, and is a clear testament to the longer term earnings power our business can support.

The sequential improvement in our gross margin is from improved mix, new products introduced recently, and cost management.

Our overall operating expenses for the fourth quarter on a non-GAAP basis were $238 million, in line with our earlier projected range of $230 million to $240 million.

As compared with the same period a year ago, we were able to keep operation expense essentially flat, and substantially improved revenues, yet another demonstration of the product cost and expense controls, and improved products we have implemented over the last year.

R&D expenses for the quarter were $187 million, essentially flat on a sequential bases, and an increase about 5% from the same period a year ago.

This was in line with our original guidance of $182 million to $188 million.

As compared to the year ago period, the 5% increase in R&D expense was due to increased tape-outs, new product introduction expenses, and to reinstated bonus accruals.

SG&A expenses for the quarter were approximately $51 million, in line with our prior guidance of $48 million to $52 million, up about 17% sequentially, and a decrease of about 11% year on year.

SG&A expenses during Q4 were higher on a sequential basis, as our Q3 SG&A results included some insurance reimbursements.

If we normalize for the benefit realized in Q3, SG&A expenses in Q4 was essentially flat on a sequential basis.

On a year-over-year basis, SG&A was down due to a combination of lower headcount, reduced legal expenses, and lower consultant expenses.

This resulted in non-GAAP operating margin of approximately 32%, up 300 basis points from the 29% operating margin reported in the prior quarter.

And an improvement of over 26 points from the same period a year ago.

Net interest expense and other income was a benefit of approximately $10 million, substantially higher than our prior expectation of $1.5 million benefit.

The improvement was due to better than anticipated returns on a foreign entity retirement account, and a gain on an equity investment.

On a non-GAAP basis, we realized a tax expense of approximately $11 million, in line with our prior guidance of $9 million to $15 million.

Our non-GAAP net income for the fiscal fourth quarter was approximately $266 million, or $0.40 per diluted share, a sequential improvement of about $0.05 per share or about 14%.

During the same period a year ago, we earned $32 million or $0.05 per share.

The shares used to compute diluted and non-GAAP EPS through the fourth quarter were approximately 672 million, up from 664 million shares in the prior quarter, and higher than the 629 million shares reported in the year ago period.

Changes in diluted share count are primarily due to shares issued in the period from exercises of options by employees.

Shares purchased through the ESPP program, along with variations in average and ending trading prices in the reported period, which impacts 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.

Fiscal 2010 was an eventful one for us and for the entire industry.

We started the year with a sudden and significant decline in revenue, resulting from the reaction to the broader economic climate.

Marvell was prepared as the reality of the downturn became apparent, we had already begun the process to strategically review our business operations, and we had began taking the necessary actions to restructure our business, while simultaneously improving the portfolio of products.

The results of these efforts were stellar, resulting in record profit levels and cash flows.

We emerged out of this very strong, and strategically positioned to substantially grow our revenues in the next few years.

We ended the year with a very strong P&L, a solid balance sheet and superb cash flow margins.

We are strategically positioned with new products and new customers getting ready to ramp in the next year.

I also want to thank all employees for making this a terrific year.

Revenue for fiscal 2010 was $2.81 billion, approximately a 5% decrease over the $2.95 billion reported for fiscal 2009.

The decrease was primarily due to the credit induced macroeconomic downturn, with most of the impact being felt in the first half of the fiscal year.

On a non-GAAP basis, full-year gross margin for fiscal 2010 was about 56.7%, versus the approximately 52% reported in fiscal 2009, an improvement of 470 basis points year-over-year.

Non-GAAP operating income increased to $660 million or approximately 24% of revenues.

Over 650 basis points better than the 17% operating margin reported in fiscal 2009.

Non-GAAP net income for fiscal 2010 was $648 million or $0.99 per diluted share, an improvement of 35% as compared to the $482 million or $0.76 per share, diluted share reported in fiscal 2009.

Turning to cash flow metrics.

Our full-year cash flow from operations for fiscal 2010 was approximately $812 million, as compared to the $681 million reported for fiscal 2009.

Free cash flow for fiscal 2010 was $756 million, representing a 27% free cash flow margin, an improvement from the $602 million reported in fiscal 2009.

We define free cash flow as cash flow from operations less capital expenditures and purchase of IT licenses.

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

We generated GAAP net income of approximately $205 million, or $0.31 per share in the fourth quarter.

Up from the $202 million or $0.31 per share in the prior quarter, and higher than the $0.11 per share loss we reported in the same period a year ago.

During Q3, our GAAP results included a $32 million tax benefit.

Normalizing for this benefit, our sequential EPS was significantly better.

Our year-over-year improvement in GAAP earnings were the result of better revenue, significantly improved gross margin, tight operating expense control, lower equity compensation expense, and lower amortization of intangible charges.

The difference between our GAAP and non-GAAP results during the fourth quarter of fiscal 2010, was due to stock-based compensation expense of approximately $31 million, or about $0.05 per diluted share.

Amortization of intangibles representing approximately $24 million or about $0.04 per diluted share.

And facilities restructuring charges of approximately $6.5 million, or about $0.01 per diluted share.

On a full-year basis, we generated GAAP net income of approximately $353 million or $0.54 per diluted share.

A significant improvement from the $147 million or $0.23 per share in the year ago period.

The major contributions to the improved GAAP profitability were higher gross profit of nearly five points, combined with tight expense control.

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

Cash, cash equivalents, and short-term investments were $1.8 billion, up $333 million sequentially, and up $845 million from the same period a year ago.

Cash flow from operations for the fourth quarter was $281 million, as compared to $204 million reported in the third quarter, and up from the $109 million reported in the same period a year ago.

Free cash flow for our fiscal fourth quarter was $253 million, representing a 30% free cash flow margin, a 29% sequential improvement from the $196 million in the third quarter of fiscal 2010, and over 170% improvement from the $93 million in free cash flow reported in the year ago period.

During the fourth fiscal quarter, our overall cash balance was positively impacted by $77 million, as employees exercised stock options during the quarter.

This was up from the $14 million generated during the third fiscal quarter, and up from the $12 million generated in the year ago quarter.

Accounts receivable was $357 million, down about $38 million sequentially, reflecting better collections under higher revenue levels, and up $135 million as compared to the same period a year ago.

DSO was 41 days, flat sequentially, and down 15 days from the same period a year ago.

Net inventory at the end of the fourth quarter was $242 million, up 1% from the $239 million reported in the third quarter.

Net inventories declined $69 million or 22% on a year on year basis.

Days of inventory was 64 days, up four days sequentially from the 60 days reported in the previous quarter, and down 53 days from the year ago period.

Accounts payable were $277 million, down $40 million sequentially and up $138 million on a year on year basis.

Before I turn to our current projections for the fiscal first quarter of 2011, I would like to provide a framework for the modeling purposes over the intermediate to long term.

As our results over the last several quarters clearly demonstrate, Marvell is a much more efficient organization than at any period in its history.

The management team has worked closely to identify and address those areas in the Company which were in need of improvement.

Over the last year, we have taken a fresh look at all aspects of our operations.

This includes our manufacturing costs, our product development, and support expenses, and product portfolio.

We have made and will continue to make the hard decisions which we believe will benefit our shareholders, customers and employees.

As have previously mentioned, we believe over the next 12 months or so, we expect to be at an inflection point in our revenue growth, as programs with new and existing customers shift into production.

Our confidence in delivering long-term growth, more in line with historical Marvell norms, has never been as higher as customers continue to adopt Marvell's solutions.

Furthermore, Sehat and I are proud to see that focus on financial discipline is becoming fully ingrained throughout our organization.

Consequently, combined on what we believe our robust top-line growth prospects with our demonstrated financial discipline, we believe we can deliver superior earnings to our shareholders.

With these comments as a background, I would like to offer the following targets which we believe investors should measure our success against.

On the top line, we believe we can deliver revenue growth in the range of 20% to 25% annually.

Obviously there will be puts and takes on a quarterly basis, but longer term we feel this is an appropriate range.

As we push costs consciousness further upstream into our development process, and combine this with new initiatives which will enable more efficient operational decisions to be made, we believe gross margins can be maintained in the range of 58% to 60%.

From an expense perspective, we will not shy away from investing in new product development and will invest to accelerate the revenue inflection point we feel is on the horizon.

However, we'll continue to be vigilant, and manage the potential expansion of operating expenses, such that expenses lag top line growth.

We believe this should result in significant operating leverage, driving sustainable non-GAAP operating margins of about 30%, plus or minus a couple of points.

While we keep a close watch on new legislation, we believe our corporate tax structure can be maintained, resulting in a non-GAAP tax rate of approximately 5% to 8%.

Now I'd like to turn our expectations for the first fiscal quarter of 2011.

We currently project first quarter revenues in the range of $825 million to $860 million, essentially flat plus or minus two points, a positive reflection given that typically we would normally see seasonal decline of a few percentage points.

As Sehat indicated, we currently anticipate revenue from our mobile and wireless addressable end markets to grow modestly on a sequential basis, while we anticipate a modest decline in our network business, primarily due to normal seasonal ordering patterns for client connectivity devices in the PC market.

And lastly, we believe revenue from our storage addressable markets should be flat plus or minus a couple of points on a sequential basis, consistent with the overall HD market.

We're currently project non-GAAP gross margin in the range of 60%, plus or minus 50 basis points, approximately flat versus the previous quarter.

We currently anticipate non-GAAP operating expenses to be approximately $255 million, plus or minus $5 million.

We anticipate R&D expenses to be approximately $203 million, and SG&A expenses of approximately $52 million.

As we indicated earlier, we believe we are close to an inflection point in our revenue growth within the next year.

As such, we are comfortable increasing our investment to introduce new and adjacent products, and the field engineering staff needed to support these products and customer deployments.

At the midpoint of our range, this should translate to an operating margin of approximately 30%, plus or minus a point.

The combination of interest expense and other income together, should net out to be approximately a $1 million benefit.

Non-GAAP tax expense should be approximately $2 million, as we anticipate the reversal of tax reserves related to foreign tax jurisdictions.

We currently believe the diluted share count will be approximately 680 million shares.

Taken together, we project that non-GAAP EPS to be in the range of $0.30 to $0.40 per share.

On the balance sheet, we currently expect to generate over $200 million in free cash flow during the quarter.

We anticipate our cash balance to be about $2 billion, excluding any special items or M&A activity.

We currently expect our GAAP EPS to be lower than our non-GAAP EPS by about $0.08 per share, plus or minus $0.01.

About $0.03 of this difference is related to amortization of intangibles, and $0.05 in stock based compensation expenses.

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

Operator?

Ladies and gentlemen, we would now like to open the lines for your questions.

(Operator Instructions).

In an effort to allow as many listeners a chance to ask a question, each caller will be limited to one question and one follow-up question.

We're now ready for the first questioner.

And it is Glen Yeung from Citi.

Please proceed.

Thanks, great job on the quarter here.

First question is, thinking about your top line growth, you're now actually back very close to your peak quarterly revenue run rate, so as you look forward and I hear your point about investing in new products for accelerated growth.

Maybe you can shed some light on where you see that growth coming from, where you see the opportunity to take your revenues to that next level.

Okay.

I'll take this one.

So the -- there are several areas that we see growth, okay, obviously in the areas that we are investing a lot is in the mobile and wireless, the new programs in our existing customers.

With TDSCDMA opportunities to serve the China Mobile OPhone in China, which is huge.

The famous Armada family of designs, application processors for the latest markets from the e-reader types to media players types of devices, and our new combo devices in the Wi-Fi space for embedded applications.

So (inaudible), and then in networking we have, we just recently entered into the PON, the AVANTA PON.

Our 48 ports so to say, 40 ports 10 gig ethernet switch that we introduced sometime last year, they will be going to production this year.

And other types of switching families but work for the gigs and the 10 gig space.

And storage.

Storage, we have traditional storage.

PCs, laptops, laptops' prices going down, so that is good for storage business.

Our investment in SSD, solid state disk controllers, aboard for the enterprise, very high end all the way down to the entry level SSD, they will be good for us, not to mention we have anticipated share gains in HDD market.

So, I mean a few others but without going through all of the individual items.

In general, basically all of the investment that we have done, we have made in over the last several years, those are the ones that contribute to the revenue growth opportunity in the next, this year and next year.

Thanks for that, Sehat.

And just as the follow-up.

Your inventories, quarter on quarter actually grew quite little.

I wonder if you can address your comfort with your current level of inventories, but also as you respond, address the capacity constraint issue that we're seeing in the foundry business and whether or not you think that is an issue going forward or not.

Sure.

Clyde, you want to take this one?

Yes, the inventory.

So, yes, it grew $3 million, days of inventory, Glen, was about 64 days.

So quite, and then you ask about capacity.

We asked -- seen tightness in capacity, particularly at foundry.

I think that's consistent to what investors would see throughout, and quite frankly that is one of the areas we do have concerns as we go through the year, is the tightness of capacity, not just at foundry, but even at the disk drive guys, the investments they've made in technology to support drive growth has been limited.

So it is a concern we've had.

We would like to see our inventory grow more, quite frankly, for quite a couple of quarters now.

But demand has always kept up with our supply, so we've been able to constrain it.

The short answer is, we are concerned here about foundry capacity near and medium-term.

Thanks.

And we have a question from the line of Adam Benjamin from Jefferies.

Please proceed.

Thanks, guys.

Just as you look at that longer term model, I'm just trying to get a sense of how longer term are you guys thinking about this as a model.

You've done extremely well on the gross margin side, and you are well above where the Company has been historically.

So I'm just curious to see how long term you guys think about this when you lay out that model, Clyde.

We are already there, right now.

For the most recent Q4, we were at 60% gross margin, the high end of our 58% to 60%, and 32% operating margin, which is the high end of the range we indicated earlier.

So we are there.

The question is, people ask, can we sustain it.

They have been asking this for nine months now, and we have sustained it and improved it by several points for nine months.

So, we've also said, Adam, that we do not run the Company for quarterly day-to-day.

We run the Company to introduce new technologies, to keep our customers happy.

So from time to time, you might see some fluctuations around that.

But on a sustained basis, whether it is one, two, three years, we expect to be amongst the most profitable semiconductor companies.

We demonstrated that today.

And essentially what we think we can sustain those operating margins over the long term.

I want to add a little bit.

As I mentioned many times in the recent past, the -- okay, we're in the business to build advanced technology -- okay, system on a chip, we integrate more function into chips, so these devices incur a lot of cost to us, a lot of R&D costs, but at the same time it brings huge amount of saving value to our customers.

So there is a reason why we believe that in the long run, the gross margins of 58% to 60%, are the right numbers to target.

And to achieve in our business or in any -- in any other business, in any other companies that are in our business should be able to achieve this kind of level as well.

Got you.

That is helpful.

Just to follow up.

Maybe two parts to it.

On the OPhone platform when you ship either a base or out processor, what is the attach rate with your combo connectivity, would be helpful?

And then secondly, as you look at your business, there was a period of lack of introduction of new products for a period there, and now you've guys have brought to market several new products with GPON and connectivity, most recently.

I was wondering if you would look at your revenue lines today, how we should be thinking about some maybe new revenue lines emerging over the course of the end of this year and into next year, that we're currently not focussed on?

Thanks.

Yes, so in general you should look at, if we introduce new product, let's pick something like an EPON or GPON, we call it XPON because we have dual device.

Those device will be of interest, sample to customer, and then customer to build prototypes and qualification in the lab, in the field, and generally these things take, let's say -- let's call it a year, it could be a year, plus minus several quarters -- a quarter or two.

So there is a time frame of devices with that complexity.

For devices there is even more complex like the cell phone.

Like Smartphones, introduction to going to revenue could be in 18 months, plus-minus several quarters.

So those are the range of time to -- I mean, when the revenues will ramp up.

For simpler products, typically a lot faster, so six months.

So things more like replacing our existing solution in the markets, so a customer already have the software, whether it is for storage or cell phone, where they already have the software, the drivers there, those things will be faster, could be six months, could be nine months.

So it varies quite a bit, but that's why we always say that a lot of the revenues that we are generating, we expecting this year are the things that already, the design wins that we had last year.

So they're very little impacts on the stuff that we have to introduce this, like today, this month, for revenues in the next several quarters, and what was the other question?

Tax rate of combo devices to the OPhone, I don't think we've highlighted--.

So all of the new designs there on the OPhones using our chips, okay, have for any phones that will come with Wi-Fi pretty much will have our Wi-Fi combo device, Wi-Fi combo things like Bluetooth.

So we provide a lot of support not just on the software side.

So it is part of our delivery is that it is a software package.

Okay.

Thanks, Adam, for your question.

Operator, next, please.

We have a question from the line of James Schneider, Goldman Sachs.

Please proceed.

Good afternoon, and thanks for taking my question.

I was wondering, I know it is very early at this point, but can you give us any kind of visibility into what your customers are telling you about Q2 seasonality, whether it be above or below what you typically expect, and then can you remind us what normal seasonality in Q2 is for Marvell?

You want to take this first, and then I'll add later?

Sure.

I think the bigger issue -- normal seasonality for Marvell, I think, if there is anything normal, Jim, in this environment, I think we all agree, who knows?

So the current environment, normal seasonality, to answer your question, is probably flattish.

Maybe some growth.

We aren't forecasting anything beyond the current quarter, I want to be clear.

As far as customers go, I think the bigger issue that is dominating demand right now is the tightness on supply, particularly at foundry.

So we get longer visibility.

I think the supply thing is probably the big issue that is probably shaping customers' minds and our minds today.

So that is probably as much as I can give you right now into that.

You read the same things we read, what they're talking about, a lot of folks think it is normal seasonality.

I don't think we get hung up on what's normal anymore.

Yes.

It's really, on my side I look at it, I'm less concerned about the seasonality for this year, because we have downturn last year and then this year, we just recovering the same time if you look at the technology being introduced across the board, you look at PCs, processors, introducing in the laptops, they are very, very advanced, you have new introductions of Windows 7, all of the DDR3, low-power memory coming up from the (inaudible), the disk drives are going to 320 gigabytes, at low cost.

So all these computers can be -- you can buy a $400 laptop or $500 laptop where previously a year earlier would cost you 30% higher or more, with much less performance.

So I look at it, the biggest issue that we have to face is actually the supply.

The supply side may be the one constraining the shipments of those products, especially toward in the Q3, Q4 of this year.

I understand, that is very helpful.

Maybe as a follow-up, in terms of capital allocation, I think you have $1.8 billion of cash on the balance sheet at this point, how are you thinking about your relative priorities in terms of M&A versus dividends and buy-backs, and what are investors telling you about that?

I'll take this little bit.

I made some comments last quarter, so my comments stands on that.

But I look at it's important as a Company that we need to have a strong balance sheet.

There are a lot of things in our plan, long-term plan, when I say long-term, I mean in the next several years, that we want to do and those plans will require us to have large balance sheets in our books, so that we work to when the opportunity arises.

We will be able to quickly react to those opportunities.

In terms of M&A, number one priority to us is always is to develop organic development in-house, but every now and then, when we are given an opportunity to acquire a small R&D team, or developing new technology that we did not focus on or we forgot to focus on, and then we'll take that opportunity and we'll snag that opportunity, obviously.

You want to add more?

Sehat, I agree with you.

I just want to add, in terms of priority, we described earlier, Sehat did, organic growth has always proven to be the most -- the fastest return, the best alternative, we think what this Company has done over the last few years and what Sehat and the team has driven, we think that opportunity is very good, indicated we think in the next 12 to 18 months, maybe a bit sooner depending on customer deployments, we have an inflection point.

So we have to invest, we started this quarter investing organically to support those customers, bring out adjacent products into a space, and sell platform solutions to our customers.

So the first priority for us would be organic.

We are very confident about that, and you'll see that going forward.

M&A as Sehat indicated, we look at it opportunistically.

If there is something that we think we can integrate into what we do today, we are not going to be shy about doing it.

There is nothing imminent, for people to do, but we want to have the balance sheet to do that.

Having said that, as time goes on, you indicated in your question it is still early, we are aware of investors questions about us and we'll respond, but the priorities are what we laid out.

Organic growth and then being opportunistic about it, with a strong balance sheet, and keep in mind this is still an economy that is not totally out of from a macro point of view.

So it is always good to be careful.

Perfect.

Thanks very much.

Thanks, Jim.

Operator, next caller, please.

Question from the line of Craig Berger, FBR Capital Markets.

Please proceed.

Craig, your line is open.

Okay.

Let's go to the next caller, operator.

And we have a question from the line of Harlan Sur.

Please proceed.

Thank you for taking my question, and congratulations to the team on the solid execution.

I got the sense that enterprise class drives were pretty strong in the December quarter for your HDD customers, and also tracking pretty strong here thus far in the March quarter.

You've obviously got good exposure to Sea Gate and Western Digital.

Just wondering if enterprise is driving the above seasonal strength here in the April quarter, or is it better two and a half inch or three and a half inch demand that's driving the better seasonal pattern.

Any color would be great.

I think we see a broad strength.

I don't think -- strength in the sense of flat compared to down-- .

Right.

Relative strength, we should say.

I would agree with you, I think enterprise is doing well, but to be clear, other areas of our business are equally doing well in desktop and mobile.

So I wouldn't differentiate within that.

Okay.

And then on the technology front, again sticking with HDDs, maybe Sehat, you can give us an update on your next generation, low density parity check rechannel technology, maybe some progress with your existing customers.

Has the team already developed an NOC with the LDPC technology, and maybe when we should start to expect your customers to ramp these types of solutions.

Yes, so on the first, on our ALDPCs, I think sometime this year we have several customer they will ramp up LDPC devices for the very, very high end, very, very high capacity drives.

So we are -- I didn't mention too much about the LDPC, we also will be introducing our, even our next generation LPC in the next, pretty soon, so I mean we continue to invest.

Actually we have multiple generations of LDPC are in these in the lab, in our engineering.

So moving forward, okay, practically everything is LDPCs, but if you want to look at the production, the most cost sensitive, I mean, the solutions, from our solutions -- our LDPC solution are the most efficient in the market.

So we are very, very -- I think we are very -- we are very optimistic about our customer success, as well.

Okay.

Thank you.

And just one last question for Clyde, so given what I assume are extending lead times, I'm just wondering if Marvell is going to book business for the July quarter?

We book business whenever customers place them.

So I think it's fair, given the tightness in supply you see business going out through that period of time, yes.

Okay.

Great.

Thank you very much.

Thank you.

And we have a question from the line of John Pitzer, Credit Suisse.

Please proceed.

Good afternoon, guys.

Thanks for the opportunity.

Couple of questions on the long term target model, Clyde.

The 20% to 25%, sort of top line growth rate relatively easy this year just given the easy compares from last year, I'm curious, is that a cyclical recovery growth rate or would you expect that longer-term.

And then secondly on the gross margins, you commented that new products helped gross margins in the January quarter, you are already at the high end of 58% to 60% long term model.

How does mix play into the longer term to get you back down from where you are now?

Thank you.

So first of all, 20%, 25% growth, John, isn't easy for anybody.

So let's not underestimate.

But fair point on the easy compare, the target models we give out is really for a sustained business over a three-year period of time.

So like a 20%, 25% over that period of time.

As far as gross margin, yes, we had a higher end, we also indicated on this call that mix would play, not all of our products are there, so yes, mix would play out as time goes on, hence, the reason for us to give 58% to 60%.

But the other thing you need to keep into consideration is there is tightness in foundries out there and so we need to be mindful of that, what that is going to do in the near term or medium term, six to 12 months out for us.

So I think, again, I don't want to be too accurate about it.

I think they're very competitive margins.

They're superior returns versus almost everybody in our peer group, and we intend to sustain that plus or minus a couple of points.

That is probably the best way to think about that.

On the near-term front, any qualitative guidance you can give us on how order rates have been trending post-Chinese New Year, and just given some of the concerns on supply, what is your exposure, if any, to potential disruptions from the Taiwan earthquake yesterday in Taiwan?

I haven't seen any difference in order patterns post-Chinese New Year.

Nothing to comment on that.

As to the earthquake, I think the assessment is still preliminary, but the indications are that the disruptions would be minimal, so we take it at that.

Having said that, it doesn't -- certainly doesn't help to have an earthquake when you're already in a tight foundry situation.

So, like I said, it is one of our top concerns as we manage the near-term.

Thanks, guys, appreciate it.

Thanks, John.

We have a question from the line of Uche Orji, UBS.

Please proceed.

Sure, thank you very much.

Sehat, let me just go back to the comments you made about 90% of the OPhone models using Marvell.

Is that mostly your application process or also your comp processor for these design wins?

And also how many OEMs are we talking about?

Okay.

So on the first generation OPhones, they are basically based on our application processors combined with the existing (inaudible) stand alone modems that were available in the market at the time this product was built.

Now, on the new designs, okay, that we're just--that we talk about, that we show at the mobile conference, okay, for example, I don't know if you have seen it yourself in our booth.

I did.

So those are single-chip device where we integrate our next generation application processors with 3D graphics, with our own TDSCDMA modem into a single chip device.

The highly integrated solution is targeted for the much higher volume market obviously, because the cost structure, as well the form factor is significantly better, smaller, lighter, lower power.

So those are the next generations.

So in terms of number, how many--?

There is nine OEMs today.

We're aligned with eight of them.

Okay.

So the -- so we are at a very good start.

We have been working with China Mobile for three years or so, so this is very exciting for us.

As China Mobile, okay, continued to deploy -- I mean to invest in the TD base stations, over the next year, I think existing rollout they will be meant for the TD Smartphones, even for entry level phones, it would be very well, very good.

I see.

Right.

Different question.

Let me ask you about storage.

First of all, so your revenue growth, your growth now in storage is more like going to trend short term in line with the market, and you still talk about getting share.

Obviously, the one big source of share gain for you will still be the announcement from over a year ago.

Can you give us an update as to where the possible share gain momentum will come from, and timing-wise, and if you can -- I know you don't like to talk about specific customers, but if you can give an update on where you are with the (inaudible) ramp that you announced, that would be helpful.

Thank you.

So on the enterprise side, so obviously we continue to ramp our enterprise SO6, our biggest customer in the enterprise side, and then on the share gain that we talk about over the last year, I mean, as it's well known that there are only two customers, two large desktop/mobile customers, that were not using our solutions, and (inaudible) referred to those two customers.

And I'm -- I am very optimistic that at least one of the customers will ramp up sometime second half of this year.

And then obviously there will be more products as they ramp up one platform there, and they have to ramp up more and more platforms over the next year.

So there is, I think that give you an idea like how these things roll out.

In terms of the area -- okay, in terms of the segment, the segment will be the desk tops or mobile segments.

About two and a half inch.

But in general, our solutions whether it's mobile or desk tops, they're basically the same device or at least the same family.

All right.

And just lastly, you mentioned SSD when you talked about some of the new products.

Can you, first of all, characterize where your product stands relative to the competition in terms of SSD controllers?

And I know this may be still too early to talk about volume expectations, but can you talk about where the margin structure of your SSD products will compare to your current hard disk drives?

So that's my last question, thank you.

So we build only 50 controllers, so we initially focussed on the high end, high performance, high throughput SSD controllers.

So you see that, look at the Intel SSD device, okay?

We built the controller, and you look at the micron, the highest performance, highest throughput SSD in the market for the (inaudible), came from Macron, that use our SSD controller.

So you get an idea, like these controllers are designed for super high performance, super high reliability.

So these devices go into the server, a SUN server, for example.

That belongs to Oracle.

So, and then over time we also built lower -- I mean, lower cost, more entry level SSDs for the laptops, as well for other embedded type of applications.

So, so we look at SSD as a more of an additional business opportunity for us in the storage.

There will be applications where customer needs super high performance, like in the high end, super high end enterprise, where the SSD will, makes a lot of sense.

And there will be applications like for hybrid laptops where small SSD combined with super high capacity drives actually is the best solution.

So we are covering all the market segments.

Question on margins.

It is too early right now in the market to tell about margins, but the long-term margins we provided as a Company, we don't see that being-- .

We look at it as similar, especially the super high end ones.

These are very complex devices.

Thanks, Uche.

I think we're at the end of our time, everyone.

In closing, I'd like to thank everyone for their time today, and their continued interest in Marvell.

As a reminder, we will be attending several investor conferences over the coming weeks.

On March 9, we will be attending the Jefferies fourth annual global technology conference in New York City.

On March 10, we'll be attending the Credit Suisse communications and networking conference in Boston, and lastly on March 16, we will be attending the Roth Capital 22nd annual growth stock conference in Laguna Niguel.

We look forward to speaking with you at these upcoming conferences or in the coming months, and thank you for your interest.

Thank you.

Ladies and gentlemen, that concludes the presentation.

You may now disconnect and have a great day.