邁威爾科技 (MRVL) 2011 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q1 2011 Marvell Technology Group limited earnings conference call.

I'll 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 Kiana, and good afternoon, everyone.

Welcome to Marvell Technology Group's first quarter of fiscal 2011 earnings call.

With me on the call today is Dr.

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

Clyde Hosein, Marvell's CFO.

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 can 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, general market trends, and statements regarding our financial projections for the second quarter of fiscal 2011.

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 statement.

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 first quarter of fiscal 2011 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.

Thank you, Jeff and good afternoon, everyone.

Today we reported fiscal first quarter 2011 revenues of approximately $856 million, reflecting a 2% sequential increase and a 64% increase over the same period a year ago.

For the first quarter, we delivered non-GAAP gross margin of more than 60% with non-GAAP operating margin of 31% and managed our working capital closely to drive free cash flow to $237 million or 28% of revenue.

Our sequential growth in the first quarter was the higher end of our guidance and was primarily due to the ramp of new products, new programs, and in certain cases, new customers.

The sale of new products during the quarter was approximately $135 million, about 35% sequentially, representing 16% of our total revenue.

During the first quarter, new product revenue was primarily due to the sale of new mobile and wireless products.

About two-thirds of new product revenue was a result of continued strong demand for our 3G communication processors and about one-third was due to the demand for new Wi-Fi products primarily our .11n Avastar products.

Our growth in the first quarter and again in the second quarter is driven by the introduction of new products and design wins we have been looking over the past two years.

Other than the revenue and new products, our baseline revenue is consistent with the trends experienced by our end customers.

As an example, our revenue from the storage market has been essentially flat since the fourth quarter.

In the second quarter, we see the positive trend of new product growth continuing.

This is a clear indication that the inflection point in our revenue growth that we discussed on our last call is playing out as expected.

Putting this together, we anticipate revenue from new products to increase from 16% in the first quarter to greater than 20% of our total revenue in the second quarter.

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 22% of our total revenue increasing about 18% sequentially, greater than our original assumptions as new products introduced by our customers continue to ramp.

As mentioned previously, we experienced excellent growth from our cellular customers during the quarter as the new Smartphone programs continue to ramp.

During the quarter, the sale of our Wi-Fi products was in line with our original expectations, growing approximately 6% on a sequential basis.

We experienced solid growth from our .11n Avastar family, which now makes up about 25% of our total Wi-Fi sales.

Additionally, we sold continued traction of our multi-radio or combo device revenue which represents about a third of our total Wi-Fi revenue.

Overall, the first quarter was not a demonstration that our long-term investments in the mobile and wireless market are beginning to yield positive benefits.

Looking to the second quarter, we expect a step function into the growth, in growth across our mobile and wireless product portfolio as new and exciting design wins continue to gain traction.

As a result, we anticipate revenues in the mobile and wireless end market to grow over 25% on a sequential basis.

Now, turning to the networking end market.

Sales were down sequentially 5%, in line with our original expectations and represented 20% of total sales.

As we progress into the second quarter, we believe sales into the networking market should improve.

We expect sales into the ethernet client market will be flattish to seasonally down while sales into the enterprise market should grow in the range of low double digits primarily due to new programs ramping at several key customers.

In total, we anticipate sales into the networking market to be up in the range of mid single digits on a sequential basis.

Lastly, the sales of products into the storage end market in the first quarter were essentially flat on a sequential basis, representing just over half of our total revenue during the quarter.

This was in line with our original expectations.

Looking to the second quarter, we anticipate the sale of our storage products to be approximately flat to slightly down on a few points reflecting typical seasonal trends.

In summary, our first quarter results are a clear indication that the actions we have taken continue to yield positive benefits from both revenue growth and profitability perspective.

We are beginning to see the signs of the inflection point in our growth we discussed on our last earnings call.

The momentum of design wins being awarded for new products is increasing.

In fact, customer demand and interest for our latest products has never been better.

A positive indication that our long-term investments are paying off.

Taken together, these strengths leave us confident that we will continue to deliver growth consistent with our long-term growth model and in excess of the overall semiconductor industry.

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

Clyde?

Thank you, Sehat, and good afternoon, everyone.

As Sehat mentioned, fiscal Q1 revenues came in at approximately $856 million, representing a 2% sequential increase over fiscal Q4 2010 and an increase of 64% in the same period a year ago.

Our overall revenue performance came in at a higher end of our guidance.

Our non-GAAP gross margin for the first quarter was approximately 60.6%, up 60 basis points from the fourth quarter and up about 900 basis points from the same period a year ago.

This was slightly better than our initial guidance of 60% plus or minus 50 basis points.

Our overall operating expenses for the first quarter on a non-GAAP basis were approximately $255 million, in line with our earlier projected range of $250 million to $260 million.

As compared to the same period a year ago, operating expenses were up approximately 9% while revenues grew 64% demonstrating the leverage in our business model.

R&D expenses for the quarter were approximately $200 million, an increase of 7% on a sequential basis and an increase of about 12% from the same period a year ago.

This was in line with the midpoint of our original guidance of $203 million.

SG&A expenses for the quarter were approximately $55 million, an increase of 8% sequentially and a decrease of approximately 2% from the year ago period.

This was slightly above the midpoint of our prior guidance of $52 million.

The sequential increase in operating expense was as a result of higher legal expenses, higher employee-related costs and new product introduction.

This resulted in non-GAAP operating margin of approximately 30.7%, down about 100 basis points from the 31.7% operating margin reported in the prior quarter, an improvement of about 24 points from the same period a year ago.

Net interest expense and other income was an expense of approximately $3.8 million.

This was lower than our original target primarily due to foreign exchange effects and our tax accrual accounts.

On a non-GAAP basis, we realized the tax benefit of approximately $1 million better than our prior guidance of a $2 million expense.

Our non-GAAP net income for the first quarter was approximately $260 million or $0.38 per diluted share, a sequential decrease of $0.02 per share.

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

The shares used to compute diluted non-GAAP EPS during the first quarter were approximately $681 million, up from 672 million shares in the prior quarter and higher than the 637 million shares reported in the year ago period.

Let me now summarize our Q1 results on a GAAP basis.

We generated GAAP net income of approximately $206 million or $0.30 per share in the first quarter, essentially flat with the $205 million or $0.31 per share in the prior quarter and better than the $0.18 per share loss we reported in the same period a year ago.

The difference between our GAAP and non-GAAP results during the first quarter of fiscal 2011 was due to stock-based compensation expense of approximately $27 million or about $0.04 per diluted share, amortization of intangibles represents an approximately $23 million or about $0.03 per diluted share and approximately $4 million or a $0.01 per diluted share representing historical portion of a settlement related to an IP infringement lawsuit.

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

Cash and short-term investments were approximately $2.1 billion, up about $282 million sequentially and up approximately $1 billion from the same period a year ago.

Cash flow from operations for the first quarter was approximately $256 million as compared to $281 million reported in the fourth quarter and up from the $145 million reported in the same period a year ago.

Free cash flow for the first quarter was approximately $237 million representing a 28% free cash flow margin down 6% on a sequential basis on an 80% improvement from the $132 million in free cash flow reported in the year ago period.

Accounts receivable was approximately $449 million up about $92 million sequentially, reflecting increased shipments later in the quarter and up $163 million as compared to the same period a year ago.

DSO was 43 days, up about two days sequentially and down just over a day from the same period a year ago and in line or in the low side of historical norms.

Net inventory at the end of the first quarter were approximately $207 million, down 14% from the $242 million reported in the fourth quarter.

Net inventories increased $3 million or 1% on a year-on-year basis.

Days of inventory was about 59 days, down five days sequentially from the 64 days reported in the previous quarter and down 31 days from the year ago period.

We continue to run with lean inventory despite our efforts to increase our inventory position and improve our customer service ability.

However, tightness in our supply chain combined with robust demand for our new products continue to put pressure on our inventory position.

We expect that situation to continue into Q2.

Accounts payable were $289 million, up about $11 million sequentially and up $122 million on a year-on-year basis.

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

We currently project second quarter revenues in the range of $900 million to $930 million, a sequential increase of 5% to 9%.

As Sehat indicated, the growth we experienced in the last quarter and expect to continue into this quarter is a lesser function of end market growth but rather due to new products and customers resulting in share gains from the investments we have made in the past.

We continue to monitor the end markets and work with our customers to manage inventory cautious about any channel inventory build.

We currently project non-GAAP gross margin in a range of 59% to 60%, in line with our long-term model reflecting a modest downward bias at a midpoint due to accommodation of product mix and potential for margin compression due to tighter supply constraints.

We currently estimate non-GAAP operating expenses to be approximately $265 million plus or minus $5 million.

At the midpoint, we anticipate R&D expenses to be approximately $210 million and SG&A expenses of approximately $55 million.

As we get more comfortable with revenue growth from the new products, we'll continue to make the necessary investments to support our anticipated growth while maintaining our best-in-class margins.

The primary drivers of the sequential increase in operating expenses are new hires, salary and benefit-related expenses, and increased new product introduction expense.

At the midpoint of our range, our guidance translates into an operating margin of approximately 31% plus or minus about 1 point.

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

Non-GAAP tax expense should be approximately $3 million to $5 million.

We currently believe the diluted share count will be approximately 688 million shares and project non-GAAP EPS to be in the range of $0.38 per share to $0.43 per share.

On the balance sheet we currently expect to generate approximately $270 million in free cash flow during the quarter.

We anticipate our cash balance to be about $2.35 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 $0.07 per share plus or minus $0.01.

About $0.03 of this difference is related to amortization of intangibles and $0.04 in 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.

Ladies and Gentlemen.

(Operator Instructions) We are now ready for our first question, which comes from the line of Glen Young of Citigroup.

You may proceed.

Glen, are you there?

Hello, can you hear me?

Hi, Glen, thanks.

Sorry about that.

Top of mind for a lot of investors these days is what is going on in Europe and what's going on, to maybe a lesser extent, what's going on in China.

I wonder if you guys can address anything you may be seeing then?

Or if you aren't seeing it that's fine too.

And see if there's any change in order patterns or anything you might detect in those regions?

Nothing specific, Glen, in order patterns.

We are aware that the economic, particularly in Europe, we see lesser in China, but it could affect some demand, particularly on the PC side.

But we think but haven't seen anything specific in our order patterns yet and it's questionable how big that could be.

I think this is more of a macroeconomic issue but anything specific.

Maybe as a follow-up then in the same vein, one of the other elements that plagues the industry today is a shortage of capacity.

I wonder if you can do two things, one, address the change in that shortage.

Does it seem more short or less short as the quarter progressed?

And then secondly, in light of that shortness, even with some weakness perhaps in Europe, how do you see that shortage situation progressing over the course of the year?

I think we have early amounts of chip companies to talk about tightness of supply.

It continued.

It's probably a slight improvement for the current quarter, Q2, I'd say it's probably a slight improvement as the quarter progressed.

Our bigger concern has been to the second half of the year when as we've described in previous calls, a lot of the new customers, new design wins, new opportunities that we've won, we expect to ramp later this year.

And into next year, our bigger concerns has been in that part of it and that's more a function of working with our suppliers to improve the situation, so that has improved substantially.

I consider it still tight but that's more work in alignment with our foundry partners and our other suppliers to improve that position.

So, short answer continue tightness near term, maybe moderate improvement in the last couple of months but long-term, we think we get better alignment with our suppliers in the second half of the year as we anticipate some improvement in our revenue position.

Thank you.

Thanks, Glen.

Kiana, we'll take our next question, please?

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

You may proceed.

Good afternoon.

Thanks for taking my question.

I guess in light of the question asked before about demand in Europe and what affect that might be having, can you give us any perspective about what you're seeing into Q3 whether your order book is further dated than it normally is?

And what you expect in terms of normal seasonality going into Q3?

Or if you think it's going to be normal or better than normal or worse?

I think it's still early for Q3.

Good question, I think that's a question on everybody's mind.

Our order patterns wouldn't play out for Q3 as much.

It's better to say today than a year ago or two years ago but that's more related to supply than it is to a demand situation, so I don't think we can add any color, Jim, to the good question of where that is playing out.

My view continues to be -- third quarter is driven by back-to-school demand and that's less of a discretionary issue I've always maintained for years.

That's less of a discretionary issue than say when you get to Christmas which may be more affected by it.

Currency, erosion may affect that a little bit, but I think Q3 --

If Euros get worse, they're particularly --

But I think there might be some moderate impact because of a currency but the issue I think in Q3 is more back-to-school type demand.

And just to return, we view that less discretionary than say for the Christmas or end of year period.

Okay, fair enough and then maybe just a follow-up on the OpEx line.

I mean, clearly, that's increased the last couple quarters as you guys have had better than seasonal revenue growth along with that.

Can you talk about how you might expect OpEx to trend for the rest of the year?

I think we've been consistent.

We -- I think we need to put it in a couple of things.

We've been consistent in two things about our design pipeline and about new products and that inflection point and I think we've demonstrated that in the current quarter the Q2 that way it's picking up.

In the past we've talked about significant opportunities mobile, wireless, storage and part of that but also networking.

So, I think that revenue part of it and as we get closer to that confidence and we get closer as days have gone by we said we'll increase expenses to support that.

There's no way we can support that level of revenue growth without concurrently increasing some expenses to support that.

These are new customers, new programs that requires a fair amount of support, so we've said this year we'll ramp up.

We increased it about $17 million last quarter.

We'll increase it again $10 million next quarter.

I don't see any big step-up functions but there's the possibility of it, showing some revenue increase.

The one thing that I'll remind people is our business model continues to demonstrate that where we still grow in revenues significantly, we still generate in 31% operating margins and think that's a reasonable number in our long-term models.

You should also expect that we will continue to invest in advanced process technology so because of [mass], because of the [CatTools].

A lot of things will continue to increase over time.

And we have to do that because these products we have to generate revenues two years from now, a year and a half from now, so we will continue to strengthen our position obviously, so that part of the expenses will continue to grow.

There's no way to get around from that.

But we are at record revenue levels in the last quarter and increasing that quarter, record revenue levels for the Company history.

And expenses are still below what the peaks would have been so the key thing, I think, Jim, is to focus on the operating margin and free cash flow.

We continue to deliver best-in-class on those metrics and we will manage our revenue growth and our expenses prudently.

That's helpful.

Thanks very much.

Operator, next question please?

Our next question comes from the line of John Pitzer of Credit Suisse.

You may proceed.

Yes, guys.

Thanks and congratulations.

My first set of question is just around inventory and supply.

I'm curious, Clyde, when you look at the drop in inventory and supply tightness, is that equal among the three business units or are you seeing more tightness in some than others?

And are you worried about especially the mobility and wireless whether or not supply constraints will limit growth going into the back half of the year?

No, I don't think it's any particular segment.

I think it's fairly broad, we use one particular foundry.

I think where you might see tightness, John, and this is to the question to what's the newer geometry so when you get to 40 nanometer is when we get cautious.

Now, keep in mind we aren't shipping any 40 nanometer products today or probably the next quarter.

So I think that is probably what I described earlier as future problem but today there's no differentiation amongst the end markets.

And then my second question, just on the hard drive side of things along with concerns over Europe, there's been a lot of chatter about some cutbacks in the PC Supply Chain.

I know you guys guided April to typical seasonal.

Are you guys seeing anything in the order patterns from the HDD customers that make you worried?

And when can we start to see market share gains as we move into the back half of the year?

Thanks.

Not really.

One thing I'd remind investors, our quarter ends in July.

Now, sometimes that works for us or against us but that helps us here because as you get into July you certainly need to get that bump-up for for back-to-school.

So when you look at it to typical seasonal patterns I know there was a lot of noise written out there about June cutoff and demand moving from June to July at some of the PC-oriented channel.

That wouldn't affect the quarter or aggregate quarter, much at all.

So I think PCs, I think we expect some moderate impact but not seen it in the order patterns right now.

It's probably in the noise right now.

On top of that laptops are bigger, it's a bigger part of the business than the PCs and the cycle, the replacement cycle for laptops are also at a much higher rate, much faster rate than PC, so that also is helpful to the storage business.

Great, thanks, guys.

Thanks, John.

Our next question comes from the line of Harlan Sur of JPMorgan.

You may proceed.

Hi, good afternoon.

Great job on the quarterly execution.

First question, as you've mentioned previously, the team has seen the infection point in the revenue growth that you anticipated last quarter.

And so along those lines with the strong growth in your mobile and wireless division expected for this quarter, can you maybe provide us with a little bit more detail, your RIM business versus your old phone business?

Are they both seeing strong acceleration or is one driving a majority of the growth?

Any color here would be helpful.

We have a policy that you want to maintain of not commenting on specific customers and fortunately implicit in your question is about specific customers.

So I think we should let our customers comment about their business.

I would say we expect improvement across all our customers, existing and new.

We've seen improvements in the last quarter.

We expect that, as I have mentioned, to continue to increase and that will accelerate as we go out throughout the year.

Old phone is probably ahead of us but we think that's on track and the shipments in that will be more moderate.

Great, thank you, and Clyde, to the prior questions, I mean, the risk of not having enough capacity seems to be getting larger and larger here, especially as your revenues continue to grow here and especially as your new products continue to ramp.

I know you mentioned you're working with some of your manufacturing partners.

Can you help us understand what are some of the specific actions the team is working on?

I mean, are you qualifying more parts at different foundries?

Are you being more aggressive on technology migration to get more die per wafer?

Any color would be helpful.

Good question.

I think the better improvement, we are working closer and I think what -- the biggest change I think in the last few months is improvement of forecast processing because when you talk about new products, primarily internally and not with our customers, is the best indicator of it.

It's hard for externally, whether our foundry or you guys to figure that out.

The most improvement we've made is taking a longer view of our demand requirements, say over a 12 month period whereas a year ago we taken more of a shorter view.

So today it's more process-oriented along working with our manufacturing partners on a longer term forecast between our customers or new customers, new products, of manufacturing partners to expand that view.

And that's where I think we see a fair amount of improvement is in that process and that's somewhat of the growing pains we're going to do at Marvell as we scale the Company up.

That's one of the things we've learned so I know it's not a sexy answer to your question but it's more business process, longer term horizons that we're putting --

Having said that, there are obviously steps we could do to improve.

But the situation, for example, improving our testing methodology so that we can improve yield, designing new products for the future to, let's say, to look at what functions are really necessary, what functions are not necessary.

And set the product lines targeting for the mass market that requires extreme high volumes may require us to remove certain functions to deal with to make the die sets smaller but most of all on a longer term basis.

In the near term, it's really a cycle, I'd say working with our customers, looking at which of the forecasts, better forecasts on their side, better visibility to our suppliers, so --

Got it.

Thank you very much.

Thank you Harlan.

Our next question comes from the line of Adam Benjamin of Jefferies.

You may proceed.

Thanks, guys.

Just to follow-up on the supply, not to beat a dead horse, but maybe ask it a different way.

Obviously, you've got a lot of measures that you can do more in the longer term but as you mentioned, Clyde, you saw that supply was easing a little bit in the last month or so.

If you look out to the rest of the year, is there some indication that maybe you're getting some better foundry capacity or that actually your main foundry is actually loosening a little bit?

I think the foundry, I didn't say last month -- I said in the last few months, I know people are looking for little data points and I'm trying to avoid that.

If you look in the longer term, I think you should mute your phone because there's background noise.

But in the longer term, if you look at the foundry, they have announced significant capacity increases in the orders of billions of dollars and cumulative probably north of $10 billion in the last six months or so.

So as that capacity comes online it comes on conveniently for us in the time frame where we had the biggest bottleneck, ie, later this year and next year.

So I think we feel better that the foundries have begun to add capacity and that makes us a lot more comfortable.

Got you.

And one just quick follow-up before the background noise comes in, as it relates to the storage HDD guidance of flat to down slightly, you mentioned seasonal.

With respect to that guidance, does that include any new ramps of the customers that we've talked about?

Not material yet at this point.

Got you.

You're talking about the ramp of the new customers?

That's probably a quarter --

Yes, small.

Very small, let's assume for the way.

Sure.

That's great, guys.

Thanks.

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

You may proceed.

Hi guys.

Thanks so much for taking my call and great job on the results.

Just qualitatively speaking if you could, is it reasonable to assume, touching on the backlog coverage, is it reasonable to assume that your coverage for the current outlook is at similar levels to last quarter?

Yes, from last quarter, yes.

From a year ago much better coverage but the last quarter, I think we were in the 90% range and if you look down midpoint of guidance, it's probably trending towards that.

Okay, fantastic and then maybe a question for Sehat.

Sehat, a lot has been made recently about iPad and the launch of products similar to that from other vendors.

Was wondering if you can just talk about how Marvell is positioned to capture that wave as it comes in and what are your thoughts on that market as an opportunity for you guys?

Yes, sure.

Obviously this is an area that we've been working on for the last several years.

This is exactly the markets that we're targeting, markets that require high performance processors, markets that require high performance graphics, 3D graphic engine, markets that require full HD functionalities.

So if you'll look at our product that we introduced a few months ago, or was it earlier this year?

Earlier this year with the Armada.

Sorry, earlier this year with the Armada family.

This is a market they are targeting for the next generation types of solutions, tablets, well I guess I should just use the word tablets.

So this is just, you should consider this just as a higher end version of our silicon chip.

Typically, we incorporate slightly less performance and less graphics capability like video capability on the tablet types, we beef up those functions.

And we have a solution beyond processors.

We have Wi-Fi, and other --

Yes, Wi-Fi -- not just Wi-Fi, this is, it is our strength.

Okay, we have ethernet, gigabit ethernet, Wi-Fi, combos, FM radios, Wi-Fi Bluetooth FM, and ethernet, gigabit ethernet, power management, battery chargers, audio technology, so this is an area that -- also the base band.

So it depends on the market, where it's targeted for a market in China and we have a TD-SCDMA base band targeted to China.

if the target market is in other parts of the world then we have 3G base bands.

So in a sense this is a market that is similar in terms of size of market that the volumes plus opportunities similar to Smartphone, but it comes in the bigger form factor.

So I usually talk to people in terms of what this tablet fits between a laptop and a Smartphone market.

But the volume is more similar to a Smartphone market than a laptop market.

So it means this is a huge opportunity for companies like us that can develop very low power, high performance application processor and complete solutions.

Great.

Thank you so much.

Operator, we'll take the next question.

Your next question comes from the line of Enbresh Shrevasava of BMO Capital Markets.

Hi, thanks for taking my call.

This is Emily Scudder calling in for Enbresh.

On channel inventory you mentioned you continue to monitor channel inventory.

What is your assessment of channel inventory?

And could you please educate us on what normal patterns are and where we are?

The first part of your question is what --

Channel inventory

Yes, I know, but what the definition of channel inventory, is that what you're asking?

No, just what is your assessment of the levels right now.

Oh, okay.

Assessment of it.

I don't want to make us an expert of channel inventory, broadly speaking the way you would look at it.

So we know that it's in our distribution channel, we know what's in our hubs, more than half of our revenues are in consignment basis so that's really our channel and that's reflected in our balance sheet.

Another 20% or so is distribution and the rest is on direct, so our hub inventory we described that earlier we see that as relatively lean.

We don't see the buildup.

We do have a fair amount of control over that and again it's north of half of our revenues in that part.

On the distributor side of it, there was some improvement in distributor inventory.

We monitor that.

We increase that and that was conscious because, as I indicated earlier, you need to do that leading up to the back-to-school season that's all there.

So I'd say compared to the last quarter, there would be higher levels of inventory and our distributors would be consciously do that to get that primed up ahead of back-to-school.

Beyond that, I think it's not fair for us to comment broadly on the channel.

I think you guys on the sell-side write enough about it, so --

I think it's good to reiterate that a lot of our businesses, our customers, fall in just-in-time.

When they need the product, they buy the products from our site, so there's really no incentive for them to pull in more than what they did.

So that's the beauty but the significant portion of our business like this.

If I could just add one thing, Emily also, our distribution model runs on a sell-through model so we're not -- the inventory that the distributor sits on our balance sheet so it's not a sell in model.

Do you have a follow-up, Emily?

Yes.

And then on HDDs, do you think that new customer ramps will become meaningful in the third quarter or not?

On which segment?

HDDs.

What was the question again?

She'd like to know whether or not HDDs will be significant ramp in material?

In general or new customers?

New customers.

Oh, new customers.

So remember, our HDD is a sizeable business, any customer ramp, a few months of customer ramps, if there's any effort, it's always going to be a small percentage, it cannot be sizeable.

Usually it's sizeable only in the second quarter or third quarter after the initial ramp.

Okay, thank you.

Operator, we'll take the next question please?

Our next question comes from the line of Quinn Bolton of Needham & Company.

You may proceed.

Hi.

You guys gave some good detail on the new product strength in the first fiscal quarter I think you talked about new products reaching 20% of sales in the second quarter.

Is that still mostly from the mobile and wireless product group?

Or are we starting to see contribution from some of the other two business segments?

It's still mostly mobile and wireless but as Sehat mentioned, it's segments in networking you see we expect low double digit sequential improvement and the substantial portion of that would be from new products in that area as well.

Is that mostly on the enterprise switching or more on the client?

Enterprise.

Okay, great and then just a quick question with the TD-SCDMA communication processors, I think you've previously talked about seeing that ramp late this year.

Is that still the right time frame to be thinking about?

Yes, still expect to do that, the demand is -- the customer engagement is very expensive.

Great.

Thank you very much.

Operator, we'll take another question please.

Our next question comes from the line of Kevin Cassidy of Thomas Weisel Partners.

You may proceed.

Thanks for taking my question, and it seems everything came in in line with what your expectations were, except the networking group, that being down 5% quarter-over-quarter.

I wonder if you could say a little more what's happening there?

It seems like enterprise networking is rebounding in other places in the market.

Yes, there's some parts of it.

I think we have seen some of the people playing in the supply chain may have had better results in that quarter or similar quarter than we did.

I think their customer specifics, we actually track that.

Our profile resembles the same except that certain customers may have been -- tightened up inventory, some of our customers better than others so I think the trends are similar.

In Q2 you see that improvement, part of it is end market, part of it is new product, so in the Q1, I wouldn't -- I'm not at all concerned, we know exactly where that was.

We know exactly why, and we saw that improvement in the subsequent quarter.

Okay, and maybe as you're talking about that as going forward and new products, is that higher gross margin than corporate average?

We don't comment about gross margin about any specific segment of ours.

Okay, all right, thank you for taking my question.

Thank you.

Operator we'll take another question please?

Our next question comes from the line of Srini Pajjuri of CLSA.

You may proceed.

Thank you, Clyde, on the gross margins coming down a bit here, you said mix is impacting that.

Just wondering as you look into the second half in 2011, obviously you have storage design wins ramping.

I'm just wondering how that impacts gross margins going forward.

Should we model gross margins coming down a bit here or do you think that will reverse in the next few quarters?

Again, like the last caller we don't comment about gross margin about any specific part of our business.

What I would suggest you model, Srini, is gross margin 59% to 60% this quarter as I indicated earlier and 58% to 60% in subsequent periods.

You get to pick any number you want in there and I think we'll stick with that as we go forward.

Yes, I just want to add maybe a little bit and say that may be related to the supply tightness, so related to gross margin, for products that are built on the existing process technologies, I think the gross margin is roughly about the same, okay.

But what I'm concerned about later when you go to more advanced process technology at 40-nanometer, 20-nanometer where the capacity is not going to be widely available, that's when the gross margin, I will be a little bit concerned at that time.

So of course we are taking some action to make sure that we don't get in trouble when we go to 20-nanometers on the gross margin side.

Okay, thanks for the clarification.

And then Clyde, you have $2 billion and counting.

Just wondering what are your plans for the cash?

Do you plan to buyback or pay a dividend or something else?

Okay.

I made my statement several quarters ago that we'll keep that.

We'll hold it -- the cash for now.

A lot of our customers are getting much, much bigger.

We have much bigger customers now and a lot of our customers are actually more comfortable dealing with suppliers.

They are very strong financially because they are betting their life.

They are betting their existence of the companies on us, so they want to see that we will be able to survive under any conditions, even if there's a possible downturn in the next couple years we will stay strong.

So I don't know, Clyde, if you want to add-on to that?

No, Sehat, I think that's true.

We acknowledge certain investors' questions about it.

We've had discussions about it.

Obviously nothing to announce, but I would also add to what Sehat said.

If you look at what the market is telling all of us in the last month or so and there's been several calls on here about Europe.

So there's still a lot of questions about macroeconomic issues and I think the prudent thing to do is to watch, observe, and take that into consideration before you implement any share buyback or any of that.

So I think we continue to be cautious about it and there are a number of factors including what Sehat said that goes into the equation.

Sehat, If I may just a follow-up to that answer.

Obviously, you have made some successful acquisitions in the past and if I look at your storage business being 50% of the sales and new wins ramp, it looks like it could go as much as 60% of sales.

I'm just wondering, does it make sense for Marvell to get into a new larger market through another acquisition in the next couple of years and if not, why not?

We have done that.

Several years we had acquired the Intel cell phone and application processing business.

This market is even bigger than -- the potential market is even bigger than the overall storage market.

And not just from the volume point of view, also from the chip size point of view, so the number of chips that we can sell into a given system.

So we've done that already, so there are a few others that we're looking at but nothing is going to be as big as that size.

But we are some of them we are working on, we are actively engaging working internally.

Some of them we have been working over the last four years or so internally, internal development, not through acquisitions.

So there are quite a few significant of our expenses in the last four years you could consider those equivalent to like buying a small company, which we could have done but we decided to go a different route.

Because we want to have control in our destiny because some of this technology that we want to have -- not just being useful for the market but also being useful across the market.

I can give you an example, HDTV.

We spent four years to develop our HDTV technology because this market is not just for HD or set-top box business or BluRay player business but it's also used for Smartphones and tablets.

So, okay, if we don't put control on this technology on our hand, we will have many different solutions down the road.

So we decided four years ago to bite the bullet and spend the money and do it internally and do it right.

Thanks, Srini.

Operator we'll take one last question now please?

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

Hi guys.

Nice job on the results.

Thanks for squeezing me in.

One of your main hard drive competitors is talking about ramping into new customers over the next couple years.

Do you have any thoughts on whether you can keep those customers' console sourced and what gross margins might do if they do penetrate?

Yes, so I don't know how much I want to respond to this because I think I've been asked these questions more than a dozen times and this particular, if it's the same particular competitor that I think of, this is a competitor that we compete against starting in 1996 when we first competed with them.

So the same management globally has been saying that getting the same way from us and all this other stuff.

But it's -- the truth is we have superior technology, we have low power.

Our chip does not need to have a band to protect the technician from patching the chip so they will not bring their fingers, so our chip has better SNR.

Our chips get better yield and our customers make more money if using our chips, so I don't know what else I can say about it.

You just need to ask them to be more specific like, which product are they talking about?

Do you have a follow-up, Craig?

Yes, I do and I wanted to ask on the Wi-Fi combo chips.

Can you talk about what products beyond the gaming consoles that you're shipping into now, what your expectations are?

I think you said it was a third of your overall Wi-Fi business which seems pretty big.

Yes, the biggest market for combo devices eventually will be, one, the phone -- the Smartphones.

And the Smartphones are going to take over or begin to replace feature phones so that's going to get bigger.

Second, the tablets.

The tablets are going to have combo devices so they are also going to be big, and laptops, I'm not sure if laptops will need combo devices but if they do, it is a reasonably sized market.

Oh, the other part probably could be, you could consider as any consumer, like TVs may or may not have combo devices but for sure if you look or listen to some reports out there, that all TVs will have internet whether they are wire ethernet or wireless ethernet or any other kinds of connectivity.

They are all going to be connected, so some of these devices will also go into the TV markets or BluRay players.

Do you guys have any Smartphone combo chip wins and one for Clyde, what should we do with taxes going forward, Clyde?

Obviously, we have many design wins on the combo devices with the Smartphone markets.

If you look at our reference designs and our Smartphones.

I mean, just to look at one aspect of the business on the smart books, on the processing side.

All of our reference designs comes with our Wi-Fi, so all the software, everything has already been developed with that in mind.

I see.

And I think we provided a model last quarter but I believe it was somewhere between 5% and 8% tax rate.

I think you should do that.

I recognize that in any given quarter, it is, for example, lower than that, but in the sustained basis I think 5% to 8% would be a reasonable amount.

The quarterly accounting of that can sometimes get well around with tax reserves you take for positions in the future, you revisit that every quarter, so it's hard to provide specific other than what we give you for this quarter, but then a longer term basis I'd go with 5% to 8%.

Thanks.

Got it.

Thank you.

Well, everyone thank you very much for your time today, and your continued interest in Marvell.

Real quick reminder, we'll be attending several investor conferences over the next several weeks.

On June 2, we'll be attending the DA Davidson Technology Forum.

On June 3rd at the Bank of America US Technology Conference.

On June 9, we'll be attending the UBS Global Technology Conference and on June 10, we'll be at the RBC Technology Conference.

All these conferences are in New York City, and then lastly, on June 23 we will be attending the OMX 24th Investor Program being held in London.

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

And thank you very much for your interest today.

Bye-bye now.

Thank you.

Ladies and gentlemen, that concludes today's conference.

Thank you for your participation.

You may now disconnect and have a great day.