邁威爾科技 (MRVL) 2012 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second-quarter 2012 Marvell Technology Group limited earnings conference call.

My name is Chanel and I'll be your operator for today.

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

Later, we will conduct a question-and-answer session.

(Operator Instructions)

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

I would now like to turn the conference over Mr.

Sukhi Nagesh, please proceed.

Thank you, Chanel, and good afternoon, everyone.

Welcome to Marvell Technology Group's second-quarter fiscal 2012 earnings call.

I am Sukhi Nagesh, Vice President of Investor Relations.

With me on the call today are Sehat Sutardja, Marvell's CEO; and Clyde Hosein, Marvell's CFO.

We will all 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's website under the Investor Relations section at Marvell.com.

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

Please be reminded that this call will include forward-looking statements that involve risks and uncertainties that could cause our results to differ materially from Management's current expectations.

The risks and uncertainties include our expectations about sales of new and existing products, including statements about our TD, HDD and SSD products, statements about general trends in end markets we serve, statements regarding our financial projections for the third quarter of fiscal 2012 and our expectations about long-term growth.

To fully understand the risks and uncertainties that may cause results to differ from our expectations and outlook, please refer to today's earnings release, our 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 all of our statements are made as of today, and 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 include 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 our core operating performance.

Pursuant to Regulation G, we have provided reconciliations of the non-GAAP financial measures to the most directly comparable GAAP measures in our fiscal second-quarter earnings press release, which has been furnished to the SEC on Form 8-K, and is available on our website in the Investor Relations section.

With that, I would now like to turn the call over to Sehat.

Thanks, Sukhi, and good afternoon, everyone.

Today we reported second-quarter fiscal 2012 revenues of approximately $898 million, reflecting a 12% sequential increase from the prior quarter.

We delivered a non-GAAP gross margin of 58.1%, non-GAAP operating margin of 26%, and non-GAAP earnings per share of $0.38.

We generated free cash flow of approximately $235 million, equivalent to a 26% free cash flow margin.

Our revenue results were at the high end of our guidance range, and we continue to deliver strong profitability and cash flow generations, driven by revenue and share growth in all of our served end markets.

The key message that I want to give you today is that Marvell is executing well on all of its new product initiatives, which will increase our market share and contribute to our growth.

In addition, and consistent with our plan to return value to our shareholders, we continue to repurchase our shares.

As you know, our Board has recently increased our share repurchase authorizations by an incremental $500 million, bringing the total amount authorized to $1.5 billion.

Now, let me summarize our results across our end markets.

First, in our mobile and wireless end market, Q2 revenues increased approximately 18% sequentially, and represented approximately 26% of our overall revenues.

The sequential increase was driven by growth from our new products such as TD in China, and seasonal growth from our wireless connectivity solutions.

We believe the headwinds that faced our mobile and wireless end market in the prior quarters are mostly behind us, and we expect to make solid progress moving forward.

I would, once again, like to reiterate that the mobile end market is very important to Marvell and we remain focused on both growth and expanding our customer base.

We have made significant progress in the development of the TD platform.

As you are aware, we have been amongst the earliest companies involved in the development of the TD technology.

We have over 1,000 highly-talented engineers deployed in these and related technologies, at multiple locations in China.

Today, we continue to be the only provider of a single-chip TD smartphone solution.

This has resulted in over 20 TD smartphones being deployed both at OEM providers and white box manufacturers with our solutions.

For example, during the last quarter, ZTE announced 4 new Marvell based TD devices.

In addition, Motorola, Huawei, Samsung and others are currently deploying TD smartphones based on Marvell solutions.

We are proud to say that, working closely with our customers, we have helped them achieve an unsubsidized price point of $100 for TD smartphones, a first in the industry.

In the coming months, many of these handsets will be deployed in multiple Chinese provinces, both through the carrier and the channel.

Our revenues for TD smartphones have roughly doubled in the last quarter, and we expect double-digit sequential growth again in the third quarter.

We understand the skepticisms that some investors may have about TD, but we believe the coming quarters will prove that our investment was worthwhile.

We continue the development of TD road map and we expect to introduce products based on TD-LTE platform to our customers later this year.

In addition to TD, business at our largest existing mobile customer has stabilized.

We expect new 3G handset devices with Marvell solutions, Marvell silicon to come to the market in the near term, targeting the high-volume segments.

Further expanding our customer base during the second half of our fiscal year, we expect to launch multiple Android-based handsets targeted for consumers in Europe, Asia and South America.

In wireless connectivity, we experienced increased sales of our products to enterprise and game console customers, driven primarily by seasonality.

Given Marvell's strong market positions in the embedded connectivity area, we are expecting continued solid growth into the next quarter.

Overall, quarter to quarter, we expect revenues from our mobile and wireless end market to, once again, deliver double-digit growth, driven by TD, positive wireless seasonality, as well as increasing content at existing platforms and other new product ramps.

Now, turning to our networking end market, Q2 revenue increased about 3% sequentially and was approximately 20% of our total revenue.

This growth was better than the relatively flattish overall networking end market.

The sequential growth for our networking business was driven by share gains and new product growth at existing and new enterprise and home networking customers.

For example, in the Enterprise Networking area, we continued to gain share at all our major customers in network switches, and are ramping at many of our customers' new platforms.

In home networking, we are experiencing strong growth for our PON, passive optical network solutions, at major Asian networking OEMs, which is exceeding our expectations.

PON technology is being delivered to consumers at lower price points, while offering an order, potentially several orders magnitude, higher bandwidth over much longer distances compared to ADSL or VDSL.

The PON market is a relatively new area for Marvell, and we are gaining strong wins and traction for our universal PON solution that integrates both EPON and GPON standards.

MSOs and carriers worldwide are investing in PON networks in order to serve the HD, video-centric applications commonly demanded by consumers today.

For example, as you may have heard, Google will be deploying a PON network with through-put of up to 1 gigabit per second per user.

This high through-put is made possible by using Marvell's advanced PON solution with an integrated gigahertz-class processor.

We expect increasing PON broadband deployments worldwide to drive growth for our home networking business.

For Q3, we expect our networking end market to grow high single digits with growth driven by both enterprise and home networking customers.

The growth we expect in Q3 will now represent the third consecutive quarter for growth for our networking business, and illustrates the share gains from Marvell in a relatively slower growth end market.

Now, moving to our storage end market, Q2 revenues grew 13% sequentially and represented approximately half of our total revenues in the quarter.

Results in this end market were significantly better than our initial expectations of low to mid-single digit growth due to the share gains at Hitachi Mobile Drive, which is now fully ramped.

In addition, we experienced strong seasonal demand later in the last quarter, in support of the back-to-school buying season.

I would like to give you some additional details on our HDD business now.

Similar to our comments in the past, and based on our discussion with our customers, we remain confident that Marvell will benefit from the ongoing OEM consolidation.

We believe our ability to further distance ourselves from our competitors will become self-evident as new platform ramps at our customers become visible in the marketplace.

I also want to point out that the ramp of next generation mobile drives, a 500-gigabyte processor will potentially benefit us.

4 of 5 existing drive customers are already shipping drives with Marvell SOC for single-platter 500-gigabyte drives and 2-platter 1-terabyte drives, both industry firsts.

We expect the fifth customer to ramp within the next year.

The 500-gigabyte capacity point is a technologically challenging one and we are the first to market with our solution.

We excel at this capacity point because of the strength of our technology, superior signal-to-noise ratio, and lower power consumption.

We believe the transition to 500-gigabyte drives will be faster than anticipated with most of our customer-standard platforms moving to this capacity point by the end of this year.

We also enable our HDD customers to bring to market ultra-thin 7-millimeter height HDDs, which we believe will be predominant in low-cost, ultra-thin compact laptops.

Moving to the enterprise HDD market, we have won the next generation design at the major North American customer where we are already sampling our solution.

We expect to start ramping for this next generation enterprise drive in the second half of 2012.

Now, let me make a few comments on the SSD, the solid state market.

Here, we continue to make excellent progress, working with all the major flash manufacturers.

At the beginning of this year, we projected to double the quarterly product revenue run rate ending last fiscal year.

At the mid-year junction, we have made significant progress and are on track to double product sales by the end of this year.

Many of our customers were using the old solutions before, but as the SSD market transitions from the current 3-gigabit SATA speed to higher performance levels, we believe we will become the primary supplier for the controllers in this market.

We expect many, if not the vast majority, of Tier 1 customers to use Marvell solutions for the client SSD with speeds equal or greater than 60-gigabits per second.

Our leadership position and expected share gains in the HDD, combined with the strong traction for our SSD business will contribute to excellent growth in our storage business in the long term.

Looking into the third quarter, we expect our storage business to be relatively flat.

This outlook reflects the modest but sub-seasonal end market growth projected by our customers and offset by a short-term transition of enterprise HDD drives at one of our customers.

In summary, we believe -- in summary, we delivered strong sequential growth in our second fiscal quarter and continue to make good progress on all our new product initiatives across all our end markets.

We continue to work hard to provide the best-in-class solutions to our customers and are confident that our business model will continue to pay dividends to our customers, our employees, and our shareholders.

I would like to turn the call over to Clyde to review our financial results for the second quarter and provide our current outlook for the third quarter of fiscal 2012.

Thank you, Sehat, and good afternoon, everyone.

As Sehat mentioned, Q2 revenues for fiscal 2012 came in at approximately $898 million, representing a 12% sequential increase from Q1 fiscal 2012, and up slightly from the same period a year ago.

Our overall results were the high end of our prior forecast.

As Sehat indicated earlier, we delivered strong profitability and growth in all of our served end markets.

Our non-GAAP gross margin for the second quarter was approximately 58.1%, within our earlier projected range.

Our overall operating expenses for the second quarter, on a non-GAAP basis, were approximately $285 million, in line with the midpoint of our guidance.

As compared to the prior quarter, overall expenses increased 2% and were up about 10% from the same period ago, with the majority of the sequential increase coming from increased spending on R&D, in preparation for the launch of several new products, most of which are finer geometries, which are more expensive.

R&D expenses for the quarter were approximately $227 million, up about 2% from the last quarter, and up about 11% from the same period a year ago.

SG&A expenses for the quarter were approximately $57 million, a 2% sequential increase from the prior quarter.

This resulted in non-GAAP operating margin of 26%, at the midpoint of our guidance.

While we have funded our new growth initiatives efficiently, we also continue to manage our expenses in order to deliver industry-leading operating profit that investors are used to.

Interest expense and other income was $2 million, in line with our expectations, while non-GAAP tax expense of approximately $4 million was slightly above our prior forecast.

Our non-GAAP net income for the fiscal second quarter was approximately $233 million,(Sic-see press release) or $0.38 per diluted share, at the upper end of our earlier projection and a $0.09 increase from the prior quarter.

The shares used to compute diluted non-GAAP EPS during the second quarter were approximately 625 million, a decrease of roughly 38 million shares from the prior quarter, primarily due to our share repurchase program.

Cash flow from operations for the second quarter was approximately $263 million, as compared to $177 million reported in the first quarter, and lower than the $319 million reported in the same period a year ago.

Free cash flow for the fiscal second quarter of 2012 was $235 million, representing a 26% free cash flow margin, compared to free cash flow of $157 million, reported in the previous quarter, and $292 million in free cash flow reported in the year-ago period.

We define free cash flow as cash flow from operations, less capital expenditures and purchases of IP licenses.

Now, let me summarize our quarterly results on a GAAP basis.

We generated GAAP net income of approximately $192 million, or $0.31 per diluted share in the second quarter of 2012, up from the $147 million or $0.22 per diluted share in the prior quarter, and slightly lower than $220 million or $0.33 per share reported in the same period a year ago.

The difference between our GAAP and non-GAAP results during the second quarter of fiscal 2012 was mainly due to stock-based compensation expense of approximately $30 million or about $0.05 per share, amortization of intangibles represented approximately $11 million or about $0.02 per share.

Now, I'd like to review our balance sheet as of the end of our fiscal Q2.

Cash, cash equivalents and short-term investments were approximately $2.4 billion, an increase of approximately $132 million sequentially and slightly above the same period a year ago.

During the second quarter, we repurchased about 9 million shares for approximately $136 million.

Over the past few quarters, we have repurchased and retired over 64 million, or nearly 10% of our standard shares.

Accounts receivable was approximately $406 million, down about $20 million sequentially and a decrease of $85 million as compared to the same period a year ago.

DSO was 42 days, down from 50 days last quarter, and 48 days a year ago, all due to improved revenue linearity in the last quarter.

Net inventory at the end of the second quarter were approximately $322 million, up from the $299 million reported in the prior quarter and $239 million in the year-ago period.

Days of inventory was 75 days, up one day from the 74 days reported in the previous quarter and up from the 55 days reported in the year-ago period.

The sequential increase in inventory is mainly due to ramp of new products and anticipated seasonal build by our customers.

Accounts payable were approximately $354 million, up $32 million sequentially, and down $32 million on a year-on-year basis.

Now, I'd like to turn to our expectations for the third quarter of fiscal 2012.

We currently project third quarter revenues in the range of $940 million to $980 million.

At the midpoint of this range, this represents growth of about 7% sequentially.

By end markets, we expect our mobile and wireless end markets to grow double digits sequentially, our networking end market to grow high single digits sequentially, and storage to be relatively flat.

Our growth in the mobile and wireless end market is being driven by strong growth of new products such as TD, and continuation of seasonal strength in wireless, along with increasing content at certain customers.

In that book-end, we expect revenues in Q3 to increase sequentially from new design wins and share gains in both enterprise and home networking end markets.

In our storage end market, we expect revenues to be relatively flat.

This flat forecast reflects earlier shipments in July, sub-seasonal end market projections from our drive customers, combined with previously mentioned short-term enterprise drive transition at one of our customers.

We currently project non-GAAP gross margin of 57%, plus or minus 50 basis points.

As we have mentioned in our previous calls, our gross margin is influenced by various factors.

First, the impact of gold prices -- the price of gold has increased from about $1,200 per ounce a year ago to over $1,700 today.

This has eroded our gross margin by about a 1.5 points in that period.

We are transitioning to copper, but this will take some time.

Second, foundry prices have not fallen as much as we typically have seen in the past.

This leaves us with some margin compression as we continue to deliver normal price reductions to our customers.

We are qualifying new fab sources which will provide relief for us in the medium-term, as these additional foundries come on-line.

Our customers are fully behind us on these moves.

Third, as we increasingly move to more expensive advanced process nodes, there will be initial gross margin erosion until these new products fully ramp.

And, finally, our mix has increased in the area of lower margins.

These headwinds will affect us in the near term, however, we do not believe this is a permanent shift.

Whether gold prices decline in the future or we ramp up on copper, either scenario would allow us to recover some of the margin loss.

In addition, as we ramp up at new foundries, we'll get more favorable with our pricing.

We currently anticipate non-GAAP operating expenses to be approximately $295 million, plus or minus $5 million.

We anticipate R&D expenses to be approximately $235 million, and SG&A expenses are approximately $60 million.

At the midpoint of our revenue range, this should translate to an operating margin of approximately 26%, plus or minus a point.

The combination of interest expense and other income together should net out to approximately a $2 million benefit.

Non-GAAP tax expense should be approximately $2 million.

We currently believe the diluted share count will be approximately 620 million shares.

This share count does not reflect any share repurchases we may undertake during the quarter.

Taken together, we currently project non-GAAP EPS to be about $0.41 per diluted share, plus or minus a couple of pennies.

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 $2.6 billion, excluding any special items, M&A activity or continued share buyback.

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 $0.05 of this is related to stock-based compensation expenses.

In summary, the second quarter of fiscal 2012 was a strong one for us.

We delivered results at the high end of our guidance and grew our business in all our end markets, despite the choppy broader environment.

We continue to deliver top-tier growth, operating and free cash flow margins in our peer group, demonstrating the resilience and execution capabilities of the Marvell team.

With that, I would like to turn the call over to the operator to begin the Q&A portion of our call.

Chanel?

Thank you.

(Operator Instructions).

And your first question comes from the line of Glen Yeung of Citi.

Please proceed.

Thank you.

Good results.

My first question, slightly multi-part here but it's big-picture oriented.

We're obviously seeing a lot of macro issues in the stock market these days.

My question is, have you seen any direct impact of that in your fundamental business?

Maybe you could respond to that by addressing linearity in the quarter.

And the second part of this question is for you, Clyde.

I think back to our conference back in I guess it was 2008 when things were a bit choppy.

You could obviously see it.

I wonder if you could compare and contrast what you see now to what you saw then.

You're bringing up those dark times again.

Unfortunately.

Let me address your questions.

In terms of direct impact to our business, I think probably the biggest area you see it with us is in our storage end markets.

I think Glen, you and the others would agree, typically in the September quarter, you would see probably high single digit type sequential growth in PCs and drives and I think after listening to customers and other people in the PC food chain, people are looking at more low to mid-single digit type of growth.

So that's probably the biggest area of ours and that's 1 of the biggest contributors to our flattish guidance.

The other 2 -- the other being we ship earlier in the July time frame, which is reflected in our Q2.

The second part, beyond that, I think if you listen to our customers, there's a lot of apprehension back about the macro results.

Nothing major to see other than the area we mentioned, but they seem to be a lot of it.

Our linearity last quarter was a lot better than in previous years, which is 1 reason our DSO was better.

And to your last point on macro, there's a lot of differences compared to 3 years ago.

1, I think as you said in the market, and a number of people -- companies participating in the space, people are already reflecting macro environment.

I don't think you'll see the sharp effect as you might see 3 years ago, As you recall at your conference 3 years ago, we were canary in a coal mine.

I don't think that's happening now.

That's been fairly reflected.

So I don't think you're ahead of a credit bubble.

I think this is more of a consumption demand.

The big issue will likely be in various government debt in the world.

As soon as we rationalize or get our arms wrapped around that, I think you will see a better environment.

So, probably more subdued.

Nothing near as bad as we would characterize it 3 years ago.

And then with respect to Marvell, we are always cognizant about these macro environments, how it affects our business, and our preparation for it, if that happens.

I don't see the same thing happening compared to 3 years ago.

I think it's probably going to be better, certainly compared to 3 years ago.

It's not a good environment.

I think we'll be better off in that period of time.

What we are doing at Marvell and what we expect to deliver is a fair amount of share gain from either new products or existing products in the market, and that's what the team is focused on.

That's where we're making our investments, and that's what we intend to do.

That actually segues well into the next question, which is, thinking a bit longer term, and by that I actually just mean 2012, if you look out into that year and think about the opportunity that you see in the mobile and wireless space, non-RiM and the opportunity that you see in RiM, how should we think about the relative growth rates of those 2 things and when does -- or does RiM become kind of irrelevant in the context of the overall mobile and wireless business?

We don't compare comments on specific customers and I don't think that customer would ever be irrelevant.

They will be every bit as relevant as they have been.

Granted, there's some headwinds there.

Our dependence, however, on any single customer in the mobile space today is much lower than it was at any given period since we bought this business 5 years ago.

So as Sehat mentioned earlier, we are ramping up on TD.

That's doing very, very well.

Marvell is really acing it on the smartphones part of it.

We mentioned earlier, we've got price points as low as $100.

This is unsubsidized into the channel.

We believe that this is a huge demand for -- a huge inflection point for low cost smartphones and we believe we deliver in that space.

In addition to that, we're on the cusp of inflection of non-TD Android-based smartphones.

There's a couple that we expect to come out.

We have said second half of this year.

That's still on track.

You'll see that probably in the next quarter or 2 or you'll see very meaningful so our customer concentration and where we are positioned today is much, much better than it was at any point in our history, and that's because of the great work the team has done in terms of technology and customers.

I think investors should not discount RiM.

We continue to work closely with RiM in delivering new solutions.

They will make the product to look really, really nice, better performance as well.

So, don't discount that.

Don't discount RiM at all.

Your next question comes from the line of Harlan Sur, JPMorgan.

Thank you for taking my question and nice job on the quarterly execution.

I would assume that much of the growth in your TD business has been due to the channel fill and ship into China Mobile so what's kind of the read-through on demand and sell-through of either the high-end Android or OMS-based TD phones thus far?

So, as we said, we are the first to work with our customers to deliver $100 TD smartphones.

This is unprecedented.

Just about a year ago these phones were selling for about $400 to $500 because they are based on multiple chips in a system and requires a very complex implementation.

As the price gets to the $100 price point, the demand is increasing rapidly.

This is what we expect to see and we projected this would happen and we're seeing that.

We're seeing the customer demand is increasing and also as more and more of these products qualify by China mobile to be released into the market, we expect the volume will continue to ramp.

So, we're talking about phones that are not much higher than a high-end feature phone.

Maybe even a similar price point, if you take into account the touch screen feature phones.

Typically, there is not much difference in the bill of material to build those high-end touch screen phones with the smartphones we're delivering.

So, we are very, very optimistic that as more and more of the success of 1 -- many of these customers will lead to other successes.

Okay.

Great.

My follow-up question, obviously your networking business once again outperform the market in Q2.

I think you've got it for growth again in the third quarter.

Does the team still anticipate this segment growing in the mid-teens range this year, which would imply further growth in the fourth quarter, and then you've articulated some of the growth drivers here.

How much is the 10 gigabit Ethernet transition contributing to this growth?

Thank you.

I think you're asking about 2 different market segments, 1 is the enterprise segment where the 10 gigabits are starting to become a bigger -- not a bigger, starting to become more sizable in terms of volume.

It's still much smaller volume compared to the gigabits segment, but as people are building this bigger data center, building server farms, those 10 gigabits will become more important, so we are playing into this market.

We have 10 gigabit FIs and 10 gigabit switches.

We just recently introduced our super high port count, 10 gigabit switch on a single chip, on a single chip, the highest in the industry.

So, we expect to play -- to gain market share in this area.

But the other segment that we talked about in the prepared statement, is in the PON.

So, as many people are aware, at Marvell, okay, historically never played in the segments of cable modem or DSL or ADSL or VDSL because we did not enter the telecom side of the market until recently.

Our first entry into the market is through our investment in PON.

Specifically, we decided to leapfrog the market by integrating powerful processors and EPON and GPON and all the voice processing, switching functionality to everything in a single chip, and the result is now becoming evident that we're getting very good traction into the market in China.

We're getting Tier 1 engagements.

You see the Google ramp, the Google deployments of PON.

They were the first 1 in the world to deploy 1 gigabit per second per user.

This is like unheard of.

You're talking about most folks have ADSL running half a megabit or 1-megabit.

Maybe if you're nearby the office, the telephone office, telco office, maybe you can get several megabit per second.

Even if you have VDSL if you're lucky enough to be living nearby those remote CO you may be able to get 25-megabytes per second with VDSL if you're lucky enough.

We're talking about orders of magnitude higher through-put in optical and we're seeing this appear in a lot of parts of the world, developing world, where people are now deploying mainly just optical because optical will be the -- optical networks that's in the white area networks will be the technology for the next 100 years.

Whatever you invest on the ground will stay there in the next 100 years, while copper is already at the end of its life.

So, our growth in the -- our growth into the networking space, in 1 sense will be better than the market, because we have good traction in the PON and we also -- the PON is also -- naturally it's replacing ADSL and VDSL and cable modem because of its sheer physical advantage, physics, just so much better than copper.

Okay.

Too long for that explanation.

That's good.

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

Thank you for taking my questions and congrats on the quarter and the outlook.

Just had 1 question, a couple of questions, I guess.

First question is, you guys recently made your first foray into the tablet market.

I believe it was a Vizio tablet launched through Costco.

Was wondering if you can give us any color on kind of what the initial uptake or feedback has been around that device.

It's still early, Sanjay.

First foray, the price point is, we believe is very attractive, so it's geared for people who can't afford the higher-end ones and that price has been coming down, is expected to come down in the future and as we develop more and follow-on products.

So, initial reaction is very good, but it's still early.

I don't think you want to make too much out of it at this early stage in the game, but it's, I think price performance in a very good place.

Okay.

And then just as a follow-on, Clyde, you talked about the margins, the headwinds that the raw material cost, specifically gold going up to $1,700 an ounce, been a headwind of about a 1.5 points.

Wondering if you could talk through the conversion to copper, some of the technical issues around that, and what the timing is, how quickly you think that migration can be made.

There's a number of issues.

But technical issues.

I think the team is doing a great job getting over that.

The bigger issue has been more customer apprehension about performance when you go from gold to copper.

Because the price is reduced that apprehension about performance, when you go from gold to copper, because of the price, it's beginning to reduce that apprehension, getting a lot of support from our customers to move into that transition.

So the technical issues, they're still there, but they could be and will be overcome, especially on the higher performance ones, there's always those.

But we are moving ahead as fast as we can, and as I indicated earlier.

Either gold prices will come down from the current levels or transition to copper [ore].

So, this is a near-term headwind that we expect to go away.

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

Good afternoon.

Congratulations on the strong results.

Clyde, I was wondering if you could give us an update on the visibility you're hearing from your customers right now.

First of all, can you talk about what your backlog coverage is this quarter versus what it was last quarter, and then any kind of read into early in Q4 where you think that's going to be down seasonally like you talked about last quarter or maybe not so much.

Yes.

Visibility I think reflects what I think Glen asked earlier, people are more apprehensive, I think.

But the backlog coverage, I would say, is probably about where it is historically.

We went through a number of periods.

I don't think last quarter's a good quarter, because if you recall, we had that earthquake event last quarter, that created probably better backlog.

So, that's probably not a better comparison.

But if you look at historically over, say, 10 quarters and you look at a range of it, probably within that range, maybe a little bit higher end of that range.

So, I don't think visibility is as much of an issue.

And then in terms of seasonality, if you look at a couple of things, our broad markets, you've got to buy[inaudible] a broad business and some of the new products.

Broad business we participate a lot into a lot of consumer-centric products, whether it's PC-based or gaming systems or printers and the like and they tend to have good July quarter and October quarter build patterns, and you see that in our results and our forecast and then it falls off, as it did last year.

So, broad end markets, I would see that decline a few percentage points at a top level.

However, there is -- as Sehat indicated and I indicated earlier, there is a fair amount of new products coming to market which would be offsetting to that.

The extent of the offset is tough to predict at this point in time, especially with new products, but we do have a hedge, whether it's a normal seasonality, whether it's some moderate effects of macro, we do have a hedge from some of these new products and share gains, so I think we'll do okay.

Thanks.

That's very helpful.

Just as a follow-up, on the capital allocation front not withstanding the extreme volatility in the market recently you guys have done a very good job returning cash to shareholders via buybacks.

Can you talk about going forward, what your preference is, more buybacks, dividends, M&A, do you still feel the same as you did a couple quarters ago?

Yes, we do.

And we believe in all 3.

The good news, Jim, is we have a very strong balance sheet.

We have -- even after buying back over $1 billion, we still have about $2.5 billion in cash, and generate about $0.25, $0.26 on every dollar in free cash flow, so we feel very good and because of that we can partake in all 3.

So, we've done -- because of the performance of our stock, we centered around buying stock back.

I think that will continue.

We have another 500 authorized.

We intend to fill that in.

I think M&A in this environment is certainly an opportunity with valuations lower, that brings a number of product IP type things into our valuation space.

I think that's certainly a possibility.

And we discussed dividends in the past and I think that's still on the table.

It will be on the agenda at the next Board meeting and we'll just leave it at that.

So, I think we have the luxury of being able to address all 3 of those issues at Marvell and we intend to look at all 3 when it makes sense, we have the ability to do it.

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

Good afternoon, guys, congratulations.

Clyde, clearly you guys have some product cycle Company-specific drivers that are kind of offsetting some of the macro headwinds out there.

I'm kind of curious specific to the TD business, can you help us quantify what percent of mobile wireless it is today and as we think about kind of the market opportunity here, where do you think that could go over the next several quarters?

So, it's a small part today, just getting started and we think as Sehat indicated, we think it's a huge opportunity.

We aren't disclosing any, whether it's TD or anything, what specific segments are, but it's a small percent of the total today.

Looking forward, a lot will depend on the consumption rate in China.

We're opening up -- or there is a lot more channels opening up in the next few months so, I expect that to pick up especially wide box channels in each of the provinces that open up in these phones.

So that should expect to pick up.

Tough to predict.

We think it's a huge opportunity.

There is several 100,000,000 people who at the right price point, a significant percent of them should convert.

But, I think the next few months will tell us better.

So we firmly believe and continue to believe that this, smartphones at this price range, again, $100 at the low end, unsubsidized, we're already there within 2 quarters of introduction of the technology.

We think that's an inflection point of demand.

It's hard to predict what the next 2 quarters demand is going to be.

They sell through today some of our revenues, this quarter is already on a sell-through basis.

Granted, some of it is in channel.

But, some of it is already sell-through.

People have phones already, users, and we expect that to accelerate.

But the penetration rates into the new market, new country, new set of users, difficult to predict near term.

We are bullish in the long term.

In the long run -- every time you ask for short-term, a quarter, 2 quarters I consider short-term projection.

That's very hard to project.

Ramps, they can be, where the slope could be 10% slope or 5% slope or 15% slope, so those kind of projections is extremely dangerous to provide.

But, what we believe internally is that when channels have 550 million to 600 million subscribers, we can model, 3 years for now, whether 30% of it will be TD smartphones, is it going to be 40%, is it going to be 30%.

This is kind of model we can play.

Of course, everything is based on the price elasticity.

If the price goes to $100, how many percent, we expect this thing to be maturing at.

When the price goes to $70, what does it mean?

And I don't see any reason why this thing cannot be in a year or so from now, for example.

So, we're bullish in the long run, just the short-term it's very hard to say exactly what going to look like.

John, do you have a follow-up?

I guess as my follow-up, going back to the hard drive business, you talked about a product transition at an enterprise customer in the October quarter.

Wonder if you could elaborate or quantify how much growth that's taking off of the business in October.

You guys have typically had a pretty good read of inventory, but at the beginning part of the year, there was an inventory drawdown that hurt you guys.

Where do you think inventory is for drives in general and for your chips that go into those drives?

First of all, it's probably a couple percentage points in terms of revenue headwinds.

Timing is probably a year to 18 months.

We've already delivered the follow-on.

This is typical cadence at that customer.

We delivered the follow-on technology, goes at 1 node to another node, from supplier to supplier.

We've already for 6 months now have delivered the next generation products that we believe are working very well.

So, we think this cadence is probably shorter than typical.

We've had this node for about 3 years now.

We think the next transition will take less than that before it comes back to Marvell.

By the way, this is the same technology that goes in the 500 gigabyte drive except this thing is running at much higher [inaudible] frequencies.

As far as inventory, I think people are a lot more cautious, John.

Our inventory grew, part of it was for new products, part of it was ahead of seasonality, and some of it is inventory which we expect to be consumed in the next quarter or some was cautionary from the Japan earthquake.

But we hold in that.

We know what it is.

It's new products.

It's not risk of spoilage.

We expect that to be consumed.

That's better for us because we've got a better handle on it rather than it being in the channel out there.

So, short answer to your question is, I think channel inventory to us appears in pretty good shape, and so, we feel decent about that.

Your next question comes from the line of Ross Seymore, Deutsche Bank.

Hi, guys, congrats on the strong results and guide.

In the mobile and wireless segment, any sort of color on the split between the cellular and the Wi-Fi side?

Really, what I want to get at is the seasonality in Wi-Fi seems to be pretty volatile so how should we think about that going forward as you get towards the end of the calendar year and into 1Q?

So, we don't break out the details in mobile and wireless, but I'll answer your seasonality.

I expect Wi-Fi, a fair amount of our product today are in gaming systems, printers, and some cameras.

The build patterns for those is somewhere between May and October which is our July and October quarter, where a significant amount of the product is built to be sold to back-to-school season and Christmas season and then it falls off again probably for about 5, 6 month period after that.

So, in the wireless you'll see extreme seasonality.

We talked about this for several quarters, and in Q4, I would fully expect to see some extreme seasonality in that product, which contributes at a Marvell level of a few percentage point decline from an end market point of view, offset being new product improvement.

So, that's probably the best we can quantify for you.

Do you have a follow-up?

1 quick follow-up.

In looking at the gross margin side of things, Clyde, you went through a lot of the cost reasons why it's kind of come down a little bit.

Was just curious with the new products ramping, how do we think about product mix as far as what it means to gross margin going forward?

I indicated one of the 4 items is mix.

I would say some of the -- in mobile and wireless probably 1 of the areas that you might try early on, might be mixed, so that's probably where you might have weaker mix.

That's going to change from time to time, some of the early days you might get higher margin and as product gets mature.

As I also indicated, we tend to drive costs down as well.

So, mix will help.

The bigger issue I think is the other 3 issues I indicated.

Your next question comes from the line of Uche Orji of UBS.

Sure, thank you very much for taking my questions.

Let me just -- Clyde, let me probe a little bit into the Android handset design wins.

First question here is what type of price points are you aiming?

Is it close to the same as TD?

And what is the silicon content that you have in these Android handset?

I understand the TD handset includes not just baseband and match processor, but also RF PON management and Wi-Fi bridges.

If you can talk about your content here in the Android phone, what kind of price points you're aiming for and what regions, quite frankly, are you going to be shipping these PONS in.

Is it North America, Europe or emerging markets?

Thank you.

The price points is really up to the customer and I think I'll let them define that.

Where we do well at Marvell, and so this is somewhat of a lead into it, is the high-volume, lower-price point smartphones, so that gives you an indication of where that's likely to happen.

In terms of geographies, we did mention I believe Sehat mentioned in his prepared remarks that the initial deployment would be in Europe, South America.

And Asia.

And Asia.

Those are the 3.

You look at very populous countries, and so that correlates with the price point.

In terms of content, we have the CP which is a motor match processor.

We have Wi-Fi, power management, RF but not every 1 of the solutions have all of those but they have multiple Marvell chips in all of those designs.

Let me ask you about the TD-LTE transition, Clyde.

You said there will be some at the end of the year if I heard you correctly.

Will those be phones or will those be dongles, and as you speak to China Mobile, how do they balance the transition to TD-LTE with the expensive investments they've made in TDS-CDMA.

Also related to that, do we anticipate that coming into Chinese New Year now that they have some smartphones, there'll be aggressive promotion for TD given that it hasn't really done so well so far in China.

Thank you.

Let me start and then I'll turn it over to Sehat.

I'll take the LTE stuff.

Let me refute this, it hasn't done well.

That's probably more misnomer.

The smartphone piece of it, which is the piece we participated in, yes, it hasn't gone through 10s of millions of units.

If you look at any deployment, like frankly 3G in a network, this usually takes a quarter.

I am very confident this will be faster than a typical 3G deployment in terms of that.

As far as the TD-LTE and dongles, we'll deliver the chips to customers end of the year.

They have the choice to put it in dongles or phones.

I think that's from an end-device probably more into 2013, although there's a lot of noise out there, and I'll turn it over to Sehat to add about TD-LTE versus regular TD.

I think he's by far the expert in this country on that.

TD-LTEs, as you should expect in any new deployment, the dongle will definitely will go in first.

It's easier to qualify the dongle, but the biggest volume obviously is not in dongles, the biggest volume will be the handset.

When you go to the handset, more likely it will go into the highest end, high price handset.

So, that will be more likely will be the phase-in of the TD-LTE.

So, nothing surprising.

The key is over time to build lower price, higher integration, single chip solutions to get to the mass market TD-LTE.

So, don't expect that to happen, the volume to ramp up on the mass market any time next year.

But on the other hand, the TD -- as you say, China Mobile's already investing huge amount of dollars and resources in the infrastructure, base stations, more than 200,000 base stations deployed with TD-CDMA.

Those are the 1s most likely to be ramped up first, and follow in certain selective cities, maybe not even in every part of the city but certain -- maybe the downtown area where maybe they will start deploying trial TD-LTE deployments, to test the system.

Or maybe, I don't know, a year or so before they will move to -- before they will spread it out to the more major market.

So, we've got nothing surprising.

These things will have its own course.

The key for us is we work very closely with China Mobile also to make sure our specifications for the TD-LTE is what they need.

We'll be prepared either way.

So, it will be somewhat agnostic.

Next question?

We'll take the last question here, please.

Your final question comes from Craig Berger, FBR.

Hi guys, thanks for squeezing me in.

In the solid state drive market, can you help us understand how big that is today and who your top customers are?

Referring from the second part, because we don't give specifics.

What I would say on the customer side is we are working with all of the flash manufacturers, certainly all of the significant ones, the vast majority of them.

There's been public announcements from a few customers.

In terms of size of the market, it's relatively small.

It's sub-$100 million.

If you're looking at SSDs in terms of disc drives, not talking about flash memories in things like tablets or phones type market which is a future potential for us.

So, the PC-centric part of it is probably a sub-$100 million TAM.

However, Craig, a fair amount of excitement driven by a lot of thin PCs coming out that we'll participate in both sides of it with disc drives, 7-millimeter drives that Sehat mentioned, and in SSDs.

Most of those new drives are expected to be at 6 gigabit type speeds or faster and we intend to get the lion's share of that.

A lot of that design is probably I'd say a couple quarters before ramping, outside chance for Christmas, but next year I think you'll see very healthy ramp from those design wins.

Great.

Just as a follow-up can you guys review where you stand with mobile Wi-Fi, mobile connectivity, is that still a priority for you and also same question on not TD-LTE but just traditional LTE.

On mobile Wi-Fi, we have -- all of our TD phones are ramping with our Wi-Fi.

You see customers looking for solutions, platforms, if you may, so we have a mobile platform where we sell a number of technologies into that including Wi-Fi.

So, all of our TD phones have Marvell connectivity in it, Marvell Wi-Fi, other components.

The Android based phones for the most part, although I can't say absolutely exclusively they have all of our Wi-Fi, but I believe all of them do have our connectivity.

And I think that's how we'll deploy into that market.

In terms of standalone Wi-Fi, there's nothing to bring to market yet or bring to your attention yet.

We have engagements with customers but nothing to announce yet.

So, our Wi-Fi connectivity in handsets is really where we are selling platforms, whether it's an Android based platform or TD based platform.

I want to add a little bit more on this.

You're asking the question, focused on -- absolutely we're focusing and building more advanced Wi-Fi.

We talked several quarters ago, talking about beam forming and again, this is a technology that will be needed in the future for all the phones.

Why is this important?

Well, eventually if we believe in Moore's law, eventually we need to integrate every modem technology, whether it's called LTE or FDD-LTE or TDE-LTE or 3G or TDS-CDMA or Wi-Fi, or beam forming Wi-Fi, anything -- all of these things will be needed and then, okay, eventually they're going to be integrated to 1 chip.

It's just a matter of time.

If it's not feasible to do it today, maybe next year.

If it's not feasible next year, 2 years from now.

You don't have to wait for 5 years to see this to be integrated.

This is the reason why we have to invest in all this technology.

So, we are not backing off.

Related to FDD-LTE, or TD-LTE, we have already sampled FDD-LTE last quarter.

So, where we're talking about the TDD, LTE, the TDD, sample the end of this year, specifically related to the requirements that China Mobile is putting into the marketplace.

That concludes the Q&A session.

Let me now turn it back over to management for closing remarks.

Thank you Chanel and thank you everyone for your time today and your continued interest in Marvell.

We look forward to speaking with you in the coming months.

Thank you and goodbye.

Ladies and gentlemen that concludes the presentation.

Thank you for your participation.

You may now disconnect.

Have a great day.