邁威爾科技 (MRVL) 2012 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the third quarter 2011 Marvell Technology Group, Ltd.

earnings conference call.

My name is Regina and I will be your conference operator for today.

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

Later, we will be conducting a question-and-answer session.

(Operator Instructions)

Today's event is being recorded for replay purposes.

I would now like to turn the conference over to your host for today, Mr.

Sukhi Nagesh, Vice President of Investor Relations.

Please go ahead, Mr.

Nagesh.

Thank you, Regina, and good afternoon, everyone.

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

I'm Sukhi Nagesh, Vice President of Investor Relations, and with me on the call today are Sehat Sutardja, Marvell's CEO; and Clyde Hosein, our CFO.

We will all be available during our 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 marvell.com.

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

Please be reminded that today's discussion 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, WCDMA, PON, HDD and SSD products, statements about general trends in the end markets we serve, impacts of the flooding in Thailand, statements regarding our financial projections for the fourth 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 the 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 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 third quarter earnings 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 third quarter revenues of approximately $950 million, reflecting a 6% sequential increase from the prior quarter, driven by our mobile and wireless end market.

We delivered the following non-GAAP results; gross margin of 56.8%, operating margin of 25%, and earnings per share of $0.40.

We generated free cash flow of approximately $239 million, equivalent to a 25% free cash flow margin.

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

In Q3, we repurchased about 15 million shares for a total of approximately $215 million.

Now let me summarize our results across our end markets.

First, in our mobile and wireless end market, Q3 revenues increased approximately 24% sequentially, and represented about 31% of our overall revenues.

Growth in this end market was better than our initial expectations, with the sequential increase driven by strong growth from our new products that goes into TD-SCDMA smartphones and seasonal growth from our wireless connectivity solutions.

Now expanding on TD, this business performed strongly in the third quarter and more than doubled from the previous quarter, resulting in TD smartphone market share of over 70%.

Mass deployment of TD smartphones started in September, and many of these devices are now selling throughout the retail channel.

Furthermore, China Mobile is increasing its investment in TD-SCDMA and TD-LTE and Marvell has a strong product lineup in both technologies to take advantage of this expected growth.

While we expect increased competition from followers in TD smartphones, we expect to maintain our leadership position and grow revenues next year.

Overall, we have made significant strides in developing and helping commercialize the TD standard in China, which we believe provides an ideal platform for low-cost smartphones.

This initial platform strategy that we developed for TD is also very applicable to the WCDMA market.

And during the third quarter, we recorded initial revenues from new CDMA smartphone customers.

While currently modest, we believe it represents a significant market opportunity for Marvell over the next few years.

These WCDMA devices are now qualified at multiple carriers around the world.

In addition to TD and new WCDMA customers, business at our largest North American mobile customer continues to be stable.

This customer has already delivered four new 3G and TD handsets with Marvell silicon, and we expect more devices to come to market over the next year.

Our mobile business now has solid traction as our current first generation smartphone platform solutions allow handset OEMs to produce devices that are just slightly more expensive than feature phones, while providing the same capabilities as many of today's high end smartphones.

In addition, we also have a solid product road map with our next-generation low-cost smartphone solutions wherein we are adding and integrating more features, while at the same time reducing the cost.

We are now serving over 15 cellular customers and ramping over 30 handsets.

The available market for such low-cost yet high performance smartphone solutions is over half of the world's population.

The global market for low-cost smartphones is starting to grow rapidly and Marvell is well-positioned to benefit from this trend with both our TD and WCDMA product offerings.

For fiscal Q4, we expect our mobile business to once again grow sequentially, driven by TD, and from customers adopting our platform smartphone solutions in the WCDMA market.

In wireless connectivity, we experienced a double-digit increase in revenue driven by seasonal sales of our products to home connectivity and game console customers.

Our leadership position in the gaming-related connectivity market continues to be strong with many customers now actively engaged with our next-generation products.

As many of you know, our wireless connectivity business is hyper-seasonal and typically experiences a significant drop-off in sales around this time of the year.

As a result, for the fourth quarter we expect revenues for our combined mobile and wireless end market to decline by double digits as the growth in mobile is more than offset by seasonal decline in connectivity.

Now turning to our networking end market.

Q3 revenue declined about 1% sequentially, and was approximately 18% of our total revenue.

Revenue from this end market was below our expectations, as demand for many of our existing products was weaker, mainly due to customers tightening inventory positions.

This was not unique to Marvell and, as you know, there has been inventory tightening in the supply chain over the past few months.

In addition, while our new products in networking grew in the third quarter, demand was more moderate than previously anticipated.

Specifically, in PON, we're gaining solid traction and our sales more than doubled in the quarter.

As we have mentioned in the past, PON technology is now being delivered to customers at much lower price points and at significantly higher bandwidth rates compared to the best copper-based DDSL technology.

Increasingly, we are seeing carriers now installing fiber versus copper due to costs and capacity advantages, and also to satisfy future backhaul requirements of LTE.

As a result, we expect continued traction in this area and expect our PON business to once again deliver strong double-digit growth in the current quarter.

For Q4, we expect our overall networking end market to be relatively flat sequentially.

We expect continued growth in the new products, such as in PON and switching, to be offset by a decline in existing products.

Finally, moving to our storage end market.

Q3 revenues declined approximately 2% sequentially, and represented about 45% of our total revenues in the quarter.

However, recall that Thailand floods occurred in the early part of October and if not for the flood, we believe our overall storage end market would have actually delivered a couple points of growth in Q3.

I would now like to take a moment to address the current flood situation.

As you already know, the hard disk drive industry has been severely impacted due to the floods in Thailand.

However, I want to reiterate that this industry is very resilient and has successfully navigated many critical changes including technological transitions and [axonal] shocks in the past.

Time and again, the industry has come together and responded to both orderly transitions that are the outcome of technological changes as well as through natural disasters.

The most recent Japan earthquake situation should provide a good case study on the resiliency and the effectiveness of the industry response to a natural disaster.

Similarly, we are confident that the industry will rebound from this flood and start growing again.

Therefore, it is not a question of if, but a question of when the industry will recover.

At this juncture, our highest priority is to work even more closely with our customers to help the industry recover faster.

In the meantime, in order to mitigate drive shortages, we expect the industry to accelerate the adoption of advanced hard disk drive technologies so that similar storage capacity PONS can be shipped using fewer of the components that are currently in short supply.

This is an advantage for our advanced 500-gigabyte-per-platter technology, as the industry can use one side of the platter with one head and still achieve the existing 250 gigabyte per drive capacity.

As you may recall, Marvell has a significant lead in 500 gigabyte, 2.5-inch or 3.5-inch, 1 TB per platter technology.

Therefore, we believe this transition to advanced technologies will be increasingly beneficial to Marvell.

Now moving to SSDs.

Our SSD, our Solid State Disk, business grew double-digits in the quarter and we are on track to achieve our revenue milestone of ending this year at a quarterly run rate of double that of the prior year.

We expect multiple devices including ultrabooks to come to market with our SSD controller technology over the next few months.

Furthermore, the current HDD shortages have reduced the price delta between SSDs and HDDs which is translating to increased demand for our SSD solutions.

While SSD volumes are still small compared to traditional HDDs, we are very well positioned to benefit from the growth of the SSD market over the next few years.

For Q4, given the current impacts of the recent flooding in Thailand, we anticipate our storage end markets to decline by double digits sequentially.

If not for the flood-related decline, we estimate our storage business would have been flat to up a few percentage points sequentially in Q4.

In summary, we delivered solid sequential growth in our third fiscal quarter in a tough macro environment, and continue to make good progress on all of our new product initiatives across all our end markets.

While our Q4 will be impacted by the Thailand floods, we are confident that the impact will be temporary and the industry will recover.

Marvell is a diversified Company and we continue to work hard to provide the best-in-class solutions to all our customers across all our end markets.

We remain confident that our business model will continue to play dividends to our customers, our employees, and our shareholders.

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

Thank you, Sehat, and good afternoon, everyone.

As Sehat mentioned, Q3 revenues for fiscal 2012 came in at approximately $950 million, representing a 6% sequential increase from Q2 fiscal 2012, and down about 1% from the same period a year ago.

We believe our Q3 revenue was impacted by roughly $20 million on account of the flooding in Thailand.

Our non-GAAP gross margin for the third quarter was approximately 56.8%, within our earlier projected range, but slightly below the midpoint of our guidance, mainly due to continued higher commodity prices.

Our overall operating expense for the third quarter on a non-GAAP basis were approximately $300 million, up 5% from the prior quarter, and up about 15% from the same period a year ago, with the majority of the sequential increase coming from higher spending on R&D for several new products and programs such as TD, SSD, WCDMA, and PON.

R&D expenses for the quarter were approximately $241 million, up about 6% from the last quarter, and up about 22% from the same period a year ago.

SG&A expenses for the quarter were approximately $58 million, a 2% sequential increase from the prior quarter, and a 5% sequential decline from the same period -- 5% decline from the same period a year ago.

This resulted in non-GAAP operating margin of 25% for the quarter.

Net interest expense and other income was about $8 million, while non-GAAP tax expense was $4 million.

Our non-GAAP net income for the fiscal third quarter was approximately $244 million, or $0.40 per diluted share in line with earlier projections, and a $0.02 increase from the prior quarter.

The shares used to compute diluted non-GAAP EPS during the third quarter were approximately 615 million, a decrease of roughly 10 million shares from the prior quarter, primarily due to our share repurchase program.

Cash flow from operations for the third quarter was approximately $262 million, as compared to $263 million reported in the second quarter.

Free cash flow for the third quarter was $239 million, representing a 25% free cash flow margin, compared to free cash flow of $235 million reported in the previous quarter.

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

We generated GAAP net income of approximately $195 million, or $0.32 per diluted share in the third quarter of 2012, up from the $192 million, or $0.31 per diluted share in the prior quarter, and lower than the $256 million or $0.38 per share reported in the same period a year ago.

The difference between our GAAP and non-GAAP results during the third quarter of fiscal 2012 was mainly due to stock-based compensation expense of approximately $31 million, or about $0.05 per share, amortization of intangibles representing approximately $11 million, or about $0.02 per share, and certain one-time costs of $7 million or $0.01 per share.

Now I would like to review our balance sheet as of the end of fiscal Q3.

Cash, cash equivalents and short-term investments were approximately $2.4 billion, an increase of approximately $25 million sequentially.

During the third quarter, we repurchased about 15 million shares for approximately $215 million.

Over the past five quarters, we have repurchased and retired over 79 million or about 12% of our outstanding shares.

As of the end of Q3, we had $258 million available in our share repurchase plan.

Accounts receivable was approximately $451 million, up about $45 million sequentially, and a decrease of $17 million as compared to the same period a year ago.

DSO was 41 days, down slightly from 42 days last quarter, and 45 days a year ago.

Net inventories at the end of the third quarter were approximately $310 million, down from $322 million reported in the prior quarter, but up from the $228 million in the year-ago period.

Days of inventory was 70 days, down 5 days from the 75 days reported in the previous quarter and up from 54 days reported in the year-ago period.

We effectively managed our inventory down in anticipation of the typical seasonal declines in our consumer products in the fourth quarter.

Accounts payable were approximately $355 million, essentially flat from the prior quarter and up slightly from the year-ago period.

Now I'd like to turn to outlook for the fourth quarter of fiscal 2012.

We currently project fourth quarter revenues in the range of $775 million to $825 million.

The midpoint of this range represents a sequential decline of about 16%.

By end market, we expect our mobile and wireless end markets to decline by 10% to 15% sequentially, with growth in mobile more than offset by a seasonal decline in wireless connectivity.

We expect our networking end market to be relatively flat in Q4 and our storage end market to decline between 20% to 30% sequentially.

We believe the impact to our Q4 revenue outlook on account of the Thailand floods to be in the range of $120 million to $130 million compared to the midpoint of our current outlook.

I'm sure many of you are trying to figure out when the HDD industry gets back to normal.

As Sehat mentioned in his comments, it is difficult to predict but to the best of our ability we believe roughly 10% to 15% of the lost HDD capacity is likely to be recovered during the January quarter.

We believe a bigger portion of, or about half of the lost capacity will recover during our April quarter and the remainder during our July quarter.

We currently project non-GAAP gross margin of 55%, plus or minus 50 basis points.

Higher commodity prices, especially gold, the introduction of new products at finer geometries, and flat foundry pricing continues to pose headwinds to our gross margin in the interim.

We have undertaken various measures, such as moving to copper, and using multiple foundries to help mitigate the impact to our gross margin, but these measures take time to get the desired results.

As a result, we expect our gross margin to be in the range for the next -- in this range for the next couple of quarters.

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

We anticipate R&D expenses to be approximately [$240] million, and SG&A expenses of approximately $60 million.

At the midpoint of our revenue range, this should translate to a non-GAAP operating margin of approximately 18%, 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 615 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 $0.23 per diluted share, plus or minus a couple of pennies.

On the balance sheet, we currently expect to generate about $125 million in free cash flow during the quarter.

We anticipate our cash balance to be about $2.5 billion, excluding any special items, M&A activity or continued share buybacks.

We currently expect our GAAP EPS to be lower than our non-GAAP EPS by about $0.07 per share, plus or minus a penny.

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

In summary, the third quarter of fiscal 2012 was a good one for us and we delivered solid growth driven by mobile and wireless end markets and continued profitability despite a choppy broader environment.

Our fiscal Q4 forecast has some headwinds from the floods and typical seasonality for our consumer products.

In spite of these, we continue to generate good margins and cash flow.

I would like to finish my commentary by highlighting to you the significant transformation that is occurring in the Marvell business model.

Fiscal 2012, or calendar 2011, has been a challenging one for not only Marvell but for the entire semiconductor industry.

Even through these difficult times, we have been extremely focused on developing products and winning a disproportionate share of our designs in each of our served end markets.

We are just starting to see the benefits of the investments we have made and the ongoing transformation.

For example, in our cellular product offerings a year ago we had just one customer with a few products.

Today, we have over 15 customers in this space, ramping over 30 handsets.

This is in itself a significant transformation for the Company in a very short duration.

In storage, we gained approximately 5 points of share in HDDs over the last 12 months.

Furthermore, the Thailand floods is likely to accelerate the move to advanced HDD technologies, such as 500 gigabyte per platter where we are the clear leader.

In addition, we expect to double our SSD revenues in Q4 from the same period a year ago and sets us up for excellent growth as this market develops.

In networking, we have started to already outperform most of our peers on the strength of share gains, new products and platforms such as PON and 10 Gig.

We expect to deliver more products like these in the existing and new markets in the coming year.

In summary, while we continue to transform the Company, we also continue to deliver top tier gross operating and free cash flow margins in our peer group.

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

Regina?

Thank you, sir.

(Operator Instructions) Your first question today comes from the line of Sanjay Devgan with Morgan Stanley.

Hey, guys, thank you so much for taking my call and good job in a challenging environment.

I guess first question for Sehat.

Sehat, you talked about the impact from the Thailand floods and how it's driving a move to, one, SSDs, and, two, to advanced HDD technologies like the 500 gigabyte per platter drive.

In your opinion, do you think this is a temporary change or do you think this is a structural change, and should we view these, just the technology landscape going forward based off of the flooding that's happened in Thailand?

Yes, I think there are two types of changes.

The SSD, the move to SSDs especially on the high end products such as ultrabooks, that will naturally continue because people can afford to pay for the higher price storage solutions.

The changes in the rapid adoptions -- the accelerations of the 500 gigabyte per platter, once these transitions happens there is no way back to go to the previous solutions because in history it's always that's the way it has to work.

Every time some new technology matures, the new technology will result in the lowest cost solution.

So, traditionally, 500 gigabytes -- if we don't have the floods in Thailand, one would expect that the 500 gigabyte per platter will mature at a slower rate, because people tend to be more conservative in terms of deploying new technology.

In this case, we have no choice.

We, the whole industry, the drive industry doesn't have a choice, so they have to, okay, they will have to accelerate the 500 gigabyte per platter.

We actually introduced this technology for more than a year and a half, maybe even two years.

The technology from the semiconductor side is very mature.

Our technology is super mature in this area and we are the clear leader in this area, and so, it makes a lot of sense that when you're faced with limited supplies of heads and suspensions, for example, a lot of these components are built in Thailand.

When you have these problems you do want to maximize the number of drives that you can build.

If you can build drives with only one head per drive, so instead of building 500 gigabyte drives, you build 250 gigabyte drives, you can produce twice as many drives and somehow recover significant uptick of your volumes that you normally produce.

So, that's one.

But the things that I -- those are the ones I'm trying to clarify what I said earlier.

But the most significant things that I have mentioned earlier is that there will be significant long-lasting change in the industry.

So, if you have factories in Thailand under floods, you have, I don't know, hundreds of, $0.5 billion worth of equipment maybe under the water, what are you going to do when you replace that equipment?

Well, many of this equipment probably is five years old or 10 years old to begin with.

Now you're replacing that equipment with newer machines, newer CMC machines, more precision.

You're going to have much more advanced capability as you rebuild your factories.

And what does it mean to the industry?

I think, okay, my prediction is, the industry will come out even stronger once these new factories are built.

Because these new factories will be able to build even higher capacity drives, smaller, thinner, lower power.

They will take advantage of new storage, SOC technologies, and not just they will be able to build storage for traditional markets.

Now they will be able to build storage for maybe even tablets.

Okay,

which they probably never considered in the past, because in order to address that market, it is a chicken-and-egg problem.

If there's no demand for disk drive in tablets, you don't build.

You don't invest $0.5 billion in equipment to make those products.

But now you have to invest this $0.5 billion anyway, you might as well build the best products.

So you automatically, whether you like it or not, you're going to build those products.

Sure.

So I believe this is going to be a massive -- it's a major change to the industry we're going to see in the next maybe a year or so.

Great.

Sanjay, have you got a follow-up?

Yes, that's very helpful, guys, thank you.

Second question pertains to your mobile and wireless business.

Obviously, China Mobile has been a great growth driver for you in the back half of this year.

However, Qualcomm yesterday at their Analyst Day they unveiled their new 28-nanometer products, and they've talked about support for TD within all of their products coming out in the second half of next year.

Was wondering, as the competitive landscape in TD specifically starts to increase, can you talk to the dynamics there and how do you feel about your competitive position and with the emergence of new threats coming into this space?

Yes.

Okay.

What we've been saying all this time, that TD is a real business opportunity.

Now that the dust has settled, it's clear that the market for TD is huge, especially China Mobile with more than 600 million subscribers, will eventually move the vast majority of their subscribers to TD.

It is obvious that more of the existing suppliers will build TD, and it is expected and we've been saying it all along, that everybody will realize that they have to invest in this.

So, we're happy actually that now people are investing.

So, just proof that, okay, we're on the right track.

The good thing is we are ahead.

We've been investing.

Our device is qualified with all the base stations, not just one base station, but every base station in China.

So, we have at least a year, if not two years lead in this area.

And we're not staying still.

We're willing to introduce our new generation products and we're also focusing in lower cost solutions, so not just very high end products, they happen to have very expensive products.

They happen to have a TD built in that's not even proven yet.

Sure, okay.

Thank you so much, guys.

Thanks, Sanjay.

(Operator Instructions) And your next question, gentlemen, comes from the line of Harlan Sur with JPMorgan.

Hi, good afternoon, and thank you for taking my question.

I'm glad Sanjay asked about the competitive dynamics in TD.

I wanted to focus on the overall market growth in TD.

It really looks like the momentum here is starting to pick up, given the subsidies on smartphones, the continued strong government support for the network, and also the fact that, I think, China Mobile's GSM network is starting to get pretty highly congested.

On the smartphone side, where Marvell dominates, what's your view, Sehat, on the growth outlook for this segment next year?

Let me address a little bit and maybe Sukhi may want to chip in on this one.

So, as I said, 600 million subscribers, okay, and then maybe a quarter or two ago I mentioned about several hundred thousand, 200,000-plus of base stations, TD base stations, being deployed or have been deployed.

So, that's more than any major carrier in the US have base stations in the US.

A single major carrier in the US probably have fewer base stations than that.

We're talking about like greenfield, new build-out.

I do believe this is a huge opportunity.

And you mentioned earlier that it's a subsidy.

So, we talk about subsidy.

That's true about a year, two years ago, without subsidy TD will never take off.

Why?

Well, because without subsidy, two years ago the handset was selling for $500, $600 US dollars.

Okay.

Clearly, without subsidy it would never have taken off.

But with this new solution, this platform solution we provide, low cost, these phones can be built without subsidy for $100, even less than $100.

So, clearly, now we're in a different phase of the deployment of TD smartphone in China.

$100 is not a lot of money to many people in China, especially, we're talking about smartphones.

We're not talking about feature phones here.

Many times people buy feature phones for $50 or $60.

Okay, with low quality LCDs with terrible softwares, with no storage capacity, with very limited functionality, no web browsing capability.

So, this is clearly, it's a huge step-up for most people that want to have -- to be connected and you want to add, Clyde?

No, I think, Sehat, you said it well.

It's going to grow significantly.

I think the estimates on the smartphone space, which is where we play, is 10 million to 12 million this year, growing to 20 million or 30 million next year.

So, that portends to steady -- doubling of growth in the space.

We expect more competition as Sanjay pointed out earlier.

But we have the lead, we address in areas where other people could come after us.

We still expect to grow in spite of competition.

Got it.

Okay, and then my follow-up question, on the pull-in of your 500 gig per platter to your customers, I think the team was expecting to ramp that more aggressively in the first half of next year.

So, are you seeing the 500 gig per platter ramp starting this quarter, or is that more likely kind of a Q1 ramp?

Why don't you talk first.

Sure.

As we indicated earlier in our prepared remarks, it was going to ramp this quarter anyway, putting aside the flood.

The rate and pace is increasing because of the component shortage that Sehat alluded earlier, as well as in his prepared remarks.

So, short answer to your question is, starting this quarter, it's doing better because of the floods, and then we think the adoption rate is probably going to be even faster.

When people get the yields improved on these new technologies, they're going to continue to use it.

So, this is very good for Marvell.

Okay.

Great.

Thank you.

Thanks, Harlan.

Your next question comes from the line of Srini Pajjuri with CLSA.

Thank you.

Clyde, on your guidance for the storage business, you said you expect it to be down about 20% to 30%, and that's actually significantly better than what some of your customers are talking about.

I'm just trying to understand where the difference is coming from, if it is share gains or from something else?

So it's -- there's a couple of things.

You've got to look at the timing of the recovery, obviously, the timing of the flood affected us in our Q3 versus some other people, because we have the October quarter.

Similarly, our quarter ends in January.

The significance of that is we expect to see some production restoration starting in the December month, so we'll get some benefit of that and that's going to mitigate that.

There's also -- one of the good things about Marvell is we serve many customers in many different countries.

And so they're also shifting capacities to other customers and to other countries.

So, you won't see it singularly as you might see it in a particular customer.

Okay, great.

And then just as a follow-up, Sehat, you talked about progress in WCDMA at other customers.

Just trying to get some more color.

Could you talk about how many customers you have or how many design wins and how we should think about the ramp over the next few quarters?

Thank you.

Okay, well, Clyde, why don't you answer this?

It started off -- as I said before, it started off in our Q3, it's modest.

It's a few customers.

We expect the revenues from that to grow next year, both in terms of revenues from the customers that already started, as well as some new customers, and we'll provide more updates as we go through.

Thank you.

Thanks, Srini.

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

Thank you very much.

My first question is about networking, Sehat.

Your flat guidance, does that imply that the inventory correction is complete?

And if so, can you just give us some parameters to reach that -- that's allowing you to reach that conclusion?

If you notice in the prepared remarks, okay, I did mention that we do expect to have continued increase in the PON deployment, so in certain areas we'll continue to have increase in revenue.

But in other areas, we're still seeing some downside on maybe through the inventory correction, may still be lingering a little bit.

So, that's the reason why we are forecasting flat as a whole.

Right.

I'm going to just follow up on this.

And the reason is when I look at your commentary last quarter, we were very confident this business will grow and, obviously, it didn't.

Can you just give us a little bit more insight in terms of things like bookings, is there enough bookings coverage to feel comfortable with on the PON side to offset the areas where there is continued inventory correction?

And outside of PON, what else is growing, and in terms of what will drive growth going forward from here?

Can you just help us understand your confidence of the growth drivers for your networking business?

That's it.

Sure.

Last quarter, we had anticipated growth from new products but if you look at the competitive space in networking, whether it is FBG or other products [specific to this] space, you saw some fairly significant reductions, mid-single-digit type decline.

You follow that up into the December quarter, you're looking at double-digit, 10%, 15% declines from many of the participants.

Marvell was down slightly, I think down 1% in October quarter and flattish next quarter.

The end market for our products resemble what you see in the industry.

However, some of the new products are beginning to kick in to improve on that.

And so, PON, 10 gig, 5, which is new for us in the last few quarters, and some switch and design wins is also beginning to kick in.

So, that's the three areas that tend to buffer it on the underlying customer tightening up of inventory.

So, the backlog supports the flattish forecast and, yes, it's better than what most people are seeing but, Uche, you look at the backlog and I'm fairly confident that at this point in time that would support it.

Thank you very much.

Thanks.

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

Jim?

Jim, are you there?

He probably just dropped.

Can you go to the next caller, please?

Certainly.

Your next question comes from the line of Craig Ellis with Caris & Company.

Kind of a suspenseful build-up there.

Thanks for taking the question.

Guys, first on gross margin, Clyde, I think at the 55% level, sequentially down about 180 basis points or so, can you just help us understand how much of that would be mix and how much of that would be some of the input cost headwinds that you identified?

From which period?

From a year ago, from a year ago we had about 4 points of decline, which is what people, a lot of investors do.

But half of that is input cost, primarily gold.

And then the remaining is about equally divided between new geometries, 40 and 28, which we have brought into production right now and the third piece of it is foundry prices.

Let me address what we're doing about that.

On gold we are moving to copper.

We should ship our first copper products this quarter.

We were arguably late versus other people.

Our customers were a lot more reluctant because of some of the quality issues on copper.

We feel we've got that addressed.

We should start our copper transition now.

A year from now, if you jump ahead, Craig, we should expect more than half of our new products coming out with copper.

So it's a very, fairly aggressive ramp-up to copper, and that's going to address the gold even at current prices.

On the foundry issue, we have developed a multiple source foundry strategy that has a number of advantages.

One of them is to address the lower pace of cost reductions that we are currently experiencing.

That would help accelerate that and make us more competitive.

But it also addresses a number of risk profiles for our customers, especially with the two big disasters this year, customers are beginning to resonate with that.

So, the foundry thing, we think, is going to start getting addressed in a quarter or two as we move it over.

These things, obviously, are slow to move.

And the third element, which is about a point compared to a year ago, is the new products and that's simply accounting.

Once the production is -- product is ready, you've got to start amortizing the assets.

But, as you know, the products tend to be back end loaded as customers take about six to 12 months to bring that.

So, you'll get the benefit of that probably in six, nine months, you'll start seeing that benefit.

So, all of these areas, we feel, are very addressable.

And the last thing I'd say is, even with our current guidance, in our peer group we still have the best gross margins in the industry.

So, we've had a lot of room to transition these issues and we still have the best margins and with the actions I outlined I think we'll improve that as time goes on.

Maybe I'll add a little bit on top.

When we also do multiple sources, that will increase our [mass process], as well as a result.

So, that will also have some impact on the gross margin in the short term.

In the near term.

In the short term.

The benefit comes later when those products go into production.

Okay.

That's helpful.

And then, you're getting close to the end of the current authorization off of what was yet another real good free cash flow quarter for the Company.

Clyde, can you just help us understand how you're looking at your excess cash alternatives from here?

I think we've shown our hand.

We believe that our stock is undervalued, given our plans and strategies.

Obviously, you know a lot about that; people in the investor base.

We still believe that.

We bought back, I think, 15 million last quarter.

We still have a couple hundred million and we intend to actively participate in the market.

We have another Board meeting in December.

We'll address the same issues.

We have very good balance sheet.

We need something like that in this economy, but we are generating a lot of cash as we did last quarter.

So, our intention is to return that to shareholders in some which way, shape or form and our current preferred methodology is share buybacks.

We intend to continue that.

Thanks, guys.

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

Yes, guys, thanks for the question.

Clyde, you talked about the recovery in the hard drive space one quarter out.

I know there's a lot of variables.

I think you said industry recovery of about 10% to 15% in the March timeframe.

Just out of curiosity, is that coming from, production coming back online in Thailand in your opinion, or excess capacity outside of Thailand which will be better utilized in the March quarter?

What's kind of the variables that go into that statement?

10% to 15% was more in our current quarter, and in the current quarter it's going to be probably outside of Thailand and then in time they'll restore it back.

So, as you get out to other quarters it will be more in Thailand but in the near term it's, obviously, outside.

And then, Clyde --

To give you an idea, maybe to give you an idea there, the capacity, say, in Thailand, the people have capacity in Thailand, people have assembly capacities in Malaysia, people have capacities in Guangdong and there are capacities in Ouchi, in China, and in Japan, and, as well as there used to be quite significant capacity in Philippines.

Some of these things could be also brought up to -- they might not be there yet anymore or maybe small percentage, but they could be easily be brought up as they are -- I suppose the buildings are still there.

And then, Clyde, how do we think about the inventory in the hard drive controller space?

I guess I'm curious as to how much of your inventory you think was damaged by the Thailand floods?

How do you think customers are trying to manage inventory of controllers through this?

Are you likely to get hit worse as they figure out where to find capacity and then see a snapback as you start to replenish inventory or how do I think about that?

Specifically, for hard drive controllers, our inventory was not affected.

And we've got all of our inventory secured.

Our operations team did a fantastic job and now we have full support of our customers.

So, it's not an impact directly to Marvell.

In terms of broadly speaking in the channel, John, as you know, the PC space is the primary space.

I think they'll use up most of the existing capacity to support that space and true-up a lot of their existing inventories.

So, from a broad channel point of view, I think you'll see a fair amount of drain, especially for the Christmas season, which is one of the bigger buying seasons for it.

And then in Q1, Q2, you'll see a replenishment.

So, obviously, Marvell's results or Marvell's forecasts reflect the near-term effects of all of that but there's a fair amount of upside next year as people restore the broad channel inventories.

Great.

Thanks, guys.

Appreciate it.

Your next question comes from the line of Mark Lipacis -- excuse me for that pronunciation.

He's with Jefferies and your line is open.

Thank you.

That's okay for the pronunciation.

I've been called a lot worse than that.

The question is, Sehat, I wanted to make sure I understood on the TD side, your comments about the low-cost solution.

Could you just clarify for me, does this mean -- is this a new set of products that you're introducing to the market that's additive to the smartphone products or is this what drove the growth so far?

So, as mentioned earlier about, what, two years ago, when we talk about smartphones for TD we're talking about $500, $600 phones.

So, now we're talking with a single chip, a smartphone solution that we provide, many of our customers -- basically all the, more than a dozen of customers, shipping products, shipping smartphones, the sales in the retail, approximately about $100, give or take.

So, that's what we call low cost, unsubsidized.

With subsidy, if the carrier wanted to have subsidies, they can easily make it for free if they wanted to but there's no need actually.

Because the price will naturally go down from $100 to $90 to $80, as people will have improved the manufacturing costs of the overall phones.

After all, the silicon cost is not the majority of the cost of building the $100 phones.

So, there's a huge -- again, this is -- when we call low cost, we truly mean it is low cost.

Anything that sells for $100 or less, it is low cost.

Okay.

And this is what drove your 20% growth this quarter?

What did we say?

Yes.

Yes.

Okay.

Thank you.

And then a follow-up question on the solid state drive market, I'm trying to understand the trade-off.

Say, hypothetically speaking, assuming all market shares stay the same, say ultrabooks take over and solid state drives cannibalize 10% of the notebook market, can you help us understand how does Marvell -- could you give us a framework for thinking about how Marvell benefits or loses in that scenario?

Thank you.

Good question, Mark, and I relate to the pronunciation of the last name.

I experience that a lot.

On the SSD, our business model and we are delivering this, although investors will see more of that coming, we have more share in SSD than we have in HDDs.

We have about 62% share in HDDs today.

We have more share in SSDs.

The price point today is higher, although that's going to compress as time goes on, but it's higher, and the gross margins are better.

So, as this transition happens, pick 10%, pick what you want, we expect this to be accretive to Marvell.

Thank you.

Thanks, Mark.

Your next question comes from the line of Glen Yeung with Citi.

Thanks.

Maybe just a follow-up on the last question.

We saw one of your competitors, LSI, buy SandForce this quarter, and I wonder if you can talk about whether or not you feel Marvell needs to acquire similar types of correction technology or whether or not you feel you can develop that technology in-house?

All right.

So, I guess maybe I need to -- okay.

Let me answer this way.

We've been investing in SSDs, as we said, for many quarters already.

Actually, quietly for what maybe six years or more, way before anybody realized that there is an opportunity to utilize flash memory to build solid state disks.

This is a time when nobody knew what could -- what we could do or how to solve this problem.

So, we have amassed significant technologies to make it happen.

This is not surprising, so it's not surprising that we have the vast majority of the design wins of all the merchant market SSD controllers in this business.

So, clearly, okay, we have -- clearly, okay, we have a comfort zone competing against anybody who wants to go into this business, whether they are new suppliers or somebody that's showed up several years ago.

So, the answer, we don't need to buy anything.

We have our own.

We have stuff that people don't know yet what's coming.

We have a huge lead in this area and in terms of the opportunity, again, it's just really a function of the availability of the flash that's going to be out there, that's going to be available in the market.

We have nothing to worry about.

Glen, do you have a follow-up?

I do, thanks.

I also wanted to ask about where -- if you can just give us more specificity on where Marvell is with respect to TD-LTE, when you think that's going to ramp, how ready you feel for that transition, and whether or not you think you have that same lead in TD-LTE as you do in regular TD?

Sure.

So TD-LTE is an important technology to address 4G, the next-gen, high data rates, especially as we move to beyond 100 megabits per second platter throughput capability.

TD-LTE is a natural migration for TD-SCDMA, just like TD-SCDMA is a natural migration for Edge.

Again, due to the vast majority of the usage model that goes into these smartphones or laptops or tablets, okay, will be data-oriented download applications.

So, we do expect TD-LTE will be deployed as soon as the cost structure of the base stations make sense.

Meaning in the next -- initially a small amount initially in the next year, but more rapidly two years from now, especially in this particular situation.

You need to invest in the base station first before you have the volume on the handsets.

So, the handsets will come behind it.

If I have to guess, maybe six months, nine months, 12 months behind deployment of the base stations.

So, this is the way we look at it and we already sample our TD-LTE, in case you want to understand how we position in this -- on the silicon, on the handset side.

So, we should be -- the short answer is we should be on time on the ramp on the TD-LTE on the handset side.

And we'll have it backward compatible to the existing.

Not to mention TD-LTE is only used for data downloading, for voice communications, probably for the next three to four years you will not see voice on LTE until LTE is -- until the base stations are completely built out, this is all mainly for data downloading.

So, backward compatibility is extremely important, at least for the next four to five years.

Regina, we'll take one last question, please.

All right.

Your final question comes from the line of Craig Berger with FBR.

Hey, guys.

Thanks for taking my question.

Nice job during a difficult time.

Just wanted to get an update on how you see market share in hard disk drives?

Are you still gaining at Seagate?

Where are we there?

Are you still gaining at Hitachi?

Where are we there?

I'm asking more on the client side.

Then I have a follow-up.

Sure.

Hitachi, we've gained.

We pretty much to date own most of their -- have most of the mobile space, so that continues.

That's done.

And then with the other customer, I don't think we have any other changes than the last time we gave you, which they should be ramping up next year.

I see, next year.

Okay.

As a follow-up, you guys, clearly, have done well in solid state drive controllers, still trying to learn more about that market.

and so I'm just surprised to hear that your market share is greater in solid state drives, given guys like OCZ, Indilinx SanDisk, Toshiba, Samsung, SandForce.

Do you supply the captive flash producers and which -- are any of those your customers?

Can you just give a little more on the competitive landscape.

Thank you.

We won't name names but many of the names you talk about are customers of Marvell.

When we talk about SSD, we're talking about PC type replacements or 6 gigabit speeds or faster which is fairly small.

We acknowledge that.

SSD revenues have doubled from the last year, still small, but we think and many people think it's poised to grow.

Those customers, many of those people you mentioned are customers of Marvell already.

Great.

Thank you.

Even for some people that used to build their own inside controller, many of them are realizing that our controllers are superior.

So, okay, at the very least on the high end products, okay, they are now moving to using our technology.

I see.

Thanks.

One point of clarification on TD-LTE, are you guys in field trials there yet?

I don't know how to answer that one.

I think we just recently sampled, so we -- okay, we tend to work very closely with the carrier, so I'm sure it's some kind of trials that we work on with the carriers.

I don't know how extensive it is.

There will be more, of course, as we -- as time progresses.

Thank you so much.

Thanks, Craig.

Ladies and gentlemen, this concludes the question-and-answer portion of today's event.

I'd like to turn the call back over to management for some closing remarks.

Thank you, Regina.

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

Look forward to speaking with you in the coming months.

Thank you and good-bye.

Thank you.

Ladies and gentlemen, this concludes today's presentation, and you may now disconnect.

Have a great day.