邁威爾科技 (MRVL) 2012 Q4 法說會逐字稿

Good day ladies and gentlemen and welcome to the fourth-quarter fiscal 2012 Marvell Technology Group Limited earnings conference call.

My name is Geoff and I'll be your coordinator for today.

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

Later, we will facilitate 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 to your host for today, Mr.

Sukhi Nagesh, Vice President Investor Relations.

You have the floor, sir.

Thank you, Geoff and good afternoon everyone.

Welcome to Marvell Technology Group's fourth-quarter and full-year 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, 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 website under the Investor Relations section at www.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, growth opportunities, impacts of the flooding in Thailand, statements regarding our financial predictions for the first quarter of fiscal 2013, and our expectations for 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 most recent quarterly report on Form 10-Q and subsequent SEC filings for a detailed description of our business and associated risk.

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 the affect of stock-based compensation, amortization of acquired intangible assets, acquisition related costs, restructuring costs, and certain one-time expenses and benefits 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 fourth fiscal quarter and full year 2012 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 fourth-quarter revenues of approximately $743 million, reflecting a 22% sequential decrease from the prior quarter.

The sequential decline was driven largely by lower HDD volumes on account of the Thailand floods, seasonality and softer demand for our mobile and wireless products, particularly in China.

For the quarter, we delivered the following non-GAAP results.

Gross margin of 54.5%, operating margin of 16%, and earnings per share of $0.21.

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

In Q4, we repurchased about 13.5 million shares for a total of approximately $186 million.

Fiscal 2012 was a challenging one for the industry and for Marvell in particular.

We endured product transitions at one of our largest customers, the Japan earthquake during the early part of the year, and flood related disruptions in the later part of the year.

These challenges created a perfect storm for us.

We estimate these effects on our full-year revenues to be about 10%.

In spite of these effects, we continue to invest in new product initiatives and ended the year with revenues of $3.4 billion, non-GAAP EPS of $1.27, and free cash flow of $670 million or 20% of revenues.

Over the last six quarters, we repurchased and retired approximately 93 million or about 14% of our shares, and returning $1.4 billion to our shareholders.

Before I go through our end market results, I would like to also take a moment and highlight some of the new initiatives that we introduced recently.

At CES, we announced the ARMADA 1500 application processor which has been designed into the next generation Google TV and other applications such as set-top boxes.

We are proud of this accomplishment and this design win is a testament to our core capability in developing highly-integrated application processors with the highest performing ARM-based multi-core CPUs that is ideal for viewing multiple high-definition videos.

This chip is designed to enable PC-like processing power with more than 6,000 Dhrystone MIPS of computing horsepower while concurrently being extremely power efficient.

Although early in the process, we expect multiple Marvell-powered Google TV and related solutions to come to market this year.

In addition, we also introduced the industry's first highly-integrated wireless ZigBee microcontroller system on a chip.

They can be used in smart energy appliances and home automation systems.

As many of you know, the microcontroller market is one that is entrenched by a few suppliers and has been elusive to new entrants.

However, by integrating advanced wireless technologies along with high-performance ARM-based CPUs, we believe this is the perfect time for Marvell to enter this market.

Moreover, with global energy costs rising, the traditional appliance market is rapidly transitioning to a market for smart energy appliances.

These smart energy appliances not only consume less power but also connected through wireless technologies using things like such as ZigBee and Wi-Fi.

Marvell's products offering addresses this new market effectively as our wireless SoCs integrates ZigBee transceiver, 32-bit ARM-based microcontroller, flash memory, for various peripherals and extensive power management.

We already have early design wins and expect to see increased activity for such highly-integrated wireless microcontroller products as the year progresses.

Now let me summarize our results across our end markets.

First, in our mobile and wireless end market, Q4 revenues decreased approximately 21% sequentially and represent about 31% of our overall revenues.

The sequential decline in this end market was largely driven by seasonal patterns but was greater than we had originally anticipated as some of our mobile customers, particularly in China, reduced their inventory levels due to softer end year demand.

Despite the soft ultra mobile and wireless results, I want to highlight the tremendous success and growth achieved by our team in a couple of areas in the past year.

We were the first to introduce and currently remain the only Company to ship in production a single chip TD-SCDMA solution to customers serving China.

We ended the year with over 70% market share of the overall TD smartphone market.

The Marvell team has been focused on winning designs and quickly bringing to market TD smartphones from multiple handset OEMs.

During the year, we expanded our customer footprint by delivering low-cost WCDMA solutions to customers serving both China and other markets.

We are now serving over 20 customers globally with over 40 smartphones in production and expect to expand our leadership this year.

While we expect increased competition from followers in TD smartphones, we are nevertheless bringing to market new solutions that will help us continue on this growth trajectory.

In addition, China Mobile continues to increase its investments in TD-SCDMA and TD LTE, and Marvell has a strong product lineup in both of these technologies to take advantage of this expected growth.

As you may recall, in order to provide a path from 3G TD-SCDMA technology to 4G TD LTE, Marvell introduced the industry's first single chip's modem supporting both multiple 3G and 4G technologies in the third quarter of last year.

Overall, we have made significant strides in developing and helping to commercialize the TD standard in China.

In wireless connectivity, as expected, we experienced a double-digit decline in Q4 revenue driven by a seasonal decline in sales of -- sales to our game console customers.

As many of you know, our wireless connectivity business is highly seasonal and typically experiences a significant dropoff in sales post holiday season buildout.

For the full fiscal year 2012, mobile and wireless represented 29% of total revenues and declined 14% over the prior year.

Overall for fiscal Q1, we expect our mobile and wireless end market to decline sequentially in the high-single digit range, driven by continued seasonality.

Now, turning to our networking end market.

Q4 revenue declined about 1% sequentially, which was relatively in line with our original guidance and represented approximately 23% of our total revenue.

Our networking business performed better than many of our peers as declines in the broad customer base were offset by growth in areas such as switching, PON, and power line communications.

During the quarter, we also announced the acquisitions of Xelerated, a leading provider of network processing and programmable ethernet switching solutions for the carrier ethernet, access backhaul, and transport markets.

Our customers are excited about these acquisitions and have very high regard for Xelerated products and intellectual property.

With this acquisition we expect to see increased market opportunities especially in the service provider space and with Xelerated now part of Marvell, customers will have access to a family of network processors, programmable switches, packet processors, ARM-based SoCs, and low power physical layer devices for a wide range of applications.

Our networking customers now have the ability to buy all the key pieces of silicon they need from a single supplier.

For fiscal 2012, networking represented 21% of total revenues, and grew roughly 2% over the previous year.

For Q1, we expect our overall networking end market to be relatively flat sequentially, which is better than the current end market trends.

Finally, moving to our storage end market, Q4 revenues declined by approximately 31% sequentially, and that represented about 40% of our total revenues in the quarter.

This large sequential decline was mainly due to the impact of the Thailand floods.

As we have mentioned in the past, the hard disk drive industry is very resilient, and has successfully navigated many critical changes including technological transitions and external shocks in the past.

During the quarter, the industry began to recover from the impact of the Thailand floods.

Although slightly later than we had originally anticipated we are very pleased with the progress that has been made overall.

We expect Marvell to benefit from multiple quarters of sequential growth as the industry works to get back to full capacity over the next few quarters.

In addition, we are seeing excellent demand for our next-generation 2.5-inch, 500 gigabyte per platter SoC solutions which grew strongly in the quarter.

As we have mentioned in the past, the ramp of next-generation mobile drives, at 500 gigabyte per platter, will substantially benefit us.

We are now shipping our 500 gigabyte solutions to all of the drive customers and expect continued growth for these devices throughout this year.

I would like to stress that the 500 gigabyte capacity point is a technologically challenging one and ours is the first and currently only solution in the market.

Moving to SSDs, revenues from our SSD controllers was very strong and more than doubled during the quarter.

As you may recall, our revenue milestone for SSD was to exit the year at a quarterly run rate of double that of the prior year.

We are proud to report that we exceeded our original goal by a significant amount.

We expect multiple devices including ultrabooks to come to market with our SSD controller technology this year.

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 fiscal 2012, storage represented 46% of total revenues and declined 5% over the previous year.

For Q1, given the well-documented recovery of the hard disk drive industry, we anticipate our storage end market to grow in the range of 10% to 20% sequentially.

Summarizing the full year, fiscal 2012 was a challenging year for Marvell as we were impacted not only by the choppy macroeconomy but also specifically by several customers transition earlier in the year, the Japan earthquake, and then the Thailand floods.

Marvell had good success in several new products and initiatives during the year.

Our China TD business is now producing tangible results.

Our SSD revenue has exceeded expectations.

And our networking business is growing due to new products and share gains.

Marvell also generated excellent financials and repurchased approximately 13% of our shares in the fiscal year.

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

We remain confident that our business model will continue to benefit 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 fourth quarter and full year, as well as to provide the current outlook for the first quarter of fiscal 2013.

Thank you, Sehat.

And good afternoon everyone.

As Sehat mentioned we reported revenues for the fourth quarter of fiscal 2012 of approximately $743 million, representing a 22% sequential decrease from Q3 of fiscal 2012 and down about 18% from the same period a year ago.

Our non-GAAP gross margin for the fourth quarter was approximately 54.5%, within our earlier projected range.

Our overall operating expenses for the fourth quarter on a non-GAAP basis were approximately $289 million, a 4% decrease from the prior quarter, as we implemented cost controls across the board.

R&D expenses for the quarter were approximately $232 million, a decrease of 4% from the prior quarter.

SG&A expenses for the quarter were approximately $56 million, also a 4% decrease from the prior quarter.

This resulted in non-GAAP operating margin of 16% for the quarter.

Net interest and other income was about $5 million.

We also had a $5 million tax benefit for the quarter due to a tax rate change in the foreign jurisdiction.

Our non-GAAP net income for the fiscal fourth quarter was approximately $127 million, or $0.21 per diluted share.

The shares used to compute diluted non-GAAP EPS during the fourth quarter were approximately 606 million, a decrease of roughly 9 million shares from the prior quarter, primarily due to our share repurchase program.

Cash flow from operations for the fourth quarter was approximately $69 million, as compared to $269 million(sic -- see Press Release) reported in the third quarter.

Free cash flow for the fourth quarter was $38 million, compared to free cash flow of $239 million reported in the previous quarter.

The decline in free cash flow was a result of the decline in revenues and changes in working capital primarily due to the Thai floods.

This being our fiscal year end I would also like to summarize our results on a full-year basis.

Fiscal 2012 was a challenging year for us as our revenues declined 6% from the prior year of which roughly 4 percentage points was due to the recent Thai floods.

Marvell's fiscal 2012 was also impacted by transitions at a cellular customer and earthquake in Japan.

Despite these challenges we ended the year with a solid balance sheet and excellent cash flow margins for the year.

We are strategically positioned with new products and initiatives and expect to deliver steady improvement in the future.

Within our mobile and wireless end market we experienced strong growth of our China business and ended the year with over 70% share in TD smartphones.

Our low-cost platform solution for TD has been widely adopted in the market and we extended our success in TD through low-cost WCDMA devices resulting in over 20 OEM launches -- over 20 OEMs launching devices with our silicon solutions last year.

In our networking end market we delivered modest growth in fiscal 2012, which is better than most of our peers due to new products and share gains.

In storage, our overall sales was good even after taking into account effects of the Thailand floods and hard disk drive industry.

Prior to the floods, we gained about 5 points of share in HDDs as we ramped new products at the new customer in their mobile platforms.

Our SSD business grew strongly and is poised for continued growth this year.

On a non-GAAP basis, full-year gross margin for fiscal 2012 was 57%, versus approximately 59.7% reported a year ago.

Non-GAAP operating income was $784 million, or approximately 23% of revenues, compared to $1.1 billion or 31% a year ago.

Non-GAAP net income for the fiscal 2012 was $795 million or $1.27 per diluted share, compared to $1.1 billion or $1.64 per diluted share reported a year ago.

Turning to cash flow metrics, we generated approximately $670 million in free cash flow for the year, representing a free cash flow margin of 20%.

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

We generated GAAP net income of approximately $81 million, or $0.13 per diluted share in the fourth quarter of 2012 compared to $195 million or $0.32 per diluted share in the prior quarter and lower than the $223 million or $0.33 per share we reported in the same period a year ago.

The difference between our GAAP and non-GAAP results during the fourth quarter of fiscal 2012 was mainly due to stock-based compensation expense of approximately $31 million or about $0.05 per share and about $15 million or $0.03 per share related to amortization, acquisition related, and restructuring expenses.

On a full-year basis, we generated GAAP net income of approximately $615 million, or $0.99 per diluted share, compared to $904 million or $1.34 per diluted share in the year-ago period.

Now I'd like to review our balance sheet as of the end of fiscal Q4.

Cash, cash equivalents, and short-term investments were approximately $2.2 billion, a decrease of approximately $178 million sequentially.

During the fourth quarter we repurchased about 13.5 million shares for approximately $186 million.

Over the past six quarters, we have repurchased and retired approximately 93 million or about 14% of our outstanding shares.

As of the end of Q4, we had $572 million available in our share repurchase plan.

Accounts receivable was approximately $407 million, down about $44 million sequentially, and a decrease of $52 million as compared to the same period a year ago.

DSO was 53 days, up from the 41 days last quarter, and 47 days a year ago.

The decrease in DSO was primarily due to linearity of shipments in the quarter.

Net inventories at the end of fourth quarter were approximately $354 million, up from $310 million reported in the prior quarter and the $245 million reported in the year-ago period.

Days of inventory were 89 days, up 19 days from the 70 days reported in the previous quarter and up from the 58 days reported in the year-ago period.

The increase in inventory was mainly due to lower HDD volumes in Q4 and anticipated improved shipments over the next few quarters.

Accounts payable were approximately $305 million, a decrease of $51 million from the prior quarter, and a decrease of approximately $27 million from the year-ago period.

Now I'd like to turn to our outlook for the first quarter of fiscal 2013.

We currently project our first-quarter revenues of flat to up 6% sequentially.

The midpoint of our guidance represents a sequential increase of about 3%.

By end market, we expect our mobile and wireless end market to decline seasonally in the high-single digit range and we expect our networking end market to be relatively flat in Q1.

We expect our storage end market to increase between 10% and 20% sequentially, driven by recovery in the drive industry.

We currently project non-GAAP gross margin to be relatively flat at 54.5%, plus or minus 50 basis points, and currently anticipate non-GAAP operating expense to be approximately $295 million, plus or minus $5 million.

We anticipate R&D expenses to be approximately $237 million, and SG&A expenses of approximately $58 million.

This sequential increase in operating expenses is mainly due to the annual payroll tax reset.

At the midpoint of our revenue range this should translate to a non-GAAP operating margin of approximately 16% plus or minus a point.

Combination of interest expense and other income together should net out to be approximately $2 million benefit.

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

We currently believe the diluted share count to be approximately 610 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 $0.20 a diluted share, plus or minus $0.02.

On the balance sheet, we currently expect to generate about $120 million in free cash flow during the quarter.

We anticipate our cash balance to be about $2.4 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 $0.04 of this is related to stock-based compensation expense.

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

Geoff?

Thank you.

(Operator Instructions)

Sanjay Devgan, Morgan Stanley.

First question I had, looking at the outlook for the storage business you previously expected that business to snap back and I was wondering looking at the slope of the recovery for the HDD industry in aggregate, how has that changed?

What are your projections going forward and how has that changed relative to your previous assumptions?

Thank you, Sanjay.

As we discussed on our announcement earlier and today, the industry started a little bit later than we originally anticipated on our last call but the trajectory, once it started, should resemble what we said earlier.

We expect roughly half of the recovery to happen in our fiscal Q1 and the rest of it in our fiscal Q2.

That is slightly ahead than you might hear from some of the industry but we tend to ship ahead of the drive guys.

So start a little bit earlier but the trajectory should be the same as we have described earlier.

Great.

That's helpful.

And then one other question, if I can.

Just talking about obviously you had a great deal of success at the TD market in China last year, but obviously the success is now bringing on additional competitors.

Was wondering, as you look at the competitive landscape increasing over there, what can you do to hold onto the share?

I think you said you have around 70% share.

What can you do to maintain?

What differentiates your products?

Is it cost?

Performance?

Power?

All of the above?

What's going to help you guys maintain your positioning there?

The answer to that is quite straightforward.

We are on a path to introduce our second-generation device.

We are already working on a third-generation device and even already start planning on the fourth-generation device.

So while initially we only have one product, so what we need to do is we need to fork the products into a high-end products as well as even lower cost, but potentially much higher volume market opportunities.

So this is the typical strategy that anyone will take.

In this case, we have proven portable stacks so the -- the thing that we have to do is just to deliver the products and port the stacks into the new chips.

John Pitzer, Credit Suisse.

A couple follow-on questions.

First on the TD market, my understanding was some of the weakness in the January quarter were some inventory changes at some of the Chinese customers.

Given that you're guiding mobile and wireless seasonal, it sounds like you're not getting a benefit from any inventory restocking from the destocking in the Jan quarter.

Is that true?

And if so would you expect any sort of restocking in inventory sometime throughout this current fiscal year?

So restocking to that level, hopefully not.

Because they ended up with more inventory than we had anticipated.

John, to understand that in our fiscal Q3, for two of those three months we were in allocation mode.

The demand far exceeded what we had anticipated going into that quarter and as is typical in this industry, people tend to over-order and as it turned out, particularly with the tier 2 and tier 3 customers we have indicated earlier over 20 customers in that space, they end up ordering more than they needed.

And so we didn't -- it's harder to get visibility to the tier 2 and tier 3 folks and so we didn't see that in our Q3.

So hopefully that netted out.

Then you run into this quarter you end up at Chinese New Year, typical of Q1 low seasonality, so we see stability in the TD market in our fiscal Q1 and we expect growth to resume in Q2.

We've added some significant customers, even as we speak, and as Sehat indicated we added more content to those customers as we move on in that space.

So it is stabilized this quarter and we expect the growth to happen, to resume next quarter.

And then Clyde, as a follow-on to the first quarter asked on the HDD space, you talked about half the recovery happening in the April quarter, the other half recovering -- the other half recovering in the July quarter.

How are you defining a full recovery?

Would that imply by the time you guys get to the July quarter you'll be back above $400 million run rate in revenue?

How are you defining a full recovery?

Putting aside industry dynamics, I expect that the supply situation should resume back to the pre-flood levels and as you know, John, Q3 is ahead of back-to-school and we all end up speculating as to what PC demand is, so I don't want to peg a particular number to it.

But I expect supply situation to resume to normal levels by our July quarter.

I could add some color to this, to this storage demand.

So currently storage from -- it's well-known in the industry that the industry is shipping product to the point where the inventory level is practically nonexistent.

So what limits it is building the -- the demand is always higher than the supply.

And some of the -- the biggest impact really is in the high precision, CNC machineries, they got flooded.

So this is what I learned over the last few days.

But the good thing is, we also found out that many of the suppliers that have the machineries get flooded are already bringing new CNC machines, and that's confirming what we originally like predicted in the past where they've got to bring advanced machinery.

So that's happening.

So all the base plate manufacturers, as well as the motor manufacturers are bringing very advanced machineries, they can be actually extremely useful to build the next-generation's 7-millimeter -- This upcoming volume, 7-millimeter drives they will be useful for the ultrabooks market as well as in the future, 5-millimeter drives.

This is very encouraging in the long run.

Glen Yeung, Citi.

Can one of you can elaborate a little bit about the content increase that you're seeing in TD phones.

Maybe help us understand what do you think your content will be on average in 2012, what it was -- versus what it was in 2011, for example.

We add in new silicon functionality.

It's not move the needle a major way but we are adding more content to the cell phone, silicon solutions.

We're actually using other people's content.

Earlier we used more.

I expect that to continue as the year goes on.

Then you have overall price.

We described earlier competition coming in.

We today remain the only supplier, we have 100% share of the single chip.

It's hard to maintain 100%.

As you go down we expect pricing to be more competitive as we go through the year.

From a dollar content point of view, from a chip content point of view I expect us to deliver more chips.

Dollar content we need to see how competition reacts to pricing.

Okay.

Fair enough.

Thanks Clyde.

As a follow-up, Sehat you mentioned that natural disasters in 2011 robbed you of about 10% of revenue.

Is that something where we should think that will come back to you in 2012?

Or was some of that lost revenue and we shouldn't think of it that way?

It's Clyde.

Right before Sehat answers, the combination of a number of things including natural disasters was 10%.

The Thai floods in particular was about 4%, and as you end the year as I indicated earlier, I expect as we go through Q3 we'll be back to normal production, full quarter.

I'm sorry, Q2, we should be back to full production from the flood so Q3 will be the full quarter effects of that.

So yes, I expect that we'd recover that 4%.

In terms of cellular customers, if you look at Marvell prior to the flood we had restored back to that decline already.

So I expect as the year goes on we should be able to get back to our normal run rate.

Storage is an area where we have been -- this is truly our playground, our territory.

If you look at the competitions, from decade ago when we had 12 to 20 competitors, we only have one left, okay, and not -- that's not -- maybe that's not so important to know.

It's more important to know that in the 500 gigabyte, platter 2.5-inch drive, we are in all customers.

We have design wins in all customers and a lot of these customers are ramping up as we speak.

So in fact, most of the ramp-up is limited by the amount of components that can be built because of the flood.

These new platforms, the 500 gigabytes use new SoC, but that's not the bottleneck.

The bottleneck is the new base plates, the new motors they're using into these 500 gigabytes per platter.

These new CNC machines are being brought in as we speak and my gut feeling, talking to the base plate manufacturers, this will be completed in the next few months as these equipments are being brought up to production.

A lot of the components will be more widely available for the 500 gigabyte per platter solution.

So clearly if the industry wants -- if the PC industry, the consumer electronics, the PVRs all wants more capacities, it's natural that these revenue is going to come back to us.

It's going to come back especially to us because of the 500 gigabytes is by far, we are the only one that's shipping this technology into the market.

Uche Orji, UBS.

Sehat, let me start with solid state drives.

There's two questions I want to ask.

The first is you mentioned ultrabooks as a possible driver.

What is your sense of design momentum for ultrabooks and do you have any sense how much will use hybrid drives and how much will use pure SSD, and essentially could you describe what your competitive edge is in this market vis-a-vis other players?

As we mentioned many times in the past, we've been investing in SSDs for almost more than six years already.

We did anticipate that the SSD has certain advantages, namely the power, instant-on capability, and tiny footprints, like very thin profiles.

Having said that, we also know that there's a cost disadvantage in SSDs which over the last decade, last decade and-a-half looking into this.

It's always around 8 to 1 to 10 to 1 ratio.

So we know for us to be the leader in this market we need to put our best in both sides.

For people that really care to built truly the thinnest of the thinnest laptops, the SSD will be the natural choice, regardless what the price is.

That's price incentive to market.

For the billions of people in the world that want to have let's say ultrabook like laptops they will not be able to afford to pay more than $399 for the laptops.

In that case, somehow we need to solve this problem some other way and you'll remention one way to do it is to have a hybrid solution.

So it's clear that the hybrid solution will be an important solution for the 80% of the people in the world that cannot afford to pay for the full SSD solution.

So we have also been working on hybrid solution, again, for the last five years, not to mention, even that we thought all of the market in the bottom, maybe 50% of the market, maybe even the hybrid they cannot afford to pay for.

Those in the market will be targeting the sub-$250, sub-$300 laptops.

So those are the markets that can be served with traditional HDDs.

In this case, we still need to make them look sexy so three years ago we spearheaded the industry to move to 7-millimeter.

We are the only one, Marvell was the only one that pushed this technology into the market.

And basically convinced the whole supply chain to build the 7-millimeter.

And it's happening.

So it's ramping up now.

And about a year and-a-half ago we realized that 7-millimeter it's great but maybe a little bit too thick so we also spearheaded the industry to move to 5-millimeter.

So it's also happening.

I'm glad to mention it that this 5-millimeter activity is finally happening and 5-millimeter HDD will be thinner than the battery, the cell phone battery that you have in your cell phone.

So imagine if you can build beyond ultrabook with HDD that is thinner than a cell phone battery.

So look at it, the reason Marvell is strong in storage is not just because we are strong in developing new technology, high-performance SSD, but we also -- we never forget that the cost is also important.

So we have all the solutions to serve the rich end people, the rich customer base, but we also build products to serve the rest of the world which can only pay for like $30, $40 for the storage instead of $200.

Long answer to that.

That's fine.

That is at least helpful to know that as 435 limited drive markets.

Could I just switch gears a little bit onto the wireless segments.

Outside of your TD-SCDMA can you discuss the trends of your non-Chinese TD customers?

Specifically if you could talk about -- obviously you don't talk about your customers openly but we know the big one outside of China.

Any sense as to whether we should expect any revenue drivers outside of China's TD customers and also any updates on TD LTE developments at Marvell?

That would be helpful.

Thank you.

Any updates on what's the last part?

TD LTE.

Oh, sure.

So I'll answer the last part first.

We are developing TD LTE as Sehat mentioned.

We announced product in Q3 last year that follows through on that and I think Marvell will have solutions in both TD LTE and FTV LTE as that market develops in that space.

On the non-TD customers, we mentioned in our prepared remarks earlier we started seeing increased activity and revenues in the WCDMA space.

We are continuing to see traction.

That's about six to nine months from where we were ramping TD, following similar patterns.

That's a lot more competitive space.

Unlike TD where we dominate, there's a lot more competition in the WCDMA space.

So the growth and trajectory is probably won't follow as TD but it is so far growing along the earlier TD projections.

A lot more competition in that space so we need to play out a lot more pricing and the like so we expect that and we expect that to grow.

And as far as our largest customer, that business continues to be stable.

Obviously it ebbs and flows with that customer and with seasonality.

But that business has been stable for a year now.

Harlan Sur, JPMorgan.

On the outlook for your storage business, my understanding is that HDD production will be growing about 20% to 30% sequentially here in the first quarter.

And I've always believed that production is probably a better proxy for your chipset sales.

So maybe you can just help us understand the difference between your shipment outlook of up 10% to 20% versus production growth of 20% to 30% by your customers.

Are there some inventories of your HDD SoCs and that's where the delta is?

Any color there would be great and then I have a follow-up question.

So no inventory.

Obviously, things continue to be tight.

One of the biggest supply in that space for that calendar Q1 I think units were up 12%.

If they're producing much more than that, obviously I can't comment any specific customers.

But our guidance of 10% to 20% is at least consistent with that, with a bias to better than that.

Perhaps that gets closer to the number where you are.

If the industry or particular customers do other than one customer where we're ramping today, we pretty much have very significant share, 100% share at all of the other customers.

So if their production was to grow as you said, then we'll follow that growth.

Our forecast today is more reflective, a little bit better than say the 12% at one of the bigger suppliers.

Great.

I appreciate that, Clyde.

On the previous call you mentioned your view on the TD market in 2013.

I think somewhere in the neighborhood of 20 million to 30 million smartphone shipments this year, that's up about I think 2, 2.5 times versus last year.

Is that still the team's view?

That is still the view, not just of Marvell but a number of people have published unit -- TD smartphone unit in the 20 million to 30 million range.

Okay.

Great.

Thank you very much.

Ross Seymore, Deutsche Bank.

This is Bob Gujavarty for Ross.

I was curious if you think -- you mentioned your SSD controller surpassed your expectations for last year.

Do you think that that's an acceleration of SSD adoption or just a simple perhaps pull-in in response to the HDD shortage?

Be interested in your take.

I think it's both.

About a year ago I think in this call we said we expect our SSD revenues ending the year which was our last reported quarter to more than double -- to double, more than double.

Point is, Marvell is a very, very significant player in that space.

What we saw in Q4 where it more than doubled, part of the demand is because of HDD shortages as you pointed out correctly.

So we saw some effects of that.

Obviously, as HDD supply comes into line, you might see less of it.

But I also think -- we also think that this year will be an inflection point for ultrabooks, started by a significant PC supplier last year.

I think ultrabooks with all of the benefits, some of which I have covered earlier, I think people are beginning to adopt.

I think regardless of supply situation and HDD shortages I think calendar 2012 will be an inflection point for ultrabooks and we expect to play in that space.

How big that's going to be is to be seen.

One of the key players in the space thinks 40% of laptops this year will play.

That's interesting.

But we don't have a prediction on it.

What we predict is make sure we play with the various players in the space.

We have our controllers in there and we feel confident that we do.

Great.

Just a quick one on your WCDMA traction.

Curious how we should think about the geography.

Is it China first, then maybe other emerging markets?

Obviously WCDMA is a very competitive market.

Just curious how we should monitor your design-win traction perhaps by geography versus I know you can't talk about specific customers.

Sure.

What you said is a fair accuracy.

Understand that a lot of the OEMs are China-based.

They make it in China.

But they're marketing these products in a number of countries.

I expect in the near future, you would see Marvell WCDMA products in Europe, in South America, in other parts of Asia, other than China and possibly in Australia and North America.

So it's hard to predict where they market that product.

A lot of the design activity centers around the China region because the device manufacturers are there.

But we know they're planning to deploy this in multiple geographies around the world because our engineers are working with them to do the carrier qualification.

Great.

Thank you.

Doug Freedman, RBC Capital Markets.

Can you guys talk a little bit about what you're doing to improve the gross margins?

Clearly there's a recovery in your business that should help but I believe you were also working on improving shipping more devices with copper and how that transition's going.

There are two things that affect overall margins.

There are multiple things but two things that we are fixing one of them obviously as business recovers but beyond that, you mentioned copper, Doug.

We are moving most of our new designs onto copper.

That has started.

That's going to accelerate probably more likely in the second half of this year, into the meaningful volumes.

We feel comfortable with that although there's always areas for us to improve on that in copper.

The second area is we had challenges on the wafer side of it and we have developed strategies last year to improve on our wafer cost by using a number of suppliers.

We begin to see early results of that this quarter, very early results but we think as the year goes on we will see improving results.

So certainly the second half of this year I expect us to see improving margins putting aside mix and economic levels and the like, but from a fundamental point of view, with copper and wafer sourcing we expect to see improvement in our second half.

Let me add a little bit.

Although it's still very small percentage of the impact to us, some of the advanced products that you see in expensive packaging, so we're also looking in new technology to solve this problem.

But that impact more will come sometime next year, I mean improvements in the site.

We're basically the message is this.

We're tackling it from multiple different angles, improving the second source, that's what Clyde already mentioned.

One thing.

We're also accelerating the development of new process technology using even smaller, more advanced technology for new products so that the sooner we can get the new product in production, the sooner that we can phase out the older products that tends to have not great gross margin due to all the shortage, whatever wafers and that process node for example.

So many different angles.

Copper, multiple sources, accelerating process technology as well as developing new packaging technology to solve some of these advanced requirements.

And all of these actions put together expect you to return to your past gross margin targets where you've been 60%-ish?

Is that the right way --

That will be hard.

The reason is we are also going to markets where -- into consumer space where -- think about it this way.

If we are successful going in to address this entry-level smartphones, address the bottom 50% of the world populations, that cannot be 60% gross margin market.

That is like -- but the volume will be tremendous.

So while we care for that market essentially is our bottom line.

I agree with Doug.

Keep in mind, today as much as people might be.

The best in the industry.

So when you're on the top, everybody takes shots at you and our gross margin today is high.

We expect to improve that as we increase but whether we get back to previous levels I think is -- given the business we go into, it's going to be tougher.

We expect to improve it, particularly in the second half of this year.

Srini Pajjuri, CLSA.

Clyde, you said that your HDD business, you gained about 5 percentage points of share last year.

Just wondering what your thoughts about your market share this year as we go through the next several quarters, how do you feel about your market share?

Sure.

Post recovery, I suppose.

The 5 points was before any flood effects.

Once you get past the flood effects, so putting aside flood effects which we described adequately on this call, we feel very comfortable about the other areas that we're going to go to.

I'm going to turn over to Sehat since he met recently those customers.

He has a lot more color to add about that.

So I happened to spend like the whole day yesterday actually, 10 hours, 12 hours talking to different people in the supply chain and at one of the largest -- the customer.

So based on the data I've seen, I feel even more confident that all of our design wins that we mentioned last year, but our share gains in this market is going to materialize as these factories are being built, the new factories are being replenished with new equipments, our share will -- can only go up.

Many of the design wins that we talk about are the design wins that we had like two years ago, last year, two years ago.

This is just about to go into productions into the market.

I think sufficiently Sehat, we feel very comfortable after yesterday with the design activity, the current design activity at particular customers, new customers.

I think Sehat feels very good about those design activities after yesterday's meeting.

James Schneider, Goldman Sachs.

Good afternoon.

Thanks for taking my question.

I was wondering if you could quantify your TD-SCDMA revenues for last fiscal year?

And then maybe looking out forward, as we look forward to TD LTE whether you think you can maintain the same kind of share on TD LTE as you currently have on TD-SCDMA?

First of all.

Thank you, Jim.

We don't disclose any revenues by product.

We stick to end markets.

Sorry, can't give you those specific.

On TD LTE just like with WCDMA we expect more competition.

On our TD business today, like I said we have about 70% overall share, competition is very much more limited.

In LTE space, all together, TD LTE, we expect a lot more competition.

So I don't think the share's going to approach that level but the market opportunity there both FTV LTE and TD LTE is bigger, so we expect that to generate growth.

That's not near-term, I think that's more of next year type growth.

So smaller share but a much bigger market for any versions of LTE.

Having said that, also you need to understand that the TD LTE is -- there's several different markets for TD LTE.

One is to address China market, specific market and the other part is the TD LTE to address the rest of the world.

The two are completely different market.

The one address the China market must have TD-SCDMA backward-compatibility.

For that market the competition there that we'll be facing in the TD LTE or China market will be the market that must have the presence in TD-SCDMA.

So these are not kind of competition that you normally talk about big, big companies, competitions.

In the rest of the world, where they may not need to have TD-SCDMA backward-compatibility, that will be the market with the open competitions will be against the biggest of the biggest chip suppliers in the world.

But regardless, we are confident because the biggest market for TD LTE is at this point still China so our solutions are being proven in the China market.

So if it's good enough in China, for China market it's going to be good enough for any parts of the world.

Fair enough.

As a follow-on -- Just in terms of the R&D spend, I think over the last 18 months it's drifted up fairly meaningfully.

I was wondering as we go through this year, how much we could increase we could expect in R&D and maybe what are the top investment priorities that are driving that?

If you look at some of the programs Sehat mentioned before, TD LTE, SSD, some of the new --

Hybrid technology.

And the like, that's where we would invest in.

Our expect our rate and pace of increase in R&D, Jim, to slow down this year versus last year.

We will still keep increasing investment but a much lower rate than we did before.

Last year we added a significant amount of engineers as we ramp up a number of new programs, Google TV, microcontrollers, should be put in that category.

This year you'll see more moderate increase in headcount but we'll have increase in new tape-out, new products and the like.

So that's probably where most the increase will come from but much slower pace than he we did a year ago.

Mark Lipacis, Jefferies.

Two questions, actually.

Could you -- when you talk about the Google TV design win, can you help us understand, what are the broader implications of that design win?

Does this mean that you guys are -- is this product basically going to just grow with Google TV shipments or is there something broader going on there?

And then I had a follow-up.

It is something broader than that but it's important to address the specific Google TV opportunities.

I think people can appreciate the revolutions in the smartphones.

Where phones used to be boring, basic, functional, feature phone functionalities and all of a sudden it's more advanced than many PCs.

In fact, you can argue the touch screen technology, the display technology is -- the user interface technology in the smartphone is way ahead of the PC space.

So these same technology that revolutionized the phone business is also going to revolutionize the television business.

Not just the television business but also set-top box business.

So the Google TV is to address this television business and then there will be variance of this that will go into set-top box business.

This is to us, to Marvell, this is a big business opportunity because over the last 16, 17 years we've been in the business we have decided not to enter this business because of the entrenched competitions from the two top suppliers in this area, and unless we could get a differentiation, it will just be a waste of our time to enter -- to go into this market.

So we've been preparing ourselves over the last five years to build solution that's will intercept the future and the future is everything smart.

Smart TV, smart set-top boxes, smart everything.

Smart appliances.

Smart whatever it is okay that you want everything that you have in a smartphone, multiply that by many times performance to fit in the display size of a TV.

Okay.

Fair enough.

And then the last question on the customer inventories.

I think you were pretty clear that they're below normal levels in the hard disk drives supply chain.

Did you mention on the wireless, networking, can you give us a sense where your customer inventories are in that, where the supply chain is there?

Thanks.

Networking, we don't see any inventory.

Networking business relative to the broad market did very well last quarter and I think will overachieve again this quarter so we don't see any inventory problems, not that affects Marvell but don't see anything major there.

In cellular wireless and mobile, I think there's a couple of customers that might have, and that's reflected in our forecast.

But nothing broad that in any broad industry way.

Clyde when you say networking, don't see any inventory does that mean that the inventories are normal levels or below normal levels?

Normal from what we see.

Okay.

Great.

Thank you.

Ladies and gentlemen, that concludes the question and answer portion.

I'd now like to turn the presentation back over to Sukhi Nagesh for closing remarks.

Thank you everyone for joining us on this call.

We'll participate in a few conferences this quarter and we'll talk to you again next quarter.

Thank you.

Thank you.

Ladies and gentlemen, that concludes today's conference.

Thank you for your participation.

You may now disconnect.

Have a wonderful day.