邁威爾科技 (MRVL) 2013 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first quarter 2013 Marvell Technology Group earnings conference call.

My name is Larry, and I will be your operator for today.

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

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

(Operator Instructions).

I would now like to turn the conference over to your host for today, Mr. Sukhi Nagesh, Vice President of Investor Relations.

Please proceed.

Thank you, Larry, and good afternoon, everyone.

Welcome to Marvell Technology Group's first quarter fiscal 2013 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 Marvell.com.

I also want to highlight that, starting this quarter, we will be posting a slide deck summarizing our quarterly results in the IR section of our website for investors.

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, TDLTE, FEDLTE, PON, ACD, and SSD products; statements about general trends in the end markets we serve and future growth opportunities; statements about market share, impact of flooding in Thailand; statements regarding our financial predictions for the second quarter of fiscal 2013 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 annual report on Form 10-K and subsequent filing -- 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 the effect 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 first fiscal quarter 2013 earning press release, which has been furnished to the SEC on Form 8-K and is available on our website in the Investor Relations section.

Now with that, I would like to turn the call over to Sehat.

Thanks, Sukhi, and good afternoon, everyone.

Today we reported first quarter revenues of approximately $796 million, reflecting a 7% sequential increase from the prior quarter and above the high end of our previously projected range.

The reason for the better than expected revenue performance was 25% sequential growth in our TD-SCDMA revenues and increased deployment by all of the drive customers for our leading -- industry-leading 500-gigabyte proprietary mobile HDD products.

This is in contrast to the overall revenues for our nearest competitor in the TD market, which declined double digits, while our competitors in the storage space are not shipping similar 500-gigabyte technology.

These areas are two small examples of the leadership that Marvell has and will continue to demonstrate.

Building on the strength of our results, we are forecasting our second quarter revenue to increase in the range of 6% to 12% sequentially.

We expect our TD revenues to grow again by more than 20% and the 500-gigabyte revenues to grow about 50%.

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

Gross margin of 54.5%, which was in line with our expectations.

Operating margin of 17% and earning per share of $0.23, both of which were above our original guidance.

As a result of the improvement we are seeing in our business recently and our strong product pipeline, we are more confident in our growth opportunities.

This confidence is leading us to further increase shareholder returns, and especially, given the recent performance of our stock, we're increasing our share repurchase program by $500 million to a cumulative total of $2.5 billion.

In addition, and largely in response to broad institutional shareholder request, we are initiating a quarterly dividend of $0.06 per share.

Now let me provide more color on our performance and expectations across our end markets.

First, in our mobile and wireless end market, let me remind you that our initial guidance was for a sequential decline of high single digits.

However, I'm glad to report that our Q1 revenues for our mobile and wireless end market was instead down just 1% sequentially, and was up 14% from the same period a year ago.

Typically, this is our weakest seasonal quarter in mobile and wireless, so the year-over-year performance, particularly in the current macro environment, illustrates our increased traction in this end market.

Our mobile and wireless end market contributed 29% of our overall sales.

In Q1, our mobile -- while mobile or cellular revenues performed better than expected and grew about 50% from a year ago.

At the beginning of the quarter, we expected our revenue from TD smartphones to be essentially flat.

However, during the quarter, China Mobile announced their targets to grow TD smartphone units by over 2.5 times year-over-year to 30 million units this year.

Once this target was released, we saw a significant increase in demand for our solutions within the quarter, resulting in some spot shortages.

Our TD smartphone revenue increased 25% sequentially and significantly outpaced our nearest competitor, whose revenue, as many of you know, declined double digits in the quarter, a clear indication that Marvell is taking share in the TD market.

We expect our TD unit shipments in the first half of this year to account for about 40% of China Mobile's full-year targeted volume, and we are well-positioned to ship more as the year progresses.

In fact, in the first quarter, the number of TD smartphone models in mass production with Marvell increased over 30%, and the number of new smartphones in development increased over 60% sequentially.

We are now designed into over 70 different high-volume handsets.

This is not surprising, as our industry-leading single-chip TD-SCDMA solutions have the most mature protocol spec and highest throughput performance and continue to garner increased high volume design wins from multiple OEMs.

Our mobile business is now rapidly diversifying, with no single customer representing 10% of total sales.

We are well ahead in the development and commercializations of the next generation of TD-SCDMA, TD LTE, and FDDLT solutions, which incorporate high levels of performance and integration that we believe will continue to drive the strong adoption of low-cost smartphones.

As a result, we are on track to more than double our China (inaudible) smartphone business this year.

In addition to the growth in our -- of our TD business, our Android-based WCDMA revenue was also better than previously anticipated.

While this is relatively small today, we expect steady growth in our Android-based WCDMA revenue over the next few quarters.

Also in Q1, our Wireless Connectivity business performed better than expected, as new gaming product launches offset seasonal declines in other end markets, such as wireless access points.

Overall for fiscal Q2, we expect our mobile and wireless end market to increase sequentially in the mid to high single digit range.

We expect our TD smartphone shipments to grow over 20% sequentially on top of the 25% increase in Q1, and thereby further extending our competitive lead.

This implies that in Q2, we except to ship over five times the units of our nearest competitor, assuming they achieve their stated expectations.

We also expect positive seasonality in our Connectivity business to contribute to our growth in Q2.

Now turning to our networking end market, Q1 revenue declined about 1% sequentially versus our earlier expectations of flat sequentially.

This compares to the market, which declined about 5% sequentially.

Our Networking business outperformed the market due to growth in our new products, including PON,10-gig switching, network processings, and PLC, which collectively grew over 20% sequentially.

Within our new products, targeting the networking end market, our leading PON products continue to do very well, growing double digits in Q1, and are expected to grow again by at least 25% in Q2.

Let me remind you, our PON products had first revenues just a year ago, yet we now have over 25% market share.

In addition, our accelerated network processors are already getting significant tractions with Tier I customers.

We are seeing strong design wins and demand from multiple customers for their events and network processing and programmable ethernet switching solutions.

For example, we recently won major mobile backhaul designs for both accelerated and our switching products at Tier 1 European and Asian OEMs.

We believe we have now won about 50% of the designs for the next-generation mobile microwave backhaul with our highly advanced solutions.

Overall, our Networking business continues to perform well, and we expect to this translate to above market growth for Marvell this year.

The networking and market, the percent -- about 22% of our total revenue in Q1.

For Q2, we expect our overall networking end market to grow in the mid-single digits sequentially, driven by a broad-based demand increase, especially in areas such as Internet 5, and continued growth in areas such as PON and advanced network processing.

Finally, moving to our storage end market, Q1 revenues increased by approximately 20% sequentially.

This was at the high end of our earlier projected range.

Storage represented about 45% of the total revenues in the quarter.

In Q1, our HDD unit volumes increased consistent with the recovery from the effects of the flood.

And we now believe that by the end of the quarter -- by the end of this quarter, the flood-related impact will be behind us.

More importantly, there was a significant increase in demand for our 500-gigabyte per platter mobile drives, which grew 2.5 times in Q1.

And that represented over 25% of our unit shipments.

By the way, we are now shipping these 500-gigabyte products to every HDD customer, with little competition.

As the market settles down from the supply discontinuities of the flood, we believe that typical industry behavior will prevail.

This means the market will transition to higher capacity drives, such as those with our 500-gigabyte technology, and away from older technology, which is, again, a competitive advantage for us and for our customers.

We are already seeing this trend, as we expect volumes from our 500-gigabyte per platter products to increase by over 50% this quarter and should represent over 35% of our units shipped.

In addition, and in response to increased adoption of Thin or Ultrabooks, we expect to see demand for seven-millimeter form factor drives to increase later this year at a lower cost alternative to solid state drive-based Ultrabooks.

Such small form factor drives can only afford a single platter and therefore need to have the highest possible capacity per platter.

Marvell is the only solution provider today combining both seven millimeter form factor and the highest capacity point of 500 gigabytes.

Let me now address the enterprise HDD space.

Revenues increased by about 20% from existing customers, and I'm now proud to report that we began to ramp in two new next generation enterprise designs.

One of these designs is at the biggest enterprise HDD supplier.

We expect the ramp in the enterprise HDD to continue for the remainder of the year.

I recognize our HDD competitor has been vocal about their positions and their expectations of share gains in the drive market.

However, let me remind you that they were saying this when our customers were being impacted by the floods.

And obviously, this is currently no longer true as the industry returns to normalcy.

While they may choose to do their marketing on Wall Street, we choose to focus our marketing in the labs and factories of our customers, and we'll let our results speak for themselves.

Storage has always been our strength, and we fully intend to extend our leaderships in all areas of our surf storage silicon market.

In fact, on the strength of our position in mobile drives and our increasing share in the enterprise, we expect our unit share of the HDD market to increase to well over 60% in Q2.

Now moving to our SSD business, revenues from our SDD controllers was in line with our expectations and softer than the prior quarter.

As most of you know, many of our leading customers indicated softer SDD sales recently, and they attributed it to -- mainly to a return to normalcy from the temporary shortages in the HDD market.

Nevertheless, our SSD design win momentum remains strong, and we expect multiple devices, including ultrabooks and hybrid drives -- hybrid devices to come to market with our SSD controller technology, and we remain on track to deliver excellent growth this year.

In this nascent SSD market, we believe we already have over 50% of the merchant silicon controllers share today, and our design traction leads us to believe that we will increase this as the market develops.

For fiscal Q2, we anticipate our overall storage and market to grow in the range of 10% to 15% sequentially.

In summary, Q1 was a solid quarter for us, as we delivered better than anticipated revenue and profits.

We repurchased approximately 15 million shares in the quarter, and further highlighting our commitment to shareholders, we are ramping up our share repurchase program and initiating a quarterly dividend.

Marvell is a financially strong and 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 benefit our customers, our employees, and our shareholders.

Now I would like to turn the call back -- the control over to Clyde to review our financial results for the first quarter and provide our current outlook for the second quarter of fiscal 2013.

Clyde?

Thank you, Sehat, and good afternoon, everyone.

As Sehat mentioned, we reported revenues for the first quarter of fiscal 2013 of $796 million, which was approximately $31 million above the mid-point of our guidance and a 7% sequential increase, and down about 1% from the same period a year ago.

Our non-GAAP gross margin for the quarter was 54.5%, in line with our earlier projected range.

Our overall operating expenses for the first quarter on a non-GAAP basis were $296 million, with R&D expenses for the quarter at $238 million and SG&A expenses of $58 million.

This resulted in non-GAAP operating margin of 17.3% for the quarter, which is slightly above the high end of our expectations.

Net interest expense and other income was about $1 million, and our tax expense for the quarter was approximately $400,000.

As a result, our non-GAAP net income for the fiscal first quarter was $139 million or $0.23 per diluted share and above the high end of our guidance.

The shares used to compute diluted non-GAAP EPS during the first quarter was 606 million.

Cash flow from operations for the first quarter was $199 million, as compared to $69 million reported in the previous quarter.

Free cash flow for the first quarter was $178 million, compared to $38 million reported in the prior quarter.

The increase in free cash flow was the result of higher revenues and improved working capital.

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

We generated GAAP net income of $95 million or $0.16 per diluted share fin the first quarter of fiscal 2013, an increase from the $81 million, or $0.13 per diluted share in the prior quarter and $147 million, or $0.22 per share we reported in the same period a year ago.

The difference between our GAAP and non-GAAP results during the first quarter of fiscal 2013 was mainly due to stock-based compensation expenses of $27 million, or about $0.04 per share, and about $17 million, or $0.03 per share related to the amortization of intangible assets, acquisition-related and restructuring expenses.

Now I'd like to review our balance sheet as of the end of fiscal Q1.

Cash, cash equivalents, and short-term investments were $2.2 billion, a decrease of $44 million sequentially.

During the first quarter, we repurchased about 15 million shares for approximately $223 million.

Over the past seven quarters, we have repurchased and retired 107 million shares, or about 16% of our outstanding shares.

Accounts receivable was $417 million, up $10 million sequentially, and down $8 million, as compared to the same period a year ago.

DSO was 47 days, down from 53 days last quarter and from the 50 days a year ago, and is now back to the normal range for the Company.

Net inventories at the end of the first quarter were approximately $353 million, about flat from the prior quarter, and up from about $54 million from the year-ago period.

Days of inventory were 88 days, down from 89 days reported in the previous quarter.

We expect days of inventory to decrease further during Q2.

Accounts payable were $323 million, an increase of $19 million from the prior quarter, and about flat from the year-ago period.

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

We currently project second quarter revenues to be in the range of $840 million to $890 million, or up 6% to 12% sequentially.

By end market, we expect our mobile and wireless end market to increase in the mid to high single digit range sequentially, with growth driven by over 20% sequential increase in our TD smartphone revenue and positive seasonality in connectivity.

We expect our networking end market to increase in the mid-single digit range sequentially, which is better than the broader end market.

And finally, we expect our storage end market to increase between 10% and 15% sequentially, with our 500-gigabyte mobile platform revenue growing about 50% sequentially.

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 expenses to be approximately $305 million, plus or minus $5 million.

We anticipate R&D expenses to be approximately $245 million, and SG&A expenses of approximately $60 million.

At the mid-point of our revenue range, this should translate to a non-GAAP operating margin of approximately 19%, 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 to be approximately 602 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 $0.28 per diluted share, plus or minus a couple of pennies.

On the balance sheet, we currently expect to generate about $150 million of free cash flow during the quarter.

We anticipate our cash balance to be about $2.3 billion, excluding any special items, M&A activity, or continued share buyback.

We currently expect our GAAP EPS to be lower than our non-GAAP EPS by about $0.07 per share, plus or minus $0.01.

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

Before I close, I would like to summarize our call today.

As with many companies, we are affected by the sluggishness in the broader global economy.

In addition to this, in the last year, we have been affected by the impacts to the supply chain from natural disasters and from transitions in the cellular market, both at the technology and customer levels.

We believe we have managed through these issues in a swift and thoughtful manner.

Some investors question our ability to grow our Business, and we understand the skepticism.

We have always had a bias to action and to delivering results rather than talking about it.

In light of the issues we face, consider the following six points.

One, over the last four quarters, we have generated approximately $690 million in free cash flow.

Two, by the end of Q2, we would have recovered from prior earthquakes and floods.

Three, our storage networking and TD-SCDMA businesses are demonstrating significant share gains, as evidenced by the last quarter and our expectations for this quarter.

Four, in addition to these, we have a pipeline of growth opportunities queued up that we believe will continue this trend.

These include opportunities in solid state drive controllers, video processing, ARM-based microcontrollers, LED lighting, and, yes, expansion of our share in our franchise hard disk drive market.

We are investing in even more opportunities, which we believe will power our growth in the future.

Five, we have returned about $1.7 billion to shareholders through share repurchases, and with the recent approval, we are able to increase that by another 50%.

Six, and finally, at the request of our institutional shareholders, we have initiated a dividend to deliver additional shareholder value.

It has been a long and tough road in the last year, but we are as strong as ever.

We appreciate the support of the employees, customers, and shareholders who have supported us over this period of time.

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

Larry?

Thank you.

(Operator Instructions).

No questions?

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

Please proceed.

Yes, good afternoon, guys.

Congratulations.

I guess my first question is just relative to the 500-gig platter opportunity.

Can you give us a sense of what percent of your overall storage business that's going to represent, exiting the July quarter, and where that might go over the next two to four quarters?

And is this really being driven by the fact that any capacity that was destroyed during the floods is coming back on at 500 gig, or can you help kind of explain the drivers beyond that?

Thanks, John.

In Sehat's script, he mentioned about 35%, so roughly one-third in Q2 will be at this capacity point, the third of our units.

So we are fairly clear about that.

As to the -- pardon the question, where this is going to grow, as we indicated earlier, the industry has been disrupted in the last year by earthquakes a year ago and more recently and more tragically in the floods.

And that has disrupted the supply, so people produced whatever capacity drives they could.

In this case, if you have shortage of heads, you would produce the lowest -- the one that maximizes those units.

We believe by the end of this quarter, the industry will recover to normal behavior patterns, which means that if you can deliver the highest capacity drive at essentially the same cost or a moderate increase in cost, that will drive consumer behavior.

And that's been proven in the industry over the last 20 years.

So over in subsequent quarters, we expect that to increase.

As we indicated, we have a very significant position in this space right now with supplying the 500 gig to every customer under platter, and we expect that strength to grow.

And then, guys, as my follow-up question, just on the TD market, I think the concern in the marketplace is either this is going to end up to be somewhat of a niche market size and/or your competitive advantage that you have today is not going to be sustainable.

So, Sehat, I was hoping you could maybe address where you think the ultimate unit size of the TD market is.

And maybe, Clyde, can you talk a little bit about your competitive position and specifically, if pricing starts to become a weapon that other players come back at, what your cost curve looks like versus the industry?

Yes, about a year ago -- we had a lot of these questions that the market doesn't even exist.

Now the question change into this market is going to be a niche market.

I would view that this is far from the truth.

The market for TD is actually the market of the customer base, the number units -- the number of customers of the China Mobile.

In this case, they are 650 or so million subscribers in China alone.

So this is -- effectively, this is the slice of the market of TD, because, after all, TD is the upgrade for the 2G customers that we have today.

So, no, this thing is -- this started last year.

It's happening more this year.

And we do expect the number of units will continue to grow over the next several years.

And then at some point, some of the high-end customers will move to the TD LTE.

So, clearly the market is huge now.

I think that we just have to wait and see whether our projection is true.

But clearly, while last year there were very few competitors there even invested in this area, and this year the situation changed, clearly it's the case that the fact we are having competitors going into this market indicates that even the competitors believe that these markets are going to be big.

Otherwise, I don't think they want to invest their resources to go after this market.

No.

Competition is a good thing.

It's going drive the price down.

It's going to increase the volume.

It's also -- it's going to drive the technology adoptions, push the technology to more advanced technology.

So, this is no different than any other business, any high-volume business that we are in.

So, the older products will continue to have price erosions.

We will have to invest in newer technology, newer products to compensate -- to somewhat compensate the price erosions.

And we're not concerned about this, because this is -- these are the standard things that we have to do.

So, we do believe this is just normal behavior.

And we will continue to invest in more advanced technology.

I already mentioned in my call -- my prepared statement that next month will be more advanced TD.

In fact, over the last few quarters, we already introduced --released eight TD-SCDMA modem, so or the TD LTE.

So as we continue, over time, we continue to get more and more of this function into a single chip or fewer devices.

If I may complement what Sehat said, remember that China Mobile is the principal carrier today, and they have over 650 million subscribers, which in time will convert over to TD.

And we believe at the right price point will convert over to TD smartphones.

So, this is not a niche market, by any measure.

A big market like this will certainly attract a number of competitors, and we've seen that already.

But as Sehat just indicated, we will deal with competition.

We know they'll use price, because they can't beat us on function, and they're not beating us at function today.

So what else would you do if you didn't have the performance and function?

So, we expect that.

We'll reduce costs this year, and we'll reduce it again next year.

And we'll integrate that reduction next year with increased function and reduced costs.

So, we think we'll deal with that adequately.

Next question?

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

Please proceed.

Hey, thanks, guys, and great job on the quarterly execution.

Looks like you guys are ramping enterprise HDD share back into Seagate about six to nine months ahead of plan.

Can you just help us understand what were some of the performance differentiators that enabled you to get back in to Seagate on an accelerated schedule?

And then I have a follow-up question.

You want to --

So, you didn't say any particular customer, but we have said before that we won the next-generation design, and that we indicated that's beginning to ramp.

This ramp was enterprise because of the customer qualification and data centers and the like tend to take longer than the client side of it.

But that's actually not the only design we discussed today.

We mentioned multiple new designs at other customers in that space.

So we think enterprise will do well for us, and it's the robustness of our design, the better signal-to-noise ratio, those are the factors that contribute to us winning that back.

Thanks for that.

And then, obviously, the TD business was solid here in the quarter, looks solid again in the second quarter.

There's been so much noise on the competitive environment on TD-based bands.

Is the team still confident about maintaining 60% share of the TD handset space looking into the second half of this year?

And we're hearing that China Mobile is now targeting 35 million to 40 million smartphone shipments this year versus prior target view of 30 million.

I'm just wondering if the team at Marvell is getting indications that is the case.

Thank you.

So, thank you, Harlan.

First of all, the noise is coming from the competition, mostly, and that seems to be a lot of words there, David, taking on Goliath here.

As far as the share, we have much higher than 60% currently, and we indicated that earlier.

So, but to be fair, and we've indicated this, that the competition in the second half will be much more intense as some of these products from our competitors come out.

They come out about the middle of this year.

We know in at least in one instance, it is not close to our level of performance.

The other one hasn't come out yet.

So, a lot of it is speculation, and I know people tend to play games with speculation.

So, when the products come for real into the market, competition in smartphones, I think that will be the best judgment on that.

And China Mobile now looking at more like 35 million to 40 million smartphone shipments this year, versus their prior view of 30 million?

So, the guess we have is that they set a target of 30 million.

We know people have talked about numbers bigger than that.

I think outside of the carrier -- the carrier subsidies, there might be opportunities do that.

That's probably in the lower cost areas, which is where you hear some of this noise coming from.

But look, either way, it's a big opportunity, certainly not a niche opportunity.

It's a big opportunity, whether it's 30 million or 35 million, I don't think it changes the needle.

It's over 2.5 x from where it is today and very competitive.

Okay.

Thank you very much.

Our next question comes from the line of Glen Yeung of Citi.

Please proceed.

Thank you.

You know, Cisco just reported a quarter and kind of had some squishy outlook for kind of their market and kind of the broader enterprise market.

I just wonder if you can talk about what you're seeing.

It sounds slightly more optimistic.

My sense is you're gaining share in other products, but any comments you have around that.

Yes, thank you, Glen.

Our end market, I would say, resemble what you see from certain customers and I would say broadly.

I don't think there's anything different in that.

But as you indicated, where we have been outperforming at least for about a year now, nine months to a year, is in some of the new products and share gains in some of those areas.

Like we said, this quarter, we took the opportunity to add in these new products, which include PON, PLC, and the like.

We indicated on our call earlier, grew about 20% last quarter.

So, the new products that we're bringing to market, the high-end switch, the configurable ethernet devices, is what's driving us better than market performance.

And I expect that actually to increase as the year goes on.

You look at our Q2 mid-single digit guidance is above where most people are talking about.

So, your assertion is correct.

It's new products and share gains.

Sorry --

I just want to add a little bit.

In the prepared earnings, I made a statement, we also talk about mobile backhaul, wireless backhauls.

They're supposed to come from -- typically those come from different supplier base than --

Thanks, Sehat.

Maybe as a follow-up, again, obviously, TD doing very well.

But you're coming off of quarters where there was some build-up of inventory that had worked down.

What's your sense now of the inventory management that you see coming from China Mobile?

Are you more comfortable now that they're better able to manage those inventories?

The inventory decline wasn't out Q4.

And it turns out that it was burnt out mostly in Q4, early Q1.

To be clear, the inventory lumpiness, if you may, is really not so much China Mobile than the handset guys who build it to that system.

Part of the -- I don't think that's changed.

I think you'll see still some of that.

But it's hard for us to get visibility, because a fair amount of these don't have the systems that typical bigger handset manufacturers have.

So, part of it is forecasting, part of it is some of these smaller handset guys who we indicated we have over [70] handsets, I believe.

So, it's hard to get the systems in there.

And we need to be patient as we go through.

But I wouldn't say the inventory issues -- the ability to forecast it.

It's improved but not near where we want it to be.

Fair enough.

Thanks, Clyde.

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

Please proceed.

Hi, guys.

Echoing what they said earlier, congratulations, especially on the dividend side.

Nice to have that come through.

In prior quarters, you talked about last year, I believe, about four percentage points of growth was the impact in your storage business because of the floods.

I know you said that we're back to shipping at demand just by the end this quarter, at least production being back to normalized levels.

Have we already picked up that four points, or is that something that's yet to come as you continue to refill the channel?

The four points, Ross, was the annual betas, and we just looked in this quarter.

So, you have to look on the full-year basis.

But by the time the year is over, I think most of that four points would go away.

But beyond that, I think we'll pick up share in the storage space, and we are picking up share in Q2 in the storage space.

So, I would expect us this year to wipe out at four and then make up for it.

Great.

And then, just switching gears for the follow-up over to the gross margin side of things, I know you've talked longer term as you get into the high-volume markets that your former margin level might not be a logical conclusion.

But as we think sequentially through the back half of the year, can you talk us through some of the tradeoffs on gross margin as the different segments of your business grow?

Yes.

I wouldn't describe it by segments for a variety of reasons.

But the design mix, we've experienced wafer pricing compression between what customers typically expect and what the industry typically develops.

We are developing plans on wafers.

We have one foundry starting to ship production quantity this quarter.

We are qualifying another foundry this quarter and a third -- and a fourth one in the subsequent quarters.

These are early qualifications.

But the message is, we have begun to diversify from that, which we expect to give us some relief on the wafer pricing side.

Other headwinds we've had has been the price of gold, as we all know, it has increased substantially, still sustained in the $1,600, $1,700 range.

And that's been a headwind.

However, we've been moving over to copper carefully with the cooperation of our customers.

And this quarter, we actually -- in Q1, we actually made a meaningful increase in copper, and that number substantially improved.

So, still more numbers compared to gold, but we began to see the fruits of our efforts in that area.

And so, those are the two big areas for us.

Mix will affect this as we go through.

But we think -- we think we've managed through that and certainly, let's say if you look ahead a year from now, with some of these cost reduction efforts, we should expect to see some tailwinds on it.

And then, between now and then some moderate improvement.

Thank you.

Thanks.

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

Please proceed.

Thank you.

On the WCDMA front, Sehat, you mentioned that it tracked a little better than expected.

First of all, on the rim side, given that -- I know it's not 10%, but I think it's still north of 5%.

Given all the problems that customers are having, how should we think about that business going forward?

And then if you can talk about the WCDMA portion, as well?

I don't know if I want to talk too much about any particular customer.

You want to address that, Clyde?

Well, we are always cautious about discussing a particular customer's business, of any customer.

I think that customer's had challenges.

They've not acknowledged it.

Our business with them -- our shared business has improved from a year ago.

But the way it goes from here, I think, is anybody's guess.

We obviously wish them well.

As to WCDMA, it made an improvement from the last quarter.

We did indicate it's moderate.

The point is that we are making inroads in WCDMA areas, and we expect that to continue to grow.

It's a tough road.

The competition, we participate in low-cost WCDMA phones, so that has been clear for years now.

That's a target market of his.

Since then and particularly in the last nine months, there have been increased competition from some very reasonable names going after that same market that he had identified before.

So the competitive environment has improved substantially, but we think we'll improve as our stock gets more and more mature on the networks, we'll continue to get traction.

So the thing that's changed in the last nine months has been much more competitive presence with them having more mature stacks has been a little bit of a headwind for us.

But we think and we indicated today, we're making good headroom on that -- good improvements on that.

Great.

And Clyde, on the balance sheet, first of all, congratulations on the dividend.

You still have north of $2 billion, and you're generating a lot of cash.

If you could remind us what your plans for that cash is and how much you need to run the business and any potential M&A possibilities in the future.

Thank you.

We have, as I just indicated, over $2 billion.

We've, if you look at the -- we also announced today an increase in our buyback, which brings about $800 million of share buybacks.

So that should give you one indication of what we intend to do with that.

We initiated a dividend, and that's a pivotal point from our (inaudible).

That's also something we intend to continue, although we announce it on a quarterly basis.

As to M&A, we do acquire IP from time to time, and we'll continue to acquire IP.

Obviously, there's no big deal that would make a big chunk of it, because we think that there are much more cost-effective ways for us to accomplish our strategic objectives, without having to do blockbuster deals that are extremely expensive, compared to some of our competitors.

So, we think that we'll continue to acquire IP.

We look at IP continuously, and we'll continue to buy IP.

The most recent one we did that you know about is the accelerated deal, for example, that was moderate in cost, but it's already having a meaningful impact on revenue.

And that will continue to be our strategy.

Thank you.

Thanks, Srini.

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

Please proceed.

Good afternoon.

Thanks for taking my question, and congratulations on the dividend.

To follow up on the previous question, can you talk about how you're thinking about balancing the dividends and the buybacks at this point?

Is there either a payout ratio you have in mind in term of increasing the dividend to meet some particular payout ratio or a stock price in mind above which you would do more dividends and less buybacks?

Thank you.

If I had a stock pricing, then I certainly wouldn't say it on this call.

But I think we've indicated --

Although we did say especially.

Yes, we said especially at these prices, we certainly believe at these prices, our stock is grossly undervalued.

We have -- in the last year, Jim, we've bought back a fair amount of stock and increased it.

So that is a clear intention of what we intend to do and continue to do on the share buyback.

When we went through the process of dividends, one of the things we looked at is the precedents of companies that initiated a dividend, and the data we had indicated that people who initiated dividends in our space had a range of 1% to 1.7% dividend yield.

We chose the higher end of that as an initiation.

I will not make any comments about whether we're going to increase that in the future.

What I will say is that the Board every quarter will look at this and will make a determination whether we increase it or not, given the other issues we have, macro issues in particular, and, obviously, all business conditions.

Thanks.

That was helpful.

And then, maybe a follow-up.

In terms of the business, obviously, a lot of moving parts with hard drives, supply side, etcetera.

But can you help us think about your seasonality going into Q3, what segments should be doing better or worse than normal, please?

Well, we only provide guidance for one quarter.

So, I want to stick to that.

But Q3 typically is back to school, and then Christmas bills.

So I would expect to see improvement in that, but how big that is, is always the debate, and to you folks on Wall Street, you always debate that every day.

So that's the question, is how big will the back to school be?

So, I expect to see some improvement next quarter in broad market based, better seasonality for back to school and for Christmas bills.

But how big that is --

Probably too early.

Way too early to tell.

But that's going to be the debate.

Yes.

Considering this is -- nobody knows what's going to happen in Europe.

The one thing I want to leave you with, and we tried to indicate that earlier, is beyond macro, which we are all subject to, there's a lot of very good things uniquely happening with Marvell, whether it's on cell phones or TV or smaller WCDMA, whether it's storage, where we are gaining space, whether it's networking.

Every one of our end markets we indicated clear measures and clear areas where we are gaining share.

So, whatever happens next quarter is anybody's guess.

But I think one thing we feel confident about is about a new product that we bring to market and how successful they are in the market space.

And I think that's one thing we can look forward to.

That's helpful.

Thanks so much.

Our next question comes from the line of Doug Freedman of RBC.

Please proceed.

Great.

Thanks, guys.

And I echo the congratulations on the execution and the dividend.

If I could, though, go and dig into the storage segment of your business.

You've made the comment that you are back to sort of normal operating conditions, yet if I look at year-over-year comps, we're still forecasting sort of a mid-point of your guidance for storage to be down approximately 9% to 10% year-on-year.

Can you help me reconcile that?

And then, going forward, can you talk a little bit about how maybe you might -- how might we think about the mix of business overall changing as a percent of your overall sales?

So, Doug, we said, first of all, by the end of the quarter, it will be recovered.

I think I said in the previous question we expect improvement next quarter.

So, I don't think there's any intent for us to say in the full quarter it's fully restored.

I think you need a full quarter next quarter to reflect that.

Second point is, if you go back to a year ago in the storage space, as you may recall, the earthquake happened, I believe, in March, April time frame and recovered in the July time frame.

So, I would always caution you guys on the Street, when you look at year-to-year, to understand both periods last year and this year.

So last year, you had the July quarter with back end improvement from some disruptions earlier, and this year we're at the tail end of it.

So keep that in mind.

In terms of end market mix, it's really the same question.

Expect storage to continuously improve for two reasons.

I think back to school, Christmas is usually an improvement.

But there are also share gains we expect to start picking up in that space.

SSDs is still to see where that will go.

We see an improvement, but we still think HDDs are going to be the dominant storage technology, and we still think -- we believe we will gain good share, especially in the mobile and service space.

In mobile and wireless, same seasonality effects, particularly in our connectivity business, where you have a lot of gaming presence -- gaming and printers.

We expect seasonality in Q3 to improve.

Questionable as to how big that's going to be.

And we already talked at length today about TD.

In networking, it's less of a seasonal factor with networking, near-term.

I think there's been more inventory and management if you throw out a channel, as you can see, across.

So it's hard to say where that's going to go.

That's been very difficult for folks on the Street and for us to predict.

But once again, the thing that we're excited about it some of the new products that they're introducing.

Talking about the HDD, we need to also to add more color, say that the -- this ultra thin -- the ultrabooks, ultra thin notebooks will still be the dominant storage technology.

It will still be the HDD, as you mentioned.

But over time, over the long run, a lot of these things will still be HDD but will combine with some kind of hybrid capability.

Just like cars will still be dominant with gasoline engines with the supplemental -- the hybrid capability.

So, this will be the same.

Great.

If I could move on to another topic.

You've done a great job on controlling your operating expenses recently.

At what percent of revenue will you start increasing that investment on R&D and sales and marketing?

Not sure what percent of revenues.

I think we'll increase it next quarter.

If you look at the mid-point of our guidance, it's about $10 million increase this quarter.

So, there are areas we are invested in and products we already have.

In areas where we already have the products, we need to invest in the field, FAEs and the like, is the same amount of new products tape outs that drive our costs.

So, I think you'll see us increasing it -- cautiously is probably the best way to look at it -- and based on product, new product scheduled introduction as opposed to a percent of revenue.

But suffice to say that we don't have anything that in our mind yet that we need to say, hey, if we think this is above revenue goes up, beyond (inaudible), that's not in our mind, certainly.

Because a lot of stuff's already in the pipeline.

If it's anything, it's just minor tweaks here and there.

Terrific.

And thanks again.

Congratulations on the strong results.

Thanks, Doug.

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

Please proceed.

Thanks for taking the questions, and echoing the congratulations on initiating the dividend.

So, I think in your prepared remarks, you mentioned that you would have around 60% or greater of HDD market share in the second quarter.

Can you give us some context to where you thought it was in the first quarter?

And is that greater than 60% a number that you can improve upon in the back half of the year?

And if so, how much?

Craig, I'll take that.

At the low point in the flood, because of the flood -- only because of the flood, it probably was just about 56%, the best guess we have.

56%, 57%, something like that.

And we expect to -- this quarter to be -- that number to start with a six.

And to your second part, where do I think that's going to go?

Let me just remind you that half of our customer capacity was gone, completely gone, because one whole factory was underwater.

So that's half of one particular customer.

So --

In terms of where that's going to go, we think it's going to increase.

But it's better for me to tell you why we think it's going to increase.

The obvious area we described before is where we are making good traction in the server enterprise space.

That's one area.

But in the mobile space, there's a couple of phenomenas going on.

We indicated earlier that people didn't move higher capacity drives, and we do a better job than any competitor in the space on that.

And then, thin ultra-notebooks, where they wanted the maximum capacity for single platters, is where it's going to go.

So, the mobile --

Because single platter is the only one that fits in the seven-millimeter drive.

Exactly, to compete with the ultra book.

So, for those reasons, if you look at your own buying behaviors, where people want higher capacity drives and they want thinner form factor, the logic would tell you that we expect to increase it.

So, yes, we intend to increase it, but hopefully you understand the reasons why that will happen.

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

Our next question comes from the line of Mark Lipacis of Jefferies.

Please proceed.

Thanks for taking the question.

On 500-gigabyte platters -- 500-gigabyte per platter products, how big of a lead do you have?

When do you expect to see a competitive product in the market?

To give you an idea, we started shipping our -- the early generation of 500-gigabyte per platter probably about a year or so ago, maybe slightly more than a year ago.

And then there's ones where they're already on the second or third generations of 500-gigabyte per platter.

So, it's very mature.

It's extremely mature, 100-gigabyte technology from our side.

I would say like -- depending how you say it, when it first shipped more than a year ago lead to the third generation, maybe six months lead, at least.

So, it depends how you measure it.

So, it doesn't matter, actually, to us because our customers, once they qualify 500 gigabytes using our technology, their next project will be to move on to the next one, to the next capacity point, either 640 or 750 gigabytes of technology, which is the same -- which would be significantly much harder to do, but this way they get to put the R&D resources as well on our side.

We're going to put our resources to tackle the next problems, not last year's problem.

Great.

Thank you very much.

Thank you.

With no further questions, I would now like to turn the conference back over to Mr. Sukhi Nagesh for closing remarks.

Thank you, Larry.

And I would like to thank everyone for their time today and their continued interest in Marvell.

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

Thank you and good-bye.

Ladies and gentlemen, this concludes today's conference.

Thank you for your participation.

You may disconnect at this time.

Have a great day.