邁威爾科技 (MRVL) 2013 Q2 法說會逐字稿

Good day, ladies and gentlemen.

Welcome to the second-quarter 2013 Marvell Technology Group Limited earnings conference call.

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

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

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

(Operator Instructions)

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

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

You have the floor, Mr. Nagesh.

Thank you, Jeff.

Good afternoon, everyone.

Welcome to Marvell Technology Group second-quarter fiscal 2013 earnings call.

I'm Sukhi Nagesh, Vice President of Investor Relations.

With me on the call today are Sehat Sutardja, Marvell's Chairman and 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.

We will also 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 hybrid, ACD, SSD, TD, TD-LTE, FBD LTE, Wi-Fi, and PON product; statements of our general trends in the end markets we serve and future growth opportunities; statements about market share; statements regarding our financial predictions for the third 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 quarterly latest 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 our 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 the street 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 second quarter 2013 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.

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

Thanks, Sukhi.

Good afternoon, everyone.

Today, we reported second-quarter revenues of approximately $816 million, reflecting an increase of over 2% sequentially.

While this was below our initial expectations, we continue to deliver good profitability with second-quarter non-GAAP gross margin of 53.6%, operating margin of 17%, and earnings per share of $0.24.

We also continue to return value to our shareholders as we repurchased about 20 million shares and paid the Company's first quarterly dividend of $0.06 per share.

Our business was impacted by the slowing macroeconomic environment starting in the middle of the quarter.

We also faced continued challenges with lower volumes at our leading North American cellular customer, while demand slowed down at our Chinese smartphone customers.

In addition, our increasing presence in price-sensitive consumer markets is modestly impacting our gross margin.

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

First, in our storage end market.

Q2 revenues increased by 7% sequentially.

Storage now represents about 47% of revenues.

The recent macro slowdown resulted in lower PC sales in Q2, and our drive customers are now forecasting flat market demand in calendar Q3.

If true, this will be the first time in history that HDD demand is flat in Q3.

We believe this conservative view is, in today's environment, is healthy for the industry as it reduces the risk of inventory build up.

However, the drive industry may have to deal with the potential for improved demand, for example, as a result of the upcoming Windows 8 launch.

Beyond the near-term end-demand issues, there are a number of positive things happening in our storage business that I want to highlight.

First, in Q2.

We continued to see strong growth for our 500 gigabyte per platter mobile drives, which grew over 30% in Q2 and represented over one-third of our unit shipments.

As you know, we are the only provider of this 500 gigabyte mobile technology.

We increased our shipments of 500 gigabyte per platter products to a major customer for their mobile drives where we are a new supplier.

We are now at about 10% of their core mobile platforms and expect our share of their mobile drives to increase over the next few quarters.

Second, we are extremely well-positioned in small form factor HDDs targeting the ultrabook market.

We saw an opportunity for such small form factor drives as early as four years ago; and subsequently, started promoting seven-millimeter form factor to our customers.

Not surprisingly, all the seven-millimeter drives in the market today use our SoCs.

Furthermore, the industry is pushing for even thinner drives with five-millimeter form factor that are suitable for devices such as tablets.

Our longstanding investment in SSDs will be a key factor that will enable this five-millimeter form factor HDD technology in hybrid formats.

Third.

Our SSD business continues to do very well with Q2 revenue growth of about 25% sequentially, primarily from new customer ramps.

Our SSD design-win momentum remains strong, and we expect multiple devices, including ultrabooks and hybrid devices to come to market this year with our SSD controller technology.

In Q3, we expect our SSD business to grow over 25%.

For fiscal Q3, we anticipate our overall storage end market to grow low-single digits sequentially.

Now, moving to our mobile and wireless end market.

Q2 revenues were down 5% sequentially, and this end market constituted about 27% of overall sales.

This was lower than our earlier forecast and was negatively impacted as our leading North American smartphone customers ship lower volumes, even though our share as a customer increased.

In addition, revenue from TD smartphone customers in China declined, due to slower than expected demand and increased competition, which I will address shortly.

However, our TD revenue from customers outside China continued to grow.

Overall, we expect our TD revenue for the next three- to six-month period to be muted as the effects of the macro continues and as we refresh our new -- our product line.

Now, I would like to address the competitive landscape in mobile.

As you know, consumers are now transitioning to low-cost smartphones at a much faster rate than in the past.

We saw this tradition coming early; and subsequently, over the past year invested in developing our Next Generation unified 3G platform to address both the TD-SCDMA as well as the WCDMA markets.

We announced this highly differentiated new platform earlier this week.

This platform includes a TD or WCDMA modem, a high-performance 1.2 gigahertz dual-core processor, powerful 3D graphics, Wi-Fi, Bluetooth, Near Field Communications, GPS, RF, power management, and more.

We will be sampling this new platform to customers this quarter.

In comparison, today each of our main competitors currently address the TD or the WCD markets with, obviously, completely different platforms.

With our platform to pin-to-pin compatibility, our smartphone customers can leverage the same printer circuit board, handset design, operating system, and application software to build high-performance, yet low-cost TD and WCDMA smartphones with a single design effort.

We have already received excellent feedback from our customers on this unified platform strategy.

To further strengthen our competitive position in this market, we are also now working on extending our platform to include TDD as well as FDD, LTE 4G technology.

You should expect us to sample pin-compatible 4G platform solutions to our customers early next year.

In summary, for mobile we have a strong upcoming product offering; and as we build our product portfolio, we expect our existing and new customers to introduce new smartphones with Marvell solutions.

Now, moving to wireless connectivity.

We continue to make solid progress with the introductions of our next-generation combo device.

This device is the industry's first two-by-two combo that integrates mobile MIMO 802.11ac Wi-Fi with other cutting-edge wireless technologies, such as Near Field Communications and Bluetooth 4.0.

This latest addition to our connectivity product family includes immense power management and is designed specifically for consumer electronic devices and mobile component platforms such as tablets and ultrabooks.

We have already excellent customer engagement for this product and expect to see consumer electronic devices with this technology in the market earlier next year.

In the near term, we expect our attach rates for connectivity into tablets and ultrabooks to notably increase as customers bring new products to market with our leading mobile MIMO 802.11n combo solutions.

Elsewhere, our embedded Wi-Fi solutions continue to do well with market share up over 75% of printers and game consoles.

However, consistent with what we are experiencing in the PC industry, we expect demand to be weaker than seasonally typical in Q3.

Moving next to some of our newer initiatives.

In Q2, Sony and Vizio, two leading OEMs, have started to ship Google TV platform base digital media adapters powered by our high-performance ARMADA 1500 SoC, incorporating a dual-core custom CPU with PC-like computing power and advanced video processing technology.

Our proprietary QDO video post-processing technology can handle multiple video sources and formats that effectively reduces the noise and artifacts associated with the video signal, while at the same time enhancing the picture quality.

As a result, this device enables superior quality web browsing and Hi-Definition streaming on large screen devices and is already designing to multiple new connected home platforms that include the digital TV type of boxes and media players.

We are really excited about our opportunity in this developing market.

Overall for fiscal Q3, we expect our mobile and wireless end market to decline mid-single-digits sequentially, due to continued smartphone demand weaknesses in North America and near-term unfavorable demand and competitive trends in China as well as subdued seasonal demand in gaming systems and printers that use our embedded Wi-Fi solutions.

Finally, turning to our networking end market.

Q2 revenue grew 4% sequentially and was in line with our earlier expectations.

Our revenue growth was better than the overall end market, which grew only 1% sequentially.

The networking end market represented about 22% of our total revenue in Q2.

Our networking business continued to outperform the market due to growth in our new products, including PON; 10 gig switching; network processing; Powerline Communication, or PLC; and low-power server processors, which collectively grew over 25% sequentially.

Let me expand on these new products.

First, our leading PON products continue to do very well, growing over 30% sequentially in Q2.

As a result of this growth, we have increased our share in the PON market to roughly 30% currently from basically 0% last year.

We continue to be the only commercial supplier of highly integrated universal PON solution addressing both the GPON and the EPON markets, thereby directly translating into lower operating cost for Telco carriers.

In addition, we also now are also expanding our PON silicon into new areas such as fiber-to-ethernet, media converters, and high-end COM gateways.

With a full family of PON products of -- product offering, our competitive positioning continues to be enhanced.

Second, our network processors are already getting significant traction with tier-one customers, and revenue grew over 15% sequentially in Q2.

Traditionally, network processors have seen their largest demand in the core of the infrastructure.

The explosive growth of the Internet bandwidth has now driven the demand for intelligent network processors to the edge of the network.

Consequently, we are seeing new applications for our highly programmable processors in segments such as mobile back haul, access, and data centers.

We are seeing significant penetration of our network processor solution at customers such as Ericsson, ZTE, and Huawei.

Lastly, I would like to highlight one of our new product families serving the server market.

In Q2, Dell and Mi-Tech introduced the industry-first ARM-based servers, which are powered by our quad-core ARMADA XP processor running at 1.6 gigahertz and comes with a 40-bit Large Physical Address Extension, or LPAE, that can adequately handle server-class data sets, meaning large data sets.

Marvell is the first chip supplier to bring to market an ARM-based server with a solution that has the same PHY I/O transaction performance benchmarks as the current x86-based solution in the market, while achieving double the storage density in half the space.

The solution effectively addresses certain segments of the server market, like the web servers, which are moving away from compute function as a silo to system that integrate networking functions like load balancing and storage into a converged element.

We already have multiple design wins for this product at North American customers and also starting to see good tractions at key customers in China.

For Q3, we expect our networking end markets to grow low-single-digits sequentially, driven by the new product areas.

In summary, while we faced unexpected demand headwinds in Q2, we continued to deliver growth in our storage and networking end markets through share gains and new product ramps.

We are gaining share in HDDs and ramping up our SSD products at tier-one customers.

We are increasing our footprint in networking in new areas and performing better than the end market as a whole.

We acknowledge the near-term challenges we face in our mobile end market and are investing in new and exciting products to grow in the future.

In the meantime, we continue to deliver shareholder value through our share repurchase and dividend programs.

Now, I'd like to turn the call over to Clyde to review our financial results for the second quarter and to provide our current outlook for the third quarter.

Thank you, Sehat, and good afternoon, everyone.

As Sehat mentioned, we reported revenues for the second quarter of fiscal 2013 of $816 million, representing a 2% sequential increase and down about 9% on the same period a year ago.

This shortfall in Q2 was distributed roughly equally between storage and cellular revenue.

In storage, as Sehat mentioned earlier, lower PC sales resulted in our drive customers reducing production during their June quarter, which impacted our revenue in our July quarter.

In cellular, we experienced demand weakness at our North American- and China-based smartphone customers as well as increase in competition for TD smartphones.

Our non-GAAP gross margin for the second quarter was 53.6%.

Our overall operating expense for the second quarter, on a non-GAAP basis, was $298 million.

R&D expenses for the quarter were $241 million, and SG&A expenses were $57 million.

This resulted in non-GAAP operating margin of 17% for the quarter.

Net interest expense and other income was about $6 million, and our tax expense for the quarter was approximately $3 million.

This resulted in non-GAAP net income for the second quarter of $142 million, or $0.24 per diluted share.

The shares used to compute diluted non-GAAP EPS during the second quarter were 587 million.

Cash flow from operations for the second quarter was $189 million, as compared to $199 million reported in the previous quarter.

Free cash flow for the second quarter was $174 million, compared to $178 million reported in the prior quarter.

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

We generated GAAP net income of $93 million, or $0.16 per diluted share, in the second quarter, compared to $95 million, or $0.16 per diluted share, in the prior quarter, and $192 million, or $0.31 per share, in the same period a year ago.

The difference between our GAAP and non-GAAP results during the second quarter was mainly due to stock-based compensation expense of $33 million, or about $0.05 per share, and about $16 million, or $0.03 per share, related to amortization of intangible assets, acquisition-related, and restructuring expenses.

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

Cash, cash equivalents, and short-term investments were $2.1 billion, a decrease of $68 million sequentially.

During the second quarter, we repurchased about 20 million shares for approximately $250 million.

Over the past eight quarters, we have repurchased and retired 127 million shares; about 19% of our outstanding shares.

Also in the quarter, we initiated a payment of our first quarterly dividend of $0.06 per share for a total of $34 million.

We expect to pay our next quarterly dividend of $0.06 per share on October 4 to all shareholders of record as of September 13.

Accounts Receivable was $391 million, down $27 million sequentially.

DSO was 45 days, compared to 47 days in the prior quarter.

Net inventories at the end of the second quarter were approximately $346 million, down $8 million from the previous quarter.

Days of inventory were 83 days, down from the 88 days reported in the previous quarter.

Accounts Payable were $335 million, an increase of $12 million from the prior quarter.

Now, I'd like to turn to our outlook for the third-quarter fiscal 2013.

We currently project third-quarter revenues to be in the range of $800 million to $850 million.

At the mid point of this range this represents a modest 1% growth rate.

This growth rate is well below what is our typical historical seasonality and has been due to the combination of a poor macro-environment and cellular customer declines.

Our forecast largely reflects our customers' view of near-term flattish [decline] environment.

By end market, we expect our mobile and wireless end market to decrease mid-single-digits, due to continued demand weakness at smartphone customers.

We expect our networking end market to grow low-single-digits in Q3, due to continued new product growth and share gains.

Finally, we expect our storage end market to increase low-single digits sequentially, with double-digit growth for our 500 gigabyte HDD mobile platforms and SSD controllers.

For HDD in particular, we are projecting a couple points of share gains in an otherwise conservative-flat hand.

We currently project non-GAAP gross margins to be relatively flat at 53.5%, plus or minus 50 basis points, and currently anticipate non-GAAP operating expenses to be approximately $300 million, plus or minus $5 million.

We anticipate R&D expenses to be approximately $245 million, and SG&A expenses of approximately $55 million.

At the mid point of our revenue range, this should translate to a non-GAAP operating margin of approximately 17%, plus or minus 1 point.

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

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

We currently believe diluted share count to be approximately 580 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 $0.24 per diluted share, plus or minus $0.02.

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

We expect our cash balance to be about $2.2 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 $0.08 per share, plus or minus $0.02.

About $0.06 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 and slower demand, particularly in the near term.

Despite this, we continue to generate good profitability and continue to deliver shareholder value.

We are managing and focusing our investments to areas of growth which we expect to bear results over time.

In storage, we expect the grow share in our core HDD business and expand our opportunities in the growing SSD market.

We expect our networking business to continue to do well, driven by new products and share gains.

Finally, while we are experiencing near-term headwinds in our mobile end market, we continue to be focused on bringing new products to market to take advantage of growth opportunities in the future.

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

(Operator Instructions)

Doug Freedman, RBC Capital Markets.

Sehat, can you go into this storage market for us, and give us a sense of what your outlook is from a total available TAM?

It sounds like you guys are planning on growing the business through share gains.

What do you think the overall market does because at some point share gains are going to bottom out, or reach a maximum peak for you, and how should we think of your storage business going forward?

The key take away from our storage business is -- the key drivers for storage growth, or storage business, at this point and moving forward, is to address the ultra -- the small form factor, [10] form factor drive -- mobile drives is what I meant.

As we said earlier, we're the only supplier of the 500 gigabyte per platter mobile drive.

Today, it's only what, 30% or so of the shipments of -- in the industry of the drives in this storage capacity, and we expect that to grow to close to 100%, maybe in a year or so, as the industries, as usual, moves to the next generation capacity.

So, this is the growth factor.

This is what we talk about share gain from our competition, even in the mobile space where our competitor had a large market share -- in one of the customer, one of the customer, in the older capacity point, 320 gigabytes, so that's one area.

The other area is, as mentioned earlier, our investment in hybrid.

Well, our investment in solid state technology.

As you know, we've been investing in developing solid state technology for like six, seven years already, and one of our plans from very early on is to utilize this technology to enhance, to supplement the hard drives to incorporate SSD as a hybrid in the hybrid form factor.

So, this is a very important technology that we are working on to get driving this technology, especially in the even thinner form factor, like the 5-millimeter form factor, to address very, extremely high capacity like to start with, 500 gigabytes and even higher capacity later in the next couple years; while at the same time, having the performance of solid state, meaning like instant on or instant response times or high bandwidth in hybrid format.

So, this is the -- you mentioned about share gain; share gain is one.

But more importantly, we do believe that as the industry able to build as soon as they introduce these hybrid ultra-thin form factors, these devices will be used not just for the traditional PCs but also for form factors that you think it will not be the territory of hard drives.

What I mean by that is, like tablets.

Is there anything else you want to add?

No, I think you summarized.

I think, for the near term the share gains, but overall TAM.

I think the industry is moving to higher capacity, especially as people put video, our 500 gig per platter addresses that very effectively and thinner form factors and we have, like Sehat mentioned, 100% share in seven-millimeter and positioned very well for five-millimeter.

So, I think we'll grow beyond share gains very well with new technologies in the industry.

Do you have a follow-up?

Do those new technologies come at a higher content?

Are you capturing more content per unit shipped with these newer technologies?

Yes.

If you are talking about hybrids, the solutions are quite a bit more complicated, but in integrating hybrids into -- SSDs into HDDs, regardless if we can increase the cost, we will still significantly reduce the cost compared to putting the solution on the two separate PCBs, or two separate form factors.

Sanjay Devkin, Morgan Stanley.

First question, I wanted to focus on the mobile and wireless business.

I think you specifically talked about weakness at your large North American customer as well as macro concerns around the TD opportunity in Asia.

If we just focus specifically on the TD opportunity, I was wondering, given the outlook for that business into the back half of the year, how much of it would you ascribe to the general macro weakness that you guys had alluded to versus the share dynamics coming in with new entrance coming in to the market?

And, if you could give us your latest thoughts in terms of your positioning and share outlook as we exit the year in the TD market?

That would be really appreciated.

Thank you, Sanjay.

It's hard to differentiate how much of it is going to be macro affected or not.

Just to recap, where we were before the effects of this macro is China Mobile had indicated TAM for TD smartphones going from $12 million to $30 million.

That pace, so far, hasn't lived up to that.

So, now we speculate on how much of that will happen in the second half; and I think given the uncertainty we see, it's hard to see that.

It's hard to predict that with any level of accuracy.

To answer your question on share, we still ended up in the June quarter, albeit in a subdued overall end market at over 60% share.

There is one particular competitor that's very price sensitive; and as we indicated earlier, we still address it, but obviously there's a limit to it.

So, how effective that strategy is going to be -- our products, still we believe our performance -- even though existing products more better performance than the new one.

It's a smaller price gap, but now you're looking at price versus performance.

So, I think that needs to play out probably in the next three-plus months to get a better handle on that.

Great.

Thanks, Clyde.

Just as a follow-up, I wanted to touch on margins at 53%, and change.

We have talked about getting back to 55%, 57% range.

Was wondering if you could talk about the foundry diversification efforts?

Remind us where we are, and how do you think that impacts margins go forward, that versus mix?

Any thoughts there would be greatly appreciated.

We already at one of the three additional foundries bringing up, we are already shipping in volume quantities from that foundry already in Q2.

That will continue to ramp as the year goes on.

We expect to -- we qualified the second of three new foundries.

Qualification has happened; new products should come out of that next year (inaudible) product.

Then, we begin to qualify the third one in the next quarter.

So, I'd say our foundry diversification is on track.

It's a long process, as you know.

Once you qualify the foundry, which is in itself long, you got to catch that on new products because customers generally don't want to requalify going backwards.

Okay, great.

Thank you.

Glen Yeung, Citi.

Can you guys describe your position in the white phone market in your China Mobile opportunity?

Where are you in white phone relative to branded phones in that market?

And, what's your concern that the white phones are going to gain share over branded at the price points at which you're participating?

It's hard to say.

It's a very fragmented market as you very well know, Glen.

I will tell you, our devices today are north of 80 devices, so -- different phone devices out there, so I think we've got good presence in that space.

How successful white-box smartphones is going to be, I think, is still undetermined at this point, but I think our presence in white phones is in pretty good shape.

Okay, good to know.

Secondly, obviously it's a tough environment now in this handset market and ostensibly gets tougher as time goes by.

What are the factors that Marvell considers to decide whether or not you want to stay in this business?

Let me answer this.

We definitely serious into this business.

As we said earlier, we just introduced our second-generation platform solutions for this market.

This platform is the first time in our history that we combine, we integrate either TD-CDMA modem technology and, or WCDMA technology.

Not just -- which actually might have quite -- it's pretty advanced to address very high volume, yet price sensitive market.

So, I guess you could say that maybe in hindsight that we should have done this a year earlier.

Where previously, we have two different platforms, one platform for the TD and the other platform for 3G.

We found out that it was hard to split our resources by one resource addressing like the 80 different handsets being manufactures in the TD, and then it's hard for those customers to move to the 3G solutions while busy working on the TD solutions.

But, it is all behind us.

From now on, all our platforms based on single platform.

Our TD, our modem, our 3G modem technology is superior because they are used by a leading-edge North American smartphone customer.

Now, with these platforms, our customers are able to put the one-time efforts.

In fact, most of the effort comes from us as well, we provides all the OS porting, the video porting, the graphics porting, the camera, the touch screen porting, we provide all those things in a turnkey solution.

We only do this because we are serious in this business because those are huge investment from us.

It's actually -- to invest in this platform takes more resources than building the chip alone.

Building the chip, actually, is a small part of the cost of getting into this business.

We already successful on our first-generation platform.

We are confident that our second-generation platform will be even more successful; especially, now we address not just the TD, we also are addressing the 3G market.

As we move to the third-generation platform early next year with LTE, we'll be even stronger because by that time, our platforms will be even more -- our third-generation will be way more mature, and combining with our events, signal-processing modem technology to address the LTE.

So, we are very, very serious in this business.

This is, after all, it's the biggest market of semiconductors in the world.

We cannot blink.

We will not step back for any reason.

Okay, thanks.

John Pitzer, Credit Suisse.

Hi, this is Ryan Carver in for John Pitzer.

Can you talk a bit more about your hard drive business, specifically around your largest customer?

It seems like based on some recent quarter unit shipments that they're back to normalized levels, yet if we look at hard drive revenues from you guys, obviously, they were down year on year in April, but it looks like down double digits year on year for July.

And, guidance is for near double-digit year on year declines again.

Can you talk about some of the dynamics there?

If these guys are back to normalized hard drive shipment unit levels, is it share loss?

Is it price erosion?

Can you talk a little bit about that, please?

Not share loss by Marvell.

I think both the two biggest players and customers in the space have indicated slowdown, and I think a lot of the PC food chain guys are talking about the same thing.

They indicated flat TAM, both of them, from August to September.

That's highly unusual.

I think if you look back into the history of this industry that it's growing north of 10%.

It is unusual and, obviously, surprising to us.

As far as the disconnect slowdown goes between the OEM pricing, you are going to have to ask them that question.

I don't think it's appropriate for us to answer that.

With respect to Marvell, is actually share increases, as we discussed earlier.

There's no any share -- any particular customer, I don't think there's any meaningful share erosion anywhere.

Maybe I want to add, our customers have mentioned in their earning call in a few weeks ago, so that they -- at the end of their quarter, they slowdown their production.

That happened to be right in the middle of our quarter because our quarter is about one month off of their quarter.

So, we've got some other timing issues.

And of course, we've got one month, on the other hand, in October, and there's not a lot you can count on, or predict right now, in that quarter.

Ryan, do you have a follow-up?

Yes, just going over to the wireless side of things, I think Glen asked a question about white phones.

Can you give us your thoughts on how you think the market in terms of units is going to split between branded high-end phones and the white phone low-end market?

And, how much of that market you expect to be able to address with the more high-end solution?

Then, the size of the market you plan on addressing with this more lower-cost device?

And, how that will impact your expectations for gross margins going forward, if we assume this lower-end, higher volume is going to be at a the lower-margin profile?

Thanks.

Maybe I'll address this a little.

In my view, knowing what this thing looks like, or the solutions -- especially our second-generation solutions coming out, this unified platform device, the two devices that we just introduce, these are low-cost device.

Yet at the same time, it's a very high performance, dual-core 1.2 gigahertz processor, very powerful graphics, so these devices are used not just for -- when we say low cost, it means that it's not just low cost, but it's very, very high performance.

So, the way we look at it is that knowing what these things are capable of, these are devices that could be used -- they are very attractive for the tier-one OEMs and also very attractive for the white goods guys.

The differentiation between the white goods and the tier-one OEM guys will be the industrial design, will not be in the software because the software is going to be unified also, will be standard operating systems, standard video, standard graphics.

The differentiation will be who can procure a better LCD screen, or better touch screen, or better plastics, or better industrial sexiness of the design; so because of that, you could argue that some of the OEMs will probably still have an advantage in this area in getting maybe better pricings on this high-resolution LCD screen.

The silicon is capable to run either lower-resolution screen all the way to beyond 1080p screen.

Even the video is capable of 1080p, so it's just a matter of customer whether they want to pay for the expensive screen or not.

The white goods guys probably will focus their solution more on the lower price, lower-resolution screen markets.

And, the big boys will target for the higher-resolution's sexier markets, where they could charge somewhat higher price.

The white goods maybe will have more market share, replacing their feature-phone markets, for feature-phone customers that want to move to smartphones, and the OEM guys will target the more well-to-do customers.

Okay.

Harlan Sur, JP Morgan.

On TD in the near term, obviously it seems like the competition has closed the gap very near term.

I guess what the market is trying to figure out is, how is Marvell planning to maintain a sustainable competitive advantage in the TD market so you can mitigate this leapfrogging of market share from one quarter to the next?

And I think that, what the team is trying to tell us is that it's going to be based on performance differentiators, things like your dual-core platform, TD-LTE.

When should we expect these differentiators to translate into sustainable growth for Marvell?

Seems like, from what you're telling us today, we have to wait until next year, but can you just give us some color around that?

As I said earlier, in hindsight we should have migrated to our platforms to unified platforms.

We've been in this business only for six years.

To maintain two different platforms at the same time was very taxing for us.

Part of the reason that you see this issue of this leapfrogging only because we've been busy spending our time unifying our solutions so that from now on, we do not have to deal with two platforms.

From a technology point of view, we have -- everybody knows we have superior technology.

The customer knows about it.

The carrier knows about it.

It just that when we have two battle fronts, one in 3G and the other one is TD, we have to split our resources in the past.

Now moving forward, we can unify these resources to battle one battle front.

Talking about, with respect to revenue growth, in the past we're only just addressing the TD for this platform solution.

Now, of course, everybody knows that the bigger market is actually the 3G.

Now that our 3G solutions can ride on the platforms that we have developed for the TD, we can address the bigger markets opportunity for smartphones.

As even the next step, or the third generation circuit of this platform, we'll address -- we also accelerating the deployment of LTE.

The LTE will address not just -- will actually address, mainly initially, for the developed markets versus the developing markets.

There's another area that we have been absent in the past, especially talking about platform solution.

So, all these things we believe will give us the, no pun intended, the platform so to grow the revenue to be valuable as well.

And the other part?

Yes, I've got a follow-up for.

Thanks for that, Sehat.

As we have seen the first wave of ultrabook platforms being rolled out, it's kind of interesting to see that dual-drive form factors are showing up before hybrid drive architectures.

However, I do think that your customers will start rolling out hybrid drives in the second half of this year; and certainly, it will be more of the 2.5-inch mobile drive mix next year.

Can you just talk about your controller share in hybrid drives?

Is it as high as your overall HDD market share?

In the merchant market, SSD controller, I do believe our market share is either equal or higher than the -- probably higher.

If I have to guess, probably higher, but I will say at least equal to our market share in the HDD business.

Ross Seymore, Deutsche Bank.

This is Bob Gerardi for Ross.

Just to touch on the SSD space a little bit.

Can you talk about, today, where your exposure is mostly?

Is it the client SSDs, the caching solutions, do you have any enterprise exposure?

Also, I know you can't mention customers, but the merchant market could you break down -- I think Samsung still uses internal solutions, but the other ones use merchants, so can you break down the merchant versus captive market for us, just quickly?

Sure.

I think of the five flash guys, one, the one I think you mentioned, uses captive, everybody uses merchant.

Most of our revenues -- to the first part of your question, most of our revenues are on the client side.

We think that's where most of the revenue growth is.

We do have content on the enterprise side, and that's how we started off with SSD several years ago.

But, the growth opportunity is in the client side, so most of the growth we describe in is on the client side.

Great, and just a quick follow-up on the wireless side.

Does this WCDMA solution, does that -- is that intention to open up the 3G market for you?

Or, is that something that was necessary just to kind of protect your TD position?

I was just trying to think of is this an offensive move, or just a defensive move on your part?

We always wanted to do this for a while.

This is the first time in our history that we finally are able to pool all of the resources necessary to put both a 3G and a TD into a single platform.

And, we have to do this anyway because when we move to the LTE, we have no choice but to have single platforms.

The stake is just too high to have multiple platforms.

You can call it offensive strategy, but this is the plan that we have here for quite a while already.

And, this is the first result is what we introduced just a few days ago.

Great, thank you.

Craig Berger, FBR Capital Markets.

Within the wireless piece of the business, can you help us understand how much is discrete or combo connectivity, versus the TD business, maybe versus the all other cellular bucket?

Craig, we don't break that down.

When we referred -- what we move into, as Sehat described, is more platform solutions.

So, all of our TD products, and when we refer to TD is a platform solution that includes the modem and apps processor on a single chip, along with the RF PMIC, and then the connectivity devices.

So, it's all included in there.

The industry is moving.

There's a few customers, and they are notable customers, but the industry is moving more and more to complete solutions.

I believe, over time, other than some isolated customers, people will move to solutions where your attach rate is with a complete solution.

Other than one of our customer, North American customer, our attach rate in all of our CPs is close to 100%, so we don't break that out discretely.

You mentioned that North American customer, you guys used to tell us about 7% or 8% of revenues.

How would you characterize that going forward?

Lower.

Anything else there?

I'm not trying to be smart.

It's difficult to predict where some of the stuff is going.

We should not look down at people when they are in trouble.

We do have high hopes there that they will recover and to be part of their future.

Our solutions -- not all solutions are unified.

We can address, not just the Asian markets or the European markets, but also the existing North American customers.

So, this will be good to us.

If they return back to health, we can only benefit from there.

James Schneider, Goldman Sachs.

Maybe to follow-up on the gross margins, I know you talked about the fab diversification; but in terms of mix of business, how much do we think about your ability for gross margins to go up, say, over the next four to six quarters?

Could we expect 200 basis points more?

How should we think about the overall mix of your business and your ability to improve costs within that leading to gross margin expansion going out in the foreseeable future?

Jim, in spite of the erosions we have in the last year or two, our gross margins today is still in the top one, two or three of our peer groups, so it's still amongst the best.

In terms of predicting the future, it's difficult to say where our growth revenues, especially particularly in this environment, so I could only speculate.

I know, intrinsically, we are doing a number of things including foundry we described earlier, including moving from gold to copper.

Those things will improve, intrinsically, our gross margins.

But, how much one of our end markets grow versus another, is difficult to predict.

Heck, it was difficult to predict last quarter; it's difficult to predict going forward.

Okay, thanks for that.

As a follow-up, can you talk a little bit about your capital allocation thoughts at this point?

Clearly, you've done very well on that front.

You bought back a lot of stock, but you still have the capacity to buy back a lot more, or potentially increase the dividend.

Can you give us an update on your thoughts around that strategy, and how you balance buyback versus dividend right now.

Jim, our track record I think demonstrates what it is.

We have returned value mostly through buybacks, but we initiated a dividend; and obviously, intend to continue doing that.

I think we look at it from time to time, and we know what the tools are, and we intend to use the tools from time to time as we see fit.

Blayne Curtis, Barclays Capital.

I know you got a lot of questions on the wireless business, I did want to follow-up there a little bit more.

The WCDMA market, arguably, is more competitive than TD, so I was just trying to understand -- you didn't talk much about -- the focus has been on China and Asia.

Can you talk about, I appreciate the optimism with the North American customer, but all indications are probably they shrink more.

Obviously, outside of Asia could be less competitive, your progress there, and just how you look at the investments in this business, is it profitable to be in (inaudible)?

WCDMA market is more competitive.

That's actually it's good because means the cut of market's bigger.

We are not going to be shy from going to a market where the market has more players going after it.

After all, we have very advanced WCDMA technology; and if you look at the difference between WCDMA and TD-SCDMA, really there's hardly a difference in dye size, for example.

In fact, in our platform, it's exactly the same dye size because we want to make it exactly the same footprint compatible as maybe part of it we want to have the same features, we want to have the same graphics, we want to have the same video, we have to have same camera processing technology, we want to have same dual core.

The key is this, the key is not to be a competitive or more competitive or less competitive.

The key is, we've already spent the OS porting, the video porting, the graphics porting, this, as I say earlier, this takes a vast majority of our expense in going into this business.

So, if we already built those -- if we already spend those resources, anything that we go after -- if we go after the 3G market, the WCDMA market, it increase our TAM significantly without adding extra resources, except for doing the final patch-up IOT qualifications for when the handsets are built, but that's it.

If the market is so much bigger, the fact is we are going to get more revenue in, more profits out of the same investment.

Blayne, do you have a follow-up?

Got you, thanks.

Maybe for Clyde, on the gross margin, just when the guidance flat.

It seems like you should get a benefit with mobile and wireless being down and storage and networking being up, am I miss reading that?

Our range is plus or minus 0.5 point, so let's see how it plays out.

Okay, fair enough.

Thanks guys.

Jeff, can we take one last question please?

Riaj Seth, Cowen & Co.

I believe your line is open.

You may be muted?

Riaj, you there?

All right, we'll move on to another questioner.

Srini Pajjuri, CLSA.

This is Ryan Goodman for Srini.

Question, this was asked a little bit earlier, but still not entirely clear.

On the WCDMA, I know you guys had made decent progress in some of the lower-cost smartphones out there earlier in the year, and I understand that the longer-term strategy is with this unified architecture with the TD and the WCDMA going forward.

I guess where I'm unclear is, as I look out over the next two to three quarters, maybe, can you talk a bit about how we should be expecting the business to track, and any opportunities there?

Also, just help confirm when we should expect the more unified technology products to start ramping and coming to market?

Yes, so the statement that you are alluding to about earlier customer on the WCDMA, those were on our previous [16 platform] that we inherited from the Intel days.

Moving forward, every customers that we have, moving forward, will be on a single platform that we just announced earlier this week.

With regards to -- we already have running all the OS running already, making phone calls, so we will be sampling that platforms this quarter to a number of customers.

By next quarter, we will ramp up to a lot more customers that we have.

In terms of -- of course, we have high hopes that with this new platform strategy, we will have a lot more 3G customers as a result.

Then, a follow-up, kind of a similar question, but more on the storage side.

I understand the long-term strategy with the SSDs and the hard disk drives going to more of a hybrid solution leveraging both technologies, integrating them.

As a look out though to the next couple quarters, maybe two or three quarters, you have the ultrabooks of this generation ramping, it sounds like you have decent exposure on the hard disk drive side.

In terms of solid state drives, I know you guys have a decent share there in the merchant solutions both channel, ultrabooks, everything.

Could you just talk about the strategy over that near-term phase before the hybrids really gain that much traction?

Yes, I think the results and the forecast speaks for us, Ryan, recall earlier we said SSD grew 25% quarter over quarter in Q2, and we expect that to grow again 25% in Q3 as some of these newer ultrabooks come to market, this growth driven by ultrabook.

I think we have good presence in that space; and as you see more of them come to market, I think you'll see our revenues reflect.

So, 25% and 25% is pretty good traction, and it reflects what you're asking.

I want to add, there's no reason why people that build their own flash -- the people that have flash manufactures they want to go to this business.

After they evaluate all of the available SSD technology in the market, we clearly have the best SSD solution in the market.

So, this is the reason why they're -- growing 25% last quarter, and also we are going to grow again 25% quarter, next quarter.

Fair enough.

Thank you.

All right, with that I'd like to close.

I'd 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 goodbye.

Ladies and gentlemen, that concludes today's conference.

Thank you for your participation.

You may now disconnect.

Have a wonderful day.