邁威爾科技 (MRVL) 2014 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first quarter 2014 Marvell Technology Group Limited earnings conference call.

My name is Caris, and I will 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 call is being recorded for replay purposes.

And I would now like to hand the call over to your host for today, Sukhi Nagesh, Vice President.

Please proceed.

Thank you, Caris, and good afternoon, everyone.

Welcome to the Marvell Technology Group's first quarter of fiscal 2014 earnings call.

On the call today are Sehat Sutardja, Marvell's Chairman and CEO and Brad Feller, Marvell's Corporate Controller and interim 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 on our website in the Investor Relations section at Marvell.com We have also posted 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 the differ materially from management's current expectations.

The risks and uncertainties include our expeditions about our overall business, our product and market strategy, statement about market acceptance about our products, statements about general trends in the end markets we serve and future growth opportunities, statements about market share and statements regarding our financial outlook for the second quarter of fiscal '14.

To fully understand the risks and uncertainties that may cause results to differ from our expeditions and outlook, please refer to today's earnings release, our latest annual report on Form 10-K and subsequent SEC filings for a detailed discussion of our business and associated risks.

Please be reminded that all of our statements are made as of today, and Marvell undertakes no obligation to revise or update publicly any forward-looking statements.

During our call today we will make reference to certain non-GAAP financial measures which exclude the effect of stock-based compensation, amortization of acquiring 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 quarter earnings press release which have been furnished to the SEC on Form 8-K and is available on our website in the Investor Relations section.

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

Thank you, Sukhi, and good afternoon, everyone.

Today we reported first quarter revenues of approximately $734 million, a decline of 5% from the prior quarter and at the high end of our guidance range.

During the quarter, we experienced better demand in our storage and networking end markets while mobile and wireless was slightly below our expectations.

We delivered the following non-GAAP results for Q1, gross margin of 54.6%, operating margin of 12% and earnings per share of $0.19.

In addition, we continue to return cash to our shareholders, as we repurchased roughly 20 million shares costing about $200 million and paid approximately $30 million in dividends during the quarter.

And now I'd like to provide a brief update on each of our end markets.

Starting with storage, I would first like to reiterate that we have always believed and operated under the assumption that storage needs for consumers and enterprises will continue to rise as the amount of data consumed increases.

This belief has led us to steadily invest in advanced storage technologies, many of which are still years from commercialization.

As you know, HDD OEMs have recently commented that they are seeing stabilizations in the HDD TAM, despite a weaker PC market.

They have indicated that this stabilization is being driven by increased adoption of hard disk drives in non-PC consumer applications.

As a result, in Q1 our storage end market exhibited better than typical seasonality.

This, along with share gains, resulted in flat sequential revenues for us.

As you recall, Marvell's shares in HDD increased by roughly 5 percentage points in fiscal 2013 due to the ramp-up of our 2.5-inch 500-gigabyte per platter devices at all the drive OEMs.

In fact, we are now seeing adoption of our 500-gigabyte per platter technology in new types of desktop applications such as all-in-one PCs, which are slowly replacing traditional desktops.

Moving forward, our advanced product roadmap is creating strong traction at customers for new enterprise and traditional 3.5-inch desktop and new line applications.

As a result, we expect continued steady HDD share gains this year.

In addition to better trends in HDDs, we have stronger than initially expected double-digit sequential growth for our SSD business in Q1.

Our strategy of partnering with top-tier NAND OEMs is resulting in excellent traction for our advanced SSD solutions.

Consequently, we expect to gain at least 5 percentage points of share in SSD, along with the expected growth in the overall SSD TAM this year.

We also are leveraging our technology leaderships in HDDs and SSDs to help our customers to migrate HDD to hybrid storage devices.

While the market for hybrids will be small this year, we are well-positioned to benefit from this growth, which we believe will be more meaningful over the coming years.

For Q2, despite the continued weakness in the PC market, we expect our storage end market to be roughly flat with double-digit growth in SSDs offset by a slight decline in HDDs.

In summary, we believe our continued focus on investments in advanced storage technologies are resulting in steady share gains in both HDDs and SSDs.

Next, moving to mobile and wireless, our revenues in this end of market declined approximately 24% sequentially in Q1.

We believe Q1 was the trough for this business.

We continue to make strong progress in mobile at multiple tier 1 OEMs with our integrated 3G, as well as 4G platforms.

Recently, leading Asian tier 1 OEMs started production of a new smartphone and a tablet based on our dual core platform.

This is just the beginning, and we are confident that additional devices will be introduced by these OEMs, as well as other tier 1 OEMs in the coming quarters.

Moving beyond our dual core offering, we're also seeing faster adoption for our recently introduced quad core 3G platform solution, for which we have already started initial shipments.

Furthermore, we are making significant progress in LTE having already successfully demonstrated our 4G LTE modems at this year's Mobile Award Congress.

And earlier this year, we announced a fully integrated quad core bimode Cap 4 LTE solution specifically targeted for the mainstream 4G market.

This LTE solution doubles the graphics performance compared to the 3G solution and also supports features such as voice over LTE.

Our LTE solution has already passed the operator test in China and is on track to achieve certification in North America this year.

As a result, we expect at least one leading handset OEM to bring to market a 4G LTE smartphone using our solution this year with more following early next year.

Next, in wireless connectivity, as we mentioned in our last earnings call, we are continuing to see increased traction for our two by two combo solutions, both four 802.11N, as well as 11 AC.

We have won multiple designs with our new combo solutions in tablets, ultrabooks and gaming and video application platforms.

Our combo solutions offer both superior performance as well as support for multiple operating systems.

This is leading to increased opportunities for our solutions, specifically in the tablet and the ultrabook markets.

In addition, for mobile handsets, we are seeing 100% attach rate for our connectivity solutions for both our 3G and 4G unified platforms.

In our traditional connectivity markets such as gaming, we expect to benefit for multiple new consoles that are being scheduled -- that are scheduled to be introduced this year.

For the enterprise, we continue to see strong traction for our four by four solutions for access points, hot spots and service provider gateways.

In summary, with the increased demand for connectivity in consumer, as well as enterprise products, we anticipate our connectivity business to deliver solid year-over-year growth in fiscal 2014.

As I mentioned earlier, Q1 was the bottom for our mobile and wireless business and for Q2, we expect both mobile and wireless to grow double-digits sequentially.

Turning next to our networking, our Q1 results were better than anticipated and down only 2% sequentially.

Our networking business continues to perform better than most of our peers on the strength of share gains and new customer product ramps.

We continue to innovate and bring to market new solutions for the data center, enterprise and infrastructure networking markets.

For example, this quarter we introduced new 10G and 40G physical layer devices that offer high performance and strong security features to our customers.

In addition to these new five devices, we introduced a new family of our Prestera packet processors that are capable of processing data up to 1.28 terabits per second.

In addition to investing in software internally, we are also partnering with excellent software companies to run their software on our networking silicon to provide new services for mobile backhaul, carrier ethernet and data center networks.

The combination of our high-performance networking solutions and advanced software capabilities is being well-received by our customers and is ideally suited for emerging software defined networks of the future.

Our continuous investment in networking, especially in this new areas of growth, leave us confident that we will continue to outperform our networking peers.

For Q2, we expect our networking end market to grow low-to-mid single digits sequentially.

In summary, demand in Q1 for storage and networking was better than originally anticipated while mobile and wireless was slightly below our initial expectations.

We are starting to see the benefit of our prior investments as they manifest in above market growth as evidenced by our current outlook.

We continue to make strong progress in mobile with both our 3G and 4G LTE platforms at multiple tier 1 customers.

We're seeing the opportunities for our connectivity combo solutions across multiple applications.

In addition, we continue to make headway on share gains and growth in HDDs, SSDs and networking.

Finally, we remain committed to returning cash to shareholders through our buyback and dividend programs.

With that, I would like to turn the call over to Brad to go over our first quarter financial results and second quarter outlook.

Thank you, Sehat and good afternoon, everyone.

As Sehat mentioned, we reported revenues for the first quarter of fiscal 2014 of $734 million, a sequential decline of approximately 5% from the previous quarter and at the high end of our guidance.

In storage, our overall revenue was roughly flat from the prior quarter and represented approximately 53% of total sales.

Our HDD business declined less than we expected due to better than typical seasonal demand and continued share gains.

In addition, we continued to see strong growth in our SSD business during the quarter.

In networking, our revenue was down 2% sequentially and represented approximately 24% of total sales.

Despite general market weakness in networking, we saw double-digit sequential growth in network processors and PON.

Our mobile and wireless end market declined roughly 24% sequentially and represented approximately 18% of overall sales.

In the quarter, we had weaker than initially expected shipments of older generation products to our North American handset customer due to the successful launch of their new generation devices.

Moving next to margins and expenses, our non-GAAP gross margins for the first quarter was 54.6%, which was higher than our expectations due to better mix and a few nonrecurring one-time benefits, including sell through of previously reserved inventory.

Our non-GAAP operating expenses came in at $313 million, which was in line with our guidance range.

This resulted in a non-GAAP operating margin of 12% for the quarter.

Net interest and other income was $3 million, and we recognized a tax benefit of $7 million for the quarter.

Taken together, this resulted in non-GAAP net income for the first quarter of $98 million, or $0.19 per diluted share.

This was about $0.05 higher than the midpoint of our guidance.

Roughly $0.03 of this upside can be attributed to the tax benefit and the one-time nonrecurring benefits which positively impacted our gross margins.

The shares used to compute diluted non-GAAP EPS during the first quarter were 522 million as compared to 544 million reported in the prior quarter, showing the benefit of our continued share buybacks.

Cash flow from operations for the first quarter was $84 million and free cash flow for the quarter was $53 million.

This was better than our expectations due to the overall improved results in the quarter.

Now, summarizing Q1 results on a GAAP basis, we generated GAAP net income of $53 million, or $0.11 per diluted share compared to $50 million, or $0.09 per diluted share in the prior quarter.

The difference between our GAAP and non-GAAP results during the first quarter was mainly due to stock-based compensation expense of $34 million and about $11 million related to amortization of intangible assets and acquisition-related costs.

Now, turning to the balance sheet, cash, cash equivalents and short-term investments were $1.7 billion, a decrease of $186 million sequentially.

During the quarter, we repurchased approximately 20 million shares for a total of $200 million.

Over the past 11 quarters, we have repurchased and retired approximately 204 million shares, or about 29% of our outstanding shares.

We also paid dividends of $30 million in the quarter, or equivalent to $0.06 per share.

Accounts receivable was $370 million, an increase of $40 million from the prior quarter driven by improved linearity of shipments during Q1.

Our DSO remained at 43 days for the quarter.

Net inventory at the end of the first quarter was approximately $271 million, an increase of roughly 8% sequentially to meet anticipated demand as the revenues begin their ramp in Q2.

Moving next to our outlook for the second quarter of fiscal 2014, we currently project second quarter revenues to be in the range of $770 million to $810 million.

At the midpoint of the range, this represents a sequential increase of roughly 8%.

By end market, we expect stores to be flat with double-digit growth in SSDs, offset by a slight decline in HDDs.

We expect our networking end market to grow low-to-mid single digits and finally, we expect both mobile and wireless to grow double-digits sequentially driven by the release of new smartphones and tablets based on our unified 3G platform for mobile, as well as new devices utilizing our advanced wireless connectivity solutions.

We currently project non-GAAP gross margins of 52.5%, plus or minus 100 basis points, for Q2.

Recall that our long-term gross margin target range is between 50% and 55%.

There are many moving parts which impact our gross margins in any given quarter, as we saw in Q1.

We have indicated in the past that as we gain traction in some of our high-volume consumer mobile and wireless end markets, our gross margins will likely trend towards the lower end of our target range.

However, we are continuously working on reducing our costs through multiple actions, including transitioning our packaging from gold to copper and moving rapidly to advanced process nodes, which will help offset end market mix in the future.

For Q2, we currently anticipate non-GAAP operating expenses to be in the range of $315 million, plus or minus $10 million.

We anticipate R&D expenses of approximately $255 million and SG&A expenses of approximately $60 million.

At the midpoint of our projected guidance, this should translate to a non-GAAP operating margin of approximately 13%, plus or minus 1%.

The combination of interest and other income should net out to approximately a $1 million benefit.

Tax expense should be approximately $1 million.

We currently expect the diluted share count to decline to approximately 517 million shares.

Taken together, we currently project non-GAAP EPS to be about $0.19 per diluted share, plus or minus $0.02.

On the balance sheet, we currently expect to generate approximately $100 million in free cash flow during the quarter.

We anticipate our cash balance to be about $1.8 billion, excluding any M&A activity, continued share buyback or other one-time items.

We currently expect our GAAP EPS to be lower than our non-GAAP EPS by about $0.10 per share.

About $0.07 of this is related to stock-based compensation expense.

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

(Operator Instructions)

Glen Yeung, Citigroup.

This Delos Elder for Glen Yeung.

I wanted to ask a question about the PC market in the back half of 2013.

I know you're gaining share there, but could you address, are you gaining share in a growing or shrinking pie?

That's pretty hard for us to answer.

Obviously, I think we've mentioned this in the past as well, we're not directly -- we're two steps removed from the PC OEMs and obviously, we share the same news as you guys do about the weaker PC market.

But if we just go back to what Sehat said in his prepared remarks and what some of the drive customers have said, they are seeing increased applications for hard drives and not PC applications.

Right?

And I think one of our big customers said that on earnings call as well.

So, while it's hard for us to really predict what the PC market's going to be doing, drives seem to be holding their own.

Great, thanks.

And then as a follow-up, I know you're talking a lot about the improvement in your mobile and wireless division.

Can you talk a little bit about how this can be broken down into the device types?

I know you said both smartphone and tablet but can you give us a sense of which would be more?

And then also by geography if possible?

Actually, we only have a single product.

As we mentioned several times in the past, we're focusing our solutions to a single platform device, so specifically in the prepared comments, the device, the products, the smartphones, the tablet ,that runs exactly on the same identical device.

So no, there's not anything specific difference between the silicon.

Between the two products.

If you look at the 3G platform, the dual core or quad core devices they can go into smartphones or tablets, and it really depends on what the customer wants to use it for.

Okay, but you can read through this by -- what you can read through between the lines means that our smartphone solutions are in the class of a tablet class performance.

So, this is actually is our strategy of entering this market to become a bigger player by building products that the end user will appreciate.

This is for the dual core and then moving the quad core and so on will be a better performance.

Thank you, Delos.

Can we get the next question, please?

Harlan Sur, JPMorgan.

Great to see the strategic initiatives starting to drive some growth here.

So, it sounds like the unified 3G baseband platform is a big driver of the incremental growth here in Q2.

Could you guys share a little bit more color here?

Is it both TID and WCDMA smartphones that are ramping?

Does it include some tier 1 handsets OEMs as well?

And more importantly, do you expect your unified 3G platform to continue to drive growth through the second half of this year?

And then I have a follow-up question.

Yes.

The answer is yes in all those areas.

So, a little bit more specific, it's a single platform that support 3G -- both PD and 3Gs, so both handsets devices will be in production.

Tablets, there will be tablets that will support 3Gs as well tablets support TD and some tablets that don't have anything, only just Wi-Fi.

So, as we projected early on that earlier in the last couple quarters, that we are putting a lot of focus in this area.

And we expect that every quarter we'll see measurable improvements so that by the end of the year, we'll have much better positions in this market.

Yes.

And Harlan, we are focused on the top-tier OEMs.

Yes.

I forgot about that part.

The answer is yes.

The top-tier OEMs are the ones go into production first in back.

Okay, great.

Harlan?

Yes, so thanks for that.

And then from a financial standpoint, the team has committed to keeping OpEx dollars relatively flattish this year over last year.

Roughly about $1.2 billion.

You're maintaining that run rate here in the first half.

Can you keep it flat in the second half as well?

And if you are, how is the team going to continue to balance out the incremental investment dollars required to gain scale in the mobile device market and still commit R&D dollars to other forward-looking initiatives like 64-bit ARM or 100-gigabit ethernet or 10-gigabit PON and other related development efforts?

So, I'll address the first part of the question, Harlan, which the answer is yes.

We're comfortable we can keep operating expenses at the current level, which would drive us to roughly flat for the year.

We have a lot of initiatives underway under the covers to make sure that we can do that.

But yes, we're comfortable we can keep it at these levels.

And the other part is recently our expenses is high compared to our revenue for the last several quarters.

It's because we have been investing in a lot of new areas, a lot of technologies areas that takes a lot of years.

Your question specific about 64-bits, just one of the many things we're investing.

So, that's quite a bit of investments in engineering to prepare for the 64-bit ARM, which is not going to be meaningful in terms of revenue this year, might be zero revenue this year, but next year, and a year from -- and more later down the road, it will become more important.

A lot this investment has to happen early on, and we're already prioritizing our investment.

Basically another way to answer, how do we keep the expense flattish?

Is just by focusing on investment, is it going to matter in the next several years?

Right, and Harlan, you know that in the last two years, our methods -- our operating expenses have actually gone up each year.

Revenues are actually trailed a little bit, right?

So, the investments have been made.

Now, we're reaping some of the benefits, we expect to reap some of the benefits.

Okay, great.

Thanks, guys.

Cody Acree, Williams Financial.

Congrats on a good quarter.

If we go back, Sehat, again to the mobile and wireless side, the one thing you haven't mentioned so far is your prior target of 10%.

Are we moving away from that?

Is that a continued target?

And to the extent that you can talk about the contribution that you expect, at least from a size standpoint, from Asia and then maybe also from the tier 1 players?

Yes, specifically related to our target, I personally am not moving away from my original target.

I know, as I say from day one, that this is a very high target for us to achieve.

Yet at the same time, I believe that a 10% is very reasonable and it's something that we have to strive for.

And we have the right technology.

We have the right technology, we have global 3G standard devices capable to support WCDMA as well as TD-SCMA now.

We just recently introduced, so we have a device there on the same platform, meaning like the software will be fully compatible.

We are supporting LTE, and not just any LTE, we're supporting cat 4 LTE, meaning release 9 LTE versus what's in production today, it's release 8 LTE in the market.

So, I felt it's just a matter of time that we will achieve the 10% target.

What was your other question, Cody?

Yes, the other question was really in the networking space, you talked about share gains there.

We've seen some puts and takes as far as end activity.

I'd like to get a bit more color on what you think we're seeing from an investment standpoint more broadly, and then, where is it that you specifically think you're taking share?

I think in general, if you look in areas in networking in areas that we're investing, we're investing in building more advanced PHYs, like some of the advanced PHYs that we continue to put a lot of investments in the -- trying to make the costs and power for the 10-gig ethernet of copper to be lower, to increase the adoptions of 10-gigs in the enterprises.

We're also investing in network processors because a lot of these programmable network processors are becoming the choice by the carriers for base stations and deployments.

If we all believe that consumer wants to have wireless connectivity for their devices, if we believe that tablets and smartphones are going to be more ubiquitous, LTE is going to be the de facto choice for delivering this data to the users.

And that means that the entity in networks in the infrastructures, those programmable network processors will be very important, and software also that runs on these network processors will become important as well.

Now, other areas like investing in switch fabrics, okay, for the data centers, if you believe the data centers -- if the computing moves to the data centers.

So I think -- to summarize, Cody, our investments there in enterprise -- at least in networking are span enterprise and span data centers, span infrastructure area, as well as software -- internal software as well.

Great.

Congrats, guys, and thanks for the help.

Doug Freedman, RBC Capital Markets.

Congrats on a strong quarter.

Could I focus in for a few seconds on the SSD market and how you see that developing?

Clearly, it does seem like we might be hitting a bit of a knee in the curve there.

Is there a point in time that you think you'll have enough revenues from the SSD side of the business that you can break it out as a percentage of sales for us?

And can you give us an update on the kind of progress that you're making there?

Yes, okay.

We have stated from -- for a while already, maybe for the last couple years, that we believe that SSD is going to be becoming an important role in ultrabook markets -- ultra thin laptops, and we still believe that.

But having said that, we've also been saying that it takes times for the market to grow to be significant volume compared to traditional HDDs.

After all, the traditional HDDs are shipping in the what, 600 million units plus market?

So, and then the other part is, at same time, the price points is about 10 X for the same capacity of HDD, the SSD is still priced of 10 X. It's going to be a matter of when the investments in the next generation stops for flash will happen to be able to drive the cost of the flash to reduce the costs of the SSDs.

And we don't really care one way or the other when this thing happens.

We're investing in both sides.

We believe both sides will continue -- the revenue will grow.

Of course, the smaller part of the SSD will have a faster growth rate, it's natural.

For the same number of units growth, percentage-wise is going to be much higher than the HDDs.

But we also believe that in the long run, in the next several years, the growth of HDDs, will go back to -- will recover as the markets -- as lower-cost PCs get to the market earlier call.

Talk about the market for PCs, in my personal opinion, my personal opinion is that if the PC market price drops down to like $200 plus, the market for PCs as well as non-PC market that will need these HDD, we'll be there.

So, we are not concerned.

As a Company, we are not concerned about our opportunity in this market.

Do you have a follow-up?

Yes.

Sehat, you just mentioned that the next generation NAND will expand the market.

We're hearing from some suppliers that they're looking at moving to a 3D NAND architectures.

Have you seen those products yet?

Are you working with those manufacturers, and is that going to have an impact on the controller market?

Yes.

We are very well aware of the 3D NANDs.

We do expect the 3D NANDs will be in production sometime next year.

But that's as much as we can talk about.

Blayne Curtis, Barclays.

This is Chris Hemmelgarn on for Blayne.

Thanks very much for taking the call, and congrats on a good quarter, guys.

First question is, I don't think you mentioned this, could you talk about your 10% plus customers, what share they were of revenue this quarter?

So, I think typically, there's been just one in storage.

And Chris, we'll get back to you on that offline.

Okay.

We'll touch --

I don't have that handy in front of me.

No worries, then.

Second question is, it looks like you may be, given your guidance for next quarter, slowing the pace of your share repurchases a little bit, is that the case?

Is that a conscious choice, or -- ?

No.

You shouldn't read anything into the guidance on us slowing down.

We'll continue to be active with the buybacks.

Obviously, be very opportunistic in the quarter, but you shouldn't read anything into the guidance to say we're slowing down.

And Chris, the 517 million share count that Brad provided guidance on did not include any share buybacks.

Got you.

That's very helpful.

One last quick follow-up then, talk a little bit about how the overall comm market is looking for you in the back half?

You guys certainly are still seeing some share gains and all, but the overall market environment?

Well, the infrastructure market, a lot of people are looking at growth in the back half of this year.

Obviously, from all the CapEx increase, we do see some initial -- our networking business is actually doing quite well in the past few quarters, relative to our peers.

But we're going to wait and see how it plays out in terms of whether our customers will actually benefit from the CapEx increase.

It's a little early for us to comment on that, Chris.

But we're watching it closely.

Perfect.

Thank you very much, gentlemen, and congrats again.

James Schneider, Goldman Sachs.

If I look at the storage market for a second, specifically in hard drives, you guided that down slightly in this conventional hard drive business.

I would have thought that you would have seen some growth there, given that many of your customers are guiding the TAM flattish and you're gaining share.

Can you give us any sense about what might be going on?

Is there a little bit of component inventory out there in the channel, or are you just being a little bit more conservative than some of your customers are?

Yes.

So, the reality is, most of our customers guided to flat or slightly down.

There is the share gains still to come, some of the enterprise gains are coming slowly, as we expected.

And then there's obviously always pricing declines, so nothing necessarily to read into that, enough saying we're slightly down.

Okay.

Fair enough.

And then actually leads into my second question, which is on the SSD controller market.

Obviously, we're expecting pretty healthy market growth there in terms of units overall.

Can you talk about the ASP environment on SSD controllers, what you're seeing there and what kind of pressure is being driven by some of the captive players that may have 3-bit per cell technology?

Yes.

As we say, consistently over the last few couple years to be, the fact that the market for SSD is low-volume as well as the SSD tends to have bigger [life-sizes], bigger packaging and so on.

The price, okay, is naturally higher than the controller for the HDDs.

So, it's still the case.

The markets have not moved to low end SSDs yet at this point.

So, until the market -- until that happens, the pricing will always be higher.

And then maybe like a couple years from now when the market moves to very low end SSDs, the market, the pricing maybe will approach the HDD pricings.

What was the second question?

3D NAND.

The 3D NAND, yes.

The 3D NAND?

That's 3-bit per cell, I'm sorry.

The 3-bit per cell, yes.

The 3-bit per cell is just -- this is anticipated by us.

We're building -- if you look at our controller, one of the main reasons that our customers are using our controllers is because our error correction capability is superior compared to many of what's available in the market, including for people building in-house.

So, our controller is already designed for 3-bit per cell and beyond.

When the time comes, there device will capable to support those weaker flash.

Jim, I think our controller actually supports that, it's just a matter of when our customers bring this to market -- bring their devices to market in 3-bits per cell.

Great.

Thank you.

John Pitzer, Credit Suisse.

Yes, this is Ryan Carver in for John.

Just a question on gross margins, last time that mobile and wireless was 18% of revenue, gross margins were about 550 bips higher than the quarter you just reported.

And so you mentioned gross margins trending towards the low end of your current range.

Part one of this is, can you remind us what the target range is?

And two, can you walk through some of the nonmobile wireless changes that it's caused that gross margins decline?

Is it purely HDD ASPs, or are there other drivers at play that has caused this decline?

Yes.

Just a reminder on range, Ryan, it's 50% to 55% in gross margins.

And there's a lot of moving parts.

As I said in my prepared remarks, there's a lot of moving parts which impact gross margins, so ASP declines are normal in our markets.

But we've had impacts to higher costs for advanced process node, math sets, gold, all those different areas, so those are the main things that drive it.

There's a lot of moving parts within margin, but we're committed to keeping it in that 50% to 55% range.

As we continue to see success in mobile and wireless, it will drift towards the lower end of that range.

And Ryan, remember, when our margins were in the high 50s and we dropping like 400 basis points, we actually -- we mentioned that earlier on, roughly about 400 basis points of that decline was -- could have been attributed just to gold prices -- high gold prices.

But the other part, Sukhi, I think we also mentioned so many times is that in the 3G space, the market is very competitive, so the margin is naturally lower there.

So, we're not shy from going into -- competing in 3G, but we do believe that as we grow to be more successful in the LTE space, the margin will go back [trends] up at that time.

Great.

That leads to my follow-up question.

In terms of the 4G solutions and the go to market strategy, could you walk through -- there's a couple of players, competitors in the 4G market in China already.

Clearly, there are a number of competitors in the US market.

Could you walk through your go to market strategy for expanding into the 4G side in China and then maybe talk through some of the US market objectives?

And you talked about the one LTE customer.

Is that a traditional LTE customer or traditional North America customer you've had?

Maybe walk through that dynamic for us?

Yes.

So, the LTE is -- our strategy in LTEs is -- from day one is to build an LTE solution that is worldwide standard, meaning it supports both TDD as well as DD capabilities.

In certain markets, like in China, there's a huge amount of bandwidth in the TDD space that will be available, so that feature is an absolute must.

In the North America, the majority carriers is using FDD with one carrier specifically having a number of large TDD bands.

Different companies, India and Japan, the TDD as well as -- TDD as well as DD is also very important.

Our strategy is to qualify to have certifications this year on all the markets, as much as we could get this year, so that we can grow production both -- not just in Asia, but grow production also in North America.

So, again, working with tier 1 OEMs is yet another skilled strategy to bring LTE into production quickly because the tier 1s are the ones they're being able to bring volume -- high volume quickly.

Great, guys.

Congrats.

Srini Pajjuri, CLSA.

This is Ryan Goodman for Srini.

Thank you for taking my question.

I have another question on the SSD opportunity here.

You're forecasting double-digit growth in SSDs for the coming quarter while at the same time, NAND prices are holding up much better than they have in the past.

And one of your customers actually is forecasting a slight decline for the quarter.

Just any color you could give on what's giving you confidence there and any comments on what you're seeing in terms of OEM inventory levels in that sector?

Yes.

The growth in SSD is across multiple customers, so this is new design wins that are going to come to market.

There's no real impact for existing inventory in the market.

There is several new design wins across multiple customers that we think will drive into volume starting this quarter, which will drive up our SSD revenues nicely this quarter.

And Ryan, remember, both -- some of the major flash providers have guided to 50% to 60% growth in SSDs this year already.

And you're seeing some of them being ultimately price aggressive in the market.

We also know that demand NAND flash pricing is holding up right now, but there are also -- these customers have also said publicly that they are focused on selling as many SSDs as they can this year.

So, I think we'll be able to piggyback off of that and do better than what they're saying the market will do.

Okay, great.

Thanks.

And just follow up on a different tangent here, any updates on the CMU litigation in terms of timing?

I think last time we talked it had been -- you expected a court decision as soon as May, which it might be a little late for now, or even June, so any updates there?

Yes, in the first week of May the post-trial motions were heard in Pennsylvania.

We haven't heard anything out of the judge on final rulings, and we expect over the coming months that she will come out with those final rulings, but that's really the only update at this point.

Okay.

Thank you.

Craig Ellis, B Riley.

In the prepared remarks, you talked about some different dynamics and hard disk drive space with non-PC-related products a little bit stronger than PC-related products.

Can you talk about the mix of revenue between PC and non-PC controllers from Marvell, and how do you expect that mix to evolve over time?

Craig, that's a little harder for us to judge because when we sell our product into our drive customers, all we know is it can go into certain types of applications, but they don't tell us what the mix is.

So, the best judge for that would probably actually be to talk to our customers to get that information.

Okay.

As a follow-up, since I'll need to go to them to get that, moving to OpEx, Brad, you talked about a number of initiatives that you have working in the background, the key operating expenses flattish on a year-on-year basis.

Can you talk about what some of those are, and is there potential given it sounds like there's multiple, but operating expense would actually go down quarter-on-quarter in the back half of the year?

Yes.

Yes, so the biggest one is what Sehat alluded to earlier, which is really product prioritization.

So, we're looking at every device that is in development, making sure it's the right device, making sure that we have the right number of chips in certain markets, they're the ones that are going to bring revenue in the next few years and making sure that we're very focused, given that the majority of our OpEx spend is in R&D.

That is the biggest one.

In terms of it declining the second half of the year, obviously I'm going to try, but I think if we can keep it at consistent levels to where we are today, I'll be happy.

Okay, and maybe I'll sneak in one more.

You talked about the LTE product and shipping that this year.

Is that going to contribute meaningful revenues this year, or is it really more of a 2014 revenue story?

Starting shipments we expect to be at least the one customer as we say in the call, by the end of this year.

So, there will be multiple added customers going to production in the following quarter next year.

Obviously, in terms of meaningful revenue, it will be more meaningful next year, this year will be more of initial production ramp.

Thanks, Sehat.

Ruben Roy, Mizuho Securities.

First of all, Sehat, I wanted to make sure I understood that in terms of the significant mobile and wireless growth for Q2, the TD growth s is that mostly coming from new products or is it a balance mix between new and the older generation technology?

And on the wideband CDMA side as well, are you seeing a little bit of a pickup after a drop-off in Q1 on -- from that business?

Thanks.

It's all based on the unified platforms, so it's a new product that we introduced late last year.

So, the design win was happening in the last couple quarters and the initial shipments from the production from customers is happening now.

And as we said, we expect -- every quarter we get to more and more customers going to production with that new product that we just introduced.

Now, that was the dual core solutions.

We pretty much do not talk much more about the dual core solutions with our customers.

Our customers now working on with -- on the new designs, they're all quad core solutions.

And then starting this quarter, there'll be more engagement on the LTE side.

Okay.

Just to follow up on that, in terms of dual core shipments moving to quad core eventually, historically, you've played in the TD-SCDMA market at the higher end of the market.

I would assume that that remains true, or are you seeing a wider use -- okay, it is, it does.

Okay.

Yes.

Again, there was a question about the TDD -- what it is smartphones or tablets, different solutions, and my answer was that this is -- they came from exactly the same chip, to address the tablet.

And I said if a chip has addressed a tablet, the chip is powerful enough to address the high-end parts of the TD market smartphone markets.

Okay, and then just a last question on the hard disk drive side.

In terms of the enterprise ramp, Brad, you talked about potentially seeing a slower ramp than -- I guess you expected a slower ramp, but I'm trying to understand, has the ramp started, or do you expect that to start later this year, or did it get pushed out?

No.

So, the ramp has started, Ruben, it's just -- as we expected, it's been a slow ramp.

So, the ramp has begun.

We have been shipping enterprise devices to that customer.

It's just a slow ramp.

Got it.

Thanks a lot.

Quinn Bolton, Needham.

Congratulations on the strong results and guidance.

Wanted to come back to the SSD comments, Sukhi, you'd mentioned the 50% to 60% growth in the market.

I'm assuming that that's a unit figure, so just trying to get a sense, with your unit -- with the market growth of 50 to 60 plus share gains, is --are you seeing enough pricing pressure, or are you seeing pricing pressure in that market that we should be thinking about a lower revenue growth figure, or is pricing holding up fairly steady?

Well, on the SSDs, Quinn, pricing has been, in the past, been okay.

But in the future, we've always said as unit volumes increase, it will come down, pricing will come down.

For this year at least, if you were to expect -- if the market were to grow 50% to 60% our unit volume will actually grow higher than that based on our design wins.

It's a little too early for us to comment on how pricing will trend in the back half of this year, though.

Many of the design wins that we have, we already do forward pricings for the higher volume, so a lot of these things -- a lot of pricing pressure is already been being baked into the modeling.

Okay, great.

And then for Brad, just wanted to come back to the gross margins, I think you had mentioned that there was about a $0.01 effect from the sale of previously written down inventory in the first quarter.

Is that -- do I have that right, about a 70 basis point --

It's between 1% and 2% in terms of the impact related to that --

Okay.

Backing that out, the non-GAAP would have been somewhere around 53.5%, something like that?

Yes.

That's about right.

Okay.

And then is the drop from that adjusted 53.5% to 52.5%, is that mostly the mix shift with mobile and wireless being up double-digits, or are there other things in the --

Yes.

It's mainly mix.

Okay, great.

Thank you.

Chris Rolland, FBR.

Great quarter.

Sehat, you had actually mentioned SDN, and I think you guys are a benefactor there, not only in merchant silicon, but also in white box switching.

Some of the guys moving into SDN a little bit more quicker than some of the other players out there.

So SDN adoption has been pretty controversial.

So, Sehat, were your comments implying that we might be have some sort of an inflection point there?

Or how are you viewing that market?

I look at a lot of these -- things move at a slow pace.

So, there will always be customers that are willing to pay higher prices than they will have -- they will use more programmable network processors.

And then all these customers like in the data centers where they don't need any programmability, all that they need is just throughputs.

That will probably not move to any programmability for the next 5 to 10 years.

I will say, the SDN part will continue to be a bigger percentage of the market, but slowly.

Okay, and what about white box switching and merchant silicon more generally?

Are you guys seeing inflection there?

Are you picking up --

No, no.

If it's a white box switching, there are mainly few of the switching, mapping, no software design network -- 46 hardwired hardware base switching technology.

Yes.

Would you say that we're seeing an inflection there versus the Ciscos and Junipers of the world?

No, the white box market tends to address the lower price point segments, and the customers there are less sophisticated.

Some of them just want to have bandwidth, so I don't think you can expect those markets to move to programmable network processors anytime soon.

Probably never.

Okay, okay.

And also, in terms of hard disk, also the hybrids, pure SSDs, when we talk about the move to Haswell here, what do you see impacts there between all those different segments there?

And how do you see that play out in the back half of the year?

If we look at the very ultra thin notebooks, the ultrabooks, those are the ones that are going to adopt the SSD first.

So, a lot of this increase in SSD volume, actually a specifically target for this market.

The hybrid portion -- and then also, there's a market for where these 5-millimeters segments is becoming -- will become important for the lower-cost ultrabooks.

We have the support of a small amount of hybrid capability, hybrid SSD capability.

So, some of the initial recommendation from Intel was running at around 24-gigabytes.

I think Intel's trying to lower that number so that to make the cost to be more affordable.

We'll see, I will think that will happen naturally over the next year or so as these specifications, or how much of the hybrids is enough for needed.

But we don't really care in our case, okay?

We believe that at the end of the day, it doesn't matter whether the customer is willing to pay $20 or $15 or $10 more for the hybrid capability for very minimal flash capacity.

Romit Shah, Nomura.

This is [Sanjeev Teresia] for Romit Shah.

Sehat, one question on mobile and wireless.

You indicated that you saw lower demand for older products from your North American customer.

I was wondering if you could talk about your traction with the newer platform and if you will see any upside from that in the back half of the year?

I suppose you are referring to the new OS that they're building?

Yes, we are working with that specific customer.

We anticipate be able to have the product launched closer to sometime early next year.

At the very, very early -- maybe late this year, but I will bet more closer to sometimes next year.

And as a follow-up, it seems like mobile and wireless is growing 30% plus, actually 35% plus.

Is all this growth coming from the dual core platform with the new OEM, or could you break this down for us between connectivity and the chip set?

So Sanjeev, so the growth in mobile and wireless is across-the-board.

In mobile and connectivity, both double-digit, which is right what we said.

And mobile in particular, they come from mostly the dual core devices that we'd talked about and some initial shipments of our quad core device.

And our tier 1 OEMs.

And a tier 1 OEM.

As new OEM -- new customers.

New customers, yes.

Okay, thank you so much.

Okay, Caris, I think we're done.

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

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

Thank you, and goodbye.

Ladies and gentlemen, that does conclude today's conference.

Thank you for your participation.

You may now disconnect.

Have a wonderful day.