邁威爾科技 (MRVL) 2014 Q2 法說會逐字稿

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

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

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

Later, we will conduct a Q&A 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.

Please proceed.

Thank you, Tony, and good afternoon, everyone.

Welcome to Marvell Technology Group's second-quarter fiscal-year 2014 earnings call.

With me on the call today are Sehat Sutardja, Marvell's Chairman and CEO, and Brad Feller, Marvell's 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 at our Company website under 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 differ materially from management's current expectations.

The risks and uncertainties include our expeditions of our overall business; our product and market strategy; statements about market acceptance of our products; statements of general trends in the end markets we serve, including future growth opportunities; statements about market share and statements regarding our financial outlook for the third quarter of fiscal 2014.

To fully understand the risks and uncertainties that may cause results to differ from our expectations and outlook, please refer to our earnings release, our latest quarterly report on Form 10-Q, and subsequent SEC filings for a detailed description of our business and associated risks.

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

During our call today, we will make reference to certain non-GAAP financial measures, which include -- exclude the effect of stock-based compensation, amortization of acquired intangible assets, acquisition-related costs, restructuring costs, and certain one-time expenses and benefits that are driven primarily by discrete events that management does not consider to be directly related to our core operating performance.

Pursuant to Regulation G, we have provided reconciliations of the non-GAAP financial measures to the most directly comparable GAAP measures in our second-quarter earnings press release, which has been furnished to the SEC on Form 8-K and is available on our website in the Investor Relations section.

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

Thank you, Sukhi, and good afternoon, everyone.

Today we reported second-quarter revenues of approximately $807 million, an increase of 10% from the prior quarter and at the high end of our guidance range.

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

We delivered the following non-GAAP results for Q2, gross margin of 53%, operating margin of 13%, and earnings per share of $0.23.

In addition, we continued to return cash to our shareholders as we repurchased roughly 7.2 million shares, totaling about $83 million and paid approximately $30 million in dividends during the quarter.

Before I discuss each of our end markets, I would like to first take a moment and provide you a brief update on the overall Company as we stand currently.

I am pleased to report that over the past few quarters, we have made tremendous progress in executing our strategy.

We are focused on growing across all of our end markets and continue to raise the bar for innovation in order to be more competitive.

We have always believed that if we continue to push the envelope in innovation, it will naturally lead to commercial success, which is what we are seeing play out today.

One recent example of our innovation is the ARMADA 1500 platform that powers the new Chromecast device.

The Chromecast is an innovative new product that allows customers to seamlessly connect and stream video content to any large-screen device from any mobile device, including smartphones, tablets, and even PCs.

Given the rising popularity of Internet video and TV on mobile devices, we expect that the market potential of this application to be significant, especially given its functionality and the extremely attractive retail price point.

Another example of our innovative culture driving commercial success is our leadership position in the fast-growing SSD market.

Here we are driving the adoption of higher performance PCIe-based applications and expect such devices to grow rapidly starting this year.

Our culture of innovation also extends to areas such as mobile handset and tablet markets.

For the mobile market, we have steadily invested in multiple key technologies for a complete mobile solution.

Today we offer a comprehensive 3G and 4G platform that is gaining tractions with multiple customers and for multiple devices.

Furthermore, our second-generation 4G LTE technology increases throughput by over -- by 50% over current LTE devices in the market, while also lowering the cost.

Based on these advances in technology, we expect an acceleration in the adoption of 4G LTE through the mass-market globally.

So to summarize, Marvell's culture of innovation is now stronger than ever, and we believe we'll be instrumental in driving continuous commercial success in the future.

Now I would like to provide a brief update on each of our end markets.

In storage, we continue to execute well despite a tough end market.

For Q2, revenue from our storage end market was better than initially expected and was up 8% sequentially.

Specifically in HDDs, despite flat Q2 [TAM], we continue to outperform due to share gains and increased demand from our customers.

HDD OEMs have once again reiterated that they are seeing good demand for non-PC applications, which in the long-term could lead to growth in the HDD market.

In addition, we are seeing a step up in share gains on enterprise drives at the top North-America based HDD customer.

In Q2, our enterprise drive shipments to these customer grew by over 50% sequentially.

Moving forward, we expect continued traction and share gains in the enterprise and traditional 3.5-inch desktop and new line applications over the next few quarters and into 2014.

In addition, we have strong double-digit sequential growth for our SSD business in Q2.

We are pleased to report that both our SSD units and revenue are now approximately doubled from a year ago.

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

We have a significant lead in both SATA and PCI-based SSD solutions for the client market and are on track for share gains in SSDs.

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

Specifically for hybrids, we are leveraging our technology leadership in HDDs and SSDs to deliver a single chip solution which will drive lower price points.

For Q3, we expect our storage end market to be roughly flat.

We expect a slight decline in HDDs to be offset by continued growth in SSDs for Q3.

Turning next to networking, Q2 results were slightly below our initial expectations and down sequentially 4%.

The main driver for the weaker-than-expected networking results was due to uneven order patterns from some of our customers.

In Q2, despite sequential growth in our core enterprise business, we experienced unexpected weakness within the quarter from certain [PON] customers.

We also had weaker-than-initially-expected demand from a few enterprise networking customers in the fiscal year and switching product areas.

On the positive side, we continued to gain traction with our network processor product lines, which grew over 20% sequentially.

In Q2 we also announced our first 28-nanometer packet processor, a family (inaudible) targeting the software-defined network and mobile infrastructure markets.

This new high-performance products was -- has already captured key design wins at tier-one customers.

Overall, our networking business continues to gain market share with steady design-win success from our markets -- across all markets, sorry.

We expect the share gains to continue, and in the long run, provide steady growth for our networking end market.

In Q3 we expect our networking end market to go low single digits sequentially.

Now, next moving to mobile and wireless, our revenues in this end market increased approximately 30% sequentially in Q2 and was in line with our expectations.

We had double-digit growth for both our mobile and wireless connectivity businesses.

That was primarily different by new products.

Starting with the mobile, we have mentioned in the past that Q1 was the trough for this business.

We currently have our 3G-unified platform in mass production at multiple tier-one OEM partners.

For example, Samsung has successfully launched their seven-inch Galaxy Tab 3 globally, based on our Dual-Core platform.

China Mobile recently also selected our Dual-Core platform to launch its first branded smartphone.

In addition to our Quad-Core platform is now in production with the leading OEM partners who have already since [reduced] multiple Quad-Core smartphone models, targeting both the high-end and mass-market segments for both WCDMA and TD-SCDMA.

Now in the LTE, we continue to make steady progress and remain on track with our LTE development and design wins.

In the North America market, we are on track towards completing the full LTE certification by the end of this year.

Furthermore, our Quad-Core LTE platform continues to gain strong design win traction with leading OEMs.

To summarize, in mobile, we are pleased to report that we have turned the corner with our new 3G and 4G platform solutions and expect this business to grow steadily throughout this year and beyond.

Next in wireless connectivity, we continue to build a strong design pipeline with our one-by-one and two-by-two combo solutions across multiple market segments.

We are seeing increased market traction in high ends and mainstream mobile computing products, and we are on track to expand our footprint with a range of new product launches, including [green console] over the next few months.

In addition, we are seeing growth opportunities for our connectivity solutions for video platforms, such as smart TVs, set-top box, and micro-streaming devices such as the Chromecast.

For the smartphone market, we continue to see 100% attach rates for our connectivity solutions on our mobile 3G and 4G platforms.

In the 4x4 11 ac category, we continue to see strong momentum and can expect new enterprise and retail access points to be introduced this year.

Overall, we have strong Q2 for wireless connectivity and remain on track to deliver solid growth for the year.

For Q3, we expect both our mobile and wireless end markets to once again grow double digits sequentially.

In summary, demand in Q2 for storage was better than originally anticipated, while mobile and wireless was in line and networking slightly below our expectations.

Our customers are introducing multiple new products with our innovative solutions, which should drive continued commercial success.

We continue to make strong progress in mobile with both our 3G and 4G platforms and multiple customers for smartphones and tablets.

We're seeing new opportunities for our connectivity solutions across multiple market segments.

In addition, we continue to gain share in HDDs and SSDs.

Finally, we remain committed to returning cash to shareholders through dividends and opportunistic buybacks.

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

Thank you, Sehat, and good afternoon, everyone.

As Sehat mentioned, we reported revenues of $807 million for the second quarter of fiscal 2014, a sequential increase of approximately 10% from the previous quarter and at the high end of our guidance.

In storage, our overall revenue increased by 8% sequentially, representing continued above-market performance.

Storage represented 52% of overall sales in the quarter.

The growth in storage is mainly due to a combination of steady share gains and new product ramps at our customers.

In networking, our revenue was down 4% sequentially and represented 21% of total sales.

During the quarter, we experienced some softness in demand from our PON customers, which more than offset growth in our core enterprise networking end market.

Our networking business is currently strongest within the enterprise portion of the market.

Although there have been signs of recovery, we are still cautious.

This is consistent with what a large customer indicated recently, stating that they are seeing some inconsistencies in the global recovery.

Although we are steadily building the carrier and data-center side of our networking business, these design wins typically take longer to translate into revenue than some of our other businesses.

Our mobile and wireless end market grew strongly, up 30% sequentially and represented 22% of overall revenue in the quarter.

We had solid double-digit growth in both our mobile and wireless businesses due to new product ramps and multiple customers.

Moving next to margins and expenses, our non-GAAP gross margin for the second quarter was 53%, which was at the high end of our guidance, mainly due to better mix, while non-GAAP operating expenses came in at $320 million.

This resulted in a non-GAAP operating margin of 13% for the quarter.

Net interest and other income was $8 million.

This was higher than anticipated, mainly due to strengthening of the US dollar in the quarter.

We also recognized a tax benefit of $2 million for the quarter.

Taken together, this resulted in non-GAAP net income for the second quarter of $118 million, or $0.23 per diluted share.

This was about $0.04 higher than the midpoint of our guidance.

The shares used to compute non-GAAP EPS during the second quarter were 516 million, as compared to 522 million reported in the prior quarter, showing the benefit of our continued share buybacks.

Cash flow from operations for the second quarter was $86 million, and free cash flow for the quarter was $65 million.

Now summarizing Q2 results on a GAAP basis, we generated GAAP net income of $62 million, or $0.12 per diluted share, compared to $53 million, or $0.11 per diluted share in the prior quarter.

The difference between our GAAP and non-GAAP results during the second quarter was mainly due to stock-based compensation expense of $41 million, $11 million related to amortization of intangible assets and acquisition-related costs, and $5 million of legal settlement costs.

Now turning to the balance sheet, cash, cash equivalents, and short-term investments were $1.7 billion, approximately flat from the prior quarter.

During the second quarter, we repurchased 7.2 million shares for a total of $83 million.

Over the past 12 quarters, we have repurchased and retired approximately 211 million shares, or nearly 30% of our outstanding shares.

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

Accounts receivable was $431 million, an increase of $61 million from the prior quarter, driven mainly by the higher revenues and the linearity of shipments during the quarter.

Our DSO was 45 days compared to 43 days for the prior quarter.

Net inventory at the end of the second quarter was $335 million, an increase of roughly $65 million sequentially to meet the anticipated increased demand in Q3.

Moving next to our outlook for the third quarter of fiscal 2014, we currently project revenues to be in the range of $850 million to $890 million.

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

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

We expect our networking end market to grow low single digits, and finally, we expect both mobile and wireless to grow double digits sequentially, driven by the continued ramp in adoption of our Dual- and Quad-Core platforms, as well as our connectivity solutions.

We currently project non-GAAP gross margin of 51%, plus or minus 100 basis points.

Recall we have been consistent in our message on gross margin that as some of our consumer-centric businesses, such as mobile, wireless, and smartphones start to ramp, we will experience a slight trending down of our gross margins.

However, we have also said that investors should be measuring us not by gross margin alone, but by a balanced combination of revenue growth and operating margin.

To this effect, we are focused on continually managing our costs and at the same time driving for growth in order to deliver improved operating margin leverage.

For Q3, 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 $260 million and SG&A expenses of approximately $55 million.

At the midpoint of our projected guidance, this should translate to a non-GAAP operating margin of approximately 15% plus or minus 1%.

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

Tax expense should be approximately $2 million.

We currently expect the diluted share count to be approximately 515 million shares.

Taken together, we currently project non-GAAP EPS to be $0.25 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 $0.08 of this is related to stock-based compensation expense.

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

Tony?

Good day, ladies and gentlemen.

(Operator Instructions)

We ask that everyone ask one question and a follow-up in order to preserve time.

Thank you so much.

Ruben Roy, Mizuho Securities.

Congrats, guys, on good results and guidance.

Sehat, wondering if -- I understand you talked about double-digit growth for both wireless and connectivity.

Wondering if you can give us a little more granularity around those constituents, given the execution has been so good into Q2 and obviously with the guidance for Q3 please?

So I'll cover -- yes.

So it's a combination of different things, Ruben.

It's additional devices based on our Dual-Core platform, it's the ramp-up of our Quad-Core platform for mobile, and then the related wireless that will go into those mobile applications, as well as the launch of the gaming consoles for the two guys that we deal with.

Those are the biggest pieces there.

Okay, and given that this year is a little bit different from past years, can you, Brad, talk about how you guys are thinking about seasonality as you look beyond Q3?

Is this going to be a typical seasonal year as you look at Q4?

Or do you think there are different moving parts this year, please?

Yes.

So traditionally for us, our Q2 and Q3 are seasonally strong quarters.

Q4 and Q1 are seasonally down.

I wouldn't expect anything different this year.

So I would expect Q4 to be seasonally down, as well as the fact that it includes January, you should model that down.

Okay.

And then finally on the solid-state drives commentary year-over-year growth, year-over-year revenues doubling, where do you think you are in terms of market share?

And how much more room is there to grow market share from current levels?

Yes.

So we're getting to approach similar kind of market share as we have on HDD side of things.

So we continue to get traction there.

I don't know that we've disclosed a specific number, but we continue to advance our share there.

And if you remember -- reiterated, in terms of the market, there is not proprietary based on -- the merchant market segments of the market.

Ruben, remember last year we were about 50% -- we exited the year last year about 50% or so, the merchant market.

We've been gaining share in Q1.

We've gained share again in Q2, and we expect to gain at least five, if more than that, points of share in SSDs this year in the merchant market.

(Operator Instructions)

Doug Freedman, RBC Capital Markets.

When I look at the incremental gross margin on the next quarter, pretty low number here.

And I'm a little -- I understand the growth in wireless coming at us, and that's going to be a contributing factor.

When we get into the seasonal quarters where wireless is not a bigger mix of your business, should we be modeling gross margins to recover?

Or are there other things taking place here that are going to keep the gross margins under pressure?

And I ask that with the caveat that you did just see a 30% growth in wireless, and I would have expected mix in the July quarter to have pressured gross margins.

And yet, we saw a nice number in the quarter just reported.

Yes.

That's a good question, Doug.

The way to think about it in, you're right, is it's very mix-dependent.

In quarters where mobile and wireless and some of the consumer businesses are seasonally down, you should see an uptick in gross margins.

Now, the reason you didn't see it as much in Q2 is because our storage business was so strong that it helped offset some of that decline in margin.

With most of the -- a lot of the growth in Q3 coming from the mobile and wireless piece of the business.

That's what's putting pressure on the margins.

But we've talked about the fact that as that business grows, we'll be between 50% and 55%.

But keeping it, it will push it towards the lower end of that, and then it will pull through operating margin leverage for us.

We also say that in the meantime, certainly when the majority of our wireless mobile is only -- still in the 3G side, that where the 3G side is where we see the margin pressure.

As down the road, as we go to the LTE, the margin will naturally improve back to the more normal range.

And there's mix within mobile as well.

That should help us out.

Okay.

And my follow-up is really regarding that LTE and when it becomes a material piece of the revenue mix.

Will you start shipping your LTE solution in Q3?

And what does that look like as far as a ramp over the next three to four quarters?

We already started shipping the LTE in the smaller volume, obviously, for the standalone modem.

However, for the single-chip integrated Quad-Core LTE, our expectation is the shipments in Q4 -- at the end of the year.

That's based on what we've seen from the customer plan of production.

Yes.

And then I would expect, Doug, that you'll see additional models in early next year to launch from customers as well.

Yes.

That will be more next year.

Harlan Sur, JPMorgan.

Great job on the quarterly execution.

If we assume that the team continues to be successful at driving your unified platform, obviously 3G today, 4G soon.

I know the focus is on up margins, but could your overall gross margins drop into the high 40% range, if you continue to be successful and drive mobile and wireless faster than the overall business?

As we talked about, Harlan, a couple things.

We have a lot of pieces to our business that allows us to be comfortable.

We'll keep them above 50%.

Also as Sehat alluded to, the margin in LTE, we should see an uptick there.

So it's something we'll have to continue to manage, but we're comfortable we can keep it above the 50% line.

Okay.

Great.

Thanks for that.

And then your Q3 guidance calls for a slight decline in your HDD segment.

If I look at the HDD shipment TAM for Q3, especially on 2.5-inch, 500 gig per platter, this segment is actually expected to grow about 3% to 5% this quarter.

And then on top of that, you've got new game console ramps, which should benefit Marvell, because I think your HDD controller chips are also being used on the hard drives, which are powering the PS4 and Xbox One.

So help me understand why your HDD business is going to be down sequentially this quarter.

Was there a bit of pull forward of the Q3 business into Q2?

Is there some inventory work down that's taking place at the component level?

Any help here would be appreciated.

Thank you.

Just a reminder that our second quarter includes the month of July.

And if we saw -- the uptick we saw in Q2 and the results was more on the backend side of that.

So that uptick in demand that our customers are seeing for their third quarter, a fair amount of that fell into our July month.

So it's really the month offset that you see there that's driving the difference.

Yes.

That makes sense.

Okay.

Thank you.

Chris Caso, Susquehanna Financial Group.

Wonder if you could talk a little bit more about handsets, and understand that the both Dual-Core and the Quad-Core are some of the contributors to growth in the third quarter.

Could you give us some sense of perhaps what we are likely to see with regard to design wins as we go out in the back half of the year?

I know you guys had some aggressive goals with regard to market share for the end of the year.

What should we expect to see as some of the OEMs begin to put out press releases?

Yes.

So as we've been saying over the last couple quarters, we started with the Dual-Core design wins.

And in the last quarter or so, a lot of the designs -- heavy wins are moving to the Quad-Core solution.

And we also stated that the Quad-Core solutions that' starting to ramp up in productions, so this will not change.

It will continue to be the same.

The design wins, not just in smartphones, but also in tablets, because as we said in the last couple quarters, we are focused on the single platform architecture so that our customer can build either tablets or smartphones based on the same investment that they have in engineering.

So that's in order to lower the cost of R&D from our side as well from our customers' side, and the same thing with the LTE side.

Our LTE is based on the same platform as the 3G, so the same strategy again there.

The investment that our customers have put into their 3G platform with us will directly translate into easier transition from the 3G platform to the 4G platform.

So a lot of the higher-end design wins are also moving to the LTE platform, including to people that don't even plan to use that LTE in certain markets, but you still want to have the LTE devices as a checkpoint in the marketing that it is a 4G phone.

So we are very excited that the progress that we have made in the last couple quarters is finally bearing the fruit.

Yes.

Chris, to touch on your question about the 10% market share, I think you're alluding to is we've seen strong design traction.

We'll see additional models in Q3 and Q4.

It's really going to be dependent on how successful those models are in the market, but we continue to see the traction we like to see.

And we continue to watch it closely.

Okay.

Thank you.

As a follow-up to that, perhaps you could talk to the sustainability of the design wins that you've won.

And your mobile and wireless business, it's grown in a bit of fits and starts.

With the success that you guys are having right now, what provides you the confidence that these design wins will be sticky, and we'll see continued momentum as we go into next year?

Yes.

I think the answer to that is the LTE.

Our early investments in LTE, as well as our decision to move to LTE -- second-generation LTE as our launching point of our LTE 4G solutions is -- that's second.

Third, our continued investment in next-generation LTE, and finally, the fact that we are quite ahead compared to the other companies outside the first one, they are already in the market today, that have LTE.

There's a reason that we believe that the design wins that we have with our customers will continue to increase to improve over the next year and plus the continual improvement in building next-gen, the next generation devices.

So as we said earlier, as long as we continue to invest in this -- to innovate in developing chips that are solutions that they are more cost effective, more innovative in performance, in power dissipations and in overall cost, bottom cost reductions, we believe we will make this business to be successful.

Quinn Bolton, Needham.

Congratulations on the strong results and guidance.

Sehat, wanted to follow-up on the LTE modems.

You had mentioned in the prepared comments that you're looking to get certification by the end of 2013.

Wondering if that's for SDD or TDD markets or both?

Yes.

So the full certification there for that we talk about is for the SDD for the North American market.

The vast majority of the North America market is still SDD at this point.

We are actually -- our LTE modem is fully certified in the TDD market, but it seems that those markets are mainly in Asia, those certifications that were in Asia are specifically more in China.

So but in the long run, both HDD and TDD solutions -- actually I shouldn't say in the long run.

Our TDD and HDD solutions are already unified solution today, but in the long runs, certifications will be HDD and TDD both for the North Americas and Asia.

So there will be no difference in the certification in the long run.

To clarify you already have the TD-LTE certification for Asia today?

Yes.

Yes.

That's correct.

Okay.

Great.

As a follow-up question on the 3G market --

Excuse me.

It was not just TDD-LTE.

We also have demonstrated the voice-over TD-LTE like a couple months ago in Asia.

You've noticed the announcement -- but with ZTE on the trial runs of the voice-over LTE with the TDD networks in China.

Okay.

Great.

And then the follow-up question is on the 3G TD-SCDMA market.

It sounds like there's been some accumulation of inventory, at least in that low-end smartphone segment.

Wondering if you're seeing that impact your business, or whether that's really a function of a lot of inventory for single-core smartphones and you're coming in above that with the Dual-Core and Quad-Core platforms?

Thank you.

Quinn, I think on inventory side, remember we are traditionally more closer to tier-one, tier-two OEMs as opposed to the white-box market.

And you may be hearing about more inventory accumulation from some of our competitors in the white-box area, but I don't think it particularly impacts us.

Daniel Amir, Lazard.

Shifting gears here towards the networking market, this was down a little more than you expected this quarter, and it should be up next quarter.

Can you talk a little bit about the dynamics of what you're seeing there?

What's the opportunity there in the networking market?

Is it really just the PON market recovering for you and the MPU market growing?

Or is there other things going on, because you did mention some share gains as well?

Thank you.

Yes.

So the softness we saw, as we mentioned, was on the PON side.

But going forward, the opportunity we see is both with the continued growth of the MPUs, as well as some of the design wins on the carrier and telco side of things.

We've talked about a focus on that business for a while now.

Those design wins unfortunately take longer to get to market, but when those do get to market, we expect some nice growth from those.

And in terms of the MPU market, should we expect that business to continue to grow at the double-digit a quarter growth rate that we've seen here in recent quarters?

Daniel, I don't think we've given an exact growth rate for Q3, but at least for Q2 it grew double digits, and we do expect that to grow in Q3.

Great.

Thank you.

And then to the final question, on the storage market, can you give us an idea how you view the hybrid market?

You did say that should be a growth over the next coming years.

So do you think the focus right now should be more on SSDs rather than hybrids?

And in terms of Marvell, are you indifferent if it's a hybrid or an SSD?

All of the above.

Today, in the hybrid space, let's talk about our expectations.

My expectation is down the road, the hybrid drives will be a significant portion of the market for hard drives.

Now, I say down the road.

What does it takes for the hybrid drives to be a significant portion of the hard drive market?

That requires cost reductions, and I'm talking about significant cost reduction.

Today hybrid markets consist mainly of two different devices, one device for the hard drive and one device for the SSDs.

Mindful that the SSD is a small SSD.

So whether it's a device that is packaged as a single hybrid drive or two devices in the laptop, they are basically two devices.

Now, as a result, the cost structure of hybrid solutions today is not that attractive.

So what's the solution?

Well the solution is to integrate the SSD technology into the hard drive SLC.

By doing so, we could drastically lower the cost of a hybrid drive, and this is exactly what we have been doing over the last few years.

And recently, we sampled our first-generation hybrid single-chip SLC into our customers.

And we believe that this is the trend that's going to play in the next year or two, where the truly high-volume hybrid drives will be based on single-chip SLC controller.

Craig Ellis, B Riley.

Nice job on the results and outlook on the top line.

Switching gears to the balance sheet, Brad, with the increase in inventory in the quarter up 25% where would you expect inventory dollars or days to be exiting the current quarter?

The days will probably drop a bit.

When we get to the end of this quarter, as we talked about, it's really building forward to meet the demand for Q3.

And with Q4 being seasonally down, I would expect those inventory levels to be down a bit.

Okay.

And then on the cash generation and cash use side, the buyback was more equilibrated with cash generation in the quarter.

Is that how we should think about the buyback going forward, or what parameters can you give us in terms of the Company's excess cash return?

To your point, Craig, we bought back more than our free cash flow again, and we'll continue to be in the neighborhood of our free cash flow, but a little more opportunistic than we've probably been in the past to watch what the stock does.

But it's

Glen Yeung, Citigroup.

I wanted to ask about your sense of the opportunity that you see ahead of you in the TD-LTE market.

And part of this question I'm thinking about what happened in TD-SCDMA, where initially you focused on the high end of the market.

The market I think came in at a little bit lower end, and I'm not sure you were that well-positioned for that.

So one, what's the opportunity in TD-LTE?

And then two, where in the market do you think you will be focusing?

TD-LTE is going to be -- in the long run is going to be the majority of the market in the world.

And the reason to that is because a lot of frequency bands, new frequency bands, they are being allocated for LTE.

They are inherently TDD in nature.

So for example the 2.3 gigahertz bands across the world, whether it's in Asia or in North America, they are TDD-based.

So 2.5 gigahertz, same thing.

Not to mention that there are new bands there will be freed up across the world in the 700 mega [spans].

Those are TDD bands.

Now, at the same time, while we're excited that the TDD LTEs will be the driver of LTE, that does not mean that our LTE solutions are locked into TDD LTE only.

As we mentioned many times in the past, our TDD LTE is actually a superset of LDD as well SDD LTE.

So the solution is exactly the same, whether you are -- from us whether it's SDD or TDD, they are the same device.

And the incremental cost from -- to address the TDD is insignificant compared to the overall solutions.

So this is different then in the case in the past when we are addressing the TD-SCDMA.

That solution is completely a different solution than the WCDMA.

So we are not locked into a certain set of customer base as we move to the LTE space.

The LTE solution is -- our LTE is a device is to address every customer in the world.

Do you have a follow-up, Glenn?

To be clear though, that every customer and every price point, is that a way to think about it?

Well, when you move to LTE, let's address -- I think you are alluding to these questions about low-cost TD-SCDMA in the past.

TD-SCDMA, the ultra low-cost TD-SCDMAs were addressing very low end markets.

Those are the markets where the throughput requirement is only a few megabits per second.

When we moved to LTE, there's no such thing for a few megabit per second market.

The minimum requirements of TD -- LTE today is 100 megabits per second, and the market is going to disappear very rapidly.

The vast majority of the markets are going to move to second-generation LTE.

We mentioned about 50% higher throughput of 150 megabits per second throughput.

Once you move to that segment of the market, the requirements for the memory bandwidth is different.

The requirements for the screen, the high-resolution screen is different.

So we -- at least, at the very least for the next several years, there is no such thing as ultra low cost, $50 LTE phones.

The most -- all the phones are going to be introduced in the next several years, will be at least -- will start with $100 if not more.

Now, not saying that we will not address the lower-cost markets further down the road, but that timing is not next year.

That's more like two, three years down the road.

Just one other question, then, which is you were about to qualify at AT&T for LTE.

And obviously are already qualified in China.

So as we see the Chinese handset OEMs look to move their product into the US market, can you talk about the opportunity that that presents you, given that we see now an intersection of your qualification, both at those OEMs, but also on the US networks?

I think the only thing I can say is this, the US market tends to be a heavily subsidized market.

There tends to be driven with on higher performance, higher-end markets.

So the move to -- our move to LTE is very, very suitable for driving the North America market.

So we are, of course, excited because now it allows our customers in China to be able to address the North America market using our solutions as we move to the LTE side.

So anything on the LTE is going to be positive for us.

It was only 3G I think and a lot of North America carriers are not so interested in delivering the market.

When they advertise the market, they say faster is better.

4G is better than 3G.

So you know what?

It means that they cannot sell a 3G solution in North America any longer.

Sukhi, can I ask one quick one?

Really briefly on connectivity with respect to phones, it would seem that there's some market share movement in handset connectivity today.

We see that between, for example, Broadcom and QUALCOMM.

I wonder if that represents an opportunity for Marvell to improve its position in connectivity for handsets, particularly given the opportunity you see in baseband and [AT&T].

Sure, if you look at in the past, the LTE -- sorry, not LTE, the modem side and the connectivity sides are independent.

So somebody may have used a Broadcom connectivity together with the modem side, different modem side from QUALCOMM or somebody elses.

But moving forward, a lot of this solution that we are driving is a platform solution.

So in the platform solution, we provide our modem and our Wi-Fi as -- almost like a turnkey solution, but it's fully baked what we deliver to the customer.

So as a result, the opportunity for us to capture the connectivity as we increase the modem business is -- it's real.

Today the attachment is 100%, and we don't expect the attachment judgment to change moving forward.

It's going to be -- continue to be 100%.

And further down the road to be maybe even integrated as a single device.

Glenn, one thing is we haven't -- we've rarely come across any customer on the handset side that wants to use somebody else's connectivity.

Very rare.

They pretty much ask for our connectivity with our solution.

So it's just a trend --

It's really one neck to choke, so if there's any questions about what's wrong with the connectivity or with the modem or the throughput, it's only us to choke.

Blayne Curtis, Barclays.

Sehat, I was wondering if you could walk through, your goal was 10% of the WCDMA market.

You mentioned you're shipping a couple tier ones.

I guess the Samsung device is more of a data device, so I was wondering if you could share a little bit more color on your traction with tier ones.

And then when you look at the trajectory of 3G and then you're moving to LTE, if you could talk about the timing of LTE.

You talked about getting some US carrier approvals, but to ship on a goal platform, you obviously need all the carrier approvals.

So if you could give a little more color on your traction with the other global carriers, that would be helpful as well.

Thank you.

Yes.

We are still committed to the, obviously with the advising to get a 10% (inaudible) up there the year.

As we said many times in the past, this is not an easy number to achieve, but on the other hand, we also believe that with our unified solutions now, with the fact that we are the only second suppliers in the market that have a 4G platform that is compatible with our 3G platform.

We're seeing a lot of our customers are starting to -- like several quarters ago designing our 3G solutions with anticipating that when our 4G solution is ready at the time, that they could easily move to the 4G solutions to upgrade the device to the 4G.

So we haven't seen any changes in the behavior of the customer.

They continue to be wanting to us to be successful in this market, because they know that in the long run, they're going to be very few customers -- suppliers in this market that could deliver a technology that could both support the LTE.

And they are working hard on -- you're talking about data.

It's not just for data.

It's data and voice, so all customers -- not a single customer just building our device for data.

What you see -- if you see data only, that's only for initial ramp.

Every single customer are driving a voice and data.

The same thing is playing with LTE.

If you see the first of some of the customers driving the data, only first in the market, that doesn't mean that's the only thing we're working on.

They are all working on voice as well.

In fact, in LTE there is a need for voice-over LTE, which means voice -- even more advanced, more advanced voice over the data networks.

So we'll see that will continue to play out in that direction.

Do have a follow-up, Blayne?

Shifting to hard drives, I don't think I understood the explanation exactly.

The uptick in hard drives in the July quarter versus the flat TAM, I think you were saying that you had an extra month and that was up.

Could you, one, clarify that.

And then on the enterprise side, a huge uptick there you've been gaining on that platform.

Any color as to what stage you are as far as that ramp?

Yes.

So you're right on the characterization of the growth in Q2 was backend-loaded driven by storage.

So the upside that you don't see in Q3 is really in the July month for us, which falls into our Q2.

In terms of the enterprise growth at that customer, it did grow more than 50%.

It's still relatively small, though, so as we talked about before, the timing to transition that can be tough to figure out exactly.

We expect it to be fairly steady though over the rest of the year.

Blayne, the other thing is you listen to the ACD OEMs, they are increasing their TAM by a few million units for Q3.

Not a whole lot, right?

That was coming off of the flat TAM in Q2.

And we grew 8%.

So I think if you net that all out, we're still growing, gaining share, but it probably all evens out.

Stephen Chin, UBS.

First one is on your SSD business.

Sehat, you mentioned positive comments on the SATA and also PCI Express interface.

I was wondering if you can help give us some of your thoughts on the SaaS interface for enterprise SSDs.

And also for the PCI Express, was that PCI Express interface SSDs?

Or are these the NAND cache cards that you guys have had in the market for a little while now?

The vast majority -- the volume part of the marketplace initially started from the SATA side, and then more recently, we have moved that market.

We also moving to the PCIe base for the client type of the market.

So in the PC client type of market, the market will continue to be dominated by SATA and PCIe base low-cost PCIe base.

So if you talk about SaaS, the SaaS market is extremely an extremely small market.

So we don't talk much about it.

We do have solutions for the SaaS market, but we don't talk much about it because there is really no point talk about it when the volume is quite insignificant.

And what was the other question?

How your PCI Express NAND solution is performing?

It's doing extremely well.

We are probably the only one that have this client-based PCI Express smart solution in the market today.

We have about at least a nine-month lead on a PCI Express SSD (inaudible) market.

Got it.

And my follow-up question is on your operating expenses.

So I understand you guys are probably investing in the 4G LTE bands.

And wondering from an OpEx perspective, should we expect spending there to continue ticking up on the R&D side, or do you think the current spending level is enough to meet your deliverables over the next year?

Thank you.

We've talked about the focus on keeping OpEx at current levels and working very hard to look at the prioritization of our spend and making sure we're investing in the right projects.

So we're comfortable we can keep it at these levels for the rest of the year.

Let's take one last question.

John Pitzer, Credit Suisse.

Sehat, Brad, congratulations on the good numbers.

Brad, going back to the mobile side of the business so that I understand, the gross margin dynamic, I appreciate the fact that 3G is what is ramping in volume.

And that's probably driving the incremental gross margins, which are lower than I think some of us would have liked.

But I'm curious, gross margins within the 3G business, have they've been relatively stable so it really is a mix issue?

When does LTE become meaningful enough volume that it starts to offset some of the gross margin headwinds you see as 3G ramps?

And I'm assuming LTE is probably losing money right now, so any volume is a fairly leveragable event.

Is that a fair assumption?

Yes.

So your question about 3G, the pricing has been fairly consistent, or the margin profiles have been fairly consistent there.

Obviously, as Sehat alluded to, lower than some of our other businesses.

In terms of when the LTE crossover will be, it's probably sometime next year I would guess, where you'll start to see the impact of LTE start to counterbalance some of the 3G work.

What was the last part of the question?

Assuming it's mostly expense and not a lot of revenue right now, so any revenue becomes fairly leverageable.

Is that a fair assumption?

Yes.

Definitely.

In fact if it's not most of all of our R&D that we are doing for the basic R&D in that business is LTE -- not just LTE, but next-generation LTE.

And then Sehat, as my follow-up, going back to the SSD controller market, I'm curious as to what you think the ultimate split will be between merchant and captive.

The reason why I ask is as I talk to the raw NAND suppliers, they continue to make the argument that building the NAND gives you a leg up on the controller, especially as you move from planar to 3-D.

And clearly a lot of those NAND providers are trying to move up the value chain by doing more on a solutions-level basis.

So help me understand the ultimate break you think between merchant and captive.

And as the market moves to 3-D, does that change the dynamic at all?

We've been consistent in saying this, if you look at an SSD solution, let's call it 90%, if not more than 90% of the cost of the SSD is the NAND, not the controller.

So question is, what's the reason any NAND controller companies want to build the controller themselves?

Well, if they think they can build a better controller, they can make their NAND to work better, yes, of course they will build it themselves.

However, we have proven that as a Company, we know how to build SSD controller better than the guys internally could build.

Not just building things to work.

How do we make -- how could we make the controller to make the error rate, the life cycles of the flash to be longer, to double, triple, quadruple the lifecycle of the flash chips?

So these are the reasons why those companies -- people that traditionally used to build their controller have realized that our error-correction technology that we have developed over the years, specifically in the LED-PC technology that we have invested over the last 13, 14 years in hard drives, are now starting to pay off.

The NAND chips, the lifecycle is dropping like rocks.

As the NAND chip suppliers move from 40-nanometer to 30 nanometer to 20 nanometer and to the 1 X nanometer, they are finding out that the life cycles are crashing.

And they realize that they're trying to realize that only the best controller could solve this problem.

And since 90% or 90% plus of the cost of the SSD is the flash chip, and if they could move to the smaller geometries chips on the plus side, they're going to win.

Even if they have to pay somebody like us to deliver the controller.

So I don't think this is going to change anytime soon.

So, John, the other thing is just look at the history of the hard drive industry itself.

A lot of the hard drive OEMs initially had their own chip development as well.

And core development internally, as well, and as we had more and more features and functions and patents and IP, they started to outsource.

You're seeing that right now, and on the SSD front, we expect that to continue.

It's not (inaudible) Thank you, everyone, for listening to our second quarter call.

And we'll talk to you soon.

Thank you.

Ladies and gentlemen, this concludes today's conference.

Thank you so much for your participation.

You may now disconnect, and have a great day.