邁威爾科技 (MRVL) 2014 Q3 法說會逐字稿

Good day, ladies and gentlemen.

Welcome to the third-quarter 2014 Marvell Technology Group earnings conference call.

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

(Operator Instructions)

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

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

Please proceed.

Thank you, Celia, and good afternoon, everyone.

Welcome to Marvell Technology Group's third-quarter fiscal 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 the 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 discussions will include forward-looking statements that involve risks and uncertainties that could cause our results to differ materially from management's current expectations.

The risks and uncertainties include our expectations 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 fourth 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 today's earnings press 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 exclude the effect of stock-based compensation, amortization of acquired intangible assets, acquisition related costs, construction 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 a reconciliation of non-GAAP financial measures to the most directly comparable GAAP measures in the third-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'd now like to turn the call over to Sehat.

Thanks, Sukhi, and good afternoon, everyone.

Today we reported third-quarter revenues of approximately $931 million, an increase of 15% from the prior quarter and above the high end of our guidance range.

During the quarter, we experienced better than expected demand from our mobile, wireless and storage customers.

We delivered the following non-GAAP results for Q3, gross margin of 50%, operating margin of 17% and earnings per share of $0.32.

In addition, we continued to return cash to our shareholders as we repurchased roughly 6 million shares, totaling about $71 million, and paid approximately $30 million in dividends during the quarter.

Before I discuss each of our end markets, I would like to reiterate to all our investors a few important points about our overall business.

First, we remain highly focused and continue to work hard to improve our execution.

Second, our sustained investments in advanced technologies are now leading to new innovations which will drive our future growth.

Third, our overall financial goals remain the same.

We are targeting revenue growth that is created in our competitors' and EPS growth that is faster than our revenue growth.

After two years of customer and product [transitions], the midpoint of our Q4 guidance clearly indicates the financial turn-around for the Company.

We expect a continuation of these positive trends in our next fiscal year.

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

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

For Q3, revenue for our storage end market was better than initially expected and grew 3% sequentially.

Starting with HDDs, we continue to outperform due to share gains and increased demand from our customers.

As many of our HDD customers have indicated publicly, the overall drive of the industry seems to have stabilized.

We believe our customers are seeing good demand for non-PC applications, which is offsetting weakness in the traditional PC market.

In the enterprise space, we continue to see steady share gains at the top North America-based HDD customer.

In Q3, our enterprise drive shipments to these customers grew by over 20% sequentially.

We do expect continued traction and share gains in the enterprise device heading into calendar 2014.

In addition, we are making some progress in getting new design wins for our traditional 3.5-inch desktop and nearline applications.

Next in SSDs.

Q3 was a record quarter for both units and revenue, and we delivered another quarter of strong double-digit sequential growth.

Our PCIe-based SSD solutions are now in mass production, and we have a significant lead in the market.

We are also shipping our fourth-generation starter SSD products in production and multiple top-tier NAN OEMs.

Furthermore, we are winning designs for our next-generation SSD solutions across a broad customer base and believe this will further increase our leadership position.

As a result, we expect our SSD business to once again grow strongly in the next fiscal year.

We are also well positioned for the hybrid market and should benefit when the market starts to grow.

Specifically, for hybrids, we are leveraging our technology leadership in HDDs and SSDs with a single-chip solution that should drive lower price points.

This is an important driver for market adoptions.

For Q4, we expect our storage end market to seasonally decline low to mid single-digit percentage points.

Turning next to networking.

Q3 results were below our initial expectations, and down approximately 3% sequentially.

The weaker than expected networking results was due to softer than expected demand from some of our enterprise customers.

On a positive note, during the quarter, we saw strength in our Ethernet PHY and PON product lines.

In Q3, we were pleased to announce that our first 28-nanometer network processor and traffic management solutions, the Xelerated AX and HX family targeting the infrastructure market.

We already are engaged with tier one OEMs, customers on these new high-performance products for their next generation networking equipment.

We have additional 28-nanometer products in the pipeline.

We remain confident in our ability to provide long-term differentiated and cost-effective solutions to our networking customer base.

To summarize, in networking, we are making steady progress in increasing our footprint in the infrastructure market, while continuing to take measures to improve our enterprise-related business.

For Q4, we expect our networking end market to decline low single-digits sequentially.

Next, moving to mobile and wireless.

Our revenues in this end market increased over 60% sequentially, and was significantly better than our expectations.

Starting with mobile in Q3, we doubled the unit shipments of both our WCDMA and TD-SCDMA 3G products and started initial shipments of our 4G LTE solution in Asia.

During the quarter, we witnessed over 10 new smartphone and tablet product launches by more than five OEMs using our 3G platforms.

Feedback from customers has been extremely positive and sell-through remains strong.

In addition, China Mobile recently launched their first Bandit smartphone based on the Marvell 3G platform.

In LTE, we have achieved data certification as a major North American carrier and are on track to complete voice certification shortly.

Also in the quarter, the Chinese Ministry of Industry and Information Technology issued the first LTE networks access licenses for LTE smartphones, including those powered by the Marvell 4G LTE.

To summarize in mobile, our 3G and 4G LTE platforms continue to gain strong design tractions with leading OEMs.

We expect our 3G platform to continue steady growth through the remainder of this year and into the next year.

We also expect to see a ramp of our 4G LTE platform in the first half of our next fiscal year.

Next, in the wireless connectivity, our revenue in Q3 grew over 50% sequentially.

Recall that we have 100% attach rates for our wireless connected solutions with our new 3G and 4G mobile platforms.

The increased tractions of our Marvell connectivity in smartphones and tablets is leading to share gains in the mobile market.

In addition, growth in the connectivity was helped by the ramp of multiple new products from our non-mobile customers.

In particular, we are excited about the use of our wireless connectivity solutions in the upcoming new game consoles that are being launched for the holiday season.

We expect wireless connectivity and other advanced features in this new game console to help drive growth for the industry in the coming years.

In addition, our connectivity products are also gaining traction in smart TV, set-top boxes and mobile computing devices.

For Q4, we expect our mobile and wireless end market to decline low single-digits sequentially with growth in the mobile offset by a seasonal decline in our non-mobile connectivity business.

I would also like to highlight that in Q3 we saw strong demand for Marvell's platform solution that is designing to the Google Comcast.

We are extremely pleased by the commercial success of the Comcast continues to enjoy.

In Q3, our unit volumes increased significantly compared to the prior quarter, and demand continues to grow strongly.

In summary, demand in Q3 for mobile, wireless and storage was better than originally anticipated, while networking was below expectations.

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

Moreover, we are seeing the opportunities for our connectivity solutions across multiple market segments and we continue to gain share in HDD and SSDs.

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

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

Thank you, Sehat, and good afternoon, everyone.

As Sehat mentioned, we reported revenues of $931 million for the third quarter of fiscal 2014, a sequential increase of over 15% from the previous quarter, and above the high end of our guidance.

In storage, our overall revenue increased by 3% sequentially, which was better than our initial expectations of flat.

The growth in storage is mainly due to a combination of steady share gains and increased demand at our customers in anticipation of the holiday season.

Storage represented 46% of overall sales in the quarter.

In networking, our revenue was down 3% sequentially, and represented 17% of total sales.

As you may recall, our networking business is currently strongest within the enterprise portion of the market.

Recent results from many of our enterprise networking customers indicate an overall weak market and our business is not immune to it.

Despite this market weakness, we are seeing some pockets of strength such as an ethernet five and a recovery in our PON product line.

We remain cautious and expect the recovery of the market to take longer than previously expected.

In addition, we continue to make strong progress with development and design activity for our product portfolio addressing the infrastructure portion of the market.

Our mobile and wireless end market grew strongly, up 63% sequentially, and representing 31% of overall revenue in the quarter.

The growth in the quarter was due to the launch of new devices into the market from multiple customers.

We are extremely pleased with our strong progress in the mobile and wireless end market, as we continue to win new designs each quarter.

Moving next to margins and expenses.

Our non-GAAP gross margin for the third quarter was 50.3%, which was in line with our guidance range despite the stronger than expected growth of our consumer-oriented products.

We continue to be very focused on initiatives to maintain our gross margin levels.

What you are seeing is the case where the design wins and volume shipments within some of the consumer businesses have significantly exceeded our expectations.

Many of the gross margin improvement initiatives take time to realize, which is leading to a temporary dip in gross margins until those initiatives are completed.

Furthermore, we are also focused on accelerating the introduction of our next-generation products, which will command higher ASPs, as well as optimizing the pricing for existing products.

To summarize, we are taking actions on both the cost side, as well as the pricing side, to improve our gross margins in the future.

Our non-GAAP operating expenses came in at $313 million, which is below the midpoint of our guidance as we continue our expense management efforts.

Taken all together, this resulted in non-GAAP operating margin of 17% for the quarter.

These results demonstrate the strength of our business model, as despite a sequential drop in our gross margin, our operating margin expanded by more than 300 basis points in the quarter.

We continue to believe that we can drive revenue growth and operating margin leverage as we execute on the multiple growth opportunities that are ahead of us.

In Q3, our interest and other income was $1.5 million, and we recognized a tax benefit of $6 million for the quarter.

The shares used to compute diluted non-GAAP EPS during the third quarter, were 514 million, as compared to 516 million reported in the prior quarter, as we continue to drive down our share count with share repurchases.

In total, this resulted in non-GAAP net income for the third quarter of $163 million, or $0.32 per diluted share.

This was about $0.07 higher than the midpoint of our guidance.

Now summarizing Q3 results on a GAAP basis.

We generated GAAP net income of $103 million, or $0.21 per diluted share, compared to $62 million or $0.12 per diluted share in the prior quarter.

The difference between our GAAP and non-GAAP results during the third quarter was mainly due to stock-based compensation expense of $43 million, $11 million related to amortization of intangible assets and acquisition-related costs, and $6 million related to restructuring and exit-related costs.

Now, turning to the balance sheet.

Cash, cash equivalents, and short-term investments, as of the end of the third quarter, were $1.8 billion, an increase of 5% from the previous quarter.

We generated cash flow from operations during the third quarter of $177 million, and free cash flow of $157 million, or 17% of revenue.

During the third quarter, we repurchased 6.1 million shares for a total of $71 million.

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

Accounts receivable was $467 million, an increase of $36 million from the prior quarter, driven by higher revenues.

Our DSO was 44 days, compared to 45 days for the prior quarter.

Net inventory at the end of the third quarter was $380 million, an increase of roughly $45 million sequentially, to meet the anticipated increased demand for some of our new products in the coming quarters.

Moving next to our outlook for the fourth quarter of fiscal 2014, we currently project to be in the range of $880 million to $920 million.

At the midpoint of this range, this represents a sequential decrease of roughly 3%, better than normal seasonality for our fiscal fourth quarter.

By end market, we expect storage to be down low- to mid-single digits, as seasonality is partially offset by continued share gains.

We expect our networking end market to decline by low-single digits.

And finally, we expect our mobile and wireless end market to decline low-single digits with growth in mobile offset by seasonal declines in non-mobile connectivity.

We currently project non-GAAP gross margin of 50%, plus or minus 100 basis points, and 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 100 basis points.

The combination of interest and other income should net out to approximately $1 million benefit and tax expense should be approximately $5 million.

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

In total, we currently project non-GAAP EPS to be $0.25 per diluted share, plus or minus a couple of pennies.

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

We anticipate our cash balance to be about $1.9 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 $0.09 per share.

About $0.08 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.

Celia?

(Operator Instructions)

Harlan Sur, JPMorgan.

Congratulations on the solid quarterly execution and outlook.

Obviously, connectivity was a solid driver of the upside here in the third quarter.

Based on the tear-downs, it seems like your content in at least some of the first new game consoles has increased significantly.

My question was more about your efforts in mobile, specifically on LTE.

I know the team has said that you'd be shipping 4G TD or FD LTE chip sets to a tier one OEM in the second half of the year.

The question is, is this taking place now?

And if you could give us a bit more color on who those OEMs are going to be.

Is mobile growth in Q4 and as you look into the first half of next year, is that more 3G TD or 3G WCDMA?

And then I have a quick follow-up.

Harlan, right?

Hey, Harlan, Sehat here.

As you know, we've been saying that we are pushing LTE really hard.

My expectation is it will continue to -- is the same, consistent with our prior expectations.

We are progressing very well in the LTE, and our LTE solutions should ramp-up through the course of next year.

So, I feel pretty comfortable there.

The goal, again, our goal is to -- as well, in that 3G, we were behind in ramping up with the rest of the customers.

In LTE, we are quite well ahead.

We have vertically just a second behind Qualcomm and [Akadia] so we feel confident and excited that SDD carriers, more and more carriers are demanding LTE.

It is possible that by second half next year, the LTE could out-strip the 3G demand, at least from our side point of view.

From our customer base point of view, that's what I meant.

So, while today, most of the shipments are still in the 3G, it might be in the next year, maybe could be more and more in the LTE.

So, Harlan, you should expect, as we've talked about before, handsets actually in the market before the end of this year with our LTE solutions, with at least one, and potentially and additional customer.

In terms of your question about 3G, between TD and WCDMA, it's a combination of both.

Both of them are growing strongly.

As you recall, our Quad-Core solution has bolts that can go to into either market.

We are seeing strong growth in both.

Great.

Thanks for that.

Within your storage business, the performance in your HDD segment this quarter, I think, is a really good example of the proliferation rate of HDDs into other markets like gaming.

But within compute, I know on their last earnings call, one of your competitors claimed that they had won a 3.5-inch desktop HDD platform with one of your customers.

Any color on that?

And the potential impact to Marvell in calendar year 2014?

Maybe, if the team could share with us some of the share opportunities that you are capturing in HDD that would be a positive offset to any 3.5-inch potential share shifts as we look into next year.

In HDDs, this is an area that out of all the businesses that we have, this is the one that we feel the most comfortable, because this is the business the way we started 18 years ago.

Consistently, every single year, for the last 18 years, we've been investing.

We have out-invested our competition in the three-channel technology.

The result is that consistently over the years, we've been gaining market share.

Over the 18 years, all our competitors always took shot at us so they are getting some of the market share from us.

If we look at the last 18 years, the net result is we get market share every single year.

So, we do not expect any noise from the competition for them to impact us one way or the other.

As I mentioned about the prepared remarks, we continue to gain design wins and including any new markets for 3.5-inch desktops and nearline applications from customers that we don't have yet.

So, we feel comfortable here.

We are investing -- we are several years ahead in the HDD three-channel technology in this space.

Some of this technology -- our customers don't have to go into production for another couple years.

And we already have been working, in some cases, often we have samples already in-house.

So, I think in short, we don't see -- nothing changed.

Harlan, one other thing.

If you look at our storage business, given where we're guiding to for Q4, if you've heard that -- we are going to significantly outgrow the market itself.

That should tell you that are we are gaining share this year.

What Sehat was alluding to, and what we alluded to in the prepared remarks, we will continue to gain share on the enterprise side as we head into next year.

We feel pretty comfortable about our share position.

Great, thank you.

Again, congratulations on the solid results.

Doug Freedman, RBC Capital.

Congratulations, again, on the strong results you posted.

If I could just follow up to the last line of questioning, focusing on your biggest piece of business, the hard drive market.

Your competitor talks about gaining share, actually, on the client side.

I think the market understands that you are gaining share on the enterprise.

Do you have a strategy to maybe keep them out of the client side where you have been traditionally quite strong?

If you could touch on that a little bit.

Sure.

In this business, actually, our solutions have no difference whether it's a client or the enterprise.

Our strategy always a single strategy.

Build the best three-channel technology on the planet.

Whether that's the same technology, actually, integrated whether it is in the enterprise side or the desktop or in the mobile space.

Same exact technology.

So, we are different obviously, different types of exercise certainly for different customers.

So, the strategy is always the same.

Build something, build things that our customers would need a few years from now.

Our customers' differentiations I did today is to build higher-capacity drives.

Every years, they have to compete against their competitions to build high-capacity drives.

They have to build drives at higher yield, lower cost, so that they can get lower cost.

A 1% increase in yield, translates in the entry-level hard drive, translates about $0.50 saving to them.

A 1% increase in yield.

Imagine, often we have, especially in the early stage of productions, often our customer will have 10% or more yield of increase against our competition.

So, this is one area that is hard to explain why we command such a high percentage in this business, despite the fact that we belong in this business for 18 years and our competition has been in this business for 30, 40 years.

So, I feel good that it's an area that anybody who use our competition solutions will find out that they will get a worse solutions and they will come back to us.

It was proven in the enterprise a few years ago.

It's proven many times in many other customers, several years ago in Japan.

Every single time, if there's any one program coming to competitions, they all went back to us.

Thank you for that color.

That's very helpful in understanding the market.

If I could follow up with a question looking at the mobile and wireless business.

Your present platform has a dual-use purpose to it.

I believe you explained that customers could design for one standard and build one phone for many standards.

Is that feature playing out?

And can you give us some color on how broad a base of customer you are building out in your wireless business?

Yes, we talked about it a little bit in the prepared remarks, Doug.

It is a compelling solution for customers, and we are seeing customers continue to design additional models with our Quad-Core platform that has both the TD and the WCDMA modems.

As Sehat mentioned, just this quarter we had five OEMs designing product based on our -- five top-tier OEMs designing product based on that solution.

So, it is a compelling solution and we are getting strong traction at multiple different OEMs and also multiple models within those OEMs.

Great.

Thank you.

I will jump back in the queue if my questions don't get asked.

Thank you.

Hans Mosesmann, Raymond James.

Can you give us more detail on what may be happening on the hybrid side of the hard disk drive and solid state drive for your business and trends going into 2014, in terms of market share?

Thanks.

Sure.

So, let's go back to how we started this business.

About six, seven, maybe even eight years ago, we realized that there is going to be a market for SSDs.

We invested new technology to develop advanced SSD solutions.

Over the last year or so, finally, the price of flash becomes cheap enough, although still very expensive compared to hard drives, to allow a small percentage of the market to move to SSDs.

Now, despite having said that, despite the success that we have in SSD, and also well in line with our projections from day one, that the market for hard drives, primarily, still determined by cost-sensitive applications.

As such, it will be quite a miracle for the hard drive industry to move to SSDs completely.

It's highly unlikely that -- it's not fundamentally possible from the physics point of view, for that to happen.

So, a compromise needs to be made where we will integrate the best of both sides, namely the low cost of the hard drive and the performance and instant on capability of the SSDs.

So, that's where hybrids plays in this segment of the market.

What we are doing, we've been working on it for the last several years, is to develop new technology to leverage the SSD technology, control technology that we have developed.

You are seeing already the success today in the market, to be integrated with our HD controller.

We have introduced a technology and we believe that this is the technology that will allow our customers to be able to build hybrid drives at extremely cost-competitive solutions in the market.

So, hopefully, maybe sometimes, in the next year or so, where the customers have completed the software development effort, this thing will be able to go production, with very minimal cost increase compared to the standard hard drive.

Okay.

If you don't mind, a follow-up, a quick one.

What is the status of 3D NAND and the controller technology that you will have to implement to support these types of new memories?

Thanks.

Yes.

That's a good question.

3D NAND is the next evolutions of flash.

Flash is approaching the end, planar technology is approaching the end of life.

So, practically, before the end of next year or so, you cannot expect flash chips to string any further.

The only way to increase or lower the cost on NAND flash chips is to go to the vertical directions with the 3D NANDs.

So, this has been a huge -- it's a huge activity in the supply chain of the flash chips to boost the 3D NAND.

Some of the biggest challenge that people are facing, the long-term reliability of moving to this advanced devices.

So, on our side, from the controller side, primarily on the controller side, there are two parts.

One is the general control functions, which is the same, whether it be a vertical or horizontal.

There is the air pressure technology that we call the LDPC technology, that we have been developing again for the last six, seven years for the SSD.

That will be extremely important to address the reliability issues that we expect to encounter, moving forward.

So, we are well prepared for that.

I guess I could shorten.

We are prepared.

Thank you very much and congratulations on the quarter.

Quinn Bolton, Needham and Company.

Let me add my congratulations on strong results and guidance.

Sehat, I just wanted to come back your comments on the 3.5-inch drive where you're seeing some opportunity to gain share in desktop and nearline.

Are those opportunities scheduled to ramp in calendar 2014?

Or are those longer-term, platform wins that may take some time to ramp?

It's too early for me to make any comments on that.

We will talk about that at the appropriate time.

Exactly.

We are not going to disclose particulars on the design wins yet.

Okay, maybe I can just stepping back, your biggest competitors are talking about share gains in 2014.

If you look at next year, do you guys think you also gain share on a net basis?

You are around 70%.

Do think it's more stable next year?

We say we have share gains 2014.

So, we feel good about it.

Our technology, we've been working in this area, as I say, for so long that in every single year, we are well ahead of the competition by at least a year or so in the signal processing segment.

So, our solution is easily beat the competition in terms of yield and cost, all our cost structure.

I don't see any changes one way or the other, except we continue to increase the market share gain in the segment.

Okay.

Just as a follow-up, as you guys gain share on the mobile platform, as you pull through the connectivity with 100% attach rate, can you share with us, on that connectivity business, is mobile now a meaningful percentage of the overall revenue?

Or are game consoles, printers, set-tops, is that still the vast majority of the connectivity business?

Our connectivity business is much more diversified today than it has been in the past.

Obviously, as you alluded to, it was historically a lot of game consoles, printers.

But, with the traction we've gotten in mobile, that has become a much more meaningful piece to the connectivity business.

As well as, at the high end, wireless access points, as well as connectivity for tablets, ultrabooks, that kind of thing.

Much more broad across multiple areas of connectivity, which has led to overall solid growth.

Great.

Thank you.

Jim Schneider, Goldman Sachs.

Congratulations on the strong results.

Sehat, I was wondering if I could dial down in to one of the previous lines of questioning on the wireless design wins for next year.

Based on the pipeline of design wins you see right now within the LTE segment of the market, do you currently expect your SDD solutions or your TDD solutions to be a bigger contributor for calendar 2014?

The question is for the LTE?

Yes, for the LTE, clearly, we are working with TDD and SDD LTE.

We're already starting to productions in China and China, of course, is TDD LTE.

The FDD LTE will soon come after that for market outside the China market.

We are well in, first of all, the technology side, TD LTE is a curious superset of FDD LTE.

For those people that do not know the difference between the two, let me assure you that a TD LTE as a superset of FDD LTE.

What works in TDD will work with an FDD by practically almost by default, because the software, a slightly different software site.

We expect, as I said earlier, by the end of next year, the LTE parts of our business is going to be probably -- my expectation is it will be bigger than our 3G business.

Okay.

Fair enough.

I was wondering about whether FDD or TDD will be bigger.

Maybe a question for Brad.

(multiple speakers).

Okay.

That was hard to say because the market, both markets are quite large.

Okay.

That's fair.

Then, Brad, on the gross margin side, obviously, you're working on a lot of cost reduction measures, as you pointed out.

The mobile wireless business is growing very strongly.

What's your confidence interval that you will be able to keep gross margins at the 50% level throughout calendar 2014 even if the wireless business grows substantially?

We remain confident that we can maintain that, Jim.

As I mentioned in the prepared remarks, it's really just a temporary phenomenon that's driving us to the real low end of the target range.

It's really just the ramp-up of those designs, which was significantly faster than we thought.

But, we have multiple efforts, both on the cost side and the pricing side that will allow us to recover.

In addition, as the next generation of products come to market, more mid-next year, that will also help the margin.

We feel very good and are confident that this is a temporary dip in the margin profile.

Great.

Thanks so much.

Glen Yeung, Citi.

This is actually [Saymo Myen] on behalf of Glen.

Just a blanket question.

I was wondering if you could provide any details on the health of the channel inventory, particularly in mobile and wireless and then expectations going into year end?

I don't think there's anything unique related to it.

I think for us in the mobile and wireless side, our products are going into devices and devices are getting out into the market very timely.

We are not seeing any real channel buildup of any of our products or the devices that they go into.

Great.

Thank you.

John Pitzer, Credit Suisse.

This is Ryan Carver in for John.

If I go back to fiscal third quarter of 2011, Marvell has done a great job of returning a lot of free cash flow in terms of share buybacks and dividends, about 123% it looks like.

Even with the last couple of quarters, it was a more depressed level of free cash flow.

You guys had been at a 400% plus, and 180% plus of free cash flow.

Third quarter, 64% return looks like the lowest level in a couple years.

Is that just a matter of timing, in terms of buybacks?

Or, are you guys being more conservative given the CMU litigation overhang?

Walk us through your thoughts on the short returns going forward.

Sure, no problem, Ryan.

There's obviously multiple elements to it.

If you take the buybacks we did plus the dividends, we did do a fair amount of our free cash flow this quarter.

We remain very committed to doing that.

Obviously, the stock price ran up toward the tail end of the quarter and when that happens, we are in the quiet period, it's difficult for us to react to that.

Obviously, we are being a little bit more opportunistic given the status in the CMU case.

But we remain very committed to returning cash to shareholders and being very active on the buyback.

Ryan, if you notice, for the year to date, we have returned in excess of our free cash flow generation, over 100%.

You can be looking at this one quarter at a time.

Got it.

As a follow-up question, there have been a couple questions around the profitability and the mix shift within mobile wireless.

It looks at mobile wireless, for the fiscal fourth quarter, is going to be a bit weaker, a bit less as a percentage of revenue.

Gross margins are going to be coming down.

If I do some back of the envelope math, it looks like some incremental gross margins for the fiscal third quarter were up quite a bit for wireless versus what they were in the second quarter.

How should we think about the mix between connectivity and cellular and that impact on the overall gross margin level?

The fall question is, how should I think about R&D investments over the next couple of quarters, as you guys invest in developing these new lower-cost products that will hit the market the middle of next year?

Thanks.

Ryan, as we've talked about in the past, our gross margin is largely mix dependent.

We don't break out mobile versus connectivity.

As we've talked about in the past, and I mentioned on my remarks, mobile and wireless will have somewhat of a downward impact on our margins, but we have multiple initiatives under way that will recover those.

We still feel very confident on a gross margin perspective.

As I mentioned, given the controls around OpEx, we still increased the operating margins over 300 basis points this quarter, which shows you the leverage in the model.

In terms of your question around R&D, we've obviously committed at the start of the year to keep OpEx relatively flat.

I think we've done an excellent job of adhering to that commitment.

We will continue to be very disciplined on what we invest in from an R&D perspective, making sure that we are investing in the right opportunities.

You should see, next year, the growth in revenue to significantly exceed any increase in OpEx spending.

Also add something on the comments about doing R&Ds for lower cost products.

While it's true that we continue to build devices to be lower cost, we also on the other hand, do not lose sight of the fact that a lot of this business, at the end of the day, the technology, really advanced technology better feature, higher performance and lower power, longer battery life and better use of interface, are the one the customer is going to demand.

In terms of how to achieve that, we are accelerating our investment in advanced architecture, as well as in the geometries that these devices will go into.

So that will be some of the increase of the R&D costs.

Not increase, some of the R&Ds that we are focusing on.

So building fewer things that matters to the customers.

Thanks, guys.

Good quarter.

Ross Seymore, Deutsche Bank.

This is actually Matt Diamond on Ross's behalf.

A real quick question on my end.

It was quoted earlier this month that there was potential for Marvell to be taken private.

I'd just like to get your thoughts there.

(laughter) I can only laugh for that one.

We are investors coming in and out, buy Marvell shares.

As a general policy, we always welcome any investors that believe in Marvell and understand our strategy, agree with our principal.

We are driving for growth for the future.

So, we welcome their particular investors.

Other than that, we have no idea -- we cannot make any comments.

It's a matter of policy.

There's nothing to talk about.

Understood.

In a somewhat similar vein, any comments on the CMU litigation?

Yes.

So, there's not a whole lot of new news around CMU.

We are still in the post-trial phase.

We are waiting for the judge in Pennsylvania to come down on her -- the post-trial motions.

We are obviously setting up the surety bond in advance to make sure that we can accelerate quickly into the appeals process, once her rulings do come down.

Understood.

Thanks so much.

Mike Burton, Brean Capital.

Let me add my congratulations on the strong performance and guide.

Within storage, just looking ahead to next year, would you expect the HDD opportunity to be up or down considering the console cycle and SSD adoption increasing?

Then within SSD, do you continue to see higher SPs there?

What is the impact to margins?

We expect our overall storage business to grow next year.

We've talked about the opportunity on the HDD side, both in the enterprise side of things and just in the core business.

Our SSD business continues to grow very nicely.

Our PCIe solutions are best-in-class in the market and we are seeing a very strong traction from the SSD side of things.

There is still a premium to an SSD device versus HDD, and those tend to drive a higher margin profile.

Okay.

I know it's a little early, but can you give us a sense for how we should be thinking about the April quarter this year?

Relative to historical trends?

And, your guidance for better than a seasonal January?

Thanks.

Yes, sure.

So, we only guide one quarter at a time.

But traditionally, our Q1 is seasonally down from Q4.

I don't expect that to be significantly different this year.

Celia, can we take the next question, please?

Romit Shah, Nomura.

This is Sydney Hope for Romit.

Congratulations on the quarter.

On the SSD controller side, can you help us terms of how big your SSD controller business is as part of your storage business?

I may have missed it.

Can you expect that business to grow in Q4?

We don't break out the SSD portion of the storage business.

But, the SSD business in Q4 will likely be seasonally down a bit.

Okay.

Great.

Then, my follow-up to that is, do you expect to continue gaining share, especially given your competitor has recently launched a new solution?

And on top of that, what's your plan to grow out of that declining business?

The question, I think, was around SSDs?

I think we will continue to grow in the SSD side of the business.

We have gotten great traction with many OEMs and we've largely been focused on the client side of the market, which we will continue.

We are also looking at opportunities on the enterprise side of the SSD market as well.

We will look at those opportunities as well.

We think, overall, the SSD business has a great growth profile for us in all aspects of the market.

I want to give some color on the SSD side.

A lot of our competitors are making a lot of noises in the SSD as well.

The track record is not as clear.

Our SSD solutions are the most reliable in the market versus our competition.

Our competition is having a lot of problems.

You might want to check it out yourself.

All right.

Thank you very much.

Kevin Cassidy, Stifel Nicolaus.

This is Dean Ramos calling for Kevin.

Thank you very much for taking my call.

There's a lot of discussion in recent times about the outlook for transistor cost to rise as the industry moves to denser nodes.

I was wondering if you concur with this outlook and, if so, what strategies you may adopt in your mobile processor area?

Thank you.

Sure.

Actually, everyone of us has heard about this over the last four or five years, about that, as we look to the next process nodes, the processor cost increases.

We actually believed this is several years ago, when we decided to delay the transitions in our smartphone solutions from 55 to 40.

And we made a mistake.

I don't want to repeat the same mistakes.

So, even though I am hearing that transistor costs are going to go up, I have decided that the customer, the end-users are going to have to wait.

Competitions tend to create lower prices.

So, advanced transistors will always give lower prices, eventually.

Now, it is always true -- unfortunately, it's true -- it's always been true -- that as we go to smaller advanced technology, the R&D cost going up through the roof.

That part is an area that continue to happen and continue to accelerate.

So, as we go to a pin pad, the mass cost is going up through the roof.

However, we do not expect to the cost of the silicon to be -- transistors to be higher.

It will continue to drop.

Very helpful.

Thank you.

Do you have a follow-up, Dean?

No, I don't have a follow-up.

That's very helpful.

Thank you very much.

Alex Gauna, GMP Securities.

This is Michael Wu calling for Alex.

Thank you for taking my question.

Congratulations.

We know that Marvell has a number of design wins within the Samsung Galaxy family.

I was wondering if you could give us a little more color on what is your current exposure to Samsung?

Are they now your largest customer in mobile?

Also, are there certain others, Samsung platforms that you have won, or have aspirations?

Unfortunately, we can't get into the details of the design activity at any given customer.

You need to talk to them about what designs we have and that kind of stuff.

It's an area that we can't get into, unfortunately.

Okay.

Fair enough.

For my follow-up, Intel at its Analyst Day today mentioned that it believes the PC market is stabilizing and that there might be some pent-up customer upgrade demand for PCs.

I was curious, what is your visibility and your take on the secular trends happening for PC to finish out this year and heading into calendar 2014?

Well, I think that's an area that is kind of presumptuous for us to be the expert in this area.

The only thing I can say, is Intel continue to build more advanced processors for the PCs.

For Sony and Microsoft continue to build better software for the PCs.

I think the business will be doing fine in the long run.

But, again, you need to ask them for that.

We are only suppliers.

We happened to be a suppliers.

It's parts of the PC supply chain, let's say, like the storage area.

Other than that, hard for me to make any guesses what's going to happen, especially quarter to quarter.

We are a couple levels removed from you, as a consumer, buying a PC.

Obviously, if that trend happens, that would be a good thing for us.

My kids still all buying PCs.

They keep buying new PCs.

My kids are probably different than other kids.

Do you have a follow-up?

I think that was your follow-up, okay.

Celia, if there's no other questions in the queue, we will take one last question, or if there's no other questions, we will probably end.

Are there any more questions left?

At this time, there are no other questions in queue at this time.

Okay.

In that case, I would like to thank everyone for their time today.

Continue to invest in Marvell.

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

Thank you and goodbye.

All right, thank you.

Thank you.

Ladies and gentlemen, that concludes today's conference.

Thank you for your participation.

You may now disconnect.

Have a great day.