邁威爾科技 (MRVL) 2014 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q4 2014 Marvell Technology Group Limited earnings conference call.

My name is Sarah, 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 over to your host for today, Sukhi Nagesh, Vice President of Finance.

Please proceed.

Thank you, Sarah, and good afternoon, everyone.

Welcome to Marvell Technology Group's fourth-quarter and full-year fiscal 2014 earnings call.

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

We will all be available during the Q&A portion of the call today.

If you have not obtained a copy of our current press release, it can be found at our Company website under the Investor Relations section at Marvell.com.

We 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 includes our expectations about our overall business, our product and market strategy, statements about market acceptance of our products, statements about general trends in the end markets we serve including future growth opportunities, statements about market share and statements regarding our financial outlook for the first quarter of fiscal 2015.

To fully understand the risks and uncertainties that may cause results to differ from our expectations and outlook, please refer to today's earnings release, our latest 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 the call today, we will make reference to certain non-GAAP financial measures which exclude the effect of stock-based compensation, amortization of acquired intangible assets, acquisition-related costs, restructuring cost 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 non-GAAP financial measures to the most directly comparable GAAP measures in our fourth-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.

Thanks, Sukhi, and good afternoon, everyone.

Today we reported fourth-quarter revenue of approximately $932 million, flat from the prior quarter, and above the high end of our guidance range.

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

We delivered the following non-GAAP results for Q4, a gross margin of 50%, operating margin of 16%, and earnings per share of $0.29.

We also paid approximately $30 million in dividends during the quarter.

Before going into my financial commentary, I want to briefly introduce Mike Rashkin, for those of you who are not familiar with him.

The Board has appointed Mike to serve as our permanent CFO, effective immediately.

Mike has been with the Company for over a decade, and we are pleased that he has agreed to serve as our CFO, as we drive towards the next phase of growth.

Mike is well-liked, and universally respected within the Company, and he is a great team player.

He has a strong background in finance, operations, and tax, which will serve the Company well.

He is the best choice for the role, and for all of our stakeholders, including investors, customers and employees.

Now turning to the business, fiscal 2014 in many respects was the start of a turnaround for Marvell.

For the full-year, our storage business performed strongly, and grew approximately 13% from the prior year.

This growth in storage was due to strong growth in our SSD business, and the continued share gains in the HDD, despite a year-over-year decline in the overall HDD TAM.

Our mobile and wireless end market delivered modest growth in fiscal 2014, after undergoing two years of customer and product transitions, and we are now well-positioned to deliver strong growth in fiscal 2015.

Our networking business declined in fiscal 2014, which was in line with the overall enterprise networking market.

In networking, we are focused on expanding our opportunities in new areas within the enterprise market, and also in the infrastructure and data center markets.

We expect these new initiatives to drive better results, starting the second half of this year.

Before I discuss each of our end markets, I would like to reiterate our commitment to our investors that we remain focused on improving our productivity and execution.

In line with this, our overall financial goals remain the same.

We are targeting revenue growth that is greater than our competitors, and EPS growth that is faster than our revenue growth.

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

In storage, we continue to execute well.

For Q4, revenues in our storage end market was better than initially expected, and grew 3% sequentially.

Starting with HDD, our business continues to outperform, due to share gains and increased demand from our customers.

Customer orders were stronger than expected towards the end of the quarter.

This may also have been due to the timing of the Chinese New Year.

We believe some of this better than expected demand trend can also be attributed to the stabilizations in the global PC markets.

In addition, we believe our customers continue to see good demand for other non-PC applications.

In the enterprise space, we continued to see steady share gains at a top North America-based HDD customers.

For your reference, at the end of Q4 our share at this customers enterprise business was still only 50%, compared to roughly just 15% at the beginning of last year.

We expect the steady share gains to continue throughout this year.

I would also like to stress that we are accelerating our investment in next-generation advanced HDD and hybrid technologies.

We believe this will allow us to further increase our share, and solidify our leadership position in the market.

Next in SSDs, we ended fiscal 2014 with strong year-over-year growth for both of our PCIe and SATA-based products.

For the full-year, our SSD revenue doubled from the prior year.

We are executing well, and seeing strong traction for our fourth-generation PCIe Express, PCIe SSD products.

Recently in Q4, we introduced two new high-performance SSD products, and have many new -- more products in the pipeline for the rest of the year.

We expect our SSD business to once again grow strongly in fiscal 2015.

For Q1, we expect our storage end market to seasonally decline mid to high single-digits sequentially.

Now turning next to networking.

Q4 results were above our initial expectation, and increased approximately 5% sequentially.

The solid results were driven by strength from our enterprise and service provider customers, which contributed to growth in most of our product lines.

In Q4, we saw a strong double-digit growth in our Xelerated NPU and ARMADA SoC product families.

In particular, our ARMADA SoC product family is seeing good traction in the growing mass-market, and is leading the adoption of ARM-based architectures in the enterprise and service provider control planes.

In Q4, we garnered additional design wins for our Xelerated, Prestera, and ARMADA ARM SoC product lines.

We also continue to invest in innovative technology to intercept the future needs of our customer base.

For instance, we have invested in a new fabric technology that is ideally suited for realtime requirements for the data center and mobile infrastructure markets.

Our next solution, currently in the market, our unique fabric technology offers efficient scheduling, low latency and (inaudible) operation that significantly increase the performance of the networks and the data centers and mobile infrastructure.

To summarize, in networking we continue to increase our footprint in the service provider market, and are benefiting from modest improvements in enterprise end markets.

For Q1, we expect our networking end market to be approximately flat from the prior quarter.

Next moving to mobile and wireless, our revenue in this end market declined 14% sequentially, and was below our initial expectations.

For our mobile business in Q4, we witnessed softer than initially expected results, mainly due to product launch delays from some of our customers.

However, we expect demand for our mobile products to return to normal in the current quarter.

Highlighting the turnaround that we started to see in the mobile last year, our 3G WCDM unit shipments grew double-digits from the prior year.

Our unified 3G platforms are now improved production, with many of our leading OEM partners.

Now I would like to provide some -- provide a brief update on our progress in the LTE.

Unlike in the 3G way, we were late to the market, our LTE products are hitting the market just in time, and we are excited about the traction we are getting at multiple customers.

Our focus from the beginning has been to address the high-volume part of the LTE market, and our 4G platform solutions are well-suited for the RMB1,000 and below segment.

As you know, late last year, the Chinese government issued TD-LTE licenses to all three mobile operators in China, and current expectations are for the TD-LTE market to grow slowly in calendar 2014.

We have been deeply engaged with multiple customers for our 4G LTE solutions, and are seeing strong orders from these customers.

In North America, our 4G LTE solution is now fully certified for voice and data at AT&T, and we expect full certification to be completed at another large carrier in some time Q1.

We expect to see initial shipments of our LTE technology in Ultrabooks in North America, followed by, later by tablets and smart phones.

Next in wireless connectivity.

Revenue declined double-digits sequentially, driven by seasonal decline in game console business.

However, for the full-year, our connectivity activity business grew over 15% from the prior year.

This growth was driven by a combination of new product cycle, as well as increasing attach rates for our mobile platforms.

From a product standpoint during Q4, we introduced the industry highest integrated 1x1 11 AC combo, specifically targeting for the smartphone market.

Furthermore, our market-leading 2x2 AC combo products continue to see design win momentum and adoption across the mobile computing and video segments.

For Q1, we expect our mobile and wireless end market to decline low single-digits sequentially, with growth in mobile offset by a seasonal decline in our non-mobile connectivity business.

In particular, I would like to highlight that in Q1, we are expecting some revenue and unit growth for our 4G LTE mobile platform for multiple customers.

Moving next to our video business.

In Q4, in addition to continue volume shipments for the Google Comcast, several service providers are -- also have started shipping our platform video solutions for the IPTV and hybrid set-top box of products.

We have also see leading OEMs such as [Hisense] and Skyworks launch smart TV and set-top box devices in the quarter.

All of these products are based on our award-winning ARMADA 1500 family of scalable platform solutions.

In summary, we ended fiscal 2014 on a strong note.

For fiscal 2015, we are extremely well-positioned to deliver solid growth across all of our end markets.

We continue to make strong progress in mobile at multiple customers, plus smart phones and tablets.

We are seeing new opportunities for our connectivity solutions across multiple market segments, and we continue to do better than the market in both the HDDs and SSDs.

We also expect more of this recovery in building our networking business in fiscal 2015.

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

With that, I would like now to return the call over to Mike, to go over our fourth-quarter and full-year financial results, as well as the outlook for the first quarter.

Thank you, Sehat, and good afternoon, everyone.

Before I go into the financials, I would like to say a few words regarding my appointment today.

I am very pleased to step up and serve as the CFO of Marvell, and help build the Company to the next stage.

Our employees strive for excellence in products and execution.

We know that helping our customers succeed will lead to our long-term success.

We are a very innovative company, and I look forward to doing my part.

I also look forward to interacting with all our current and potential investors, and the analyst community, and sharing the Marvell story.

Moving to our financials, as Sehat mentioned, we reported revenues of $932 million for the fourth quarter of fiscal 2014, approximately flat from the previous quarter, and above the high end of our guidance.

The better than expected revenue was due to upside from our storage and networking customers, that more than offset a seasonal decline in our wireless business, and product launch delays by some of our mobile customers.

In storage, our overall revenue increased 3% sequentially, and represented approximately 48% of total sales.

Our HDD business grew as we continued to take share in enterprise platforms, and we did see a benefit from pre-Chinese New Year demand.

In addition, our SSD revenue for the quarter was better than expected, due to demand from multiple customers.

Our share in SSDs continues to rise, and overall we expect steady incremental share gains, in both HDDs and SSDs throughout the year.

In networking, our revenue was up 5% sequentially, and represented approximately 18% of total sales.

Our networking business performed better than expected, due to strength from both enterprise and service provider customers.

In Q4, our switching, MPU, and SoC product lines grew, with SoC's and MPUs in particular growing double-digits sequentially.

We also saw better than expected demand for our PON business in the quarter.

Our mobile and wireless end market declined roughly 14% sequentially, and represented approximately 26% of overall sales.

During the quarter, we saw our customers delay the launch of some high-volume products into the Q1 timeframe, which resulted in a decline in our mobile business.

We are already seeing these delayed programs now growing in Q1.

Also as expected, our wireless connectivity business declined seasonally.

Moving next to margins and expenses, our non-GAAP gross margin for the fourth quarter was 50.1%, which was in line with our guidance range.

In Q4, we took an inventory write-off charge that negatively impacted our non-GAAP gross margin, a [nearly] 80 basis points.

Non-GAAP operating expenses came in at $315 million, which was also in line with our guidance.

This resulted in a non-GAAP operating margin of 16% for the quarter.

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

This resulted in non-GAAP net income for the fourth quarter of $151 million, or $0.29 per diluted share.

This was approximately $0.04 higher than the mid-point of our guidance.

The shares used to compute diluted non-GAAP EPS during the fourth-quarter were 523 million.

Cash flow from operations for the fourth quarter was $100 million, and free cash flow for the fourth quarter was $82 million, and was negatively impacted by higher working capital in the quarter, mainly due to the timing of certain payments.

Now summarizing Q4 results on a GAAP basis.

We generated GAAP net income of $106 million(sic-see press release "$107 million") or $0.21 per diluted share, compared to $103 million or $0.21 per diluted share in the prior quarter.

The difference between our GAAP and non-GAAP results during the fourth quarter was mainly due to stock-based compensation expense of $38 million, $12 million related to amortization and write-off of intangible assets, and a gain on sale of non-core product line of approximately $7 million.

Now turning to the balance sheet.

Cash, cash equivalents and short-term investments as of the end of the fourth quarter were nearly $2 billion, an increase of 9% from the previous quarter.

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

Net inventory at the end of the fourth quarter was approximately $348 million, and declined 9% sequentially.

Days of inventory were relatively unchanged at 71 days.

This being our fiscal year, I will briefly summarize our results on a full-year basis.

Overall, revenue for fiscal 2014 was $3.4 billion, an increase of 7% from the prior year.

As Sehat mentioned earlier, fiscal 2014 was the start of our turnaround, and moving forward we are targeting solid growth in all our target end markets.

For the year, our storage end market had strong growth of 13%, despite a decline in the HDD TAM.

This was driven by share gains in HDD, as well as a doubling of our SSD revenue.

While our networking end market declined modestly for the year, we are focused on improving our execution and performance of this business.

Our mobile and wireless end market grew modestly for the year.

Our wireless connectivity business grew over 15% year-over-year, due to new product cycles.

Fiscal 2014 was also a pivotal year for mobile business.

We are now starting to see the fruits of focused execution, in both the 3G and 4G LTE markets with multiple customers.

Excluding revenue from North American customer which declined significantly, in fiscal 2014 our mobile revenue grew strongly from the prior year.

On a non-GAAP basis, gross margin for fiscal 2014 was 51.8%, versus 53.4% reported a year ago.

Non-GAAP operating income was $503 million, or approximately 15% of revenues, compared to $486 million or 15% a year ago.

Non-GAAP net income for fiscal 2014 was $530 million, or $1.02 per diluted share, compared to $498 million or $0.86 per diluted share reported a year ago.

Moving next to our outlook for the first quarter of 2000 -- fiscal 2015, we currently project revenues to be in the range of $870 million to $910 million.

At the midpoint of the range, this represents a sequential decrease of roughly 4%, better than normal seasonality for our fiscal first quarter.

By end market, we expect storage to be down mid to high single-digits, driven by seasonality.

We expect our networking end market to be roughly flat.

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

In particular, we expect strong revenue and unit shipments to multiple customers for our 4G LTE platform in the quarter.

We currently project non-GAAP gross margin of 50% plus/minus 100 basis points, and currently anticipate non-GAAP operating expenses to be in the range of $330 million, plus/minus $10 million.

We anticipate R&D expenses of approximately $270 million, and SG&A expenses of approximately $60 million.

This $15 million sequential increase in non-GAAP operating expenses is driven principally by annual payroll tax resets, and fringe and merit step up.

At the midpoint of our projected guidance, this should translate to a non-GAAP operating margin of approximately 13%, plus or minus 100 basis points.

The combination of interest and other income should net out to approximately $1 million, and we expect tax expense to be approximately $1 million.

We currently expect the diluted share count to be approximately 530 million shares.

In total, we currently project non-GAAP EPS to be $0.22 per diluted share, plus or minus a couple of pennies.

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

We anticipate our cash balance to be about $2 billion, excluding any M&A activity, share buyback or other one-time items.

We currently expect our GAAP EPS to be lower than our non-GAAP EPS by about $0.08 per share.

About $0.07 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 our call.

Operator?

(Operator Instructions)

And our first question comes from Harlan Sur from JPMorgan.

Please proceed.

Congratulations on the solid results.

Given the strength of your 4G TD-LTE ramp here with multiple customers, I think last I commented, you had six major smartphone customers, and given what appears to be an aggressive proliferation target by China Mobile, I am just trying to get a sense on the volumes here in the first half?

Are we talking about millions of 4G chipsets being shipped by Marvell per quarter here in the first half, and a potentially larger number in the second half?

Any way you can help us size your 4G business, and a ramp rate would be great?

Yes, Harlan, it is Sehat here.

Yes, we do.

I think the numbers on, from what you expect is very reasonable.

This is now, of course, okay, we have to -- okay, of course, that all depends on the timing on how fast, okay, the carriers will push the LTE.

But from what we see at this point, yes, millions is in the --

Millions per quarter is reasonable.

Is very reasonable.

Millions per quarter here in the first half?

That's correct, Harlan.

Yes, that is reasonable.

Okay.

Great.

And then, how should we think about your networking business this year?

It looked down sequentially three out of the past four quarters.

It seemed like enterprise and PON seemed to have been sort of the two pressure points now.

You did see growth in Q4, and are guiding for kind of flattish trends in Q1.

Does the team expect to grow networking this year, given some of the new product cycles like Xelerated, and the other trends in service provider spending in data center?

Yes, Harlan, I think we mentioned that we are looking at diversifying our networking business outside of core enterprise, and we are starting to see some traction in other areas within the enterprise, as well as in the mobile infrastructure space.

Right?

And I think we have talked to the investors about our Xelerated NPU growing, our ARMADA SoC business growing, and all of these are targeted to non core non-enterprise areas.

So while we are seeing some weakness in the traditional enterprise space, and it is more mainly market-driven, we are also seeing some traction now in the non-enterprise space.

For the full-year, like Sehat mentioned earlier, we do expect some pickup in our networking business, but that is probably going to be more to the second half of this year.

Got it.

And then just one final question.

So I think the team articulated the reasons for the OpEx step up in Q1.

I think our Marvell overall was very disciplined on OpEx expansion last year, so how should we think about your OpEx profile beyond Q1?

Is the team still committed to driving its operating expense growth at a rate that is lower than revenue growth beyond the first quarter?

Yes, as you know, as we say, okay, is the Q1 increase due to this one-time event.

And from, okay, what I am committed to, just like last year, I am committed to do a careful, careful and tight control of our expenses, while we are, okay, still improving our execution.

So for fiscal 2015, I am committed to keep our expenses relatively flat, compared to our Q1 rate for the rest of the year, I mean approximately.

So this is our commitment.

So same as last year.

So we need to make sure that, okay, we focus on what matters, including our investment in areas that is going to bring more revenues to the mid, near and mid-terms, versus spending a lot of efforts on things, that maybe only four or five years possibly will pan out.

So I hope that is clear.

Yes.

Great.

Thanks, Sehat.

Thank you, Harlan.

All right.

Our next question comes from Doug Freedman, RBC Capital Markets.

Please proceed.

Great.

Thanks for taking my question, and welcome, Michael.

Could you talk about what leverage you possibly could pull, including moving to a multi-source foundry agreement?

And what that could -- what impact you could do to margins?

Yes.

The product, okay, if you look at some of our products there, okay.

Some of the products there, that we do in the smartphone side, we need to accelerate moving to more advanced process nodes.

Those are the single biggest improvements that we can get from the gross margin, as well as getting better performance for our customers.

Not to mention, okay, better features along the way.

So we are investing -- most of, practically almost every product that we build are moving to 28 nanometers as a result, so this year.

And then, obviously, next year will be even more advanced process nodes.

So I think we mentioned this to you before, as well.

We are obviously going to talk to all, all the foundry guys out there to see who will give us the best price.

And so that is a constant dialogue we have with multiple foundry partners.

And that should help us out on a case-by-case basis.

Yes.

I think maybe, okay, maybe I, I can state this.

I say this, okay, maybe like a thousand times in the past.

All our designs, okay, you see in our libraries, our standard sales, our [nano] sales, our [case log], our analog circuits, so our memory compilers.

So our designs are actually not tied to any specific foundry.

It is just a matter of -- okay, as Sukhi says, okay, which foundries will give us the right slot share of product quality, cost and volumes.

All right.

If I could ask a question about the landscape in which the Company is operating.

We have seen intra quarter a few material changes.

You have got Avago purchasing LSI.

We have got the RDA and Spreadtrum acquisitions where they are trying tactically to put those companies together.

Can you comment what if any visible impacts that is having in your relationship, or your ability to operate in the different markets?

Yes.

It is an interesting time for all of us, obviously for us to see that happening.

But, I, running, okay, running, me as CEO of Marvell, I can not be worried about what is going on out there.

It is more important for us, is to continue to focus in investing in advanced technologies that made us to be the leader in this space.

So specifically, we talk about the LS Avago, okay.

I think what the investors probably have questions about are in the area of storage.

This is an area that in storage where we are absolutely, okay, committed.

We are not, okay, we always, we have been committed, okay, without any hesitation for the last 19 years that we are in the business.

We continue to invest well ahead of the market needs.

We say this, a few times, like several times in the past, that in SSD we invested, started investing in SSDs more than six years ago.

And as a result, we are now the leader, okay, because, okay, we, okay, because it is not so simple in this business, where people can go in the business and say, I want to invest.

They would not have to see the results for another couple of years.

So knowing that this is, okay, this a case-by-case, we actually decided to increase, okay, accelerate our investment in HDD and SSD even more.

Okay, so we don't have to worry about what they are planning to do, or what they are planning not to do.

Great.

Thank you.

And I will jump back in the queue for further.

All right.

Our next question comes from Ruben Roy of Mizuho Securities.

Please proceed.

Thank you.

So Sehat, just a follow-up on the gross margin question.

The PXA1088 LTE that you are seeing some traction with, is that shipping at 28-nanometer today, or is that a cost reduction that is coming later this year?

The first one was a [solid] 40-nanometer.

The [40]-nanometer is in the sampling stage.

Okay.

And then, I guess, for Mike, just around gross margins.

I understand the comment on the 80 basis point impact that you had in the quarter.

But it does seem like with the product mix, the way it went with storage and networking outperforming perhaps gross margins, when you look at your gross margins historically, it could have been a bit higher?

Or are there different moving parts as you are shipping more enterprise hard disk drive components and the SSD components?

Ruben, this is Sukhi.

I will take that.

First of all, I think, it really depends on your assumptions.

And we, as you know, we have never given or broken down our gross margin by products or by end markets.

Right.

And so, I think to that effect, we can't really make any comments in terms of why the gross margin was lower.

All we said was, it was 80 points of impact, for Q4, was because of that inventory write-down we took in Q4.

If not for that, we would have been at the high end of our range.

And it would probably be reflective of the mix of our business, as well.

Okay.

Thanks, Sukhi.

And then just a final question.

It sounds like you had a little bit of higher order activity ahead of Chinese New Year.

Coming out of Chinese New Year, you are guiding for seasonal, down for the storage business.

Is that a function more of the PC stabilization that people have been talking about, and things still going well in terms of orders there?

Or is that a function of continued enterprise share gains driving that in-line seasonal guide for the quarter?

Thanks.

It is a bit of both.

We will continue to see our enterprise business do well in storage, at the specific North American customer.

But if you look at our overall, like Sehat mentioned in his prepared remarks, our storage business actually really did well last year, up nearly 13%, while I think the hard disk drive TAM itself was down about 5%.

And if you ask a lot of people, what expectations are for this year, they say the hard disk drive units could be flat or down, or could be up.

And some people are thinking it could be up this year, as well.

But we feel pretty confident that we will outperform the storage market this year, as well.

It is just probably too early for us to say how the rest of this year is going to shape out.

Okay.

Thank you.

Okay.

Our next question comes from Quinn Bolton from Needham Company.

Please proceed.

Good afternoon, gentlemen.

Congratulations on the nice results and guidance.

I just wanted to come back to the LTE market.

You have recently announced a number of PXA1088 LTE wins, where you not only have the [SFC], but you also have a lot of support chips, the Wi-Fi combo, the power management, the [arc] transceiver.

Can you give us some sense when you get that entire bundle, what is the ASP increase on that bundle versus sort of a similarly configured 3G phone?

Are we talking as much as maybe a 100% lift sort of in your content in those phones?

Yes, I think as we say this so many times in the past, this is a very highly competitive market, and it would be unwise for us to disclose, okay, the ASP of the products.

But if you are asking about the LTE has a higher content dollar-wise, yes, you are absolutely right.

LTE is what everybody wants to have.

So LTE is also more complicated, more work needs to be done.

Everything is bigger.

Chip is bigger.

The transceivers bigger, yes

That so, it is true that it is, okay, it is, it brings higher dollar values to the Company.

And we, plus, we hope that, okay, the world moves to LTE, the sooner the better.

I mean, if more and more countries move to LTE, it is going to be good for us.

So this is why we continue to invest heavily into this area.

Okay.

And then just a related follow-on.

Given that you expect you could be shipping millions of LTE units per quarter, and I assume higher units in the -- or higher rates in the second half of the year, do think you might hit crossover between LTE and 3G in the second half of fiscal 2015?

So Quinn, I think that is a little hard for us to say at this point, because we are seeing demand for our 3G products, as well.

For instance, in Q1, some of the push outs that we saw in Q4 are really high-volume devices that are coming to fruition in Q1.

And we don't see any reason for that to decline moving forward.

So it is a little hard for us to say, if there is going to be a crossover point between LTE and 3G devices this year.

We are going after both, and especially for -- but in terms of growth rate, I think this year, you probably will see a faster, a much higher growth rate for LTE devices then 3G devices.

Now I think that is probably true.

I won't be able to guess either this year.

But at some point, there will be a time, whether that is next year, or the end of next year or the year and a half from now.

We do need to prepare the time when LTE will replace 3G in devices, in most countries, in most developed countries in the world.

So, there will be a time, okay, then, we say, yes, you are right.

Okay, 3G shipments will be lower than LTE

Okay.

Thank you.

Thank you, Quinn.

Okay.

Our next question comes from Craig Ellis.

Please proceed.

Well, thank you for taking the question, and Michael, welcome back.

Sehat, I wanted to ask a follow-up question to some of the LTE base band questions that have been asked so far.

And given the breadth of the Company's design wins across an array of smartphone OEMs in China, are you getting a sense for what your market share will be?

And what would be a satisfactory share of the China LTE market for you in calendar 2014?

Well, Craig, I will answer that question.

Obviously, we are working very hard to capture as much share as possible for 4G LTE in China.

And we are pretty well prepared for the growth in the market with our leading products, right?

But it is probably too soon for us to comment on market share this year.

There are comments out there, saying it could be 100 million unit market in China this year, it could be a 50 million market, it is hard for us to say exactly what the total market is going to be.

But I think given our traction right now with multiple customers, and you have seen some of the announcements we made earlier this week.

We probably are going to get a sizable chunk of it.

Thanks for that, Sukhi.

And the follow-up is more of a long-term question, and it goes back to the goal to grow at and above peer rates and grow earnings at an above peer rate.

Great.

As we think about the Company being able to do that this year, where should we expect that superior growth to come from on a segment basis?

And does the Company see that coming from share gain, or is it from SAM expansion?

And either on the former or latter, wherever it is coming, can you help us identify where that will be segment by segment?

Yes, I think you are still asking -- talking about LTE.

As we said earlier there, our focus right now is the mainstream market for the LTE, the RMB1,000 and approximately around on that range of pricing.

In the long-run, if we talk about in the long-run, in the long run, we also need to address the much lower cost LTE market.

And this is an area that maybe in the past, okay, in the 3G, we not pay attention to.

But okay, in LTE, we will pay attention to the lower cost market as well, when the markets of LTE exploding.

So more likely, that is closer toward the end of the year of, or early next year will be, where those -- the lower cost market, the much lower cost market for LTE is important to be addressed.

So to follow up on your question about growth, for fiscal 2015, obviously, it is -- we are pretty good company now.

We have multiple end markets that we serve.

In storage, obviously we are gaining share HDDs, we are seeing pretty good traction in SSDs, and even in hybrids.

And so, I think our view on storage is we will probably out grow the market again this year.

It is a little too early for us to say how the storage market is going to end up playing.

On the mobile side, clearly, that is a growth area for us for this year.

We are seeing very good traction already, for 4G LTE.

We continue to see pretty good traction for 3G platforms.

And so, I think that probably will be our highest growth driver for this year.

And in networking, like we mentioned on -- in Sehat's prepared remarks, we would probably see that business come -- turnaround, probably closer to the second half of this year.

Thanks, Sukhi.

Thanks, Sehat.

All right.

Our next question comes from Chris Caso from Susquehanna.

Please proceed.

Thank you.

Can you speak about the margin implications of, as the LTE business ramps?

I guess, I assume that the LTE margins are better than what you are currently enjoying in the 3G business?

Whatever color you can provide there would be helpful.

Yes.

So it is, obviously clear that the LTE will have a higher gross margin.

I mean, this is not rocket science to assume that, because okay, we are the second -- only second suppliers of the LTE in the market today, that are shipping LTE in volume.

So now, okay.

Maybe the question should be, what will happen if two or three years from now, when the LTE becomes mainstream, where more players will be in the market.

So this is an area where we are already paying a lot of attention to, how we can build for the ultra low-cost, the lower cost market.

What features that we could remove from our device, what are the things that people cannot live without?

What are things that they must have?

And by looking at that, we believe that we will also be able to lower the cost our -- of the mass volume ultra low cost market later down the road, while still be able to achieve better margins, compared to our historical margins in this area, when we only focus on the higher end, and the mid to higher-end type of markets.

So we do have high hopes that, okay, even though when the volume goes up, our margin will trend to go up, overall.

That's helpful.

And I guess, as a follow-up to that, and you mentioned new competition coming in -- and where some of your competitors are talking about new product entries in the second half of the year.

I mean, it sounds like what you are looking at, is growing from -- growing with -- as LTE moves into the lower end of the markets, you gaining some share there.

But how do you defend the business that you are winning this year, as those new competitors come into the market?

Yes.

So okay, so as we have talked, something, repeating investing in the lower cost segment, as well as, okay, continue to invest in more advanced LTE, the next release, the more advanced releases for the high-end market.

So we just cannot blink in the segment, because the market for LTE is going to be so huge.

It is -- carriers -- all the carriers are starting to realize that, okay, the cost to deliver LTE to the end-user actually is lower than 3G.

So they have a lot more capacity.

Okay, they can increase the number of users for frequency bands that they have.

So it is clear that they are, okay, it is just a matter of supply and demand.

If we can make the products just only incrementally, okay, like in the next couple of years, incrementally more than the 3G, I think the market will move completely to 3G.

LTE.

I am sorry, I mean to LTE, sorry.

Thanks, Sukhi.

Okay.

Thank you.

Thanks, Chris.

All right.

Our next question comes from Ambrish Srivastava from BMO.

Please proceed.

My first question was on HDD.

Can you help us understand, just stepping back and look at the overall market share, what is the market share today, and how much more room do you think you have to go?

You clearly have done a very good job over the years in this segment.

But what should be the run rate for share gains?

So that was my question on HDD, and then I had a follow-up on mobile.

Yes, I will answer that question.

As I said earlier, we, okay, this is a business that out of any companies in this business in the world, we are the true deliverer in this area.

When people say, well, this market is going down, or the market is going to disappear, we actually did not blink.

We continued to invest in developing advanced technology and signal processing, okay.

We have, okay, some of the best, maybe if not the best -- the best people in this business to, in the world to develop technology for HDDs, as well as SSD now.

So this is very expensive investment.

So what, okay, that is why people asking, this was why people kept asking, why you continue to invest in this area?

And we say like, look -- okay -- we have to invest because we do believe, okay, if we continue to make things higher, higher capacity, okay?

That could mean lower-cost to the end-users, the market will continue to be there, okay.

It is just a matter of whether the PC is going to be X86 based or R-based.

We don't really care, okay.

They are all going to need storage -- whether they go to HDD, or people that can afford, they have a lot of money, they can buy SSDs.

It doesn't matter with us.

They are similar technologies from our engineering point of view.

So this is an area that we, our team is highly, okay, super-focused, laser-focused and continue to invest in accelerating, developing new technologies.

So Ambrish, just to give you a little more color on that, in (inaudible) HDDs, at least, we have a greater than 60% share today, and those continue to climb.

And in SSDs, on the merchant market at least, we have more than 50% share, and that will continue to climb as well.

Okay.

Thank you.

Thanks for that color, and thanks for your comments, Sehat.

Back on the mobile side, I am struggling with something, and please help us understand from your perspective.

Back when [Ophone] started out in China, you had tremendous success early on.

And then, the competitive dynamics changed, and then the share went down.

So how should we look at the LTE market?

Were those from the competitor side, or from your product portfolio, which I understand is a lot more robust now.

What is the right way to think about, why should your LTE share in China be more sticky this time around?

Thanks, Sehat.

Thank you.

Sure.

Well, you alluded to that in the past, okay, we only had one product.

We have only a single core.

This was like -- this was four years ago.

And we were late in developing new -- moving to advance process node.

We are -- we are a different, our team is different, and it is much more mature team now, much more experienced.

So, okay, we are aggressively developing multiple, multiple solutions for the different segments of the market.

So this time around, we will have multiple, multiple products, from the mid-high to the mid-end, and to the entry-level, as well.

So, and moving also, developing advanced modem technology for the future.

So at the end of the day, okay, we believe this is the recipe for being successful in any business.

And, okay, we have -- we call it like an order of magnitude or more strength in this area, compared to like four years ago.

And Ambrish, you also noted, even if you just look at a year ago, early part of last year, or the end of 2012, we probably had one, maybe two customers, maybe a single product line.

Now we have multiple product lines in mobile, and we have multiple customers.

You are seeing these devices in the market already.

And so, and we are seeing orders from our customers under authority.

So we obviously have matured quite a bit, as Sehat said.

And so, I think that is giving our customers a lot of confidence that we are going to be around in this business for a while, and hence giving us more business.

Thank you.

Our next question comes from John Pitzer from Credit Suisse.

Please proceed.

Yes, good afternoon.

Thanks for letting me ask a question.

Nice results, Sehat and Mike.

I am kind of curious.

As you think about the profile of your LTE business this year, to what extent, or how much of it do think will come from phones in China, sold in China, versus the rest of the world?

And does that start to change dramatically as we go into the second half of the calendar year?

Yes, I think that it is safe to assume that China, okay, will ramp up first as, because China is aggressively moving to LTE.

They know that, okay, I mean, they also did the right thing.

They extended out LTE, TD-LTE across all the three carriers.

No more infighting about which LTE mode that people are running.

So no more argument.

So that means that when everybody is speaking the same language, the volumes will ramp up faster.

So I (inaudible) okay, so once the rest of the world, when they -- I am talking about the new, the developing worlds, when they see China, okay, successful in deploying LTE, I am sure, I am 100% that they are also going to accelerate their LTE deployment.

So because, they can see that LTE is not just for the expensive countries.

So, okay, yes, people that care about cost, could move to LTE, as well.

So we, I am confident that LTE will move to the mass market at the faster rate than historical trend.

When 2G moved to 3G, it moved fairly slowly But 3G to LTE, I think things will move a lot faster.

And then, Sehat, you have not specifically talked about profitability at the operating level for LTE.

But it is pretty safe to say, given where revenue is, that the operating profits are negative in that business.

What kind of market share, or is there a point this year is where you think that the LTE revenue will allow you to get to a operating margin breakeven in that business?

Yes, okay, it is obvious that, okay, we, okay, this is a business where scale matters.

In the past, okay, it was hard to scale when we come to 3G, being late in the 3G business.

But with LTE, we came just right at the beginning of the LTE ramp.

So, and as I said earlier, I do believe really strongly that 3G will move to full LTE at a much rapid pace compared to the historical trend.

So, the scale, okay, talking about scale, okay.

We are on the right side of the curve.

So we will have -- we will have the volume up on LTE to make this to be a profitable business.

Of course, it is the timing, okay, what is -- and our goal is obviously to, we will work hard to make it happen as soon as possible.

And, John, you know that.

We've talked about having scale and unit volume being able to drive to operating profits that are close to what our corporate targets are.

Right?

And so, we are not seeing this business any differently.

And if I can sneak in one last quick one in.

Unless I missed it, there wasn't any share repurchases in the last quarter.

And given that you have done such a great job giving capital back to shareholders, I think this is the first time since July of 2010, that you haven't repurchased.

Anything I should read into that?

Is this relative to the frustration you are probably feeling around the court case?

Or is this something that we will start to see resumption of buybacks in the first half of this calendar year?

It's a good question, John.

I think we will just reiterate what Sehat said.

We are fully committed to returning cash to shareholders through dividends and opportunistic buybacks.

You also ought to put this question into a little bit of perspective, right?

I mean, we spent 200%, 150% and 100% of our free cash flow in the last three years in share repurchases.

This is significant -- as you know, that is significantly better than most of our competitors.

In addition, we are now paying a healthy quarterly dividend to our shareholders.

So we will continue to be opportunistic in our share repurchases.

There is no change in our policy.

But we also have said, that returning over 100% of our free cash flow generation forever, is probably not a feasible option for us.

Over the long run, we expect to return maybe approximately what the industry averages to our shareholders.

And that I think, most people say it is around 40% or so.

Prefect.

Thanks.

I appreciate it.

Okay.

Our next question comes from Srini Pajjuri from CLSA Securities.

Please proceed.

On the gross margins, Mike, as we look out to the next three quarters, obviously you gave us some sort of guidance on the business mix.

If the networking is really doing flat, and storage grows a little bit, and then mobile is relatively strong, do you see room for improvement just based on the mix?

Or will the improvement have to come from somewhere else, like the cost side?

Well, we really don't give guidance beyond the one quarter.

But we have said that our target margins are between 50% and 55%.

And there are a lot of things we can do to improve our margins, and we are working on all of them.

On the cost side, on the design side, and so, I think there is room for improving margins.

We are working on them, and I am sure we are going to be within our target, our target margin range as we go along.

Great.

And then, Sehat, maybe for you.

You mentioned that you had 28-nanometer LTE product that is sampling.

When do expect that to ship into devices in the market?

In the next quarter or two, should be starting to ramp up.

Okay.

Great.

And then one final one if I can.

You actually talked about your video business.

I am just wondering, would it be possible to quantify that as a percent of your total business, and also what do you think the driver for that business this year?

Thank you.

It's a little bit too early to talk about it, and probably strategically, it doesn't make sense for us, okay, to disclose that -- to that detail.

This is a new business.

There is a lot of things changing rapidly.

The way, I mean, products, the way -- how these things are being deployed in the market is also changing rapidly.

So we are working very hard, okay, to get to try different types of solutions with the idea that, okay, something, one of those -- one or two of the flavors that we are working will stick, become the de facto standard in the market.

So, it is too early to talk about any specific, okay, any specific, okay, what I say, market share or even products, okay, what products is going to be the survivor at the end.

Great.

Thanks, Srini.

Sarah, we will take one last question, please?

Certainly.

Our next question comes from Stephen Chin from UBS.

Please proceed.

Hello, thanks for squeezing me in, and congrats to Mike on the full-time appointment.

The main thing I want to drill down was your networking division, given that some of the growth expected in that segment is more second half weighted.

I wanted to see what kind of opportunities that you saw in the data center vertical, in particular.

Is it switching or microprocessors, and also if you could talk about some of the opportunities in PON and other broadband access that would be great?

Yes.

So Stephen, I think on the data center side, it would be a primary focus is predominantly on the switching side, as well as the SoC side.

We are working on designs for those.

So with a few customers and hopefully we should see some traction there.

Right.

And then, I don't think -- nothing -- you can assume that nothing in the server side, because that is, okay, that is way too early to talk about anything, anything like that.

On the PON side, it is, I think people continue to deploy hybrids to the home, and that will continue to be -- it should be a steady business for -- as we offer these new products in this these area, and our latest products that we introduced late last year was very, very advanced.

So they also have good traction -- in some of the - in new customers.

Do have a follow-up, Stephen?

Yes, on operating expenses.

Given some of these earlier comments on OpEx over the course of this year, I just wanted to tie that back in with some of the other comments on further investment on TD-LTE product line, and also perhaps more 28-nanometer tapeouts later this year.

Wondering if that would -- if the investments would, perhaps, lead to some further upward pressure on OpEx?

Or do you think overall, there is enough movement where -- (Multiple Speakers).

Yes, I was actually -- yes, I didn't make that clear.

So it is true, the investments on the 28-nanometer is going to increase.

I mean, the costs of the 28-nanometer tapeout is going to increase, not to mention that we are investing even more advanced process nodes, that cost increase, will increase drastically as well, even more than the 28-nanometer.

And but, taking those into account, and taking into account that we are cleaning up our product roadmaps, meaning there will be fewer products, but higher volume products that we will be building.

And already assuming that we hit -- our -- so assuming we hit a flat compared to the Q1.

So I do believe that we should be able to manage that throughout the year.

Great.

Thanks a lot.

All right.

Sarah, we are done?

Yes.

Okay.

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

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

Thank you, and goodbye.

All right, thank you.

Thank you very much.

This concludes today's conference.

Thank you for your participation.

You may now disconnect.

Have a great day.