邁威爾科技 (MRVL) 2015 Q1 法說會逐字稿

Good day ladies and gentlemen and welcome to the Q1 2015 Marvell Technology Group Ltd earnings conference call.

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

(Operator Instructions)

As a reminder this call is being recorded for replay purposes.

I would now like to turn the conference over to your host for today, Mr. Sukhi Nagesh, VP of Finance.

Please proceed, sir.

Thank you Whitley and good afternoon everyone.

Welcome to Marvell Technology Group's first-quarter FY15 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 www.Marvell.com.

We have also posted a slide deck summarizing our quarterly results in the IR section of our website for investors.

Additionally, this call is being recorded and will be available for replay from our website.

Please be reminded that today's discussion will include forward-looking statements that involve risks and uncertainties that could cause our results to differ materially from Management's current expectations.

The risks and uncertainties include our expectations about our overall business, our R&D investment, product and market strategy, statements about design wins and 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 second quarter of FY15.

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 effects of stock-based compensation, amortization of acquired intangible assets, acquisition-related costs, restructuring costs and certain one-time benefits and expenses that are driven primarily by discrete events that Management does not consider to be directly related to our core operating performance.

Pursuant to Regulation G, we have provided reconciliations of the non-GAAP financial measures to the most directly comparable GAAP measures in our first-quarter earnings press release, which 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 first-quarter revenue of approximately $958 million, an increase of 3% from prior quarter and above the high end of our guidance range.

Upside for the quarter was driven by better-than-expected demand from our mobile and wireless customers.

We delivered the following non-GAAP results for Q1: gross margin of approximately 49%, operating margin of [14]%, and earnings per share of $0.27.

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

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

In storage we continue to execute well.

For Q1 revenue from our storage end market was slightly better than initially expected and declined 6% sequentially.

Starting with HDDs, our business declined in the quarter due to typical seasonality.

However, on a year-over-year basis our HDD revenue grew modestly despite a decline in the overall TAM as we continue to gain share.

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

Overall for HDDs we are accelerating our investment in the next-generation technologies.

We believe this will allow us to further increase our share and solidify our leadership position in the market over the next few years.

Next in SSDs, we had better-than-expected results and another record quarter.

Our units and revenue increased double digits sequentially.

During the quarter we saw multiple new products announcements by multiple customers from our clients in enterprise SATA and SaaS products.

In addition, we sampled our fifth-generation LDPC technology, which addresses next-generation flash.

We believe this technology will be a key enabler for volume adoptions of 15-nanometer 2D NAND and the future for 3D NAND, as well.

We expect mass productions of these products starting in 2015.

We also sampled new PCIe-based products during the quarter.

Our accessories business remains on track to grow strongly in the FY15.

For Q2 we expect our storage end market to be flat due to typical seasonality and in line with the market.

Now, turning next to networking, Q1 results were as expected and flat compared to the prior quarter.

During the quarter most of our product lines performed in line with our expectations; we saw strong double-digit sequential growth for our Xelerated NPU product family, driven primarily by LTE build outs, particularly in China.

We continue to gain momentum in closing design wins and driving new opportunities with our latest family of NPU devices.

Our ARM SoC product lines continue to gain momentum, as well.

The ARMADA family of SoC devices is garnering design wins across a spectrum of platforms from mass to wireless access points to ethernet routers.

Also in Q1, our ethernet business benefited due to new devices in the Prestera switching, Alaska V, and Link Street SOHO families.

In summary, for networking we continue to garner design wins on new technologies across multiple market segments.

For Q2, 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 grew strongly and increased 30% sequentially.

For our mobile business in Q1, we saw strong growth both on a sequential and year-over-year basis.

The sequential increase in mobile was primarily due to LTE ramp in China, where multiple tier one OEMs have launched there LTE smartphones based on our solutions.

Our shipments during the quarter exceeded expectations.

Of the top best-selling LTE smartphone models in China, nearly half of them are based on our platform solution.

We continue to focus on this fast-growing LTE market in China and are seeing more OEM partners that start new LTE smartphone designs and tablets as well as mobile broadband device projects with Marvell chipsets.

We are on track to powering multimode LTE devices from leading OEMs for deployment later this year.

We are also expanding into multiple geographies.

Following our model certification at AT&T, we achieved another important milestone with having completed LTE certification at Verizon.

Next in wireless connectivity, Q1 sequential performance was in line with our expectations.

On a year-over-year basis our connectivity business grew over 50%; this growth has been due to strong demand for new game consoles and our high attach rates for connectivity across all of our 3G and 4G mobile platforms.

Due in large part on the high level of RBOM integrations and low-power features, we are seeing increased momentum for both our 1x1 and our 2x2 11ac combo solutions in mobile computing and dongles.

In addition, our Cortex M-based Wi-Fi and ZigBEE devices are seeing adoption in new IoT-type devices.

We expect volu brands of these devices later this year.

We are also witnessing increased questions from customers for our high-performance 4x4 11ac products, which are the de facto standards for the enterprise and video distribution devices.

To summarize, we had a very strong quarter for our mobile and wireless business and we continue to be focused on improving our execution is this market.

For Q2, we expect our mobile and wireless end market to be relatively flat.

We expect continued growth in 4G and seasonal growth in connectivity to be offset by a decline in 3G business.

Moving next to our video business.

Our revenue declined seasonally in the quarter.

On a year-over-year basis our video business has grown over 2 times.

This growth has been driven by devices such as the Google Chromecast, which has been launched internationally.

Additionally, a number of service providers have selected our award-winning ARMADA 1500 family of video SoCs for their IPTV and over-the-top hybrid set top boxes.

In summary, Q1 was a better-than-expected quarter.

Although Q2 is expected to be flat, we are well-positioned to deliver solid growth for FY15.

We continue to make strong progress in mobile at multiple customers for smartphones 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 HDDs and SSDs.

Our networking business also remains stable.

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

Thank you, Sehat and good afternoon, everyone.

Moving to our financials, as Sehat mentioned we reported revenues of $958 million for the first quarter, which was a near record for the Company, an increase of 3% from the prior quarter.

Our better-than-expected revenue was due to upside in our mobile and wireless business.

In storage are overall revenue declined 6% sequentially and represented approximately 44% of total sales.

Our HDD business declined seasonally as expected.

However, our SSD business performed better than expected and grew double digits sequentially.

In networking our revenue was flat and represented approximately 18% of total sales.

Market softness in areas such as controllers and switches was offset by growth in categories such as NPUs, PHYs, and SoCs.

We also saw better-than-expected demand for our PON business this quarter.

Our mobile and wireless end market grew strongly in the quarter, increasing approximately 30% sequentially and represented 33% of overall sales.

During the quarter we saw strong growth in China from multiple customers for our 4G LTE products.

In addition, our connectivity business also performed better than anticipated with only a slight decline in the quarter.

Strong mobile platform sales and demand from game consoles were key drivers in the quarter.

Moving next to margins and expenses.

Our non-GAAP gross margin for the first quarter was approximately 49%, which was slightly below our guidance range.

The main reason for this was mix.

Non-GAAP operating expenses came in as expected at $330 million.

This resulted in a non-GAAP operating margin of 14% for the quarter, which was better than our expectations.

Net interest and other income was about $2 million and we incurred a tax benefit of approximately $5 million in the quarter.

The tax benefit in the quarter was due primarily to an adjustment to deferred tax assets and liabilities, resulting from a tax rate change in a foreign jurisdiction.

This resulted in a non-GAAP net income for the first quarter of $144 million, or $0.27 per diluted share.

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

The shares used to compute diluted non-GAAP EPS during the first quarter were 530 million.

Cash flow from operations for the first quarter was $237 million, and free cash flow for the first quarter was $211 million, or approximately 20% of revenue.

Now, summarizing Q1 results on a GAAP basis, we generated GAAP net income of $99 million or $0.19 per diluted share.

The difference between our GAAP and non-GAAP results during the first quarter was due mainly to stock-based compensation of $30 million, $7 million related to amortization and write off of intangible assets, and $7 million was due to restructuring and legal settlement costs.

Now turning to the balance sheet, cash, cash equivalents, and short-term investments as of the end of the first quarter was approximately $2.1 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 $351 million, roughly flat from the prior quarter.

Days of inventory declined approximately 6 days to 64.

Now turning to our outlook for the second quarter of FY15.

We currently project revenues to be in the range of $940 million to $980 million.

At the midpoint this would be roughly flat to the prior quarter.

We expect all of our end markets to be relatively flat to the prior quarter.

Within our mobile and wireless business, we expect continued growth in 4G, and seasonal growth in game consoles to be offset by a decline in 3G.

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 $330 million plus or minus $10 million.

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

At the midpoint of our projected guidance, this should translate to a non-GAAP operating margin of approximately 15.5% plus or minus 100 basis points.

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

We currently expect the diluted share count to be approximately 537 million shares.

In total, we currently project non-GAAP EPS to be $0.28 per diluted share plus or minus $0.02.

On the balance sheet we currently expect to generate approximately $150 million in free cash flow during the quarter.

We anticipate our cash balance to be about $2.2 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 $0.07 per share.

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)

Quinn Bolton, Needham.

Hey guys, congratulations on the nice results and outlook, especially on the mobile and wireless side.

Was hoping to start there, and obviously sounds like you're hearing the good initial ramp in China on the LTE side, wondering what visibility you have into the channel, and if you have any data on sellthrough of the devices based on your LTE solutions?

Quinn, this is Sukhi.

So far the uptake of our devices by customers in China has been very solid.

We've noticed that subscriber strength in China Mobile for LTE has been maybe less than subpar so far, but the expectations from what we hear from a lot of our customers is for that to pick up as we go throughout the rest of this year.

So we're watching that closely and we'll see how that plays out.

Great.

And then just a follow-up on the 3G business, looks like you're expecting a decline in 3G.

Is that mostly in the TD-SCDMA side as the LTE ramps?

Or are you also seeing sort of less traction on the wideband CDMA side as well?

I think the market in China is transitioning to LTE, so I think you'll probably see a lot more subsidies come to the market starting in the second half of this year.

As a result of which I think a lot of our customers are probably going to see a transition over to 4G LTE at a much faster clip.

I think you've heard other participants in the ecosystem say the same thing as well.

And this will be for both wideband as well as for TD-SCDMA we believe.

Okay, great.

Thank you.

Thank you, Quinn.

Earl Hege, RBC Capital Markets.

Hello guys I'm calling in for Doug Freedman.

Thanks for taking my question.

I guess getting back to the mobile and wireless, what do you view in terms of overall shipments, LTE shipments in that market for this year?

So I think it's a lot of questions in this area but that's especially when China Mobile says that this year volume is going to be 100 million units.

We already have -- do believe the number -- the more realistic number probably start with somewhere between 50 million units and the 100 million units is the extreme end of our projection.

So I think it's appropriate to be a little bit more conservative in the first year of the ramp.

So closer to the lower range is more realistic is what I think.

And to give some color on that Earl, if you look at the TD-CDMA market they have about 230, 240 subscribers so far and that's been around for what four years now, three to four years.

So to expect maybe potentially 100 million units in the first year of TD LTE may be stretching a little bit.

So our view has been it'll probably be somewhere between 50 million to 100 million units this year.

Anywhere between there.

Great.

Split the difference.

Okay.

and just as a follow-up I guess given the higher revenue run rate you guys have, are you still maintaining your OpEx guidance for the year of roughly flat to kind of the $330 million level?

And if so, what are you guys doing to manage that through higher revenue growth period?

Thanks.

Absolutely.

We've committed early on that it's going to be flat.

We look at the amount of resources that we have across the Company, it's clear that we have plenty of resources to take care of these important projects that we need to do to be successful.

So nothing changed, we are on track to deliver that flat OpEx this year.

Thank you, Earl.

Next question, please?

Harlan Sur, JPMorgan.

Hi, good afternoon and congratulations on the great quarter and outlook.

It's good to see the traction you have in 4G with China Mobile really starting to play out here in Q1 and Q2.

I think the big concern by investors is that when your competitor MediaTek enters the market kind of late Q3 early Q4 of this year, that your market share will decline substantially.

Now I guess the question is given the design cycle times by your customers, I would think that Marvell has already some visibility on handset design wins that will ramp in Q4 and into the first part of next year?

So are you seeing the number of handsets that you are winning during this period of time falling off in a big way as MediaTek comes into the market?

Or are you maintaining a steady stream of wins at least through the first part of next year where you should have some design win visibility?

As you correctly stated that it takes time for our customers to develop handsets using a new silicon, and we've been introducing our silicon for quite a while now, and we don't expect any newcomers to be able to get much traction this year, especially talking about 3Q or Q4.

My expectations is probably closer to sometimes next year when people they can have reasonable tractions in this area.

Now having said that, we are not sitting still.

We have our first-generation product in productions.

And we also are developing the high-end devices, so we already introduced the high-end chips with the 64 bit, even the 64 bit processors.

Whether they need them or not, it doesn't matter, this type of model we can still build it, let the market decide whether they need it or not.

We're also working on the lower end of the lower-cost solutions for market where they have to have advanced solutions but they want to have lower cost.

So this time around we are coming up with multiple products to serve the different market segments to make sure that we defend our territory much better than historically when we only had one product.

So we should be in a much better position this year.

And next year, as we build even better products we should be in a much better position again.

Do you have a follow-up, Harlan?

Yes, I do.

Thanks for that, Sehat.

Now that you're seeing more [validation-unique] controllers show up on the recent Seagate 6 terabyte enterprise drives, question is how far are you into the share ramp into enterprise?

Is that going to continue to be a bit of a tailwind for your HDD business throughout this entire year?

And if HDD TAM does start to improve in the second half, in addition to that your SSD controller business should continue to grow.

Should we see margins that are more sustainable in kind of the 50%, 50%-plus range even with the growth in your mobile and wireless business as we think about the second half of the year?

Regarding the questions on enterprise hard drive, the enterprise hard drive is a very unique business where the design cycle is extremely long design cycle.

Part of it is the customers are very conservative in selecting the chips, and then on top of that even when you're done with the products, the end customers are even more conservative; they spend like a year to two years sometimes in qualifying new hard drives for their enterprise storage systems.

So what we're seeing is the ramp-up is going to continue to -- that our percent market share will continue to steadily increase over the next couple years in the enterprise space.

Nobody should expect to jump to 100% instantaneously.

So this is good for us because not (inaudible) good.

So the lifecycle of these products are lengthening, so getting longer and longer due to the maturity of this business where it is getting much, much harder to build the next generation capacity.

And that's the reason why we continue to -- in our core I mentioned about we are trying to accelerate our investment in the hard drives because we are seeing that our customers are needing even more advanced technologies so they can introduce the next generation capacity noted earlier, and most of these will have to come in our algorithms and systems solutions.

And that means that we as a supplier in this business we have to invest to help them.

So what was the next.

What was the other part of your question, Harlan?

The second part of my question is given the tailwinds that you have on enterprise and if HDD TAM does start to improve in the second half, which it does seem like it is, in addition to your SSD controller business continuing to grow, combine that with growth in mobile and wireless, should we see a margin that is more sustainable now kind of in that 50%, 50%-plus range because you've got the higher-gross margin storage products growing at the same time that you have your slightly lower gross margin mobile and wireless products growing?

Yes I will -- our expectation is still trying to get the 50%-plus gross margin.

So at least in the near-term.

Now if we look further down the road in a much longer term, as the high-volume consumer products like the handsets becomes a bigger part of our business, the gross margin is -- could grow, slightly down.

But on the other hand we should look at that business as we offer this as still a business where the most important metric in the area is to have a reasonable operating margin of at least 20% in that segment.

So if we look at the mobile pictures, basically it will be good for us because as we improve our executions in this area, our net operating margin can only go up even when the gross margin stays at 50% or even if it goes up slightly below 50%.

Great, thank you.

Craig Ellis, Caris.

Thanks for taking the question, and nice job on the revenues in the quarter and the outlook.

First question is just a clarification and it's on the sequential change in gross margin in the July quarter.

Given that the major segments are all guided flat, is that really just the mix within the baseband business that you talked about where 3G will decline as a percent of mix?

Or are there other intersegment dynamics that are at play in lifting gross margins 120 basis points quarter on quarter?

There's intersegment play there as well Craig, and obviously if you look at even with the networking we have products that have varying margin structures.

And you know margins are different even in our storage business for HDD and SSDs.

So across the different business lines within those businesses, we'll have some -- positively impact our gross margin for Q2.

Okay.

And then the question, and I might as well keep the stream going since everybody is getting in an LTE baseband question, as you look at the LTE baseband business, can you give us a split between the China versus outside China mix?

In the first quarter I would expect it was mostly China.

And how would you expect that mix to change in the back half of your fiscal year?

Said differently, what other countries will you be shipping material LTE baseband volumes to beyond China?

In the first half it's clearly mostly China.

In the second half I think as we mentioned we did get certified on AT&T, we are certified on Verizon, and I think we mentioned in the past as well that the first initial devices and geographies outside of China will be for mobile computing devices.

And we still expect that to be true.

Okay.

Thank you and goodbye.

Chris Caso, Susquehanna Financial Group.

Thank you.

Given the big quarter that you guys saw in wireless, if you could help us how we should think about seasonality in the mobile and wireless business as we go into the October quarter.

And I guess that's a function of 3G versus 4G versus the connectivity ramp.

I'm sure you don't want to give absolute guidance, but how we should think about that; should we be seeing normal seasonal trends in that business in October off of these levels?

This is very hard for us to be able to predict that, what is the seasonality and something that just been introduced into the market.

But one thing that -- I'm talking about the LTE here, so in China -- one thing that we can make projection is that if our customer overbuild the LTE, what we have to find out we have to come up with the supplies of over inventory toward the end of the year that.

That's why when everything when investors are asking us questions and when we talk to our customer, we always like to tamper down the expectations of the ramp of the LTE for this year.

We said earlier that even though we heard, we all hear that 100 million is the possible number for the year.

We always say that it's more likely the number is going to be closer to the 50 million than close to the 100 million units.

We do not want -- I do not want our customer to overbuild and over the second half of the year say, oh sorry we had seasonality.

Seasonality usually only happens in a market where things are more mature.

LTE, the deployment in China is not a mature technology; it is just in the early stages.

We just want our customers not to make that mistake, to overbuild.

Okay.

Does that answer your question?

For us October, Chris, seasonally at least our Q2 and Q3 are good quarters for us.

And then obviously this time around we are going to a flat quarter for Q2, but typically both Q2 and Q3 are growth quarters for us.

Okay.

As a follow-up, could you address return of capital?

And I know the repurchases have paused here for a while; now that there's at least some visibility on the CMU trial, is that an avenue to allow some repurchases to continue?

Yes.

We haven't changed our policy with regard to purchases.

But over the course of the last few years we have returned a lot of money to shareholders, greater than our competitors, and we tend to look at the repurchases as an opportunistic activity.

And taking into account various activities we have planned, we'll be making a decision over the next quarter.

Chris we have not changed our views on that capital allocation.

We will be opportunistic on our buyback.

Okay.

Thank you.

Blayne Curtis, Barclays.

Thanks very much for taking the question, this is Chris on for Blayne.

Congrats again on a good quarter, guys.

I guess first of all on the CMU front since brought it up, just any update you can provide there?

I know you guys are aggressively pursuing an appeal, but just anything on timing on kind of status, general update would be helpful?

Yes.

As you know the judge has filed the order for the judgment and that has allowed us to file an appeal.

We have bonded the amount to the judgment and the appeal we expect is going to take somewhere between 12 and 18 months.

And so that's basically the status at this point.

Very helpful, thanks much.

And then I guess turning back to the ever popular topic of LTE, things seem to be going very well now, the builds are obviously strong and there's not a lot of competition; the 3G market though, pricing certainly deteriorated rather rapidly as competition intensified.

Are you still -- I think last quarter you said you expected LTE to hold up a little bit better than 3G did, just any update on your expectations there and why you think pricing and profitability may remain better in the LTE market than it did in the 3G market?

LTE is a relatively new market.

So when everybody built LTE devices, including us and our competition, they're all trying to build LTE devices, they are good performance, not throw away phones-types of performance.

So in terms of the pricing expectations is always -- as a result we always see on the higher side.

The reason you're seeing the even 3G side pricing is very, very competitive is because many of the 3G products that people are building are getting throw away-types of phones; those are the ones they are pushing the pressure on the 3G margin.

We don't expect that to happen in LTE for at least several years, meaning only after the LTE becomes mature then when these throw away phones will be built using LTE to address the third world, because many parts of the world where even the 3G side, they're just barely switching to the 3G.

So on our side our focus is to build in LTE to build devices.

They will address the mainstream market, and I already talked about the higher end and I already talked about the lower end, so the middle 60%, 50%, 60% of the market opportunities for the people that are going to buy smartphones.

So those would be the area that people still care about performance and quality.

Thanks very much.

That's helpful.

Ambrish Srivastava, BMO Capital Markets.

Hi, this is Gabriel Ho calling in for Ambrish.

Thanks for taking the question and congratulations on your great quarter.

Just want to switch gears to the networking business.

I think the first quarter came in flat and you're guiding flat; can you give us an update on what's your view on the second half?

Still confident that you can grow your networking business?

Gabriel, the networking business I think is generally a pretty lumpy business for most people as you know.

We are seeing strength in certain pockets, and I think we mentioned that on the prepared remarks we are seeing strength in the MP side for example coming out of the LTE build in China.

But at the same time we haven't really seen any meaningful pickup in enterprise spending yet.

There are certain pockets within enterprise spending we're seeing some pickup, while there's others who are not.

So it's a mixed bag there.

But I think for us, I think we mentioned our networking business is more geared towards enterprise today, it is 70%, 80% of the business to day we have is more geared towards enterprise, and so it will likely follow the trend of how the enterprise networking market goes for the rest of this year.

I think to add a little bit, some of the things that probably we'll start seeing is that some of the low-end of the enterprise markets are probably seeing softness because via alternatives to this wired networking specifically what I talk about this 4x4 11ac wireless networking, a lot of companies especially the smaller companies that start up, say they just avoid wireless networking for their workforce instead of using some of these low-end wireless networking.

So even though the growth -- in our business like we split the enterprise, even though some of this wireless actually goes to the enterprise, but we call it in the wireless networking business.

Do you have a follow-up, Gab?

Yes, just a quick one.

Switching to the SSD controller market, I think one of your customers had said they are planning to introduce a three bits per cell SSD later this year.

Do you also see this as an opportunity to gain maybe more share, further share on this Controller market?

Did you say three bits per cell?

Yes, three bits per cell of the TLC.

Yes, so talking about a flash solid-state.

As you know a lot of companies are trying to push down trying to squeeze the density of the 2D flash, and the latest is the 15-nanometer nodes, and these nodes, people are starting to realize -- coming to a realization that in order to achieve the reliability that is expected in this market for the enterprise types of storage solution, the LDPC technology is very, very important.

This is why we introduced our latest generations on LDPC specifically to address, to improve the reliability of these devices that increasingly become so small that there's only a very few charges that can be stored in the floating cells.

So if you talk about triple bits per cell, it's even more because for the same number of charge store in the cell, you have to be able to distinguish eight levels of information.

So without the cells, without this powerful LDPC, it would be impossible to build SSDs for the enterprise class of the market.

So the short answer is we actually have a good position in this area because we are the only one that has this technology.

Gabriel, in the remarks as well we mentioned we are shipping or sampling our fifth-generation LDPC technology right now and that will be applicable to both current generation 15-nanometer 2D NAND and that includes both MLC and TLC, and that will also be addressed for the 3D NAND I suspect a lot of our customers will start beginning to use next year.

Thank you.

That's helpful.

John Pitzer, Credit Suisse.

Afternoon, guys thanks for letting me ask the question.

Mike, my first question, I understand I think some of the positive dynamics going on at the gross margin level for the July quarter, I guess I'm just trying to figure out a little bit why not more leverage in the April quarter?

And I get it, mobile and wireless was up a lot sequentially, but if you look at the overall mix in your April quarter, it wasn't all that different than it was last October, except you had better LTE growth in this April quarter.

So why not a better margin profile in April, what else is going on, or what am I missing?

John, I think we did have a big -- if you look at even in Q1 or if you look at our business in Q1, our mix was more skewed towards 3G, even though our LTE business did really well.

Right.

I mean so overall I think it was, we had a significantly higher mix towards 3G.

And obviously because of that mix, the overall margin for us actually came in slightly below our guidance for the quarter.

That's helpful, thanks.

Sehat, you talked a little bit earlier in your answer to a question in your prepared comments, it would be important to scale in the baseband business, and even if gross margins are flat to down, op margin can still expand.

I'm wondering if you can help me out a little bit, some of your peers have actually broken out profitability by division and we can see how much money they are investing in LTE, i.e., losing.

How close are you guys to breakeven?

What kind of market share should we think about in LTE business that provides scale that allows you to break even or make a reasonable profit in that business longer term?

So we're not providing any breakout.

It is not appropriate for us to give the breakout at this point due to competitive reasons.

In terms of scale that will give us the ability to be very profitable on the operating basis, I would say somewhere around 15% to 20% of market share in this space.

And I do believe as we continue to invest some of the technology that we've been building, building advanced microprocessor for example, will allow us in the future to build truly differentiating products that will be able to show the benefits of our solutions against our competitions.

And I expect that we introduced those new technologies we should be able to increase our market share accordingly, and as a result we should be able to very profitable in that business down the road.

Thanks guys, appreciate it.

Hans Mosesmann, Raymond James.

Thank you, congratulations on the quarter.

Can you give us please if you can the attach rate of your connectivity solutions to your LTE modem?

100%.

It's 100%, Hans.

Okay, that's consistent, you expect that to be the case throughout the year?

It's at this point okay every -- it's not just us, every LTE suppliers in this business will have 100% attachment rates within their own products.

There's no business where that you could expect us to support other suppliers, not because we don't want to support them, because they don't want us to support them and vice versa.

We are engaged with so many multiple customers right now, Hans, on the LTE side, and there's not a single customer who's looking for a discreet connectivity solution.

They want basically one guy to choke; if there's anything wrong with the handset they just want one supplier to choke.

So it doesn't matter whether it's LTE problems, a part management problem, the transceiver problem, the audio problem, the video problems, the graphics problems, doesn't matter.

They want only just one person to choke.

So as a result you should expect that in this business, it is a business where we have to provide complete solutions to the customer.

So not 90% of the solution, 100% of solution.

Okay, very helpful.

Thank you.

Srini Pajjuri, CLSA Research.

Thank you for taking my question.

Sukhi I think a follow-up to the previous question, you said that one of the reasons why the gross margins were a little weaker was 3G was stronger, and obviously you're guiding 3G to decline next quarter, and that seems to be helping the gross margins.

Just wondering how big is 3G if you kind of compare that to 4G?

And then do expect 3G to continue to decline over the next few quarters?

And should we expect further improvement in your gross margin?

That's a good question, Srini.

We don't typically breakout 3G versus 4G.

But like I said, 3G was a bigger part in Q1; it's hard for us to say exactly how that's going to end up by the end of this year or the second half of this year, mainly because we are sometimes still engaged with certain key customers for some of their 3G product line.

And this is strategic engagements in some of these cases, and we'll engage strategically with some of these customers because we know there's follow-on business to be had either later this year or next year for some of the LTE business.

So it's a little hard for us to quantify that at this point.

I'll add to follow on to that.

If it's up to us, I would like to accelerate our ultra low-cost LTE business so that down the road like a year from now, we'll want to see no 3G business.

But having said that we may have no choice but to build some of the 3Gs because of the customer requirements.

But again if it's a choice, I would like to have everything move to LTE.

So just to follow-up and clarify on that, Srini, it's a little hard for us to really give you a good description of whether 3G is going to really continue to decline in the back half of this year.

Okay, fair enough.

And then just a clarification, did you have any 10% customers?

Thank you.

I believe we did, it was probably in the storage space.

Okay, great.

Thank you.

Sanjay Chaurasia, Nomura.

Hey guys.

A question on SSD, you guys have been mentioning that your SSD business is increasing in double digits for several quarters now.

Could you talk about how is it as a percentage of the storage business?

And then within SSD, what is your split between OEM and merchant solutions?

And then I have a quick follow-up.

So Sanjay, we don't breakout our SSD business with our HDD business.

We will refrain from doing that.

The majority of our SSD business today is clients, catered to client, so when you refer to OEM we're not sure what that really means.

But if you look at our solutions on the SSD side for both the SATA and PCI express side, most of our customers are using for client devices.

I guess maybe to help you maybe we need to reiterate what we said over the last several quarters over the last several years.

When we build our SSD controllers, we're building our SSD controllers to address the people that care about quality and performance.

So the kind of clients, the customers that we have, the people they have, they have invested billions of dollars to build fab factories to build their flash capacity.

So the customer, the OEMs that they're buying, maybe the OEMs are buying our products are the people that have their own factories to build these flash chips.

Of course the other customers, there's a few, less than a couple of customers that would be able to buy excess capacity of those flash from this customers -- for these companies and we support them as well.

But those are the minority; the majority will be the people that have their own fabs.

That's helpful.

And as a follow-up, are you guys expecting any changes in SSD controller landscape?

Because there's some chatter that one of your competitors may be looking to exit the SSD controller space?

Could you talk about that?

And anything, any changes in the landscape back end of the year?

I think it's pretty well-known that -- that particular story that you mentioned, the chapter is very well known, it's not a dispute because they're the ones saying it themselves, so it's not even a rumor.

So we don't consider that as to be a positive neither here or there.

We've been working this area for six years now, so we have all the different classes of SSD solutions from the high-end to the mainframes to the low-cost segment.

So our focus is just to mind our own business, to build products that will be able to step over the different markets and make our customers to be successful.

And I think probably what they're saying they don't have the skill that we have.

And if they decided to get out of this business, it's not going to change our market share one way or the other, we only capture today the value on the market anyway.

We're over 50% of the market right now as you know and that continues to do well.

Okay.

Our focus on the SSD front is to come up with really strong solutions that we can continue that momentum for the next two years and beyond, and then move into other areas within SSD as well.

Great, thanks so much.

Mike Burton, Brean Capital.

Thanks for taking my question and congratulations on the good results and guidance.

Can you help us understand what percent of your shipments and design wins are for five-mode devices versus three mode and what's the view of five mode versus the three mode opportunity, or that 50 million to 100 million that you mentioned, and where do you think Marvell will be more heavily weighted?

Usually it's the same device.

For customers that deal in five modes and three modes, the only difference is just the number of the RF power amplifiers and duplexers in the system, so there is no change whatsoever in the delivery from our side.

So some customers on the higher-end are building mainly building the five modes, and for the lower costs, obviously they're building the three modes only.

So the mix is we don't really control the mix, it's up to the customer.

But you've already designed into and shipping into five-modes device already on the market?

Oh yes.

Our delivery is all five-modes, it's up to the customer to remove, if they want to remove a few components on the outer side, it's their responsibility, I mean it's their right.

Even some customers with even five modes, they even want to remove to make it four modes because it's an area the don't even need TD-CDMA, so they say okay I don't want to pay for that some of the extra components needed in that space.

(inaudible) I have some customers that say (inaudible) TD-SCDMA in the network.

So it's really up to the customer.

So zero difference.

Our LTE is we support every mode possible that are shipping off, so we don't argue what's the best solution from us, we want only one solution.

Do you have a follow-up, Mike?

Just another on the mobile, can you help us out with the linearity of the quarter since most of the other suppliers into China saw a really large pickup in March and April, is there a May holiday reset for you guys?

And then we build off of that or is it generally a more frontend-loaded quarter?

No, I think for Q1 it was more backend-loaded for sure.

And May, I think has been so far similar to what our expectations were, so we're not seeing it being frontend-loaded in May for sure.

All right Whitley we'll take one last question please.

Joe Moore, Morgan Stanley.

Thank you.

I wonder if I could talk about the TD-LTE market one more time, if you look to 2015 and you think about MediaTek having product and other people having product, can you talk about how your product is positioned?

Should we think of you participating in every price spend, should we think of you as being a premium thing, just how do you see positioning a year from now when there are more vendors in the market?

A year from now, so we have a lot more products portfolios from all the different price points.

So there will be higher-end devices.

They will be lower-end devices.

So we believe that as LTE becomes successful in China, a lot of parts of the world will take notice that the performance of LTE is going to be -- the cost of deploying LTE will be actually lower than deploying the 3G on the previous basis.

So when that happens, a lot of the parts of the world will demand, want to have lower-cost solutions to take care of the price points, they normally expected.

We stated before but on the other hand, okay this also means that it will create a huge opportunity for us to finally be a serious player in the smartphone business as we are now considered to be early, whereas we are early in the game.

So we are busy right now building all the different parts, different flavors.

Within China specifically to the extent that in areas where MediaTek has comparable technology to you, people talk about the number of people they have on the ground kind of supporting the smaller handset vendors.

What are the competitive dynamics in those kinds of channel customers?

I understand that but at the same time, the vastness of the volumes eventually, just like we stated last quarter, to build a handset, eventually the one that controls the DRAM capacity, the flash capacities, the LCD capacity, those are the ones that are going to be the most successful in this business.

So it is important therefore companies like for us to focus on what eventually, who is going to eventually be the winner in the big players in this business.

So in our opinion it won't be this 1,000 or 100 small companies that are going to be shipping fake phones.

The other part is we don't want to be related to people, customers building fake phones because this can only ruin our reputation in the tier-one customers.

So we need to pick and choose the battles.

And our other choice is we want to be the site of the big customers that care about their reputation and the quality and the performance.

And then if we are to lengthen some of these clone fake telephones, white box, let the competition take over that business.

We're not going to worry about it.

Great, thank you very much.

There are no further questions in queue at this time.

I would now like to turn the call back over to Mr Nagesh for final remarks.

Thank you, Whitley.

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

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

Thank you and goodbye.

Thank you.

Ladies and gentlemen that concludes today's conference.

Thank you for your participation.

You may now disconnect.

Have a great day.