邁威爾科技 (MRVL) 2015 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q2 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, Vice President of Finance.

Please proceed, sir.

Thank you, Whitley, and good afternoon, everyone.

Welcome to Marvell Technology Group's second 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 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 investments, our 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 third 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 flings for a detailed description of our business and associated risks.

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

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

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

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

Thanks, Sukhi, and good afternoon, everyone.

Today we reported second quarter revenue of approximately $962 million, slightly higher from the prior quarter and in line with our guidance range.

Revenues in the quarter were driven by better than expected demand from our storage and networking customers, offset by softer 3G mobile business.

We delivered the following non-GAAP results for Q2, gross margin of approximately 50.6%, operating margin of 17%, and earnings per share of $0.34.

We also paid approximately $31 million in dividends during the quarter.

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

In storage, revenues came in higher than expected, driven by strength in both HDDs and SSDs.

For Q2, revenues from our storage end market increased 6% sequentially.

Starting with HDDs, our business grew sequentially as we continued to gain share.

This growth was despite a flat industry TAM, and as we continue to improve our 60%-plus percent share of our total HDD market.

Our 500 gigabyte per platter solution continues to gain momentum, and we believe this technology could continue to strong growth for the foreseeable future.

In the enterprise drive space, we continue to see steady share gains, with units doubling in Q2 compared to the same time last year.

For reference, our share of the largest HDD manufacturers enterprise business is just over 50% and growing.

In addition, we are continuing to accelerate our investment in next-generation HDD 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 another record quarter driven by a double-digit sequential growth in both volumes and sales.

We continue to be the top SSD controller supplier in the market.

During the quarter, we announced several new products that expanded our industry-leading SSD offerings.

These included our fifth-generation SATA product with a new LDPC technology that supports 3D NAND as well as 15-nanometer 2D NAND.

We also introduced a low cost but higher performance PCIe-based SSD solution with a similar price point to our previous generation SATA solution.

In addition, we introduced a very high end enterprise PCIe product for the data center and high-end client markets, with which we already have multiple customer engagements.

We expect mass production of these products starting in calendar 2015.

In the meantime, our business remains on track to grow strongly in FY15 on the strength of our existing end product lines.

For Q3, we expect our storage end market to be flat to up modestly, driven by stable HDD fundamentals and continued strength in SSD.

Turning next to networking.

Q2 results grew 6% compared to the prior quarter.

We saw strong double-digit sequential growth from our ethernet product lines across enterprise, data center and service provider, with the latter also providing growth in our PON product line.

We saw solid growth in our North American customer base, especially in IP networking for enterprise and data center solutions.

We also saw continued growth in our ARM-based embedded networking SoC products.

This [end win] momentum continued this quarter, with new programs that cover low end, fixed solutions to high-end modular platforms in enterprise and service provider markets.

In summary, our networking business remains steady, and we believe we are well-positioned for growth going forward.

For Q3, we are expecting flat to modest growth in our networking end market.

Now next move -- moving to mobile and wireless.

Our revenue in this end market came in softer than expected, and declined approximately 9% sequentially.

Although our 4G LTE and wireless connectivity businesses continued to perform well, we saw weaker than expected 3G demand from one of our major Asian smartphone OEMs, which led to most of the downside.

However, on a year-over-year basis, our mobile and wireless businesses still increased over 65%.

Specifically in mobile, we continue to see growth across our customer base in 4G LTE, and saw double-digit sequential unit growth in Q2.

During the quarter, we expanded our customer list from Tier 1 OEMs to now include Tier 2 OEMs.

We expect new smartphone launches with our LTE solution in the coming quarters, and are confident about holding a strong market position in China.

We have also seen good expansion of our 4G LTE products outside of China, with a leading OEM already launching our LTE solution in the European market.

In addition, Samsung recently launched the new Galaxy MINI 4G LTE smartphone and a multi-mode mobile hot spot, both powered by our LTE solutions.

Samsung has also selected our quad core SoC to power their new 7-inch Galaxy tablet.

In summary, for mobile [air] we are well-positioned in 4G and 4G LTE to meet any competitive challenges.

Next in wireless connectivity, Q2 performance was slightly better than expectations, with double-digit growth both on a year-over-year and quarter-on-quarter.

For our 1X1 MIMO solutions, we saw strength in gaming market for both console and portable devices, as well as continued growth in our 4G smartphone platform.

For our 2X2 solutions, customers continue to adopt our combo solutions in set-top boxes, tablets and Chromebooks, and we expect to see more products launching later this year.

Finally, in the 4X4 devices, we are seeing stronger traction, as the [access] point and gateway markets move towards the higher end.

Moving next to the IoT market, which is a part of our wireless connectivity business.

We have already introduced as you know a ZigBee solution in the past.

Now we have recently enhanced our family of wireless microcontroller SoC with Wi-Fi and Bluetooth.

These SoC targets a broad spectrum of IoT, for [both] wearable and smartphone products for which we are currently seeing strong customer interest.

We are seeing strong design traction in the [lighting], appliances and home automation markets.

We expect volume ramps of these devices later this year.

We are also thrilled to be supporting Apple's new HomeKit accessory protocol.

HomeKit enables home electronics manufacturers to easily add the ability for their customers to securely pair and control devices throughout the home including integration with Siri.

We expect HomeKit-enabled products to be launched later this year.

For Q3, we expect our mobile and wireless end market to grow modestly on a sequential basis.

Similar to Q2, we expect continued strength in 4G LTE and connectivity, to be partially offset by ongoing challenges in 3G at a major Asian customer.

Now moving to audio business.

Although revenue in Q2 declined seasonally, on a year-over-year basis sales increased over 50%, mainly due to shipments of Google Chromecast which has now launched in 18 countries.

Additionally, we continue to gain traction at new service providers with our ARMADA 1500 family of set-top-box SoC.

In summary, excluding 3G weakness, most of our end markets in Q2 came in better than expected, with storage, networking and connectivity delivering higher revenues.

Looking ahead, we expect to see growth in Q3.

Our 4G mobile [design wins] traction remains solid, with many new customers just starting to ramp into production.

We also have [many] new products coming up that will further enhance our competitiveness.

Our connectivity business remains strong due to demand from enterprise, gaming and high attach rates through our mobile business.

Our storage business is also healthy, driven by market share gains in HDDs and strong growth in SSDs.

Finally, our networking business remains stable.

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

Thank you, Sehat, and good afternoon, everyone.

Moving to our financials, as Sehat mentioned we reported record revenues of $962 million for the second quarter, which was slightly higher than the prior quarter, and an increase of 19% year-over-year.

The inline revenues were driven by better than expected growth in storage and network, and offset by a larger than anticipated decline in 3G mobile.

In storage, our overall revenue grew 6% sequentially, and represented approximately 46% of total sales.

Q2 sales in this area were better than expected, and we saw growth in both our HDD and SSD businesses.

In networking, our revenue grew 6% sequentially and represented approximately 19% of total sales.

Networking sales in Q2 were better than expected, and driven by strong growth in our ethernet product lines and continued adoption of our embedded SoC solutions.

Our mobile and wireless end market came in softer than anticipated, declining 9% sequentially and represented 30% of overall sales.

Although sales of 4G LTE, and wireless connectivity products increased during the quarter, 3G shipments declined more than expected mainly due to weakness at one of our major Asian-based OEMs.

Moving next to margins and expenses.

Our non-GAAP gross margin for the second quarter was approximately 50.6%, which was above the midpoint of our guidance range, and improved 180 basis points sequentially.

The main reason for this was a more favorable product mix during the quarter.

Non-GAAP operating expenses came in at $323 million, at the low end of our guidance range due to excellent expense controls by our business units.

This resulted in a non-GAAP operating margin of 17% for the quarter, improving 260 basis points sequentially, which was better than our expectations.

Net interest and other income was about $12 million, mostly due to an investment gain that occurred in Q2.

We recognized a tax benefit of approximately $6 million in the quarter, due in part to the expiration of the statute of limitations in certain foreign jurisdictions.

This resulted in non-GAAP net income for the second quarter of $181 million, or $0.34 per diluted share.

This was approximately $0.06 higher than the midpoint of our guidance.

The shares used to compute diluted non-GAAP EPS during the second quarter were 533 million.

Cash flow from operations for the second quarter was $157 million, and free cash flow for the second quarter was $137 million, or approximately 14% of revenue.

Now, summarizing Q2 results on a GAAP basis, we generated GAAP net income of $139 million or $0.27 per diluted share.

The difference between our GAAP and non-GAAP results during the second quarter was mainly due to stock-based compensation of $35 million, $4 million related to amortization and write-off of intangible assets, $2 million of indemnity guarantee costs associated with ongoing litigation, and $1 million 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 second quarter was approximately $2.3 billion, an increase of 7% from the previous quarter.

We also paid dividends of $31 million in the quarter, or equivalent to $0.06 per share.

Net inventory at the end of the second quarter was approximately $394 million, an increase of about $43 million from the previous quarter, in order to meet demand for our products in the coming quarters.

Days of inventory increased approximately 7 days to 71.

Moving next to our outlook for the third quarter of FY15, we currently project revenues to be in the range of $960 million to $1 billion.

At the midpoint, this would equate to a roughly 2% sequential growth.

We expect our storage and networking businesses to be flat to up modestly, while mobile and wireless business is expected to grow slightly.

Within our mobile and wireless business, we expect continued growth in 4G and connectivity to be partially 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 approximately $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 16% 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 $6 million.

We currently expect the diluted share count to be approximately 535 million shares.

In total, we currently project non-GAAP EPS to be $0.29 per diluted share, plus or minus a couple of pennies.

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

We anticipate our cash balance to be about $2.4 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.

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)

Our first question comes from the line of Craig Ellis with B. Riley.

Please proceed.

Want to follow-up on some of the points made about the mobile business on the 3G and the 4G.

Mike, can you -- or Sehat, can you give us the mix of 3G versus 4G?

And how should we expect the mix of that business to change, as we look out over the back half of calendar 2014 and through calendar 2015?

Well, we don't provide the mix of those products, but as time goes on, we expect the 4G to exceed the 3G, with the 3G really on a downward ramp.

Yes, Frank, this is Sukhi.

3G, if you will remember, in Q1 we said 3G was predominant part of our business in Q1, and 4G was a smaller part.

That is still the case in Q2, as well.

And as you know, I think it's pretty clear out there, that there is one Asian OEM that has had some issues, and we will not -- we didn't escape that in Q2.

Thanks for the help there.

And then the follow-up question is on gross margin.

It looks like the mix of business is unchanged quarter-to-quarter, but the gross margin midpoint is down sequentially.

So what accounts for the decrease in gross margin when mix is flattish?

Well, there is always pluses and minus every quarter, Craig.

And we do -- we are going to see growth in our mobile business in Q3.

As I think we have mentioned this in the past, that from a mix standpoint, mobile wireless generally commands lower than corporate average margin, and that would be a contributor to the lower margin, really.

Thanks.

Your next question comes from the line of Harlan Sur with JPMorgan Please proceed.

Hey, thanks for taking my question.

Good to see the continued 4G growth in your Q3 guide.

But MediaTek is ramping its 32-bit and 64-bit multi-core 4G solutions into China mobile this quarter, and there has been a lot of concern that your market share is going to drop significantly.

Sehat, any way to help give us confidence that you are still capturing a high level of 4G design wins that will ramp beyond just the third quarter, and that you will continue to build scale in 4G smartphones?

Maybe I don't know -- quantify the number of 4G handset design wins you have in the pipeline that you have yet to ramp, or some sort of confidence that you can continue to grow your 4G business in Q4 and into the first half of next year?

Anything you can provide would be appreciated.

Sure.

We -- talking about 64 bit, so we also introduced 64-bit 4G solutions last quarter.

So those will be ramping up sometime this year as well.

So there it is not -- there is nothing unique about MediaTek building 64 bit.

We have 32 bit solutions.

We have 64 bit solutions.

The area that we haven't played in the past were on the ultra low cost side, that in the future we will be addressing as well.

So those are the designs that are in the pipeline, and they will go into production sometime next year.

So if you talking about the way the volumes continue to grow, I do believe that as 4G LTE price goes up -- no, I mean -- well, as the market -- as we and the market, as in our competitions are starting to address the ultra low cost side to replace the 3G, we believe the market for 4G LTE is going to explode.

So this market is going to be so big that it is clear that the competition is going to be fierce.

But we are not concerned about that.

Every time we enter like a big market opportunity, there is bound to be a lot of companies that get into this business.

And the good thing is a lot of companies also are going out of this business.

So only just three of us are going to be left in the LTE space.

And being -- not being late this time around in the LTE, creates -- sets us up in a much, much better position in our -- in the customer base.

All we have to do is make sure that we deliver the lower cost solutions to address the 3G replacement, sometime -- it's going to happen sometime next year.

Okay.

Thanks for that.

We also mentioned -- Sehat mentioned in the prepared commentary, right, we are expanding our customer base from Tier 1 OEMs to now include Tier 2 OEMs as well.

And you can't do that without -- obviously, you need to have design wins to do that.

Right?

Yes.

We already have.

Okay.

Great.

And then my follow-up question is, when the stock was last at these levels, the team was aggressive in its buyback program.

I think the last time around, you were probably using 100% of your quarterly free cash flow to buy the stock, here in the $12, $13 range.

Can you give us an update on when you think you will finalize some of the remaining issues with the CMU appeals process, and be in a position to start to aggressively buy back your stock again?

A good question, Harlan.

I think we talked about this in the past as well.

We have mentioned, right -- I mean, our capital allocation strategy has not changed.

It continues to be the same.

We will be opportunistic in our share repurchases.

And just to put that question in perspective, we spent a significant portion as you said, spent a significant portion of our free cash flow in the last three years on share repurchases, right, close to $3 billion in share repurchases.

So this is significantly better than pretty much most of our competitors out there, and we are also paying a heavy -- a pretty healthy dividend to our shareholders.

The management of the Company, Board continues to evaluate the business needs every quarter about the capital structure and capital returns.

We are using our cash, I think we mentioned this to you as well, for appropriate investments and to drive future growth, as well as return capital to our shareholders in the form of buybacks and dividends.

In the near-term, however, I think as we mentioned in the past, we are waiting for further clarity in the ongoing litigation before we can proceed forward.

Any visibility in terms of timing on when you are going to be able to resolve some of these remaining issues?

We are just waiting.

Okay.

Yes, the other thing, we have just recently updated our website and FAQ.

I would urge everybody to take a look at that.

That just happened today.

So we have had -- obviously we have filed our appeal in the CMU case.

There is a bunch of new information that is probably good for you to take a look at.

Okay.

Thank you.

Your next question comes from the line of Quinn Bolton with Needham & Company.

Please proceed.

Hello.

Just wanted to come back to the mobile and wireless business.

Obviously, you talked about one OEM in the 3G business that has gone through some market share issues.

But can you talk about whether there is any real active 3G design going on right now, or is most of the design work you are seeing on the LTE side of the business?

Yes, most of the activities are 4G LTEs.

Pretty much if you talk to the OEMs in Asia, they all are working -- they are all saying that the demand it is in the 4G space.

So this is the -- I think this could be a transition year from 3G to 4G, and next year will be when the LTEs -- when the ultra low cost LTEs finally is available in the market.

Nobody will ever talk about 3G any longer next year.

So we, as a result, we don't spend too much time on trying to get new design wins on the 3G side.

Great.

Thanks for that clarification, Sehat.

Just a follow-up question.

You talked about the ultra low cost LTE.

Do you have any sense on how the margin profiles of those solutions will compare to your current 3G business?

I think, obviously, the LTE is going to be better than the 3G, especially when you are talking about the 3G is almost at the end of life.

So I don't see any concern on their side.

Quinn, are you referring to the low cost LTE?

Well, just wondering if you do a one-for-one replacement of a 3G design today for an ultra low cost next year, is that margin accretive?

Yes.

Yes.

Okay.

Obviously, the ultra low cost is going to be slightly lower margin than the higher end.

That is always going to be the case, but the volumes are going to be so much bigger.

But you also need to be -- to put it into perspective, that in the 3G we have a lot more competition today than in the 4G.

4Gs we are talking about something -- just today there is three, three suppliers.

So, three suppliers versus more than like six, seven suppliers in the 3G.

The market profile is going to be significantly better in the LTE space.

Great.

Thank you.

Your next question comes from the line of Doug Freedman with RBC Capital Markets.

Please proceed.

Great.

Thanks for taking my questions.

Congratulations on the strong result.

If I could dig into a little bit maybe, if you could highlight for us what is causing revenue growth to be maybe a little bit less than you would normally see in this quarter?

Is it literally all related to the 3G softness that you are seeing, or is there other things occurring in the storage or networking businesses?

For Q3, Doug, it's predominantly I would say the 3G business that is offsetting growth elsewhere.

Plus remember, if you talk about Q2, right, Q2 obviously we had initially expected our storage business, the network business to be flat.

They came in better than expected, right, 6% growth for each of those end markets for us, and our Q2 has the month of July as well.

So clearly, for us -- I know where you are going with it.

You are going with -- the storage guys have been guiding their -- the end market to be up a lot more.

Should that be up for us as well?

But we expect it -- on a two quarter basis, it would probably even out for us.

So the main difference really for us is the 3G going down.

Okay.

If I could focus in a little bit on the base band efforts the Company is pursuing.

Your competitors have offered up a number of units they expect to ship this year.

Would you like to counter that with a number of units you think you can ship either this year or next?

And if you could maybe give us a better understanding of the amount of your R&D or OpEx that is going towards your base band efforts?

What was the first question, the units?

Just the total number.

MediaTek has offered up that they expect to ship a certain number of units this year.

And I was wondering how you still feel about what the -- how many units you think you can ship, and what that is in terms of the market size, maybe?

Yes, we have never -- we haven't divided the units.

We never talk about units in this business.

We are still obviously a new -- relatively a new company, so we also have to be careful about talking about our units.

But in terms of the -- our investment in the base band, we are actually quite leading in the LTE space.

So we already sample -- release 10 devices, so it would be a sample early, what -- it was late last year -- so we have prototypes in the new next generation devices in the pipeline.

So we have --so in terms of the amount of effort to do this, actually it is not in the base band side.

Most of the efforts, they require a lot of investment in supporting the application side.

So those things are the ones that we have been working, even starting from the 3G time frame.

Now it is our solutions are being more mature.

Actually, this is helping us, our customers to be able to ramp up production on our 4G solutions sooner -- I mean at a faster rate than used to be, when we presented a 3G space.

So as I said earlier the volumes in -- if you look at -- in the 3G space, we are tiny, tiny player in the past.

So if we look at the positive side, next year when the volume moves from 3G to 4G, we are talking about getting market share away from our competition on the 3G volumes.

So if anything, it's going to be -- for the industry to move to 4G, it's going to be better for us than if the industry stays with 3G.

So our -- my expectation as about share and volumes unit wise, without putting the numbers is going to be bigger than this year on the 4G.

And then my last question is one that I think I have asked in the past, and the question really is in your storage business, has SSD revenue gotten to be the size that it is large enough that you can separate it for us, or highlight for us what percentage of your storage business it is?

Well, it is getting bigger for sure, Doug, but we have not disclosed that.

We don't intend to disclose that at this point.

I also mentioned in the past that we will not disclose that.

Especially in this business, it's not just HDDs, it's SSDs, and down the road there will be SSDs for smartphones, as we have nothing to do with SSDs for PCs or enterprise.

And not to mention about hybrid HDDs -- and it's too complicated and some of these devices actually are going to be the same device, just retargeted from one market versus the other market.

So we would rather not split the numbers.

For competitive reasons there too, Doug.

All right.

Thank you.

Thanks, Doug.

Your next question comes from the line of Hans Mosesmann with Raymond James.

Please proceed.

Thank you.

A couple of questions.

On the storage side, and specific to the PC side of that business, it seems that you are guiding to a flattish TAM in the current quarter.

What is going on there, and can you provide some clarity in terms of PC refresh on the enterprise side of things that was ongoing earlier this year?

Thanks.

Yes, Hans, I think we mentioned, if you look at it on a two quarter basis, Q2 plus Q3, it probably evens out for us, right.

I mean, Q2 HDD TAM was flat.

We grew our business, right.

Our storage business overall grew 6% in the quarter.

And we have guided to our storage to be business to be flat to up modestly, right, to come in better than flat.

So I think on a two quarter basis, just because we are off by a calendar month, you should be looking at it that way.

It probably evens out and it's relatively in line to the market.

Can you provide any kind of qualitative data on the enterprise or commercial PC refresh that we saw earlier in the year?

On the enterprise side, as Sehat mentioned, we continue to do very good trends, see very good trends at our one North American customer.

Our share continues to creep up steadily.

It has grown over 50% on a year-over-year basis.

So we feel pretty good about that business continuing to grow throughout this year.

Well, maybe I will give a little bit qualitative feedback.

So if you look at this PC space and the enterprise in the business users, even the consumer side, the market tends to be -- being maybe a little bit somewhat conservative, at this point because of what is seen in the last couple years of PCs, the PC market is not growing, probably even going down slightly.

But I believe the market may change, may change a little, may be improving in the next few quarters.

Again, this is just my gut feeling.

And maybe the reason is, one reason is the Intel shipping new -- this 14-nanometer processors which depending on how they are priced -- if they are price the new 14-nanometer finFET processors correctly, the market may grow.

The PC market may see a cycle -- a replacement cycle in the next few quarters.

But again, I cannot -- I don't know how to predict that, because I am just making a statement here, if the suppliers, the key suppliers in the market are eager to drive the market for replacement cycle, I think this market will move.

But in the meantime, we have to be just as conservative as our customers, in terms of projecting the units in HDD.

And if the number goes up, (inaudible) maybe to supply the parts to our customers.

Great.

Thank you very much.

Your next question comes from the line of Sanjay Chaurasia with Nomura.

Please proceed.

Yes, Sehat, question on LTE market.

Could you give us some more color on the demand for LTE chipsets in the second half of this year?

Your chipset competitor in China, they are indicating a very strong demand.

I was just wondering if you could provide any color that you are seeing from your customers?

And if not, the unit shipment color, I was just wondering if -- like you used to do that with PDS/CDMA, if you could provide your market share for this year in TD-LTE?

Yes.

So talking about the units, as we say earlier, in Q2 unit shipments going up.

We already say in Q3, unit shipments also get to go up.

So we -- the shipments on LTE we expect to continue to go up as we said earlier.

But the reason that we have softness in our mobile business, because of the softness in the 3G side has nothing to do with the 4G.

Despite the MediaTek is going into the business in the 4G, it is just only making this business even more attractive for us.

If we -- if the -- as the supply chain sees that MediaTek is getting into the market, they know this market is going to be ripe for high volume production.

So as long as we continue to deliver our new products on time to serve -- to take -- I mean, to serve deeper price points of this market we believe we will continue to grow our business next year.

As I say earlier, that when we -- when our ultra low cost is ready, our volumes can only go up significantly.

And another question is, is finFET next year a necessary element in your road map to be successful?

Your other competitor in this space, they have indicated some finFET based road map for next year.

I was just wondering what is your strategy to deal with that?

Yes, so talking about finFET.

Yes, we have been working on finFET for, I don't know, a year, a 1.5 year now.

The challenge right now in finFET is the cost structure, it just does not make sense for ultra low cost segment here, or even for the medium cost segment.

And finFET, it will be important for the very, very high end market, where you need performance, where cost is not an issue.

So we are working on that.

But we don't -- we are not going to use finFET for the lowest cost product to the market first, okay?

It will be bad for the -- for gross margin if we do that.

Thanks.

Thank you, Sanjay.

Your next question comes from the line of Ian Ing with MKM Partners.

Please proceed.

Thanks for taking my questions.

So for 4G, what sort of milestones should we look for at this point outside of China?

You talked about an OEM launching in Europe.

Your modems are certified at some US carriers.

Should we look for some other milestones to see some progress there?

If -- a significant milestone obviously would be, when our ultra low cost go into production, because those are the ones that are going to replace the 3G.

And as I say, because our 3G business is tiny compared to the rest of the world, the ultra low cost 4G is going to be an important milestone for us, as those are the ones that are going to allow us to get a much bigger percentage of the cell phone market.

So it would largely be China OEMs selling into the rest of the world, that is the overseas model you think?

They are all going to be -- I think by this time, we are all going to agree that most of the phones are going to be manufactured in China and Korea.

I think with -- nobody is going to argue against that.

So, yes, if whether the market is for the US or for Europe, it is going to be built in China or Korea.

Okay.

Great.

And then as my follow-up, R&D expenditures, 28% of sales.

That is a bit high versus peers, but understandably a lot of things are in investment mode.

Do you have a sense of like which businesses are likely to move out of investment mode into harvest mode shortly?

I mean, I think some part of storage are already in harvest mode at this point.

Well, let me address the storage.

Even storage, we are not -- we are not playing the harvest mode.

There is still a lot of things that could be -- there needs to be invented to allow our customers to move to terabyte per drive and low cost.

Not -- I mean, we can build terabyte drives now, but it is -- I am talking about 2.5 inch.

But the price doesn't make sense for them, for the end users.

So building investment in hybrid, there is a lot of investment to do, how to build the proper hybrid for the hard drive.

And then continued investment of the building more advanced SSDs to allow TLCs to be just as reliable as MLC in the past.

So a lot of investment still yet to be done in the next several years.

I think the harvest mode for that probably will be five years or not at the earliest.

A lot of times people made a mistake, thinking that there is nothing left to be invented.

That is when they made a mistake, and we will be happy when they make that mistake.

Having said that, Sehat, I think we do agree that it is important to control our R&D expenses, and you will notice that our overall OpEx for this past quarter has gone down below our guidance by $7 million.

So we are very active in controlling our operating expenses.

And part of that is to direct our operating -- direct our R&D expenses into those areas where it is much -- most productive, and to reduce it in those areas where it's not so productive.

So we are going to continue to invest, but we are going to continue invest into those areas where it is going to be most fruitful.

Okay, I agree with that.

But also, I want to add another thing.

Part of it is, even when we continue to invest, we can also do better investment, do better allocations of R&D investment, meaning like for example, doing less duplication.

It's a company, a big company.

So in the past we have some duplication efforts in certain areas.

If we can have those areas -- I mean, we are working on this.

As we are able to improve the synergy in the different businesses, we could continue to invest in R&D, but without increasing the R&D dollars.

Right, so we intend to increase our investment, but reduce our expenditure.

Okay.

Thanks, Sehat.

Thanks, Mike.

Your next question comes from the line of Joe Moore with Morgan Stanley.

Please proceed.

Great.

Thank you.

I wonder if you could talk about the SSD market competitively, now that the LSI SandForce business has gone to -- Seagate is probably not going to pursue aggressive merchant market wins.

How do you see the competitive landscape in the merchant market there?

And we hear about Phison and others coming into the market, how competitive do you think that is likely to be in a year or so?

It is -- SSD is an area -- we have been -- out of all the companies in this business investing in SSD, we are the oldest one.

We have the one that have been working on the longest, more than seven years by this time.

That is on top of the things that we leverage from the HDD.

So a lot of technology, we developed HDD more than a decade ago are being imported, even when we started this business seven years ago.

So a lot of new inventions continue.

We continue to invest heavily in this area so we have a lot of new inventions coming.

And so, the reason we won this business is because we have better performance, better --which translates -- also better yield, better quality, which translate into lower cost to the end products.

So the cost of our -- . So a lot of our competitors that try to get into this business a few years back made -- did not treat this business properly.

They didn't invest the right amount of investment to compete properly to win this business.

So I am confident, I feel good about that we have extremely strong IP portfolio.

We have tons of patents in this area.

So we are very confident that we will be able to protect this business for the long run.

Great.

Thank you very much.

And then, a quarter ago you had mentioned that $100 million target on the TD-LTE side from China Mobile, was probably the upper end of the range that you would look at for the year.

Do you have any update on that, how big the TD-LTE end market will be in 2015?

(Laughter).

Yes, I did say that.

I did say that $100 million was on the high end, but I still believe it's still on the high end.

But nobody knows what is going to happen in December of this year.

But based on the rate they are running, I think maybe a little higher than our earlier projection, but -- ?

The jury is still out.

Jury's still out here.

The beauty is, it doesn't matter.

Like I say, I think it doesn't matter whether they sign $100 million this year or not.

For sure, next year is going to be more than $100 million.

(Multiple Speakers).

Thank you, Joe.

Your next question comes from the line of Kevin Cassidy with Stifel.

Please proceed.

Thanks for taking my question.

Your networking business was up 6% quarter-over-quarter.

Can you break it down a little more, how much was that ethernet, and what split within ethernet?

Are you seeing more demand at 10 gigabit or -- and do you see it moving toward 40?

Yes, so our networking business is comprised mostly of enterprise customers, Kevin.

So I think we mentioned that in the past.

We saw very nice, very broad-based growth in Q2.

We saw some double-digit growth in our ethernet PHY businesses.

We saw some pretty good double-digit growth in our switch business as well.

And this was for the data center as well as the service provider market.

Some of the things that you know before -- you may have an idea, the Prestera switching line, the Alaska PHY lines all did pretty well.

ARMADA SoC devices did very well.

The one thing, our own NPU business was a little softer in the quarter, mainly because we saw a significantly stronger Q1, but we expect that to rebound nicely this quarter.

Okay.

Great.

And maybe just housekeeping question.

Tax rate going forward, seems to be fluctuating quite a bit the last couple quarters.

What should we expect?

Well, the tax rate is affected by releases of accruals, based on reserves that were set up because of liabilities in foreign countries.

And when those statutes of limitations and those liabilities expire, it provides a reversal of the reserve.

Going forward, we believe the rate is going to be less than 5% for the year, and subject of to these kinds of fluctuations that occur because of accounting reasons.

Okay.

Great.

Thank you.

Your next question comes from the line of Steven Chin with UBS.

Please proceed.

Hello.

Thanks for taking my questions.

The first one I want to drill down a little bit more on the ARMADA SoC business.

Sehat, you mentioned earlier some of the activity on, I guess engagements with maybe carriers or telcos.

I was wondering if you could talk a little bit more about the growth opportunity there, and whether you see further growth from cast, or if it's ARMADA in TDs or some of these set-top boxes?

And if you could talk a little about whether they are an IPTV type of design, or if it is more of an OTT, over-the-top video type of delivery paradigm there?

Right.

So there will be a lot of, obviously, we are the first to enter -- I mean, the only one still in the Chromecast market.

We believe there will be significant opportunities to continue to invest in building more advanced Chromecast devices to address better new generation codec H.2265], VP9s.

Okay, so you can think about the Chromecast as the device, like a set-top box, like a micro set-top box, set-top box inside a dongle.

So the difference between that versus the real set-top box, the real set-top box will have more memory, little bit more features.

And as a result, it is also natural for us to address.

That is why when we say we have several design wins on the ARMADA 1500 set-top box SoCs.

So this is just actually the same family of products, just one optimized for the dongle, the other one more optimized for the set-top box.

So the set-top box, it's a new business for us, but as we have proven to -- as we prove our self to be -- to serve this market we believe in the long run, we could grow this business, as well.

Okay.

That's helpful.

And my follow-up is on the SSD business.

I just wanted to drill down a little bit on the latest fifth-generation SATA SoCs that you mentioned, that support 15-nanometer and also 3D NAND.

Was wondering what kind of time frame you are looking at, or expecting for the ramp-up of SSDs that use these fifth-generation SoCs and also what the SoC -- or sorry, the ASP would be -- or at least directionally, or is that a big boost-up in the ASP for that future generation?

So, yes, the -- , production target, [all which we] said introduce the 3D products last quarter, those are the productions targeted for sometime early next year.

So --and then, we are not stopping still, like we are also building newer devices, some of them could simply be like a stripped down device, let's say, for the lower end market.

Some of them will be newer generation, even more advanced solutions.

So as we build more advanced solutions, the price obviously will go up.

But as we also build lower price market for, let's say, for new generations for either the ultra book that require much lower cost solution those price will be -- designed to be obviously to be lower cost.

But the volume will be much higher.

So we are -- and those are not cannibalizing the existing market, those will just be addressing new market opportunity.

So we feel good that this is a business that we invested properly many, many years earlier, before anybody thought it was important to invest in this area.

Okay.

Great.

Thank you.

Your next question comes from the line of Ross Seymore with Deutsche Bank.

Please proceed.

Hello.

Thanks for letting me ask a question.

Just wondered when you think that 3G headwind is going to be done, and what influence if any it might have on the typical seasonality that customer puts into place that affects your January quarter?

That is a good question, Ross.

We will continue to see some headwinds this quarter on the 3G side, and that is the reason for what we guided to.

As far as Q4, it is a little too early for us to comment on that.

We recognize there is seasonality with that customer in Q4.

But as we mentioned in the past, right, we are also looking at design -- pretty solid design traction elsewhere at other customers for 4G.

So it is a little tough for us to make that call at this point.

Got you.

And then the 4G side is my second question.

I think Sehat in your prepared comments, you said that the 4G units were up double-digits sequentially.

Was there anything we are supposed to imply on the ASPs from that statement, in that you didn't mention revenues also being up sequentially?

Or am I kind of over-complicating things?

Well, it is always a very competitive market.

I don't think you should read anything more into it.

Our 4G business, we grew our units.

It is -- from an ASP side, it is a very competitive market, and it remains so for the rest of this year.

But for the 4G business, we prefer not to talk about pricing.

Our customers are very sophisticated in these areas.

They are always going to say so and so is going to have a lower price than yours, and they want to see who is blinking first.

So it is not a good idea to -- for us to talk about pricing.

It is only negative, the result be negative.

It is better for us to talk about units at this point.

Okay.

Thank you.

Your next question comes from the line of Mark Delaney with Goldman Sachs.

Please proceed.

Thank you very much for taking the question.

The Chinese government has been more focused on growing its own domestic semiconductor business.

I am wondering if you have seen any impact on Marvell, or if you expect to see any impact on your business going forward?

Well, if you look at our 4G LTE, our designs were -- we are shipping all the products that we are been shipping, it's all done in China.

So if anything, this would be positive for us, being as we are the mass majority of our resources for this business in China.

Okay.

Thank you for that.

And for a follow-up question, I realize you have the CMU lawsuit appeal has an overhang, and that is creating some uncertainty around the potential cash balance.

But for a hypothetical or for argument's sake, we put that aside for a minute, can you just talk about what sort of minimum cash balance you think you need to keep on the balance sheet?

I think we mentioned this in the past, Mark.

Roughly -- we have said roughly three quarters or so of operating expenses what we would like to keep on our balance sheet.

Obviously, we have excess of that.

And given the circumstances that we have right now, we are just being a little more cautious.

Also, I also mentioned -- many, many years ago I got this question, I said that when -- while it is true that we don't need much cash to run the business under normal circumstances, in the past when we need money to borrow money, we have always held hostage by the bankers.

So it is better for us to be -- to have more money in hand, so that when we need to do something we have the money to draw on.

So I would rather be on the safe side to have more money, than to have not enough.

It's not like we haven't returned cash to the shareholders.

Yes, on top of that, right.

Yes, we are not holding cash.

We are eating more cash than we have money in the bank.

Right.

Thank you, Mark, we will take one last question, please.

Our final question comes from the line of John Pitzer with Credit Suisse.

Please proceed.

Yes, thanks for letting me sneak in a question.

First question, just on the inventory build.

I know you talked about it in the prepared comments, and that you talked about building ahead of demand.

But just given the revenue growth forecast for the current quarter, I am curious if you could give me a little more color on why inventory is growing so much faster than revenues?

And do you have a target for inventory at the end of the current quarter?

Yes, it is a good question, John.

We do have a target for the end of the quarter.

Our inventory should drop sequentially at the end of this quarter.

One of the reasons we did build inventory was for certain products that we -- given the tight capacity that we are seeing at the foundry side for the next few quarters, we have decided to build a little bit of inventory for certain key products.

But that being said, we are pretty confident that we should see our inventory trend move down.

Perfect.

And then, as my follow-up, just quickly back to the LTE market.

Sehat, I am just kind of curious, give the level of investment in the business, are you now at a revenue level for LTE, where that business is making money?

And then you said in your prepared comments, that you felt profitability in TD-LTE would be higher than 3G.

I am just going to question why you believe that.

And the devil's advocate question is sort of, there was a similar dynamic or view from 2G to 3G that didn't hold up as the 3G market matured.

And so, why should we think profitability in LTE should be structurally better than 3G?

Thanks.

Sure.

If you look at the -- , if you are talking about maybe -- if you are talking about 2G to 3G, the 2G to 3G transition for many, many years, for the first five years of transition -- five or six years of transition, the 3G market was so much more profitable business than the 2G.

The only -- 3G being so competitive, was only happening in the last year or so.

So in 4G -- 4G situation is different than -- it is better than 3G transition from 2G to 3G.

From 2G to 3G, there were like a dozen players in the market, like give or take.

Now we have -- now the dust is settling, we really only have three players in the 4G LTE space.

So with three players in the market, I think the -- yes, the markets will still be competitive.

That's true.

But I think it is a different scale of -- people need to be more rationalized, in terms of pricing, and so that they -- we all can make the right investment for the future.

So I am not concerned about this market being competitive.

It is more important -- to be the newest market opportunity down the road, when everything moves to 4G LTE.

Do we have the right new technology?

I mean the key word is, do we have the new technology that will allow us to deliver the products that will be low cost, yet at the same time be high performance?

And while it is still too early to talk about it, we are working on developing new technology to enable the kind of price point that people expect to see in the handsets.

So when we are ready to disclose the results, then you can see what I am talking about.

But it is too early for us to talk about it.

Some of this technology is so leading edge that even we are not so sure whether the result is going to be hot, hot, hot.

It is pretty challenging to build this, but I mean, someone to build ultra low cost, but high performance at the same time.

So only time can tell when we are finally able to deliver such a product.

Thanks, Sehat.

That's helpful.

That concludes our Q&A.

And now I will turn the call back over to Mr. Sukhi for closing remarks.

Thank you.

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

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

Thank you, and good-bye.

Ladies and gentlemen, that concludes today's conference.

Thank you for your participation.

You may now disconnect.

Have a great day.