Marvell Technology Group Ltd MRVL
Q3 2013 Earnings Call Transcript
Transcript Call Date 11/15/2012

Operator: Good day, ladies and gentlemen, and welcome to the Third Quarter 2013 Marvell Technology Group Earnings Conference Call. My name is Keith, and I'll be your operator for today. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. As a reminder today's conference is being recorded for replay purposes.

With that I'd now like to turn the conference over to your host for today, Mr. Sukhi Nagesh, Vice President of Investor Relations. Please go ahead sir.

Sukhi Nagesh - VP, IR: Thanks you, Keith, and good afternoon, everyone. Welcome to Marvell Technology Group's third quarter fiscal 2013 earnings call. I am Sukhi Nagesh, Vice President of Investor Relations and with me on the call today are Sehat Sutardja, Marvell's Chairman and CEO; and Brad Feller, Marvell's Corporate Controller and Interim CFO. We will all be available during the Q&A portion of the call today.

If you have not obtained a copy of our current press release, it can be found at our company website under the Investor Relations section at marvell.com. We will also be posting a slide deck summarizing our quarter 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 product and market strategy, statements about our market acceptance of our products, statements of our general trends and the end markets we serve and future growth opportunities, statements about market share, and statements regarding our financial outlook for the fourth quarter of fiscal 2013.

To fully understand the risks and uncertainties that may cause results to differ from our expectations and outlook, please refer to today's earnings release, our latest quarterly report on Form 10-Q, and subsequent SEC filings for a detailed description of our business and associated risk. Please be reminded that all of our statements are made as of today and Marvell undertakes no obligation to revise or update publicly any forward-looking statements.

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

Pursuant to Regulation G, we are providing reconciliations of non-GAAP financial measures to the most directly comparable GAAP measures in our third fiscal quarter 2013 earnings press release, which has been furnished to the SEC on Form 8-K, and is also available on our website in the Investor Relations section.

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

Dr. Sehat Sutardja - Chairman, President and CEO: Thanks Sukhi, and good afternoon everyone. Today, we reported third quarter revenues of approximately $781 million, reflecting a decrease of 4% sequentially. This was in line with our revised outlook provided in mid-October with the softer revenue of mainly due to lower HDD demand. We continued to be profitable with third quarter non-GAAP gross margin of 52.3%, operating margin of 14% and earnings per share of $0.20. We also continue to return cash to our shareholders as we repurchased about $203 million or roughly 23 million shares and paid $33 million in dividends during the quarter.

Typically at this point, I'll provide some financial information for each of our end markets. However, we have now made some changes and we will post the comprehensive slide deck on our website that provides both our results and outlook. I will instead focus my commentary on our end market and product strategies. We believe this format will be more beneficial and especially given the near-term revenue headwinds. Brad will then provide financial color on our end markets after my prepared remarks. First, I want to reiterate that Marvell has always been and always be a strong technology driven company focusing on large growth markets. In the decade following the inception of the Company, Marvell's targeted two largest growth opportunities at that time, namely, storage and networking. Our relentless focus on advanced technologies has directly translated to our current number one position in storage and number two position in networking.

Today, it is clear that the biggest volume and growth opportunity is the mobile and wireless end market. To give some perspective the dollar opportunity for semiconductors in the mobile market is at least an order of magnitude bigger than say the storage market, due to a combination of significantly larger volumes and higher silicon content per unit. This is the reason why we have invested significantly over the last few years in mobile and wireless and our goal is to become a top player in this market.

Now, we acknowledge the short-term headwinds that we are currently going through a product transition in our mobile business. Over the last year, we have refined our mobile strategy leveraging some of the lessons we have learned from our success in storage. We are focusing our investments and realigning our resources based on our underlying strategy of a unified platform in order to be competitive and drive revenue growth. For example, last quarter we announced our first generation unified platform that addresses both the TD-SCDMA and WCDMA markets. This platform is being well received in the market and in a short time we already have three top handset OEMs designing both at the TD and WCDMA smartphones this customer engagements have less or multiple WCDMA handsets being designed for deployment in the early part of calendar 2013.

Our unified platform strategy is also allowing us to effectively target the growing significance of the white box market. White box makers in Asia today manufacture roughly 30% of the global handsets and are increasing their global footprint in smartphones.

Part of our investment in mobile is to provide complete turnkey solutions that are needed for this white box market. In total we already have about a dozen customers using our new platform and expect to deliver approximately 20 smartphone devices for key area certification by the end of Q4.

After that we expect initial revenues starting in Q1 of the next fiscal year. Our team is excited about the strong impression of our new platform and we believe we are making excellent progress to achieve our self-imposed goal of getting 10% of the global WCDMA smartphone market exiting calendar 2013.

As you know the world is rapidly adopting 4G LTE technology and we recognized this trend early and introduce our 4G LTE modem technology last year. We are also, we are now integrating this LTE modem into our unified platform in order to accelerate the adoptions of LTE to the mass market.

Our 4G devices will be pin to pin compatible with our current devices. We expect to sample there 4G devices in late Q1 to customers who are currently working on our 3G devices. The east of transitioning to 4G using our unified platform is yet another reason why customers are choosing to work with Marvell 3G platform today.

In summary, for mobile, we are confident in our strategy and look forward to sharing with you a further progress in future quarters.

Moving next to wireless connectivity, our mission here is to bring to market high-performance, integrated solutions at lower cost and lower power consumption compared to competitive solutions. Historically, we'll focus on providing integrated 1x1 Combo solutions for the mobile market, which remains the lowest power consumption. We also provided high-performance 4x4 solutions for the enterprise market, which remains the highest possible throughput.

In addition, to our continued strong presence in the 1x1 and 4x4 markets, we are now expanding our footprint by offering integrated 2x2 combo solutions for the mobile applications. These 2x2 solutions have advanced beamforming technology that provides increased range and throughput, but we have similar power consumption at our existing 1x1 solutions. We believe there is a significant opportunity for our 2x2 combo devices, especially in the tablet and ultrabook markets.

For example, we are excited that our 2x2 solution is currently being used in recently launched tablet PC products using this device – lots of tablet -- this product using this device. We're also going to see additional products using this device in the near-term. In addition, we have a strong roadmap and already sampling the next generation 2x2 low power 11ac combo devices into customers for mobile applications.

Next in storage, most of you know we are by far the market leader today. Our market share is increasing and Brad will provide details on our market gains later. We have always operated under assumptions that the demand for storage continues to rise whether in consumer devices or in the cloud. We also know that the forms of storage technologies will also continue to evolve. Consequently, Marvell continues to invest in storage and we are at a forefront of brining to market new advanced storage technologies. These new technologies span the entire HDD, the additional HDD, the new SSD technology as well as the emerging hybrid markets and effectively address the evolving demands of our customers.

For example, in the PC space, many OEMs are introducing Ultrabooks that use either our SSD for high performance or hybrid technologies for high capacity, high performance and low cost. In summary, for storage our continued investment are resulting in HDD share gain and growth in both the SSD and hybrid markets.

Turning next to networking; we are doing quite well in this market and see additional opportunities for growth over the next few years as networks evolve. We have a strong and broad product portfolio in networking, and I will highlight a few of these. Today, it is well known that network traffic is growing rapidly due to increasing data and content demand from devices such as smartphones and soon from smart TVs.

For example, the average smartphone traffic usage nearly tripled in 2011. As these devices become increasingly more sophisticated, especially with LTE, demands on the network bandwidth can only continue to rise. This plan is require network providers to find advanced solutions to maintain the cost and security of their networks, while still providing the same quality of service for consumers. We are currently a top provider of solutions for networking customers with the highest performance switching and physical layer devices.

Moving forward our next generation switching products will including network processing capabilities from our accelerated product family to effectively address the increasing requirements from our customers such as traffic management and software configurers. Our traditional networking market we have expanded into the infrastructure access market with our PON and network processor product lines.

The infrastructure access market is transitioning from copper based technologies such as DSL to fiber optic based technologies and we are seeing strong section in this area. Over the next few years, we believe the worldwide broadband subscriber growth will be driven predominantly using PON and Marvell is the key enabler of this technology.

In addition for mobile infrastructure our accelerated programmable products are getting strong traction in the rapidly growing mobile back haul equipment market.

We are also expanding into the data centers that power the public cloud today. The data center market is a large one and is dominated by PC-centric architectures today we are seeing a growing opportunity to address this market with solution that are based on lower architectures.

As a result of Marvell's long-term investment in ARM based solutions we believe we are well-positioned with a broad range of products for this market.

In summary demand in Q3 was weaker than originally anticipated but despite the near term demand softness I want to assure you that we will continue to focus on our underlying strategy for growth. We are making refinements to introduce more platform centric and even more highly integrated products. In addition we remain committed to returning cash to shareholders through our buyback and dividend programs. Also as it relates to the recent resignation of our CFO, I want to assure you that Marvell has worked hard on developing and fostering a strong and professional finance team. Brad Feller, Marvell's Corporate Controller will serve as our Interim CFO and the Company has started a search for a permanent replacement.

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

Brad Feller - VP, Corporate Controller and Interim CFO: Thank you, Sehat, and good afternoon everyone. As Sehat mentioned, we reported revenues for the third quarter of fiscal 2013 of $781 million, representing a 4% sequential decrease. The shortfall in Q3 from our initial expectations was mostly due to reduced demand from our HDD customers and slightly lower demand in wireless connectivity for the gaming market.

In storage, our overall revenues declined 3% sequentially and represented approximately 47% of total sales. Despite a 10% decline in the HDD TAM in Q3, our HDD revenue declined by only 5% sequentially. Continued share gains from our 500 gigabyte per platter technology drove our relative outperformance in HDDs during Q3. In addition, consistent with our expectations going into the quarter, our SSD revenue increased over 25% sequentially on the strength of new customer ramps.

In networking, our revenue was down 1% sequentially and represented approximately 23% of total sales. We had double-digit growth in enterprise switches, offset by an inventory correction at infrastructure related customers. Our mobile and wireless end market declined 10% sequentially and represented approximately 25% of overall sales.

As Sehat mentioned earlier, in wireless connectivity we saw an exciting new tablet PC device introduced into the market, incorporating our 2x2 MIMO solution. Growth related to the launch of this new product was offset by lower than anticipated demand for our gaming solutions and an inventory correction for enterprise access points. Although our mobile business declined sequentially as expected, we are gaining good traction for our solutions based on our new unified platform. We expect to start to see revenues in this area in the first half of next year.

Our non-GAAP gross margin for the third quarter was 52.3%, which was below our initial projections, mainly due to the shortfall in revenue and mix of products sold. Overall operating expenses for the third quarter on a non-GAAP basis were $297 million, slightly below our initial projections due to continued focus on cost controls.

Non-GAAP R&D expenses for the quarter were $241 million and SG&A expenses were $57 million. This resulted in non-GAAP operating margin of 14% for the quarter. Net interest and other income was $2 million and our tax expense for the quarter was $400,000. This resulted in non-GAAP net income for the third quarter of $113 million or $0.20 per diluted share.

The shares used to compute diluted non-GAAP EPS during the third quarter were $578 million, as compared to $587 million reported in the prior quarter. Cash from operations for the third quarter was $137 million as compared to $189 million reported in the prior quarter and free cash flow for the third quarter was $113 million compared to $174 million.

Let me now summarize the results on a GAAP basis, we generated GAAP net income of $69 million or $0.12 per diluted share in the third quarter compared to $93 million or $0.16 per diluted share in the prior quarter. The difference between our GAAP and non-GAAP results during the third quarter was mainly due to stock-based compensation expense of $30 million or about $0.05 per share. And about $14 million or about $0.03 per share related to amortization of intangible assets and acquisition related costs.

Now turning to the balance sheet cash, cash equivalents and short-term investments were $2 billion a decrease of $117 million sequentially. During the third quarter we repurchased about 23 million shares for approximately $203 million.

Over the past nine quarter we have repurchased and retired 150 million shares or about 22% of our outstanding shares. We also paid dividends of $33 million in the quarter or equivalent to $0.06 per share.

We expect to pay our next quarterly dividend of $0.06 per share on December 21 to all shareholders of record as of December 13.

Accounts receivable was $375 million down $16 million sequentially. DSO remained flat at 45 days. Net inventory at the end of the third quarter was approximately $324 million down 6% from the prior quarter.

Days of inventory were 81 days down from the 83 days reported in the prior quarter. Accounts payable was $291 million a decrease of $44 million from the prior quarter.

Moving next to our outlook for the fourth quarter of fiscal 2013, we currently project fourth quarter revenues to be in the range of $700 million to $740 million. At the midpoint of this range this represents a decline of 8% sequentially.

By end market, we expect mobile and wireless to decrease approximately 30% due to seasonality for our connectivity products and continued weakness in demand and product transitions at smartphone customers.

We expect our networking end market to grow low single-digits in 4Q as our switching business continues to grow.

Finally, we expect our storage end market to be roughly flat overall and expect our SSD business to perform relatively better than competition. We currently project non-GAAP gross margin to improve to 53%, plus or minus 50 basis points, and currently anticipate non-GAAP operating expenses to be approximately $310 million, plus or minus $5 million.

Please note our fourth quarter has an extra week based on our fiscal calendar, which would normally drive a 7% increase in operating expenses. However, due to expense controls put in place, we currently anticipate only a 4% increase. We anticipate R&D expenses of approximately $248 million and SG&A expenses of approximately $62 million.

At the midpoint of our projected guidance, this should translate to a non-GAAP operating margin of approximately 10%, plus or minus 1%. The combination of interest and other income should net out to approximately $2 million benefit. Non-GAAP tax expense should be approximately $2 million. We currently expect the diluted share count to decline to approximately 560 million shares as we get the full benefit of the 23 million shares repurchased in Q3. This share count does not reflect any share repurchases we may undertake during the current quarter. Taking together, we currently project non-GAAP EPS to be about $0.13 per diluted share, plus or minus a couple of pennies.

On the balance sheet, we currently expect to generate about $60 million in free cash flow during the quarter. We anticipate our cash balance to be about $2.1 billion, excluding any M&A activity, continued share buyback or other one-time items. We currently expect our GAAP EPS to be lower than our non-GAAP EPS by about $0.08 per share, about $0.06 of this is related to stock-based compensation expense.

With that I'd like to turn the call over to the operator to begin the Q&A portion of the call. Keith?

Transcript Call Date 11/15/2012

Operator: Harlan Sur, JPMorgan.

Harlan Sur - JPMorgan: On your mobile and wireless segments, Sehat. You talked about your unified platform and some of the early design wins, and sounds like first revenues at the beginning of next year, your embedded connectivity seems to be doing well as well. I know visibility is limited for the team in this environment, but can you just give us a sense of when you expect revenues in your total mobile and wireless segments to start to inflict higher and grow sustainably as your strategy starts to come together, is it Q2 of next year, is it second half of next year, does the team need to wait to calendar 2014, any color here would be helpful.

Brad Feller - VP, Corporate Controller and Interim CFO: I will expect to see revenue to start moving up in the first half of next year. As I said earlier that we are putting self-imposed target on ourself that by the end calendar 2013 our target is to achieve 10% of the WCDMA markets, so if we achieve that, that will be like a significant milestone for the Company.

Dr. Sehat Sutardja - Chairman, President and CEO: Harlan, just on that point, we're not predicting any particular quarter, but like we said I think we should start to see revenue inflation in the first half. End of first quarter or early second quarter, hard to predict at this point.

Harlan Sur - JPMorgan: Obviously, the team has been aggressive with the stock buyback plan up to this point. I think exiting Q3 you still got about $400 million left under repurchase plan. I know there has been some concern that the team may pull back on the buyback until either a new CFO is found or pull back just given the tough macro environment. So I guess my question is, is the team going to continue to be aggressive on the buyback near term, with the stock at current levels and is the team thinking about more aggressive ways to return cash to shareholders.

Dr. Sehat Sutardja - Chairman, President and CEO: We are absolutely committed to continuing the buy back at the current levels and potentially higher, we think the stock is at a very low point right now. And we will be very aggressive in that respect.

Operator: Glen Yeung, Citi.

Glen Yeung - Citi: My questions are largely around margins I guess the first one is gross margin is now down I think eight quarters in a row and I recognize that you are driving out for the out quarter, but just your sense on how you are going to kind of stem the flow with the gross margin decline and what you think the new targets for gross margin might be?

Brad Feller - VP, Corporate Controller and Interim CFO: So I think we've had a good track record in gross margins and as you pointed out it has declined a bit in the last several quarters. But we will maintain gross margins from a long term perspective in the 50% to 55% range. Obviously as we become more and more successful in the mobile and consumer areas of the business, it may drift towards the low end of that range. But we are very committed to that range and we are focused on bringing in the revenues to drive operating margin growth at the end of the day.

Dr. Sehat Sutardja - Chairman, President and CEO: Glen, if you look at the history of the company there has been maybe a few pockets where we have actually dropped below 50% I don’t think we are ever going to get there. So our overall target range should be between 50% and 55%. As Brad mentioned, our targeted operating margin goals are 20% or better. So, our goal really is to drive top line growth and operating margin leverage.

Glen Yeung - Citi: Actually just on that note then, over that same time that gross margins have slid, R&D has gone from 23% of sales to 34%. It sounds like you still want to be aggressive in the overall handset market. I wonder where we are – I guess on two fronts; one, just on the absolute level of R&D, again you're guiding it down for the quarter, but you're guiding it from the fourth highest level of R&D in the last eight years. So, where are we sort of in that overall trend for R&D and specifically in mobile and wireless, are we kind of through the hump there in spending or is it still more in front of us?

Dr. Sehat Sutardja - Chairman, President and CEO: The reason that R&D has to go up over the last couple of years is because the investment of going into the mobile and wireless is fundamentally is significantly higher than any other businesses that we ever get into. So, this is the main reason now. So, the fact that okay, we have a short-term headwind did not help that percentage. It was not because of the – I am sure, I believe it's the short-term issue that we are facing that percentage is still a very reasonable percentage. Now, secondarily, we also need to invest in other areas. I have mentioned we've been aggressive in investing SSD and hybrid technologies for storage. Because we do believe the market for our storage will continue to grow, and as a leader in this business we much invest in new technology to drive our future growth, but that's more of a secondary part. Now having said that, okay, we are committed to – now we have invested quite a bit in those areas, we are committed to maintain our expenses for next year, overall.

Brad Feller - VP, Corporate Controller and Interim CFO: So we'll manage the overall number, make sure that it is flat for the year investing in some new things and keeping tight controls on some of the discretionary areas.

Operator: Srini Pajjuri, CLSA Securities.

Srini Pajjuri - CLSA: I have a short-term question and a longer-term question. Looking out to the next quarter you're guiding your wireless to be down about 30%. I'm just wondering is it all related to the Wi-Fi business being weak, and also if you could give any – a bit more color on what's happening on the mobile side and what's TD doing and what's WDCMA doing?

Brad Feller - VP, Corporate Controller and Interim CFO: So, if you look at the overall number, it's roughly half wireless connectivity, half mobile. We've talked about the market transitions that we're experiencing in the TD-SCDMA market those continue, those have played out as we expected. As Sehat mentioned we're starting to get traction with the new platform that includes TD and WDCMA.

Dr. Sehat Sutardja - Chairman, President and CEO: Srini, just a little bit of follow up there. If you look at traditionally our connectivity at least in the gaming platform side, it usually drops off in excess of 50% in the fourth quarter, sequentially. If you go back few years, that's typically the norm. So, we're not seeing anything untoured at least in the connectivity side this year around, that's maybe a little bit more compounded this year by the product transitions we're having on the mobile side.

Srini Pajjuri - CLSA: Then Sehat you're setting a pretty aggressive target for the WCDMA market share and this is not a new market for you and obviously you have been in this market for several years, and I'm just curious as to what gives you that confidence that you'll be able to achieve the 10% market share in 2013 which you didn’t achieve in the past.

Brad Feller - VP, Corporate Controller and Interim CFO: Well I did mention in the past like last call, one of the mistake that we made in the past was that we have two platforms. We have one platform for WCDMA and we have another platform TD-SCDMA that create a disruptions in our teams as well as our customers in terms of building handsets for both TD-SCDMA and WCDMA we corrected that mistake with a single platforms. Now with this single platforms our customers will be able to build the handset with TD or WCDMA or vice versa. Whichever they can, they can start with TD first and they can go WCDMA with very minor efforts. So this is the reason why, we feel very comfortable we are very optimistic on our prospect in WCDMA because now we have a lot more customers to work with on the WCDMA side. On the technology side our WCDMA was proven for years, but those were mainly for the older platform. So we are putting the proven modem technology into the TD platforms to simplify to ease the transition for our customers to switch their business to do business in WCDMA to us.

Srini Pajjuri - CLSA: If I could just follow-up on that and as we look out to the next few quarters are you basically counting on the white box market to drive your market shares or is it going to be a tier one customers and also how should we think about the margins as again share in wireless in terms of both gross margin as well as operating expenses?

Dr. Sehat Sutardja - Chairman, President and CEO: We're targeting both. We're targeting both the OEMs and the white box market. The white box market is becoming increasingly important to address in fact you're asking for the white box market. As you know they represent 30% and maybe more next year of the cell phone volumes. So, the single platform will allow us also to focus on one software deliver, one turn-key delivery solution to the white box makers. While at the same time, we're able to serve the additional OEMs there, one (suite end) applications, by the way, most of the OEMs will say, we still use the same protocol specs. The second question on the expenses, by going to the single platform, we actually know we should be able to maintain our expense. It will not be otherwise, okay, if we have decided to go to stay with the two platforms that we used to have. So, this will be good for us moving forward.

Operator: John Pitzer, Credit Suisse.

John Pitzer - Credit Suisse: I guess when you look at the guidance for storage in the January quarter, can you help me understand kind of your view of the world. What's the TAM assumption there? Is there a still market share gains to be head in the January quarter? I guess if you could help me quantify what SSDs are now as a percent of that business and do you expect that to stay on a growth path in January?

Sukhi Nagesh - VP, IR: Sure, John. So, our assumption for the storage at least is predicated on the flat HDD TAM like most of our customers have indicated right, but we also said -- I think if you listen to what many of our HDD customers have talked about on their calls, they've talked about inventory and their books going up and inventory at their end customers being high as well. So there is some aspect of inventory reduction I think on the drive side in the current quarter, so it's going to be -- from our perspective, we said our storage business will be flat or down slightly, HDDs at least would be flat or down slightly. On SSDs, I think we mentioned, Brad mentioned here shortly that we should better than the competition, you know what the competition did last quarter, so I think we're seeing some of our customers in that space actually taking some share.

John Pitzer - Credit Suisse: Just a follow up on the networking side. You commented in the October quarter, you saw an inventory adjustment with some of your infrastructure players, a little bit more detail there. An general networking has been a good relative story for you guys, but it hasn't necessarily been the growth engine for you or quite frankly many chip companies in a while, I'm just kind of curious Sehat as you think about your calendar year '13 and beyond what kind of growth do you expect out of this business and what are the bottoms up drivers?

Dr. Sehat Sutardja - Chairman, President and CEO: In the prepared comments, we see the growth opportunities will be billing out – the build-out of the networks to serve the smartphone users and also LTE being also deployed, the networks has to be build out as well. So, in those areas, some of the important technologies that we need to provide are device like network processors for the base stations as well as the switches again for the infrastructure. So our guesswork is that business probably can grow around 8% maybe 10% for the next year.

John Pitzer - Credit Suisse: Just the infrastructure inventory correction in the October quarter any more color you can give us on that?

Dr. Sehat Sutardja - Chairman, President and CEO: I think we have couple of different product areas in the infrastructure side John I think you probably know. We have a very nice and growing network processor business that targets certain aspects of the access market. We also have very solid PON businesses. We've seen very strong traction in PON over last five quarters in a row. So there is little bit of pause I think we saw in the last quarter. But we are seeing resumption of growth this quarter.

Operator: Quinn Bolton, Needham & Company.

Quinn Bolton - Needham & Company: Just want to follow-up on John's question, just really trying to look at the growth drivers as we look into calendar '13 you went over a number of potential opportunities the unified platform, the SSD, the hyper drives the opportunity to get ARM processors and to some of the infrastructure and networking clients but I mean if you look at fiscal '14 or calendar '13 can you sort of rank order the top 2 or 3 growth drivers you see for next year?

Dr. Sehat Sutardja - Chairman, President and CEO: Of course, definitely it will be for the mobile and wireless especially towards the second half of the year. This is by far, mobile and wireless are by far the large market opportunity for anyone to address. So the concern that people have about us is because of this short-term temporary headwinds that we are facing in the last quarter and this quarter. So, we hope to get those things will pass by us and not just hoping, we're confident this will pass by us because of our tractions in our platform strategy. Now, the second growth opportunity is really is the SSDs. We've been investing this for a long time, and finally people are – the price of the SSDs are getting to be more reasonable. They are not cheap yet, but they're getting to be more reasonable that as a result of this, we are seeing more and more people are willing to use SSD for tablets or ultrabooks in a price range below like $800 or so. So, we're seeing that as a growth opportunity and as the price continue to drop, when I say price been -- as the price of the flash storage technology continue to drop, even bigger market opportunity for growth will be the hybrid -- Hybrid HDD/SSD where we believe that probably in about exiting maybe 2014 or so – calendar 2014, we do believe it could be at least maybe 50% of the ultrabooks, will have native HDD hybrid technology. They are basically providing the performance of SSD at the price of HDD plus maybe let say $8 or so of the ultra-differential, and that will drive the growth significantly in that market, and the third market of growth is as we mentioned earlier is the networking in the areas like PON and network processors, we believe those are the area of growth opportunity and higher performance switching technology, especially the switching technology there will incorporate network processors down the road.

Quinn Bolton - Needham & Company: Then just as a follow-up, you talk a lot about the SSDs, and it sounds like mostly client opportunities, can you address sort of what you're doing in flash controllers, perhaps for flash cards or flash arrays targeting enterprise applications?

Dr. Sehat Sutardja - Chairman, President and CEO: You mean specifically flash controllers for the enterprise side?

Quinn Bolton - Needham & Company: Yes.

Dr. Sehat Sutardja - Chairman, President and CEO: It's a much smaller portion of the business. So, I consider the flash controller for the enterprise the multi-channel PCIe controller, as well as the SAS controller, those are the one that goes with the enterprise. So, we are selling those devices, but the vast majority or the bottom (indiscernible) at the client side goes to the PCs.

Brad Feller - VP, Corporate Controller and Interim CFO: If you look at the market there on the SSD front, it's very similar in terms of a split between client and enterprise, as it is in HDD today, in terms of unit volume, roughly about 10% of the volume is enterprise compared to the remaining 90% being client, so like Sehat mentioned it's a pretty small volume. We do plan that, but the volume opportunity is clearly on the client side.

Operator: (Arnab Chanda).

Arnab Chanda: Sehat, just a couple of questions first of all my impression is and please correct me if I am wrong if you leave out sort of market trends and dynamics that you cannot control the only market where you arguably have fallen a little bit behind is mobile wireless. Can you talk just qualitatively about do you think that you have to invest additional to catch up in some of these areas, given all the connectivity or application processor or modem, or do you think that given the current rate of investment or maybe you are cutting back on some other areas, you can get to where you need to be. I have follow-up please?

Dr. Sehat Sutardja - Chairman, President and CEO: You are absolutely right we have fallen behind in some instant areas. We made mistakes but are basically focusing on two different platforms in one area where we, we have not done that, we will have introduced our next generation smartphone device at least six months or maybe nine months earlier, maybe even longer than that. So it was a hard lesson for us to learn. And nobody in the company wants to repeat the same mistakes that we made. So in terms of investments we have caught up. So I don’t think I don’t believe we need to increase our investments in terms of the headcounts and to move to the next level because after all we already are also working hard on the next generation device to ensure that next time around we are not going to say the same thing again that we made the same mistake. So we are comfortable that we are on the right path.

Arnab Chanda: One question about, on the area that it seems like you've invested early and perhaps you don't really talk about it right now, but I'd be curious is kind of data center enterprise, I think the first ARM-based CPU in networking we didn't really hear much of that beyond that. Can you talk a little bit about that whole area of data center enterprise? What your strategy is, is there an opportunity in the next 12 months or is that something you'd rather wait? If you could – is there any to discuss that with the 64-bit ARM CPU or 32-bit. If you could discuss that a little bit, that'd be great?

Dr. Sehat Sutardja - Chairman, President and CEO: You are right. There is a huge opportunity for addressing the data centers you're seeing low power processors. This is the reason why we are investing in this area. You mentioned about 64 bits, that's like 180 or 64 bits also on more powerful high performance 32-bit processors they have extended addressing modes. So, we were early actually in this area as well, but this area is – I mean if you look at the history – in history of data centers. I don't know if you remember this, long ago when everybody is using Sun Micro servers for your data centers. Even though the x86 processor was so much better than Sun Micro servers processors, we actually – as well as many other companies stuck with the Sun servers for – I think about three or four years longer than what it was thought to be obviously – okay, it should be happen for three-four years earlier. I think what's the reason was because in this business the time it takes for the applications to be ported from one architecture to the other architecture takes quite a bit longer than expected. So, as a result I think in this area I would like investors to put their expectations lower enough, not – check the expectation that this is not something that can happen overnight, we still have to invest in this appropriately with the expectation that maybe two, three years later this thing will finally will have more meaningful penetration.

Sukhi Nagesh - VP, IR: I think what Sehat was mentioning, I think the market has to be a little bit more pragmatic in terms of when this will be big unit volume opportunity. The unique thing that we bring to market is have the necessary – a broad portfolio as we mentioned. We have the compute part, which is our Armada XP device, which is now the only available ARM-based server out in the market today, even though its 32 bit and we have a networking components – 40 bit Address. We have networking switch components and our storage components all combined, which provides a unique platform solution to a lot of our customers, you don't see a lot of that from other customers -- other vendors.

Operator: Craig Ellis, Caris & Company.

Craig Ellis - Caris & Company: First, going back to the mobile and wireless markets Sehat, you mentioned the WCDMA target for the end of the year. I'm wondering if you have a similar target for the TD-SCDMA market?

Dr. Sehat Sutardja - Chairman, President and CEO: I would be happy if we can maintain our market share that we have lost this year for total of the next year.

Brad Feller - VP, Corporate Controller and Interim CFO: So our expectation is really to maintain our market share next year.

Craig Ellis - Caris & Company: Then on the storage side of the business you have talked about the growth potential in both SSD and hybrid I am wondering if you can just contrast for us the dollar content that you have in hard disk drive when it's 500 gigabyte platter versus SSD versus hybrid and related to that if PC units are flat in calendar '13? What kind of growth rate do you think is reasonable growth rate for Marvell given the share gains that you see coming?

Dr. Sehat Sutardja - Chairman, President and CEO: On the ASP front we'll stay away from specific numbers on ASPs for ACDs or SSDs all we have said in the past in our SSD pricing is higher and we'll just leave it at that.

Brad Feller - VP, Corporate Controller and Interim CFO: But I also need to mention that. We also mentioned in the past when the volume increases of course the price will also go down.

Dr. Sehat Sutardja - Chairman, President and CEO: As far as the PC market the question regarding your PC market question. If the PC market is flat next year obviously that would entail maybe a flattish ACD market as well. We should see growth mixes of that due to share gains.

Operator: Romit Shah, Nomura.

Romit Shah - Nomura: You spoke earlier about the opportunities in white box phone market and my understanding of that space is that Qualcomm and MediaTek have done very well and it's also very price sensitive market, should you gain traction here, what would be the impact to the operating model target?

Dr. Sehat Sutardja - Chairman, President and CEO: The operating model should improve. As you say, this is a market that even the biggest company in the world – once you get into, that's an indication that this is a very important market to address. So, we are not shy of going into this market, no. Having said, the market is also evolving. Historically, the white box markets deal cheap feature phones, but as the consumers are trained to – by the top tiers handset manufacturer is providing expensive very high-end smartphones. The white box guys are realizing that there is a huge opportunity to build similar kind of devices at lower price, but not at lower price the feature phone, but still a significantly lower price than the tier 1 handsets. So, we see this is exactly the opportunity that we have, enabling the white box guys to be more successful in increasing the top line by providing more advanced solutions at reasonable price. It's going to be higher than the feature phone solutions, but they don't care actually. The one actually what surprise me is more and more, we don't actually want's to have more advanced technology to differentiate among themselves.

Brad Feller - VP, Corporate Controller and Interim CFO: Just to add on what Sehat said. We talked about earlier the operating margin leverage, as more of those dollars come in from the white box market, we expect with the operating margin leverage we have that Sehat said that will actually increase those.

Romit Shah - Nomura: Just so I'm clear, your competitive advantages versus QUALCOMM or MediaTek in this segment are what?

Dr. Sehat Sutardja - Chairman, President and CEO: So simple -- maybe like one sentence, we build QUALCOMM performance for MediaTek price.

Romit Shah - Nomura: Then can I just ask you quickly on the TD market, is TD-LTEs something that's going to develop in a more meaningful way next year or do you think it's a couple of years out?

Dr. Sehat Sutardja - Chairman, President and CEO: TD-LTE is going to be starting to become meaningful toward the end of the year, but because the end of the year short I will say really in the next year after that would be very meaningful.

Sukhi Nagesh - VP, IR: So I think you will probably see handsets in the market on TD-LTE probably towards the end of next year or in 2014.

Dr. Sehat Sutardja - Chairman, President and CEO: I want to maybe make a comment on TD-LTE, when we say TD-LTE it does not mean that this is just a TD-LTE, every device that we build when we call TD-LTE actually it's backward comparable to FDD-LTE.

Operator: Blayne Curtis, Barclays.

Blayne Curtis - Barclays Capital: I just wanted to go back and make sure I understood the comments on SSDs and hard drives in general, obviously your competitor is seeing an inventory correction, so I think you said you were going to do better than that I just wanted to make sure that meant growth? Then if you could just talk about, on the inventory side you saw some correction I think your largest customer had a pretty significant increase in finished good inventory I think LSI's working through similar problem just wondering if you thought that would be corrected in the January quarter.

Brad Feller - VP, Corporate Controller and Interim CFO: So to clarify the comment on SSD as you mentioned competitor has guided down in that market we do think we'll see some level of growth in that market at a minimum flat there are some thing in the works that we think may improve that, from an ACD perspective there are some inventory, both at our customers and at their customers. We think that, that will largely work through by the end of the quarter. We also have share gains the we'll continue to see over that period as well.

Blayne Curtis - Barclays Capital: Then just on the white box market the comment you were the high end guy in TD and there were some low cost solutions that moved in when you look at the WCDMA market you are seeing some of the lower end guys with 28-nanomete quad-core on the roadmap. So I am just trying to better understand where you fit in are you going to have to move to 28-nanometer and keep up with this application processor cadence and is that, the types of products you will have in the market next year?

Dr. Sehat Sutardja - Chairman, President and CEO: I think it's clear everybody are looking on 28-nanometers. Then, when we are finish with 28-nanometer than everybody (indiscernible) on the next node, so I don’t think that will change. It is an area that we'll always have to continue to be smaller job on three devices and build more powerful processing capability, especially the graphics processing capability.

Operator: Doug Freedman, RBC Capital Markets.

Doug Freedman - RBC Capital Markets: Sehat, could you just focus in on the storage market for us, and I am sorry if I missed it if you offered. What percentage is the 500 gigabyte platter today? What is the next technology that you think the market is going to need in the HDD market?

Dr. Sehat Sutardja - Chairman, President and CEO: I don't know the number of that, the exactly percentage...

Sukhi Nagesh - VP, IR: So, Doug, you were asking what percentage of our total shipments was 500-gig today.

Doug Freedman - RBC Capital Markets: Correct.

Brad Feller - VP, Corporate Controller and Interim CFO: It's about 40%.

Doug Freedman - RBC Capital Markets: Then a follow on to that is – and where is the market going from there?

Dr. Sehat Sutardja - Chairman, President and CEO: Well, I think the market – it's clear the market is all going to move to 500 gigabytes. The cost of building (indiscernible) mainly the heads and media, yield improve. Everybody will move to the next generation's capacity nodes. So, in this case 500 gigabytes, might gut telling the percentage will double that by the end of next year.

Sukhi Nagesh - VP, IR: At least in the mobile side for sure, I think most of the customers will probably move towards 500-gig by the end of next year.

Dr. Sehat Sutardja - Chairman, President and CEO: We are the only sole suppliers of 2.5-inch HDDs for 500 gigs platter.

Doug Freedman - RBC Capital Markets: Then if I could move over to the networking market, you guys have been gaining back some share in the switching side of that business. How do you feel about your opportunities to continue that, I believe your competitors offered a new product rather recently and believes that they can start winning back some share again, how do you feel your positioning is there?

Dr. Sehat Sutardja - Chairman, President and CEO: I won't be able to answer that because I'm not familiar with some of the...

Sukhi Nagesh - VP, IR: So, Doug, if you look at relatively speaking to what we have in the market. We offer the highest performance and highest dense ports for our switching products compared to what else our competition offers in the market today, so that's why we are seeing pretty good attraction at some of the major customers. We don't see that changing any time soon.

Dr. Sehat Sutardja - Chairman, President and CEO: So we have like device LX 100, so I'm not familiar what the other guys have 200 or something, I'm not aware of that.

Brad Feller - VP, Corporate Controller and Interim CFO: As we continue to integrate with those, some of the technology from accelerated what not; I think that's going to make us even stronger.

Operator: Mark Lipacis, Jefferies.

Mark Lipacis - Jefferies: First question on the – you talked about the bogie of 10% of the WCDMA market, so if you hit that by the end of next year what do you think we're talking about in units, rough numbers?

Dr. Sehat Sutardja - Chairman, President and CEO: The markets for WCDMA is projected to be probably around 800 million units or so, so 10% of that is basically that what we were targeting.

Mark Lipacis - Jefferies: A question on hybrid drive market, I'm not asking for ASPs, but when you talk about shipping a hybrid drive, are you shipping both a hard disk drive and a SSD controller or is there – I mean is there a scale down controller there, roughly speaking what are we talking about in terms of extra content in a hybrid drive for you guys versus a hard disk drive?

Dr. Sehat Sutardja - Chairman, President and CEO: For the early, as you said it will happen in the early phase of the hybrid adoptions, we will have two chip solutions, one chip addressing the HDD and other chip addressing SSDs. So, there are customers they want full blown SDD, there are customer who want to have what you call is scaled down version of SSD. Now, eventually as it matures, this solution will be fully integrated. So what you will see there will be single-chip handling HDD and SSD and this will be -- ultimately will be the lowest cost solutions for hybrid.

Mark Lipacis - Jefferies: Brad did you give guidance on cash flow for this quarter?

Brad Feller - VP, Corporate Controller and Interim CFO: Yes, $60 million.

Mark Lipacis - Jefferies: Of free cash flow cash, okay.

Brad Feller - VP, Corporate Controller and Interim CFO: Yes.

Operator: Alok Shah, DA Davidson.

Alok Shah - DA Davidson: I'm trying to reconcile one thing, Sukhi you said gross margins wouldn't go below 50%, but if we start to look at your targeted goal getting 10% WCMA, don't you think we could probably see below 50% if that's the case? Then secondly, I guess higher picture -- bigger picture wise. I'm looking at your R&D spending as a percentage of revenue, it's quite a bit higher than most of the peer group, I know revenues have slowed quite a bit here because of some macro concerns, but when I look at the PC growth in terms of HDD growth to be lackluster, why aren't you getting more aggressive on cutting back on the OpEx at this point?

Sukhi Nagesh - VP, IR: Let me address the gross margin. So the gross margin; we are confident with the gross margin model because if you look at the smartphones, smartphones are also moving rapidly to LTE, these are also much higher price point. So, if you include all the product mix, there is no reason why we cannot achieve the target 50% at the worst case scenario.

Brad Feller - VP, Corporate Controller and Interim CFO: To address the second part of your question, we are investing not for the current levels of revenue we have, we are investing based on the growth we see in the different markets that are there. So, yes, as you look at it today, it is a higher percentage than competition, but we are investing based on what we can achieve in some very high growth markets.

Alok Shah - DA Davidson: If I could. I mean if we get towards the end of next year and we don't see this 10% achievable goal. What do you think happens then? Should we expect you guys to kind of cut back on the wireless market itself?

Dr. Sehat Sutardja - Chairman, President and CEO: That's a speculative question. We'll answer that at that time.

Brad Feller - VP, Corporate Controller and Interim CFO: At that point, yeah.

Operator: That's all the time we have for Q&A today. You gentlemen want to make any closing remarks?

Sukhi Nagesh - VP, IR: Yes. Thank you for attending the Marvell conference call. We look forward to catching up with you over the quarter. Thank you.

Dr. Sehat Sutardja - Chairman, President and CEO: Thank you.

Brad Feller - VP, Corporate Controller and Interim CFO: Thanks.

Operator: Ladies and gentlemen, that concludes today's conference. Thank you very much for joining us. You may now disconnect. Have a great day everyone.