Good day ladies and gentlemen and welcome to the Q2 2010 Marvell Technology Group Ltd. Earnings Call. My name is Anita and I'll be your operator for today. At this time, all participants are in a listen-only mode. We will conduct a question-and-answer session towards the end of this conference. (Operator Instructions).
As a reminder, this conference is being recorded for replay purposes. I would now like to turn the call over to Mr. Jeff Palmer, Senior Director of Investor Relations. Please proceed.
Welcome to the Marvell Technology Group's fiscal second quarter 2010 earnings call. I'm Jeff Palmer, Marvell's Senior Director of Investor Relations, and with me on the call today is Dr. Sehat Sutardja, Marvell's Chairman, President and CEO; and Clyde Hosein, Marvell's CFO, and Interim COO.
All of us will be available during the Q&A portion of the call today. If you have not obtained a copy of our current press release, it can be found at our company website under the Investor Relations section at www.marvell.com.
Additional this call is being recorded and will be available for replay from our corporate website. Please be reminded that this call will include forward-looking statements that involve risks and uncertainties that could cause Marvell's results to differ materially from management's current expectations, including our expectations about our product sales, and general market trends, statements regarding our financial projections for the third fiscal quarter of 2010, our expectations regarding the current economic environment and impacts to industry demand.
To fully understand the risks and uncertainties that may cause result to differ from our outlook, please refer to Marvell's latest annual report on Form 10-K and subsequent SEC filings for a detailed description of our business and associated risks. Please be reminded that 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 stock-based compensation expense, as well as charges related to acquisitions, restructuring gains and other charges that are driven primarily by discrete events that management does not consider to be directly related to Marvell's core operating performance.
Pursuant to Regulation G Marvell has provided reconciliations of the non-GAAP financial measures to the most directly comparable GAAP measures in our second fiscal quarter, 2010 earnings press release, which has been furnished to the SEC on Form 8-K and is available on Marvell's website in the investor relation section at www.marvell.com.
This time I would like to turn the call to Dr. Sutardja. Sehat?
Good afternoon everyone. Today we reported fiscal second quarter of 2010 revenues of $641 million, reflecting a 23% sequential increase, better than our revised guidance provided on June 22. We are pleased with the revenue growth we delivered in the second quarter, as we experienced improving order momentum throughout the quarter.
Our visibility into future demand is beginning to incrementally improve, and we are encouraged by the level of order stabilization. Our results within the second quarter demonstrate our continued focus on financial discipline as nearly all profitability metrics and cash-flow generation improved significantly.
During our second quarter, on non-GAAP basis, we reported gross margin of 55%, the highest level we have reported since the first quarter of fiscal 2003, and that is nearly seven years ago. We continue to keep discretionary operating expenses and a tight control, delivering operating margins of about 20% and generated $175 million in free cash flow or the equivalent of 27% free cash flow margin during the quarter.
These are excellent results which we believe clearly demonstrate our focused efforts to achieve best in class financial performance. We are ahead of plan on achieving our stated long-term operating targets. A significant accomplishment, given the challenging economic environment we have operated within over the last 12 months. I would now like to review the performance achieved in our various addressable markets.
During the second quarter, 25% of the sequential revenue growth came from new products, and made up approximately 5% of our total revenue. To be clear, we are designing new products as complete new devices launched during this fiscal year. Looking out into our third quarter, we anticipate this trend will accelerate as new products should contribute nearly half of our sequential revenue growth, and represent just over 10% of our total revenue.
The sale of products in our storage end markets grew over 20% on a sequential basis, contributing approximately half of our total revenues. We anticipate the sale of products to our storage customers should improve sequentially by low to mid-single digits during our third fiscal quarter. In line with the projected unit growth rate of the overall hard disk drive industry.
We continue to make very good progress, expanding our market share with new and existing storage customers. Within the hard drive market, our customers continue to provide very positive feedback on the performance of our LDPC read channel technology. This is a critical technology for the production of high-density and next-generation 2.5-inch mobile drives. We continue to believe the timing of the incremental share gains.
New customers, which we previously announced will begin to materialize sometime beginning in the mid-calendar 2010. Within the emerging solid state drive market, we are on track this year to nearly double our annualized revenue from the sale of solid state or SSD controllers. However, we believe it is important to keep in perspective the size of the SSD market, which this year is forecast to be less than 1% the size of the overall HDD market on a unit basis.
Another point, which is often overlooked when discussing the SSD market is the cost of the raw NAND Flash, which has been and will continue to be volatile. Over the last year, the cost of per gigabyte of NAND Flash has been a unsustainable low levels, and has only recently returned to more justifiable levels. This variability in flash memory pricing will continue to have a direct impact on the price, and therefore, the adoption rate of solid-state drives within the various consumer markets.
On the other hand, in the enterprise side of the SSD market, where the performance benefits deliver and justify the costs. Almost all major storage system OEMs has announced SSD-based products. We are well positioned to participate in both of these markets, and we continue to see interesting applications for our SSD controllers.
Now, turning to products in our mobile and wireless end market; the revenue was up about 20% sequentially and contributed approximately 20% of our total revenues. We expect revenues in this end market to grow by at least another 20% in our third fiscal quarter, highlighting the clear market acceptance of our embedded wireless applications and communication processor products.
During the quarter, we experienced over 100% growth in the demand for our 11n Wi-Fi devices in the printer and enterprise end markets. Additionally, we experienced significant growth during the quarter for our new Wi-Fi plus Bluetooth devices, and we continued to introduce additional variants of multi-function combo devices. Yet, demand for our mature and industry-leading embedded 11g devices continue both for the new as well as the existing designs.
An example of a unique application is the Novatel Wireless MiFi 2200, which is the world's first mobile intelligence hotspot. This device is just slightly larger than a credit card and allows the user at the touch of a button to create a personal cloud of high-speed wireless Internet connectivity, connecting simultaneously up to five Wi-Fi enabled devices. The MiFi 2200 is an 11g Wi-Fi based device with a 3G cellular baseband chip that allows users to connect to 3G wireless networks to access the Internet while on the go.
Within our application processor portfolio, we are making excellent progress with our product roadmap of high-performance application processors. Customer acceptance and interest is strong in various end markets, including digital picture frames, multi-function printers, electronic books or e-books, smart books and video telephony systems. We believe we are only beginning to scratch the surface of the opportunities of our application processor can address.
Within our communication processor portfolio, we are making great progress winning new programs with assisting customers executing to our new product roadmap and in our new customer engagement efforts. While our position to not preannounce products to all customer engagement may seem unusual, we would rather be prudent in our public statements until our customers announce their products first.
I continue to stress that the cellular business is a market where success cannot be measured in months or even quarters. Regardless, we continue to believe we are implementing the right strategy, which will lead to long-term market success for Marvell.
Now, I would like to discuss our efforts in the networking end markets. The sale of our networking products increased greater than 10% sequentially, and represented approximately 20% of total sales. As we have mentioned previously, we are in the early stages of a long-term growth period for our networking business.
Consequently, we anticipate sales of networking products during our third fiscal quarter should grow again in the low double-digit range. We see our market share increasing in multiple areas. We are experiencing very positive tractions with our flagship Prestera switching product family, which delivers excellent performance relative to competitive solutions.
Additionally, with our Kirkwood and Discovery Innovation Series of single and multi-core processor products, we are experiencing strong adoption rates. As an example, our low-power, gigahertz class, single core Kirkwood processor is at the heart of a revolution in small-form factor computing. These small platform computers are enabling cloud-based applications by the thousands.
We have already shipped several thousand flat computer development systems with the application development community expanding at a viral rate. This is a unique CPU platform, which, in the reality, a mini home server. What computers deliver PC like competing performance, connectivity to a network, and peripherals, combined with embedded memory, all within practically the size of a cell phone AC adapter while consuming less than 2-watts. The application possibilities are only limited by the imaginations of the developers.
In summary, I believe Marvell continues to expand its share in existing and new target markets. I am proud of our performance and of our employees in this challenging period, and I'm optimistic about the future of Marvell.
Now I would like to turn the call over to Clyde to review our financial results for the second quarter, and to provide our current outlook for the third quarter of fiscal 2010.
As Sehat mentioned, fiscal Q2 revenues came in at approximately $641 million, representing a 23% sequential increase over fiscal Q1, 2010, and a reduction of 24% from the same period a year ago. As Sehat mentioned, our overall revenue performance was better than we had anticipated in our initial guidance, as well as when we updated our guidance on June 22nd.
Our non-GAAP gross margin for the second quarter was 55.3%, an increase of 375 basis points from the first quarter and up 305 basis points from the same period a year ago. This was higher than the midpoint of our earlier projected range of 51.7%, to 52.7%. This result's also puts us above our long-term gross margin target of 53% to 55%, which we provided to you only six months ago.
The sequential improvement in our gross margin is a reflection of the cost-reduction programs we initiated during the downturn, combined with ongoing improvements in operational execution and to some degree, product mix. This is the highest level of gross margin since the first quarter of fiscal 2003, seven years ago. Our overall operating expense for the first quarter on a non-GAAP basis were $228 million, which was in line with our earlier projected range of $220 million to $230 million.
R&D expenses for the quarter were $172 million, a decline of about 3% on a sequential basis and a reduction of over 20% from the same period a year ago. SG&A expenses for the quarter were approximately $56 million down 1% sequentially and a decrease of about 10% year-on-year.
This resulted in non-GAAP operated margin of approximately 20%, up about 13 points from the approximately 7% operated margin reported in the prior quarter, and slightly better than the same period a year-ago albeit on lesser revenues.
Net interest expense and other income was a benefit of approximately $2 million, better than our prior expectations. Tax expense was approximately $9 million during this second quarter, above our prior guidance of $46 million expense. The increase in tax expense was due to a combination of improved revenues and a change in the tax rate in one of our foreign operating jurisdictions.
Our non-GAAP net income for the fiscal second quarter was approximately $119 million, or $0.18 per diluted share, an improvement of $0.13 or nearly 4 times our performance in the last quarter. During the same period a year-ago, we earned $154 million, or $0.24 per share.
The share used to compute diluted non-GAAP net income per share during the second quarter were approximately 652 million up from 637 million shares in the prior quarter, and higher than the 640 million shares reported in the year-ago period.
Changes in diluted share count are primarily due to shares issued in the periods, variations in average and ending share trading prices in the reported period reflected in the treasury method of computing diluted cash share account.
Let me now summarize our results on a GAAP basis. We generated a GAAP net profit of approximately $58 million or $0.09 per share in the second quarter as compared to a loss of $0.18 per share, we reported in our first quarter of fiscal 2010, and lower than a profit of $0.11 per share we recorded in the same period a year ago.
The sequential improvement in our GAAP earnings was a result of a better-than-anticipated revenue growth, improved cost control, yielding better gross margin, and solid operating expense control. The difference between our GAAP and non-GAAP results during the second quarter of fiscal 2010 was due to stock-based compensation expense of approximately $30 million or $0.05 per diluted share, amortization of intangibles represented approximately $26 million or $0.04 per diluted share, approximately $5 million in restructuring charges, or less than a penny per diluted share.
Our stock-based compensation during the quarter was lower by approximately $2 million or 5% on a sequential basis, and down nearly $18 million or 37% on a year-over-year basis. On a rolling four-quarter basis, we have lowered our stock-based compensation expense by approximately $72 million or 33% versus the prior four-quarter period. We continue to believe our ongoing stock option expense should be in the range of $30 to $35 million per quarter over the remaining of fiscal 2010, as compared to $40 to $45 million per quarter in the last fiscal year.
Further, we anticipate amortization of intangible assets to average approximately $25 million per quarter over the remainder of the fiscal year. Now I'd like to review our balance sheet as of the end of our fiscal second quarter. Cash, cash equivalents, and short-term investments were approximately $1.3 billion, up approximately $196 million sequentially, and up $390 million from the same period a year ago, even as we paid off almost $300 million in debt during that same period. Cash flow from operations for our second quarter was approximately $182 million, as compared to $145 million reported in the first quarter, and essentially flat from the same period a year ago even under lower revenue levels.
Free cash flow for our second fiscal quarter, defined as cash from operations less CapEx and less acquisition of acquired IP, was $175 million, represented a 27% free cash flow margin, an improvement of 33% sequentially from the $132 million in the first quarter of fiscal 2010 and 6% improvement from the $166 million in free cash flow reported in the year ago period.
In the last four consecutive quarters, we generated an impressive $644 million of free cash flow or approximately 26% of revenues. Accounts receivable was $328 million, up about $43 million sequentially, reflecting the higher revenue levels and down approximately $142 million from the year ago period. DSO was 44 days, essentially flat sequentially and down two days from the same period a year ago.
Net inventories at the end of the second quarter were $211 million, up from the $204 million reported in the first quarter, a 4% sequential increase. Net inventories declined $116 million or 35% on a year-on-year basis. Days of inventory was 66 days, down 25 days sequentially from the 91 days reported in the previous quarter and down 13 days from the year ago period.
We expect to increase our absolute net inventories in the third quarter due to improved order patents, better confidence in the end markets, as well as to improve our customer serviceability. On the days of inventory basis, this is the lowest inventory level we have had since the third quarter of fiscal 2006.
Accounts payable was $269 million, up $102 million sequentially due to increased volumes and extended payments to suppliers as we look to improve our working capital management. This was up $32 million on a year-on-year basis. Days payable were 69 days, up approximately 15 days sequentially from the 54 days in Q1 and up 23 days from the 46 days reported in the year ago period.
I would like to thank all employees of Marvell for their dedication, focus and execution as these results are a class testament to the hard work and financial discipline of all of our employees.
Now, I would like to provide an update in our current projections for the third fiscal quarter of 2010. We currently project third quarter revenues in the range of $680 million to $730 million or sequential increase of 6% to 14%. At the midpoint of this range, this represents an increase of about 10% sequentially. We currently anticipate that all revenue from all of our addressable end markets to grow sequentially. At the midpoint of our guidance, about a third of the sequential improvement will come from the mobility market, about a quarter from the networking market and about a quarter from the storage market, and the remainder from our other addressable end markets.
We currently project non-GAAP gross margin in the range of 55%, plus or minus 50 basis points, sustaining the levels achieved in the previous quarter and in line with our target model. We currently anticipate non-GAAP operating expenses to be approximately $235 million, plus or minus $5 million.
At the midpoint of our guidance, this is an increase of about $7 million or 3% from the last quarter, and a decrease of 12% from the same period a year ago. At the mid-point of our guidance, we anticipate R&D expenses to be approximately $185 million and SG&A expenses of approximately $50 million.
As we move forward, the moderate increase in operating expenses we incur are not structural additions to our business. We are approaching our operating expense expansion as variable base contingent on improved revenue growth and improved operating leverage.
As this view pertains to the midpoint of our Q3 guidance, we are guiding to revenues to increase 10% sequentially while operating expenses are only increasing 3%, which in turn should drive better than the 20% sequential improvement in operating profit and improvement in operating margin. This is the clear demonstration of the strong long-term operating leverage of our business model can deliver.
The combination of interest expense and other income together should net out to approximately zero, as the effects of fluctuations in foreign exchange rates offset earned interest in our cash balance. The effective non-GAAP tax expense should be approximately $6 million to $9 million.
We currently believe that diluted share count will be approximately 660 million shares. We currently project non-GAAP EPS to be in the range of $0.18 to $0.26 income per share.
On the balance sheet, we currently expect to generate about $50 million in free cash flow during the quarter, primarily as we increase working capital to support the improved demand environment. We anticipate the cash balance to be about $1.3 billion excluding any special items or M&A activities.
Our anticipated cash balance in the fiscal third quarter will reflect the payment of approximately $88 million in conjunction with our previously announced settlements of historical derivative shareholder losses. We currently expect our GAAP EPS to be lower than our non-GAAP EPS by about $0.09 per share, plus or minus $0.01. About $0.04 of this is related to amortization of intangibles, and $0.05 in stock-based compensation expense. Now I would like to turn the call over to the operator, to begin the Q&A portion of the call. Anita?
(Operator Instructions). Our first question comes from the line of James Schneider of Goldman Sachs. Please proceed.
James Schneider - Goldman Sachs
Good afternoon, and thanks for taking my question. I guess first off from the structural stand point on the gross margins, is there any reason why we wouldn't expect gross margins to kind of hanging there towards the higher end of your target range of 53% to 55% for the foreseeable future? How should we think about that in terms of cost benefits or any mix changes you might see going forward?
I think the management team, and our operation team has done a terrific job of getting it here and the intention is to keep it there. As you know in our guidance, we guided essentially flat plus or minus, so we are sustaining that. Our intention is to keep the things that would fluctuate would be mix, a wide variety of products have arranged some products higher, some products lower. That's probably the biggest impact to our gross margins in the foreseeable future.
James Schneider - Goldman Sachs
Then on the OpEx side, for R&D, do you think you have enough R&D spending at this point to finance the development initiatives you have in mind right now? I know you talked about certainly growing revenues and margins faster than OpEx, but do you think you have roughly the right level of R&D at this point?
I think one could argue that we have one of the largest R&D investment in the industry, so I will say that we have plenty of R&D. We are missing a few things that we could have invest. Yeah, of course, there are always additional stuff to invest, and we continue to look in to that and as we see the opportunity to acquire the right talent, and we will do so, but in general you should feel comfortable that we practically have most of the things that we need in the business that we're in.
James Schneider - Goldman Sachs
Maybe if I could just sneak one last one in. Can you talk about the total level of enterprise exposure you had in the current quarter. What you are seeing from your enterprise customers with respect to their outlook heading into the end of this year, essentially in 2010?
Enterprise I think we call it network is included in that end market, Jim, about 20% of our revenues. We guided up 10%, or low double digits, slightly better than 10% this quarter. So, we continue to see that. Beyond that, I think it's hard for us to say. Having said that a fair amount of the growth we have experienced in the last two or three quarters is really the reflection of technology and development we have been working on over the last few years, and acceptance of the technology in enterprise space. So I think regardless of end markets, you should see continued growth from the acceptance of these excellent products growth in market space.
Our next question comes from the line of Craig Berger of FBR Capital. Please proceed.
Craig Berger - FBR Capital
I guess I had a question on the combo device. Can you talk about whether you're getting revenues for those products now, maybe who some of your customers are or what type of (inaudible) are you selling into and kind of growth expectations there?
So the combos that we've mentioned ramping up was the Wi-Fi plus Bluetooth device. We also mentioned that we continue to introduce additional variance of combo devices, things that include FM radios and so far and so on, for example. So those things will ramp up obviously in the next six months to a year. So in terms of customers, we cannot be specific, we don't want to be pre-announcing those customers, anything else that you want to add, Clyde?
No. I think that business has grown very well for us; 20% last quarter in mobility and wireless, and I think it is expected to grow by the same rate in the coming quarter. So excellent growth rate, Craig unfortunately a lot of these new things are from new products, and consistent with our policy, we don't disclose customers unless they agree.
Craig Berger - FBR Capital
Just as a follow-up question, can you talk about whether you're seeing shortages for hard drives or hard drive chips out there, and potentially what the implication might be as we look to the fourth quarter? I know it's a little early on 4Q, but any visibility especially on the hard drive side?
I can answer little bit of that, and then Clyde can follow it up. I think in the last quarter or so, when the economy started to recover, we did see tightness obviously in our supply chain because of a lot of our people, a lot of customers did not disappear, the strength of the recovery.
So the good thing is certainly I think the message I would like to mention is that the good thing is okay, we were able to, in most instances practically be able to shift our customer last minute requirements. So that's good actually, good news because (inaudible) continue to show the strength of our operational team. Do you want to add on top of that?
Yes. Craig, it's hard for us to comment about shortages on drives, but I completely agree with what Sehat said. We've had some spot shortages here and there. I indicated in my presentation we have increased our wafer starts in anticipation of discontinuing and grow some inventory. The spot shortage that we don't believe affected our customers, and I don't think what the stories on the end market hard disk drive inventory.
Our next question comes from the line of Randy Abrams of Credit Suisse. Please proceed.
Randy Abrams - Credit Suisse
Last year at this time you were conservative on the holiday outlook. I'm curious with the higher base going into October, are you trying to keep expectations or assumptions conservative beyond that into the slow season? I see you are building inventory. Is that an expectation for any company specific or market ramps going in to the slow season?
I was waiting for that question, Randy. We feel much better about this year than the same time a year ago. From a macro point of view, we are coming off lows in the first half as opposed to a year ago where we ahead into the storm, we felt like the storm is behind us now as opposed to ahead of us year ago. So that makes us feel good. It seems to us that consumer sentiments are improving even here in the US where it's probably the bigger hit.
There is still a question of the timing and trajectory of a recovery, but we think this will continue until people see sustained concrete evidence. From a models point of view, we feel very good, even better. First, we're coming off of a quarter, where we posted over 20% sequential growth and we feel good about a double-digit growth again in the next quarter.
In the last year we have adjusted our cost structure substantially. Our team has done an excellent job, delivering excellent growth in operating margins and free cash flow margins. So we feel good about what we have done. We feel good about the structure we have. We believe, as we grow revenues, we have good leverage in the business model and our margin is going to expand as we described in Q3.
Finally, our technology and products are getting great customer acceptance, and we are seeing the benefits of this in the current environment. So when you aggregate everything, the improving external environment and the significant improvement we have made here at Marvell, we feel very good, but beyond this quarter, I think not much more we can add other than, I think sentiment this year is better than a year ago.
Randy Abrams - Credit Suisse
May be a follow-up on the hard drives. I think earlier in the call you said you expected low mid-single digit growth. I was curious about that outlook if it's a timing difference where you grew potentially ahead of the PC market as a number of companies in the supply chain are still talking about double-digit growth in their forward outlook?
I think we are just projecting the growth rate of the market, HDD overall. So the market includes the PCs and the non-PC markets. So, okay, the markets may grow bigger than that, but we don't know until it happens, until it materializes. If it happens, we just have to make sure we have enough inventories on hand to take care of those possibilities.
Keep in mind we have a slightly different quarter close than some of our customers. So I wouldn't expect to see an exact correlation between our storage and some of that. Second thing, we are on consignment, so customers pull on demand, and that makes it difficult to project exactly. As Sehat mentioned, it's consistent with what we are seeing, and we're preparing for it. In case it's better, we can respond to our customers.
One final question on the OpEx. You mentioned you are expanding at back of it, how should we think about over next few quarters? You mentioned contention on revenues, but is there a baseline projection, 4% growth or so per quarter as you start to ramp back up?
No. I don't think there's any baseline. I think as both Sehat and I indicated, we feel good about a structure we have now. We'll invest opportunistically, but as you grow your revenues if that happens beyond the next quarter, there will be some variable improvements that we need to make, and then we need to reward employees as well as we go along that space, but there's no formula to use.
You could probably use formula in this current quarter as best. It does fluctuate tape-outs and to fluctuate tend to be, some quarter you have a lot of tape-out, some quarter you may not. So around this structural level, I think is where we want to keep it.
Our next question comes from the line of Sukhi Nagesh of Deutsche Bank. Please proceed.
Sukhi Nagesh - Deutsche Bank
Clyde, just a question on the gross margin there. As you come out of this recession, is there a new way that you will be thinking about your long-term gross margin targets? The reason I ask that is as you look across the spectrum of the competition, be it on the hard disk drive side or on the foundry side, you have a shrinkage of capacity. Do you think that coming out of this recession, that you might have to revisit your gross margin levels upwards or leave it where it is, any comments there?
Our policy is to give this at the beginning of the fiscal year, when we report our results. So we'll stick to that change. We provided this range six months ago, and we have already achieved it, which is I think, testament to our operation team. I think we'll stick to that. We need to watch the space. There's a lot moving. Six months ago, I think things were a lot different. It's been six months, but only six months, so I think we need to watch that space. We need to help our customers with help them drive in their improvements as well. So I don't think right now we'll update that model. We'll update you in about six months again.
Then, in terms of R&D goal is always to build products there, each can integrate more functionality, so the overall cost to our customers will continue to go down. As long as we can, we're able to give more value for all products to our customers, then we can maintain the gross margin levels that we have today. So Marvell, as you know, is very focused on driving the technology, driving the integration. So those are the most important parts at the end of the day to our customers, and the rest of the stuff is just falls through naturally.
Sukhi Nagesh - Deutsche Bank
In that context, Sehat, I mean I think you mentioned earlier on the call that about 5% of your total sales in the quarter was from new products and you expect that to double in the current quarter. Can you maybe expand a little bit on that and talk about what these new products areas are, what areas they are targeting, and how you see that?
One example, the things that we talked about already, that we have new combo devices that we are introducing sampling to customers, or even things that is still in pipeline that we are just about to take out the other devices or the next-generation application processors, different types of application processors, for different markets, for cell phones, for digital picture frames, for all of the different markets. MIDs, e-books. So some of these devices have been introduced, have been sampled. Some of them are in the pipeline waiting for tape outs.
So those are the things that will drive that we consider new devices. There will be other types of devices that, that probably is not up, that I don't want to talk about yet at this point. Okay, we are busy also working on those devices, and those that will be something that typically will be important for our revenue growth, like two, three years down the road.
So we're building pipelines of new devices as a company, because we want to make sure that, okay, Marvell, when we talk to our customers, they will think us as a single-stop, one-stop shop for hopefully for everything they need with accessions of components that we don't deal like DRAMs or LCDs or batteries, but it is electronics that we can integrate, that's what we want to provide all the solutions to them. So this is why we believe the opportunities for growth for us is actually is very good in the next several years.
Sukhi Nagesh - Deutsche Bank
One final question I have, on the mobile side, thanks. There is some recent chatter about, one of your competitors getting back into RIM in most recent product refreshes there at your expense. Do you have any comments on that?
Could you be more specific in to like what are the chatters?
Sukhi Nagesh - Deutsche Bank
Just in terms of, some of the newer products that were introduced be it on Sprint or on Verizon, which previously had your product in there were refreshed with your competitor product.
So, probably it's is a misconception. Verizon is on the CDMA network, so we do not build any products for RIM on the CDMA network. So, we do build products on the 3G networks, the worldwide 3G network for RIM. We are very well positioned on the worldwide 3G Network solution for RIM. On the CDMA side, since we do not play in that market, so I don't know how can we lose that?
Our next question comes from the line of Shawn Webster of JPMorgan. Please proceed.
Shawn Webster - JPMorgan
Hey, Clyde, last couple of quarters, you talked about your entering backlog in the quarter, do you have an update for us there?
Yes. Typical backlog in a typical quarter, if you want to call these times typical is about 65% to 70% coverage. We entered this quarter a little bit about 10%, maybe a little bit better, higher, and that's sustained since then. So that's pretty much what we laid out.
Shawn Webster - JPMorgan
75 to 80?
Yes. 65 to 70 plus 10.
Shawn Webster - JPMorgan
Then, if you will permit me, I would like to dissect the gross margin change a little bit more. You guys obviously did a very good job and it was significantly better than what you thought at the start of the quarter. It sounds like mix was not a big part of it. Can you help us understand what specifically drove the upside relative to your expectations, was it lower wafer costs or maybe even segment color on which segments drove the gross margin upside? Thank you.
It was operational performance as we described on our prepared statements. You are correct, mix was lesser than issue. As far as to the forecast, good question, but when we gave our forecast three months ago, revenue projection was what, 540 to 580. So if we think about it, we flushed out a lot more of the good inventory, the reductions we had made early in the year came through and they are coming through now at higher costs, one reason why we are able to explain that. So that explains why from our earlier forecast two months ago, the higher revenues flushed out some of the allowed, some of the newer cost inventory to shift to market.
Shawn Webster - JPMorgan
Then on the wireless segment, any sense you can give us on the size of your Wi-Fi relative to your aps processor and combo baseband chip business area in that 20%?
We're not splitting that.
Our next question comes from the line of Sanjay Devgan of Morgan Stanley. Please proceed.
Sanjay Devgan - Morgan Stanley
Just a quick question. I wanted to touch based more on some of your new products again. As you kind of look over the coming years, let's say in calendar year 2010, you talked about some of the combo chips as well as new refreshes of your aps processors. What do you think is going to drive the biggest incremental growth next year? Or which we look to in terms of meaningful growth drivers for 2010, just qualitatively if you can touch on that? Then, I was wondering if you can also kind of touch on some of your initiatives in digital TV and Blue-ray and how should we kind of track expect the growth trajectories for those product lines?
So the way we look at it is actually a quite straightforward. The consumer markets, the growth of opportunity for semiconductors and the reason to that is because the process technology nowadays are to the point where we can integrate a lot of functionality into a single chip or maybe two chips at most, so at very reasonable costs. So we can integrate powerful processors, like gigahertz or multi-gigahertz, single or dual core or quad-core CPUs, 3D graphic functionalities, HDTV, whether you call it, Blu-ray player, setup boxes or TV or smart TVs.
Again the different between all these different applications are quite small. We are talking about a difference of maybe two to one or maybe even slightly more than two to one difference in cost in terms of the silicon requirements for the different markets. So we are talking about single digits or slightly upper two-digit types of cost solutions for those, for the different markets.
So the opportunity is really is to is the same actually, is to have all those capabilities in every devices. The difference between okay, I don't want to add maybe. Even in certain applications, they do not need certain functionalities, a year later they will need those functionalities again because we can do it, because we can do it. We can implement those functions at reasonable costs.
So you already mentioned about TV or Blu-ray, clearly, okay, this is one area, a area of opportunity for us to grow into as well in the next several years. We do have devices that we're sampling in to the market, just not projecting revenue yet at this point.
Sanjay Devgan - Morgan Stanley
Just as a follow-on. I think earlier you mentioned in your networking business, we're just at the beginning of a multi-year product cycle within the networking product line, Can you just remind me, given that your networking products have traditionally, or the newer networking products likely have higher than corporate average gross margins, is it reasonable to assume that that product cycle starts to kick in, that will be added to margins kind of down the line?
We have had these types of questions for the last as far as I could remember. The answer is that, at this point the company is quite diversified. Marvell is a company, not relying on a single market that can drastically change the overall outcome of our gross margin, even though in certain areas we have higher or lower gross margin.
The net is that if everything is the same, they can go up one, or plus, minus one, one way or the other. Depends on yield factors, depends the complexity of products, depends on how well is that the products are being designed, whether the dye size is as small as we like it to be, or slightly bigger than what we like it to be.
So in general, we cannot predict with very good accuracy, what they can to be, but what we do know is if we continue to push for excellence in our product development, push for high integrations, and build products that not many of our competitors can build or none of them can build at all.
We will continue to get value for products that we built. So, I'm not to consider whether it's going to be 55 or 54 or more than 55. If it's going to be more, we'll be happy, but we're not driving it that way. We are not driving the numbers. We're driving the product, they'll try to build superior product. If it happens, it will get wider acceptance, as a result of that, then we will trade off, we will trade. I will personally trade much higher volume for slightly less margin, but, then, again, I don't drive that, so when it happens, again, we'll deal with it.
Our next question comes from the line of Nicholas Aberle of Caris & Company. Please proceed.
Nicholas Aberle - Caris & Company
On the hard disk drive side, any granularity you can provide on may be what segments were strong, as respected 3.5 inch, 2.5-inch, basic consumer business, enterprise, any granularity there?
I would like to be able to know exactly where those products goes, and I think we won't be able to know exactly where they go. A lot of our products that we built, actually the same chip can go into the desktop and mobile, and this is actually our strength. Our chip can go to high-performance, high-speed, yet to be very low power. So our customers can use exactly the same device into those two markets.
Having said that, I have been keep saying for the last few years that I personally believe the mobile market, mobile computers growth is going to drive the growth of the drive markets specifically in the PC industries. It is because the processors that goes into these laptops are low-power, and yet high performance already, so that people really do not that much of a PC except for the craziest, okay like my kids that want to have crazy graphics to play games in the their bedrooms, but other than that I think everybody should be happy just to have laptops. So, therefore, the future growth of the drive business.
Nicholas Aberle - Caris & Company
In your prepared remarks, you talked about some new hard disk drive customers and that big new ramps starting in the middle of calendar 2010. Is that the same timeframe you guys have been thinking or is that a little later?
No, that's consistent we've projected here.
Nicholas Aberle - Caris & Company
The baseband business has been a little bit of a headwind for the last two quarters, you guys feel confident that that business has troughed in Q2.
Yes. That's pretty much behind us, so we feel very comfortable, we're very happy that our 3G Solutions are really very strong.
Nicholas Aberle - Caris & Company
Then just very lastly, over the longer term, I think it was about a year ago, a little over a year ago, Sehat, you were talking about product portfolio being strong, product cycles ahead of you, and you thought over year-over-year could do high teens to low 20% revenue growth in a normalized environment. Assuming we're back in a normalized environment, is that the type of range for revenues we should think about you guys growing over the long-term? Thanks.
I think that we still feel that the same in the normal environment, where we continue to, we have not stopped R&D development even during the downturn. In fact we can argue that we have accelerated some of the R&D, some of the things that we were planning to do a little later on, we actually pull in on the earlier schedule. So I do feel that if the economy goes back to normal pace that we will do what we said earlier.
Our next question comes from the line of Uche Orji of UBS. Please proceed.
Uche Orji - UBS
Clyde, let me just ask you about, obviously it looks like your visibility has improved, but can you just give us some numbers as to how much of your guidance is covered by backlog?
I think I said that earlier.
Uche Orji - UBS
Sorry, I missed that.
Yes. Typical issue that would be. We usually don't have a typical quarter at about 65% to 70% coverage and we are about 10 points or better and 10 points better than that going in, and that's kept that same pace since the quarter end.
Uche Orji - UBS
Let me switch gears a little bit to the XScale business. In terms of where the margins of that business is now, are you kind of optimal in terms of margins and what are you going to be, if not, how more efforts or by what specifics what are you going to do to try and drive margins to become more optimal on that business?
As you probably know that we never talk about specific gross margins or any specific products, but just to give your more color of that. In every business that we are in, okay, we do want to have a normal margin for that business. So in the application processor or communication processors, we've been aggressively revamping our product lines over the last year in building products with more integrations, for example putting powerful 3D graphics capabilities in some devices, HDTV capabilities.
So all of those things are steps, they will give us better margin in the long run. So if the concern is the margins of that, okay, in the long run, it will be worse than our competition. I think you should not be worried about that. So we are on the path to basically have the normal margin for the business. It's the same thing with every other businesses.
Uche Orji - UBS
Just one last question I had. A couple of conference calls ago, you talked about progress you were making on netbooks on the targets in terms of how you intend to penetrate in netbook market. Sorry if you said it, but I missed it. Are you able to kind of catch your mind back to that call, I remember in terms of what you are doing in that market? In terms of the new products you talked about, there is going to be one of those, and if you can also talk about some of the drivers of your ability to penetrate that market? I mean there have been concerned about ARM-based product and not been able to run Microsoft and that been a concern in general. So anything you can talk about your progress in this market and your view as to the evolution of ARM-based applications that would be helpful. Thank you. That's my last question.
So we are very well positioned actually in what you call a netbook or some people call it something else. So I also call it consumer. Anything that fall in to the consumer devices is a clear opportunity for our gigahertz, multi-core, single-core or multi-core ARM, gigahertz processor solution that we have in our portfolio. So the thing that drives that the opportunity besides from the silicon, on the silicon side we drive the opportunity building all this thing integrated. Everything that you knew all the peripheral, the USBs, the Ethernet, okay, the PCI, I have to say 3D graphics.
So, all this functionality into a single device, a single-chip device, but equally important, what driving this opportunity is the low-cost LCDs, cost of the LCDs have been dropping rapidly over the last several years, and to the point now that you said, okay, things are so affordable that you can build a lot of these current devices below for $50 to $100, okay. On top of that, the reasonable costs of small flash, we mentioned about flash prices going up and down, okay, but for SSD, but if you look outside of SSD, for things like 8 gigabytes or 16 gigabytes of requirement, these are like very reasonable price. So now, we can build a lot of these functions again for less than a $100.
So this is what drives, well I forgot to mention, not to mention the availability of open platform software like the Androids. They practically cost nothing; I mean it doesn't cost nothing. You have to do port from this ported to the platforms, but, okay, in the big picture, okay, when you are talking about huge volume, it's practically comes for free. So, all these events created a huge opportunity for the ARM-based consumer devices, whether it is handheld devices or even a smart TV.
They are the same to me. They have slightly different integration factors. I guess, we can give you more down the road when some of these products are introduced by our customers, if we are allowed to be more elaborate on it, we will give more color at that time.
That concludes our question-and-answer portion. I would now like to turn the call back over to Jeff Palmer for closing remarks.
Well, thank you everyone. We appreciate your interest in Marvell, would like to highlight that we will be attending several investor conferences over the next several weeks. On September 9th, we'll be at the Kaufman Brothers Investor Conference in New York City; September 10th at Citibank in New York, September 14th at the Deutsche Bank in San Francisco, and September 16th at the Jefferies Conference in New York. We look forward to seeing you then and in other investor meetings. Thank you for your interest in Marvell. Bye-bye now.
Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect and have a great day.
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