Marvell Technology Group's CEO Presents at Credit Suisse Technology Conference (Transcript)

Dec. 3.13 | About: Marvell Technology (MRVL)

Marvell Technology Group, Ltd. (NASDAQ:MRVL)

Credit Suisse Technology Conference

December 3, 2013 5:30 p.m. ET

Executives

John Pitzer – Credit Suisse

Sehat Sutardja – Chairman and CEO

Sukhi Nagesh – IR

Analysts

John Pitzer

Why don't we go ahead and get started? I'm convinced now that we only have the [Technical Difficulty].

It is my pleasure this afternoon to introduce --

[Technical Difficulty]

Question-and-Answer Session

[Technical Difficulty]

Sehat Sutardja

-- six, seven years ago we invested in SSD, realizing that there will be a time that flash chips could be based at reasonable price to address say 10% to 20% of the market demand for storage. What I mean by that, a market that can afford to pay more, but they will get -- in return they will get smaller form factors and instant-on capability.

So the proof is, okay, the track record is that we are now the leader as well in the SSD controller technology. Not surprising, we have more than seven years of investment in SSD controller, as well as more than a decade, 13, 14 years investment in LDPC technology for storage. And it turns out LDPC technology is not -- useful not just for hard drive but is also going to be very important for the next-generation triple-bit for sale [ph] SSD applications.

Sukhi Nagesh

So, John, one other thing is the dealer share [ph], right, if you go back in hard drive and look at where we were maybe a decade ago, there were maybe 20%, right? I mean over the decade it's actually gained share in hard drive and we're almost 60% today. And hopefully that will continue as we move forward, you know, we're seeing some good traction now in the enterprise space.

On the SSD side, you know, obviously we saw very good traction starting in the beginning of this year, especially in the PCI Express front and where we have a significant lead, and that should continue into our next-generation devices.

John Pitzer

For both Sukhi and Sehat, I mean if you look at sort of what happened in the hard drive controller market, at the beginning of that market, a lot of different players. There were some captive players. And over time you saw really two merchant suppliers emerge. Where are we in that maturation process for SSD controllers? You know, there's still a lot of internal technologies at the NAND companies, there's a lot of players that are trying to get into the space. You're the market share leader, where do you think your share is? But more importantly, where are we in that maturation process?

Sehat Sutardja

I guess maybe the -- one way you can look at it is this way. If you're a flash chip supplier, you'll be nervous not to have access to controllers. So if you look at several years ago, three, four, five years ago, there were really no merchant market controllers for SSDs because the market was at -- in its infancy, so the -- so, people that have flash chips, okay, they have no choice but to develop this SSD controller in-house.

However, if you look moving forward, even today if you look at it, why they have to do this is because they need to protect the 95% of value of the SSD. Ninety five percent of the value of SSD is actually the flash chips, less than 5% is in the silicon other than the flash chips. So if you have to give them a choice to not develop their own controller, they will be more than happy to have not -- not to have their own controllers, okay? As long as we can provide them with better technology, meaning what, meaning better performance and better reliability, that's even more important than anything else. If they can prolong the life of their flash chip, meaning they can bring one thing -- first thing is they can bring the new product into the market sooner, new class chips, new more advanced geometry, it tends to have short lifecycle. So we can extend their lifecycle, okay? That tends to bring lots of value to them.

So, slowly but sure that we have proven to this -- in this market that people that used to have their own controllers now also using our controller.

Sukhi Nagesh

Just to give you some data there, right, and you could look at the beginning of 2012, maybe the industry was running on the 15 million units, 20 million units run rate on an annualized basis. At that point in time, 60% to 70% of the market was capped. Now if we look at fast-forward [ph] today, it's about 30% capped. So it's clearly moving in the direction of merchant markets.

John Pitzer

And next year we'll start to see the first tier of volume production on 3D vertical NAND. Can you help us understand the challenges relative to the controller market in vertical NAND? And do you have a solution or help us understand your roadmap for vertical NAND?

Sehat Sutardja

Yes, excuse me. The 3D vertical NAND is a natural migration for flash to go to. The reason to that is because the scaling in the horizontal direction is reaching to an endpoint, were becoming increasingly more expensive to build flash chips in one dimension. So the vertical direction is the only way to go for flash to -- the only way as well as is the natural way to go.

Unfortunately, the transistor characteristics in the vertical direction is not as good as in the substrate, on the native silicon substrate. And as a result, you're seeing that the lifecycle of the 3D NAND is dropping rapidly to the point where it becomes impractical to build the 3D NAND for enterprise class, I mean enterprise quality, meaning scientific [ph] quality batch [ph] of storage.

But there is not -- but that can be solved. It requires only, okay, more advanced single processing algorithm, and this is what we play. We are re-purposing our LDPC technology that we developed for storage, or I shouldn't speak re-purposing, I'd say we're developing new technologies, leveraging our knowledge in LDPC technology for hard drive, but redesign, come up with a new way of doing it for flash. And this is a key technology to enable 3D NAND to be used in the client PC batch [ph] application.

John Pitzer

When you look at that landscape, Sehat, do you think you have a sizable IP lead? And given the technical challenges, is there actually an opportunity you extract more value on a 3D controller than the SSD controller?

Sehat Sutardja

We are very confident that the LDPC technology that we have developed for the NAND flash is the best in the world. We've been investing in LDPC more than 13, 14 years, so we have tremendous experience in building LDPC. And the stuff that we put in the -- for the NAND flash is not something that we came out overnight. It has gone to many, many iterations, many generations of LDPC for NAND flash that we have brought into production not because it was not good enough, it was because originally it was too expensive.

It was -- when the lifecycle of NAND flash was still good enough, whatever was good enough for in the past, you don't need to spend more money to use LDPC technology. So even though we have many, many generation LDPC technology, we never went production with those, until recently when the NAND flash is starting -- the lifecycle becomes so short that the industry is starting to realize that they have no choice but to move to LDPC.

Sukhi Nagesh

We have a lot of patents around it too.

John Pitzer

And so, Sukhi, maybe you can help me out, if you -- if we kind of combine the tepid growth in the core HDD part of the business with sort of the more robust growth in SSD, how should we think about kind of the growth rate in this segment of your business kind of going forward?

Sukhi Nagesh

Yes. So if you were to assume let's say, I don’t know what PC market, let's say, you know, some people think the PC units will be down maybe 5%, 10% next year, you know, maybe the hard drive industry will do slightly better than that because they're selling more units in non-PC applications. And that -- and combined with our share gains on the enterprise side and our continued strong penetration in SSDs, we expect our storage business to do better than the market, right?

So if you look at the combined market for ACD and SSD, it's like 550 million units for hard drives and let's say 60 million to 70 million units for SSDs this year. Maybe it stays flat for -- from a hard drive TAM ph next year and it grows to 80 million units for SSDs, so we should do better than the unit volume.

John Pitzer

So moving into the network space, what are the kind of two or three core applications you see as being the key growth drivers for that business?

Sehat Sutardja

Yes. In terms of networking site, if you look at the investment that the end -- the customers are investing in, really it's investment in building the networks for servicing the end-users. The explosive growth of smartphones as well as the adoptions of LTEs into the networks, not just in the industrial but also in a lot of the emerging countries, create huge opportunities for people to build the backhaul infrastructures for networking devices.

And these are -- historically this is our weakness where we -- I shouldn't say weakness, okay, it's our -- we forgot to invest in this area historically. But the last few years we've been investing in this infrastructure space by investing in highly, massively, okay, large-scale network processes for this kind of market. So we -- we think this is the biggest growth opportunity in the networking space.

The other part is, okay, in the enterprise side, besides the traditional networking devices, moving some of these network devices to a 10-gigabit space on one end and on the extreme also moving some of these small networks for the enterprise to wireless bands, wireless connectivity is another area. So there's no one-size-fits-all market strategy like in LTE, like everybody moves the LTE at the same time.

John Pitzer

Historically, cracking the service provider end-market has taken some time. Where are you guys relative to the investment? And when can we start to expect to see you reaping the benefits? Is that really at a '14 story or are we thinking more '15 before that --

Sukhi Nagesh

We've actually, if you remember the [indiscernible] --

John Pitzer

Right.

Sukhi Nagesh

-- right? And so that was maybe 12 months ago. And we've started some traction on the design win front. You should probably some of those revenues manifest itself in the second half of next year.

John Pitzer

Let's move on to the fastest growth area or growth potential for you guys which is the mobile and the wireless space. I think that one of the key concerns that I hear from investors, and Sukhi, you know I've talked about this concern with you as well, is great revenue growth there over the last couple of quarters. The margin level of that revenue growth has been well below corporate average. And so, how do we think about profitability in 3G? And what's the strategy here? Is it really sieve [ph] the market in 3G so that you can get ready for LTE? And I guess the concern investors have, why is longer-term profitability in LTE going to be any better than what's been turning into a bloodbath in the 3G market?

Sehat Sutardja

Yes. If you look at the -- we can look at many different angles. So one of the angles you can see is that, if you look at 3G, 3G is really closer at the end of life in terms of the usability for the smartphones solution, for smartphones. If you look at -- you look at another angle, if you look at another angle, okay, if you look at all the advertisement of -- lately for the last six to nine months, there's not a single 3G advertisement in any industrial world. So everybody is only advertising who has the fastest LTE -- 4G LTE network.

And there are fundamental reasons behind that. LTE network is so much more efficient in terms of the spectrum efficiency. You can build highly-dense base station deployment, meaning you can increase capacity orders if not several orders on magnitude of capacity increase, while still maintaining the same cost -- dollar cost, but for increasing capacity like, you know, up to 100x. So, meaning the cost of -- the cost per user is going to drop drastically as you have more customers. And this is the reason why we believe, okay, like many years ago, that we have to go through this market because the market for LTE is going to be so gigantic that anybody who decided not to go into this business is going to regret it.

Now, but in order to get to this business, unfortunately, we have to be also entering the backward compatibility business, meaning the 3G business, even though we knew that we were late into this business. It is a price that we have to pay in investing, in getting the customer expectations, qualifications for the 3G. And because we're entering the business late, it's natural that it's hard to get good gross margins in the space.

It's more like the price we have to pay to get into the school and -- but the good thing is -- the good thing is nobody wants to sell this 3G a year from now. Everybody wants to sell only LTE. So, good news is that our LTE is already starting to ramp up, our device is mature. So our technology is proven. So, good news, our customers are all looking on our 3G solution, especially those ones buildings [ph] [indiscernible] good news is that we also -- we already qualified our 3G, so network compatibility would not be an issue when they move to our LTE solution.

So this margin issue that we thought -- that everybody is talking about is hopefully will be behind us sometime in the second half of next year.

Sukhi Nagesh

So, John, we said this on the call too, right, there's multiple avenues for us to address that.

John Pitzer

Yes.

Sukhi Nagesh

We have big business, we have storage, we have networking, we have mobile. Within mobile and wireless there's multiple mix shift happening there as well. We're taking action on the price front, we're taking action on the cost front. You know, the teams are extremely focused in trying to optimize pricing, even on 3D products. We know our 4G LTE devices command a better profile within the mix. You know, we've always said mobile and wireless will be below our corporate average, right? But I think that's something I think most investors we talk to at least are okay with, if it's within the normal reality and if we can show revenue growth and operating margin leverage with those kind of characteristics, I think everybody, you know, people will be happy with that.

John Pitzer

Our checks into China for TD-LTE with you guys are positive. What kind of milestones from a revenue standpoint should we be thinking about for both TD-LTE within China and then LTE globally? And at what point does LTE revenue rival 3G revenue for you? And I guess importantly, as we think about profitability in the business, what kind of market share of revenue level do you need to see in LTE to recoup the investments that are clearly going on there right now?

Sehat Sutardja

Right, okay. So this is good questions. TD-LTE, people, it's almost like synonymous to China market. While it is sort of true, okay, in the short term, in the long run TD-LTE will be the dominant LTE of the world. And the reason to this is because TD-LTE will give you much lower cost structure to LDD-LTE, the requirement of much fewer -- I mean practically no duplexers, no [indiscernible] expenses [indiscernible] devices. Second, TDD-LTEs are designed for pretty much the new band, the greenfield band, the 2.3 gigahertz, 2.5 gigahertz, as well as in many countries in the world, the 700 megahertz band that is very clear from the broadcast video application.

So as a result, TDD-LTE, what you could expect is to build TDD-LTE's handsets, smartphones because just incrementally, only more expensive compared to building 3G handsets. So as a result of this, you will see -- you will expect to see that the adoption of TDD-LTE will be very rapid compared to historical standards.

And China happens to have some of the biggest frequency bands available. China happens to be -- China Mobile happens to be,okay, ought to be [ph] investing close to 200,000 -- maybe almost 200,000 or more base stations to supporting TDD-LTE. So we believe that the adoption rate of the TD-LTE is just as fast as it could get the different handset manufacturers to build devices then that meets the performance -- I mean feature sets that they're asking for. So I think it's a matter of the next six months or so when -- six months, nine months when you see -- before that ramp -- number will go up exponentially.

Sukhi Nagesh

Because China Mobile hasn't really provided a number yet, John, I think. But most -- to lead [ph] with the popular press, most of them saying maybe 20 million, 30 million for next year for TD-LTE.

John Pitzer

And then when you sort of think of milestones outside of China, when do we start to see carrier acceptance on your base band?

Sehat Sutardja

So if you look at the -- there are many different ways to look at this. There are so many countries that people let's say historically have tried to do WiMax, that's gone. All the WiMax bands will be replaced with TD-LTE. So that's huge market opportunity where there's not -- there's preexisting market that'll be migrating to TD-LTE. So that includes places in the U.S. as well where we have to build TD-LTE.

So, now, even though we've talked about TD-LTE, to us, actually our solution is no different. Our TD-LTE actually a super-set of LDD-LTE. So from the silicon point of view, it's the same device. The only difference is for different people -- if people want to build an FDD-LTE device, they need to have a lot more duplexers and filters [indiscernible] to take care of the deep and roaming requirements of -- for different countries.

This is unfortunate. This is the situation that we live in, when different countries have different band allocations for the FDD-LTE.

John Pitzer

Any questions from the audience?

So maybe I can ask sort of just a -- sorry. Yes.

Unidentified Participant

So I guess as you think about sort of the growth opportunities for -- to the TDD-based products versus the FDD-based products, now even though they're sort of the same product [indiscernible] I guess can you maybe talk about sort of geographically how you sort of see -- obviously China Mobile is the big focus for TDD, but I guess how do you see sort of your growth opportunities sort of geographically and sort of where you're kind of focusing on rank order of priorities in terms of geographic exposure for 4G.

Sehat Sutardja

Yes. So we talked about LTE. The first [indiscernible] what simply [ph] happen naturally is [indiscernible] for us, the ramp-up for the TD-LTE will happen first half of next year. In the second half of next year the FDD-LTE will follow naturally behind it.

And the reason is very simple, because, okay, all the customers that build TDD-LTE will automatically be able to do FDD-LTE with changing the RF front-end. So people that can build a three-mode device for China, we can easily move to four-mode to five-mode device for the rest of the world, so. So next year is our -- is the time for our LTE to shine.

John Pitzer

Great. With that, we've run out of time in this session, but I'd like to thank both Sehat and Sukhi and everyone for joining this afternoon. Really appreciate your time.

Unidentified Company Representative

Thank you.

John Pitzer

Thank you.

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