Marvell Technology Group F1Q08 (Qtr End 4/28/07) Earnings Call Transcript

May.17.07 | About: Marvell Technology (MRVL)
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Marvell Technology Group Ltd. (NASDAQ:MRVL)

Q1 2008 Earnings Call

May 17, 2007 4:45 pm ET

Executives

Sehat Sutardja - Chairman & CEO

Mike Tate - Interim CFO

Analysts

Louis Gerhardy - Morgan Stanley

Cody Acree - Stifel Nicolaus

Seogju Lee - Goldman Sachs

Arnab Chanda - Deutsche Bank

Michael Masdea - Credit Suisse

Craig Ellis - Citigroup

Allan Mishan - CIBC World Markets

Chris Caso - Friedman, Billings, Ramsey

David Woo - Global Crown Capital

Presentation

Operator

Good afternoon, everyone and welcome to the Marvell Technology Group Ltd. First Quarter Fiscal Year 2008 Financial Results Conference Call. Today's call is being recorded.

For opening remarks and introduction, I would like to turn the call over to Dr. Sehat Sutardja, Chairman and CEO of Marvell Technology Group Ltd. Please go ahead, Dr. Sutardja.

Sehat Sutardja

Thank you, Camay. Welcome, everyone, to our first quarter fiscal 2008 conference call. Mike Tate, our interim Chief Financial Officer, is also on the call with me today.

Today we reported Q1 revenue of $635 million, which represented the year-over-year increase of 22% and a sequential increase of 2% from the prior quarter. We had previously guided our Q1 revenues to a range between $640 million and $650 million on our Q4 earnings conference call last February.

Our Q1 revenues came up a little short of our forecasted range, given an overall weaker demand environment across some of our market. We believe this weakness is due to seasonality in the first half of the year, being a little more pronounced than originally anticipated, especially in the hard drive market.

Despite the seasonal softness in some of our end markets, their limited hour revenue growth this quarter, we continue to be positive about our leadership positioning in our existing markets and the progress we are making in applying our technologies to serve additional large markets. Given the strength of our technology and our continued focus and execution, we are positioned strongly to continue and enjoy very solid long-term growth.

With that, I would like to turn the call over to Mike to provide more insight into our Q1 financial results.

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Mike Tate

Thank you, Sehat. Good afternoon, everyone. I would like to remind all participants that the following dialogue will contain predictions, estimates and other forward-looking statements covering subjects such as enterprise, consumer, and emerging market trends, competition, customers, suppliers, products and demand, and expectations regarding revenue growth, gross margin, operating expenses, other income, and expense, cash, accounts receivable and inventory. Such statements will be preceded by words like expects, anticipates, believes, should, will, may or words with similar import.

These statements include those regarding, relating to our guidance for the second quarter of fiscal 2008, the pace of our business, and the impact of the continued adoption of our solutions on our revenue growth. The following factors, among others could cause actual results to differ materially from those described in the forward-looking statements.

They include the inability to further identify, develop and achieve success for new products, services and technologies, the inability to successfully integrate the application and communication processor business acquired from Intel, increase competition and its effect on pricing, spending, third party relationships and revenues, as well as the inability to establish and maintain relationships with commerce, advertising, marketing and technology providers.

We direct your attention to our annual report on Form 10-K, quarterly reports on Form 10-Q, recent current reports on Form 8-K, and other Securities and Exchange Commission filings, all of which discuss other important risk factors that may effect our business, results of operations and financial conditions. Please be reminded that we undertake no obligation to revise or update publicly any forward-looking statements to any reason.

Now moving to our Q1 fiscal 2008 financials. As we indicated in our press release, we will only be reporting revenue for our Q1 fiscal 2008. Today we reported net revenue for the first quarter of fiscal 2008 was $635 million, an increase of 22% over the $521 million reported for the comparable quarter in fiscal 2007 and a sequential increase of 2% from the fourth quarter of fiscal 2007.

Our Q1 fiscal 2008 revenues of $635 million, was slightly lower than our guidance of $640 million to $650 million. The shortfall in our revenue is primarily due to the desktop and mobile and hard disk drive markets experiencing greater than expected seasonal softness during the quarter.

Although the seasonal weakness is not beyond normal historical levels, the softness in the first half of this year has been more pronounced than the preceding two years, which has experienced much more muted seasonal cycles. The rest of our product families fared reasonably consistent with our expectations.

During the quarter, our Prestera networking products continued to show solid growth, given the market's ongoing transition to gigabit Ethernet. Our XScale processors had a strong first full quarter of shipments, with particular strength with our communication processors for smart phones.

Wireless LAN was down a little from the prior quarter given seasonality in the embedded consumer applications. But is positioned to grow nicely from here, given our pipeline of new design wins that will be ramping during the course of the year.

During the quarter we had two 10% customers, Western Digital and Samsung. While we cannot provide detailed numbers for our gross margin and operating expenses, the following are trends that we experienced during the quarter.

On our Q4 conference call, we had indicated that our Q1 pro forma gross margin percentage would be consistent with Q4. Our actual Q1 pro forma gross margin percentage was slightly better than expected due to our continued strong manufacturing performance.

Operating expenses for Q1 included a full quarter of the XScale business. Our annual salary increases, and the costs related to our internal review of the company's historical stock option practices.

On our Q4 call, we indicated that we expected our operating expenses would increase at a rate slightly lower than our guided revenue growth rate. However, our operating expenses for the quarter ended up slightly higher than expected, due in part to the higher than anticipated ongoing costs related to our internal review of our historical stock option practices.

In other income and expense, our net interest expense was consistent with expectations, but included an other expense was a one-time charge of approximately $5 million to reserve a prior equity investment we held in a private company that had become impaired during the quarter.

Our balance sheet continues to remain strong. Our Q1 cash is relatively flat from Q4, declining $3 million to $593 million. Our accounts receivable and DSOs declined, given improved sales linearity during the quarter.

Our inventory days increased slightly from the prior quarter, due primarily to lower than anticipated revenue shipments this quarter.

Now I would like to turn the call back to Sehat for comments on our business outlook.

Sehat Sutardja

Thanks, Mike. Although, there is some current seasonal softness in parts of our business, we are still focused on our continued solid execution on expanding our world-class product portfolio and advanced technologies, which will position us strongly for growth.

In many of the markets we address, we are in the forefront of some exciting technology growth transitions, which we believe will drive tremendous market growth as well as strong adoption of our advanced solution into those markets.

It is exciting to think about these opportunities at such large in dynamic markets as the cell phone, wireless, optical storage, and video can provide us given our unique technological advantages we can offer our customers.

In the cell phone market, we continue to be very encouraged about the strong execution from an operational as well as on a new product development front. The integration of this new business within Marvell continues to be progressing well and we are receiving very positive feedback from our customers in regards to the products we have recently introduced, as well as our strong road map.

We are also pleased to see strong design activity from new customers who have not historically been focused on the XScale products.

During the quarter, O2 in Europe became another major carrier to launch a 3G phone based on our advanced solutions following the Vodafone launch in February. We also continued to work closely with RIM to support their ongoing product launches and strong business strength.

Also during the quarter, we commenced sampling our first highly integrated single chip communication processor, which combines an HSDPA, 3G based band with a high-speed application processor.

In regards to our application processors, we continue to see diverse design activity beyond just cell phones and smart phones. Our customer base is very large and we have high volume shipments into many different applications such as GPS, PDAs, VOIP phones and a variety of handheld devices for the mobile work force.

Many of these applications are beginning to also incorporate the benefits of wireless LAN and Bluetooth, which bodes well for incremental growth of content and future integration.

In regards to wireless LAN and Bluetooth, we continue to receive very solid design wins and are on track to start shipping our integrated wireless LAN and Bluetooth Single-Chip Solution in high volume in the second half of this year.

Additionally, during the quarter, we introduced a second Bluetooth device with an integrated FM radio. All of our Bluetooth solutions are completely certified to support extended data rates, 2.0.

As the clear leader in the embedded wireless LAN market, we are in a strong position to leverage these designs to now include the Bluetooth and FM functionality. We are seeing great interest and exciting designs in high volume applications, such as MP3 players, cell phones and gaming.

Now moving to gigabit Ethernet, the market transitions from Fast Ethernet to gigabit Ethernet continues to provide us strong growth. This transition, which is sweeping across the infrastructure market is moving from the etch equipment into the home.

Given both the increased use of video and voice-over the network as well as the growing number of network-attached devices such as smart phones and gaming devices, the level of sophistication of the switching equipment is greatly pushing for new levels of intelligence and faster speeds.

As a result, the high volume SMB market is quickly moving from unmanaged Fast Ethernet to smart managed gigabit solutions. These trends play right into our strength and leverage the years of investment we have been placing in our Marvell total solution, or MTS, which combines our advanced silicon with complete software.

We're excited, as we believe we are in the in front of a very strong cycle that will capitalize on the years of investments we have made. In the hard drive market; we continue to expand our clear leadership position by offering our customers the most advanced solution in the market.

Nobody else is coming close to match our intensive level of investment we continue to make in next generation Storage technologies. We have such advanced solutions were enabling our customers to introduce products that lead the competition in aerial density and performance.

Recent product announcements from our customers illustrate the advantages of our technology, as they are able to introduce drives at capacity points, while ahead of their competitors. This quarter, Samsung introduced an industry leading 160-gigabyte per platter, 2.5-inch hard drive, and Toshiba and Samsung have both announced 80 gigabyte, 1.8-inch small form factor hard drive.

One of the critical components that allow such increases in aerial density is our SOC read channel. Our SOC's ability to achieve better signal to noise ratio or SNR allows the hard drive to pack data even closer together on a even drive platter, allowing for higher capacities.

In a commoditized market like the HDD market, such incremental improvements can translate into share gains and improved profitability for our customers. We have always offered SOC's with by far the best SNR, which has provided our customers with measurable advantages in the market.

Once again, we are very excited to announce that we have dramatically increased our SNR advantage with revolutionary technological breakthrough. After over 6 years of internal development, we have now achieved the holy grail of read channel development with the industry-first read channel SOC.

Our patented implementation of these extremely complicated and advanced interactive algorithms will even put our customers to improve SNR and performance, which will allow even greater capacity points and manufacturing yields. We have incorporated this breakthrough technology into our new SOC’s, which will go into production early next year.

Our customers are very excited about the tremendous improvement in performance we will be offering, which will greatly enhance the competitiveness of their products in the market.

Finally before I turn the call back to Mike for our Q2 guidance, I would like to discuss our transition to 65-nanometer technology. While we have not publicized our phone efforts this area, we have made great progress to date. Much of the hard work in transitioning to 65-nanometers is actually largely behind us. Even the up front investment we have made in our 90-nanometer development.

During our 90-nanometer development, we addressed one of the major bottlenecks of any process migration by consolidating our analog processor specifications for both 90 and 65-nanometers. As a result, the majority of our 90-nanometer analog IP cores that we have developed over the past two years, actually maybe upto two and a half years ago, are also easily portable as if to 65-nanometer.

While these initially created an overhead for us during our 90-nanometer development, we are now in a position to reap the benefits, as our 65-nanometer mainly just requires a simple porting of the digital backhand. We're happy to report our initial 65-nanometer designs have been very successful with just a simple blind porting from 90-nanometer and have worked flawlessly.

With this investment behind us, we are in the strong competitive position to offer our customer’s products from both processes that can be optimally selected to meet the market's requirements.

With that, I will now like to turn the call back to Mike for additional comments regarding our financials and guidance for the next quarter.

Mike Tate

Thank you, Sehat. As I mentioned in my Q1 commentary, we are experiencing seasonal softness in some of our markets. Although the seasonality is not beyond historical levels it, appears to be persisting into the second quarter. This seasonal softness is mainly limiting the contribution of our store's revenues and our last quarter as well as into Q2.

Offsetting the seasonality, we expect resumed growth from our consumer wireless LAN products and stable market conditions for our communication and application processors, Prestera networking and printer ASIC products. Based on the above factors, we believe that our Q2 revenues should increase to approximately $645 million.

We expect Q2 gross margin percentage to improve slightly from our Q1 gross margin percentage and our Q2 pro forma operating expenses to again increase at a rate slightly ahead of our rate of revenue growth. Although we are investing in a number of new product initiatives, we also remain focused on controlling our expense growth and expect our expenses to grow at a rate below our rate of revenue growth in the second half of the year.

Now, I would like to turn the call back to Sehat.

Sehat Sutardja

Thank you, Mike. I have one concluding remark. As you know, Marvell recently announced the completion of an investigation into the company's historical stock option practices. As that matter is presently the subject of ongoing litigation, it will be inappropriate and ill-advised for me to comment on any aspect of the investigation and unfortunately, I will not be in a position to field any questions about the investigation during today's call.

I am, of course, pleased that the investigation is over, as Marvell can now move forward with the restatement. We thank our investors for your patience, understanding and most importantly, your belief in the company during this past year.

That completes our commentary. Tammy, could you please poll for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Louis Gerhardy with Morgan Stanley. Please proceed.

Louis Gerhardy - Morgan Stanley

Yes, good afternoon. Can you talk about the outlook for storage and then the consumer and communication business separately for the July quarter, in terms of type of sequential performance from each of those?

Mike Tate

Well, Louis, we don't break them out specifically, but for the hard drive, we are seeing some seasonality in Q2 and it is our expectations for that to be a little soft here in Q2. It does appear that the drive market is facing pretty historically typical levels of seasonality, which we would expect on the second half of the year to, you know, obviously pick back up.

On the rest of the business, we do expect a number of product ramps to commence, starting in Q2 and moving into the back half of the year, especially in the consumer wireless LAN and also continued growth in the application and communication processor business.

Louis Gerhardy - Morgan Stanley

Great, and just a couple follow-ups on your storage business, specifically on the enterprise drive in the July quarter. Would you expect any change in your market share there? And then also, with regards to the new SNR performance and the products that will ramp in 2008, calendar 2008, would you expect your share of the market to increase then?

Sehat Sutardja

Yeah, Louis, so we don't expect any, any changes in the enterprise market share. As you know, we do have a large market share over there. With regards to the new technology, the Ethernet technology that we have just finally be able to show samples to our customers, of course this is a very exciting technology because this is one of those technology that comes, every 10 years or so, and this technology is yet another piece of Ethernet technology that we provide to our customers in the storage business to make them to be more competitive.

So with such an important technology, we do expect and we will work hard to make sure that we'll gain more market shares for next year.

Louis Gerhardy - Morgan Stanley

Thank you.

Operator

Your next question comes from the line of Cody Acree with Stifel Nicolaus. Please proceed.

Cody Acree - Stifel Nicolaus

Thanks. Following up there with some market share talk, can you talk about what you've seen since the integration of XScale? What you've seen in the smart phone market as far as your belief of market share?

Sehat Sutardja

In the smart phones, okay, what I've seen from the sample of new customers there, not just from new customers, from existing customers, as well as new customers, we are gaining numerous design wins as we continue to be the only one in the market that can deliver application processor, high performance application processor, low power targeted for the smart phones.

So a lot customers -- we have even customers that during the transition between acquisition of Intel to the Marvell was concerned about having access to the XScale technology and have mistakenly switch to competitor solutions are now coming back to use our technology because they are seeing that after all, okay, our technology's still are the best in the business.

Now, but that's not the only reason why they are using our technology. The other part is because they are seeing our roadmap, our strong roadmap providing even more advanced processor technology, as well as some of the IPs that we’re developing that can be integrated into the cell phone.

There are not too many companies in the world that can integrate 3G baseband processor together with application processors. In fact, okay, we are the only one to have the highest performance application processor device integrated with a 3G HSDPA baseband processor today. So, we're seeing significant design win activities across the board.

Cody Acree - Stifel Nicolaus

All right, great. And then a follow-up, if I may?

Sehat Sutardja

Sure.

Cody Acree - Stifel Nicolaus

I know that you can only make treasury comments on what's not wrapped up here with the options issues, but can you talk maybe more about the personnel changes, what’s your plan, what's the strategy to fill some of the holes that have been left vacant?

Sehat Sutardja

As we indicated in our prepared remarks, we're not going to be able to go into any details on the current options investigation. The press announce that we had last week goes into considerable detail and we're working on our 10-K filings, which we're hoping to get out soon, which will obviously provide even more color on those.

Cody Acree - Stifel Nicolaus

But not necessarily just the options issue itself, but we've got some fairly significant management holes now, I guess what's the plan, what's the timing, what's the strategy for making sure that those holes are just temporary?

Mike Tate

Obviously, we hope that they are just temporary and we are working obviously diligently to resolve those.

Cody Acree - Stifel Nicolaus

All right. Thanks.

Operator

Gentlemen, your next question comes from the line of Seogju Lee with Goldman Sachs. Please proceed.

Seogju Lee - Goldman Sachs

Thank you. Mike, just wondering if you could talk about the progress of the XScale business in terms of the revenue contribution, as well as the progress you're making in terms of the cost side, in terms of improving the cost structure on the products?

Mike Tate

Yeah, I can cover the, maybe first the progress of migrating the process technology. As you’re all aware the XScale processors were originally developed, they’re using proprietary Intel processes and we are in, we've been progressing, we've been migrating those designs into existing designs. That should be more specific existing designs into the foundry.

And initial samples look very, very promising and we are on target into migrating those devices, especially at the higher volume devices into the foundry. In the meantime, all the new designs are completely designed in the foundry process.

So we are, we are heavily engaged in the developments of 65-nanometers baseband and application processors and advanced processor technologies, new technologies and so on.

So, all those activities are going as planned and as those devices goes into production at the foundries, we will be able to see significant margin improvement, significant cost reductions as well as better capacities, practically unlimited capacity from the foundry. So, you want to cover the…

Sehat Sutardja

Yeah. On the revenue side the baseband is positioned very strongly in the smart phone, class of phones, which is a segment of the market that's doing very well. We're continuing to do very well supporting RIM's growth.

In addition, we are now sampling our next generation HSDPA baseband and the feedbacks in a very positive for that new device. And then also on the application processor side, we announced the Monahan Family in November and we're getting very good design traction with that device and we're expecting a nice ramp of these new application processors in the second half of the year.

Seogju Lee - Goldman Sachs

Great, and in terms of -- you said some preliminary objectives previously in terms of revenues as well as margins. Are we still progressing to hit those as you exit the year, do you think?

Sehat Sutardja

Yeah, we're continuing to see good execution of the business and its consistent with our expectations that we set at the beginning of the year.

Seogju Lee - Goldman Sachs

Great. Thanks.

Sehat Sutardja

Good luck.

Seogju Lee - Goldman Sachs

Thanks.

Mike Tate

Thank you.

Operator

Your next question comes from the line of arrest Arnab Chanda with Deutsche Bank. Please proceed.

Arnab Chanda - Deutsche Bank

Thank you. Hi, Sehat and Mike. It's been a pretty tough time here. I just wanted to have a couple questions as to sort of the future. First of all, I know it's hard for you guys to talk about, sort of targets or models, but what do you think, if you look at the gross margin for the entire company, do you think it's likely that you'll get back to your sort of historical margin model, kind of the revenue and operating margin, gross margin, operating margin kind and sort of what timeframe or may you could update us on that, and I have a couple follow-ups.

Mike Tate

Sure. Yes. Our model is still the same, 50% gross margin and 24% operating margin. We a re on track to, hit the 50% margin, at first and hopefully by the end of this year we achieve that and then the operating margin would be a function of one, our gross margin improving, but also with the revenue growth that we expect given in the different product area we have. So the goal is to hit the operating margin in the near-future, but hopefully towards the end of next year.

Arnab Chanda - Deutsche Bank

Thanks, Mike. A follow up question, may be for Sehat or you both. If you look at your XScale, its no longer Intel. If you look at your or may be your handset business, cellular business, what type of expectations do you have for this year? And it seems like it is going a little bit slower than you thought at, may be at the end, or maybe I'm wrong on that. What do you think the expectations are for this year and then what do you think that type of, what type of growth rate do you think that could experience maybe in the future?

Sehat Sutardja

Actually, as I say earlier, we have, we're seeing a large number of design wins and I want to reiterate that this is a very exciting opportunity for us, because a lot of phones, a lot of customers, a lot of people are more and more interested in providing phones that are smarter, they have more capabilities.

So in fact, our bottleneck actually today is our field application supports to address some of this new design wins, so we are, we are heavily hiring fields support engineers in Asia where a lot of these activities are happening. So we're very excited, okay, because the customers, a lot of people, lot of customers are excited about our products. So it's just a matter of time that I think we believe we'll, we will be able to have the scale to make this business to be a very, very profitable business in the next couple years.

Arnab Chanda - Deutsche Bank

Okay, and last question, again, either for Sehat or Mike, couple of things, obviously there are many issues to address right now, but you had in the past talked about things like optical drives or your video product line or even printers. Could you give us some sense of sort of how those things are progressing relative to what you expect and whether they would be growing faster or slower than your overall company, especially for sort of the calendar year 2008 timeframe? Thank you.

Sehat Sutardja

Actually, there is a conference on the SID. Sometimes this next week or the end of next week. I forget, showing the progress that we will be demoing a bunch of new products such our video technology products or technologies in that conference. So it's for some reason I think the schedule for this conference is a little bit earlier than some of our new products that we are going to plan to announce in the next month.

So in terms of video, video is one very important area for the company to address and we have been investing heavily in this area and some of those technology you'll see in the market and we clearly have a leading edge of the most advanced video technology in the market.

By no means we have completed everything, but by sometime next year, we'll have complete end to end solutions. Okay, what we started, as I said, in previous conference call, we started from the back end, from the video post processing side in terms of developing our technology into the market, because this is the area that we can clearly show, clear differentiation in the market and we'll, we are on our, on our target in introducing the front end side, which is more of a standard requirement.

So this is an important market large market area that we're targeting squarely for our future growth, of revenue growth.

Arnab Chanda - Deutsche Bank

How about optical drives or printers?

Sehat Sutardja

Yeah, optical drives, yes, optical drives, we are on progress. We are working with a couple of customers, as well as we are increasing our resources in firmware activities and we are also, we just also recently sampled our high-definitions implementations of the optical.

So we have a lot of activities in parallel, working on new technology to address the high-definitions optical because the industry will move to high-definitions very, very rapidly. So while we entered this business, this market very, very late, we want to make sure that in high-definitions we're going to be late, especially coming out with highly integrated solutions.

Arnab Chanda - Deutsche Bank

Thanks, Sehat, and congratulations, Mike.

Operator

(Operator Instructions) Your next question comes from the line of Michael Masdea with Credit Suisse. Please proceed.

Michael Masdea - Credit Suisse

Yes. Thanks a lot. I guess with all the talk of seasonality one thing we got used to in the past is of seasonality one thing we got used to in the past is the number of ASP and customer trends, which drove that got rid of the seasonality that you typically see. It seems like we've at least run out of that for the near term. There's something that gets you back to that level where these seasonal trends don’t impact as much in the hard disk drive market?

Mike Tate

Well, for the past five years, we started from a very, very small player in the hard disk drive market and we've been continuing to gain share and we now with the SOC, we're nearly 60% market share. So as we look forward, we still believe with the advanced technology that we, have especially the new technology that Sehat was talking about earlier today that over time we will continue to gain share.

But given the nature of the hard drive market where there's really only six major customers, the remaining share opportunities for us will be a little more spotty, I guess, and at times where we're not gaining share, we will look more like our end customers, which in a typical year has a seasonal pattern, but the positive point is we're largely through the seasonal part now and we look forward to the back half of this year.

Michael Masdea - Credit Suisse

All right.

Sehat Sutardja

We can ease a little bit of the seasonality by giving our customers with a more advanced technology, so hopefully, hopefully these things will be, will be softened a little bit.

Michael Masdea - Credit Suisse

All right. Then I guess switching to the other big chunk of business on the Ethernet side, there seems to be more noise from competition. I guess there's always been noise, but you have on the high-end dollar market park and yet there is also and obviously some autonomies still talking but maybe the Mellanox is the most incremental.

Do you see any changing in the Ethernet market in terms of competition or was it just still more noise and you feel like you're still doing a pretty good job when you looking out into next year?

Sehat Sutardja

Ethernets, I think there are few things that you talk about, so on the enterprise, we talk about the enterprise class switching gigabit, 10 gigabits, terabits, switches, backplane, we're absolutely the clear leader in this market.

We have the most complete, diverse solution in this market from the fundamental space all away to the small the pizza box stackable solutions. We absolutely have the most complete and the most efficient implementation at, for the entry level to the most advance solution in the metal space.

Now, you also mentioned about, one of our competitors in the Wi-Fi space, so in the wireless space, as you're aware, the Wi-Fi consortium, I guess, how do you call it, consortium, or just basically announced that Marvell 802.11n Draft 2.0 is chosen one of the primary test bed for testing for all the Wi-Fi chips in the market.

So the reason we got chosen that is because and for us it’s a test bed is because we have the early company they had contributed to the Wi-Fi certification standard committee in terms of standardizing the 802.11n, so obviously we have technologies there. They are considered to be world class in this market.

Now, we have various products to address this market. Not just from the highest end, but also we have the most diverse solutions for the embedded space, for the, cell phones, for the handheld gaming devices, so we don't see anybody else in the embedded space that comes close to us.

Michael Masdea - Credit Suisse

Got it. Thank you.

Operator

Your next question comes from the line of Craig Ellis with Citigroup. Please proceed.

Craig Ellis - Citigroup

Thanks, guys. I wanted to shift the attention over to the wireless LAN and just see if you could comment on the relative growth prospects you see across a couple of the key applications, whether they beginning embedded in the hand set and retail, et cetera, as you look out over the rest of calendar 2007.

Sehat Sutardja

The opportunity for wireless obviously in both in the PC space, the router space for the home and the biggest and eventually the largest opportunity will be for the handheld devices. So for cell phones, we're talking about cell phones, we have lots activity in cell phones.

We're talking about; we've also been talking about MP3 players. We have quite a few customers implementing our Wi-Fi, embedded Wi-Fi solutions for MP3 players. We're talking about VOIP phones for the home, replacement for cordless phones for the home, phones that can go to the Internet.

So those are the opportunities that we're talking about. Now, the technologies are here actually, so what's, what caused the bid markets to move maybe not as fast as we all like to see is the software porting platforms for all the different market and this is one of the largest investment that we have to put in the Wi-Fi. Actually it's not in the silicon development.

Actually it's in the, in the software side and we've been investing in this over the last several years and we think as more and more products are introduced in the market we'll have a better position to reap the benefits of seeing this Wi-Fi technology get into this high volume markets.

Craig Ellis - Citigroup

Sehat, is it possible just comparing contrast under the growth opportunities you see this year? You mentioned MP3, cordless phone, et cetera, but what are some of the incremental drivers from here as you look out over the rest of the year?

Sehat Sutardja

I think it's mainly executing for us is just executing design wins and delivering incrementally into some of the markets that we need to play as much in the past, okay, integrating Bluetooth into more of devices. Remember, we historically we never played in the Bluetooth segment. This one a mistake, there probably if you can call it mistake, one of the things that we forgot to focus on in the several years ago it was in the Bluetooth side.

Now we have proven, proven technology and fully certified technology. So this is one of the areas that we need to focus more, more integration, more functionalities to address some of the markets that we never have played earlier.

Craig Ellis - Citigroup

Okay. That makes sense. Then switching to manufacturing, can you just provide some color on how we should expect the mix shift from 90 towards 65 to evolve over the next three to four quarters?

Sehat Sutardja

Thank you. Sure. I have touched that earlier. Okay. Our strategy of migrating our process migration is in the 90 and 65-nanometers actually to consolidate the design activities into, into designing all the IPs that are needed, specifically, more importantly the analog IP so that the same designs can be used both 90-nanometers and 65-nanometers.

So we have this unique strategy and we didn't want to talk about it several years ago because this is one of the key strategy that we have put in place so that we can, so that we could jump into a 90-nanometer quickly, as well as not falling behind when 65-nanometer becomes more mature.

65-nanometer process get matured a little bit sooner than the industry had expected, but luckily we had placed the strategy early on so we would not get caught in a surprise by the early maturity of 65-nanometers. So what we have done is basically for chips, they are not that limited. We will move to 65-nanometers.

For chips, they are in fact limited specifically for like majority of the products that we built in the storage they are basically limited 90-nanometers, so if we move to 65 nanometer we're not going to be able to save any costs to date. But as we implement interactive technology, which is a lot more complicated, those can be used, those can be implemented in 65-nanometer to leverage the dye size shrinking in the logic side.

So, so we actually feel very, very comfortable now as we have, as we can optimize our solutions either in 90-nanometer to 65-nanometer depending on the markets there we are targeting.

Craig Ellis - Citigroup

And can you quantify what percent of revenues might ship on 65, either exiting this year or some other milestone?

Mike Tate

Surprisingly, the majority of products we're shipping are still products that were built like three years ago. Some of the higher, highly integrated Wi-Fi, embedded Wi-Fi chips that we built more than two years ago in 90-nanometer are just only starting to ramp.

Sehat Sutardja

Right.

Mike Tate

So, the percentage of the 90-nanometers, or 65-nanometers is actually a small percentage this year, but sometimes next year, it will be significantly a lot more.

Sehat Sutardja

Yeah, the design cycles in a lot of our markets are up to 18 months, so now it's getting the silicon into the customer’s hands, but the revenue will start a little into next year.

Craig Ellis - Citigroup

Thanks very much, guys.

Operator

Your next question comes from the line of Allan Mishan with CIBC World Markets. Please go ahead.

Allan Mishan - CIBC World Markets

Hey, guys. Could you let us know if you're shipping into any large hard disk controller customers, any new ones, and if not, if that could be a factor for you in the second half of the year?

Mike Tate

On the enterprise server drives, we do expect overtime to continue to gain content. But we don't specifically talk about our customers and there's really only really three customers in the enterprise side, so it's a difficult position to speak.

Allan Mishan - CIBC World Markets

Okay. And then on the gigabit Ethernet side, your chief competitor there has indicated they’re likely to lose share. Is that share that you could pickup, or is that share that Intel would have independent of you?

Mike Tate

What’s it? I didn't hear that. What was the question?

Sehat Sutardja

This is on the gigabit client side.

Mike Tate

Okay.

Sehat Sutardja

Yeah, on gigabit client, we continue have a very strong relationship with Intel and we also have a lot of success with our UCONN products into the PC OEMs as well, so we think we're holding or gaining share in that market.

But keep in mind the market adoption of gigabit is largely run course in the client market, so that market in itself is not really a growth market for us.

Mike Tate

I think in terms of probably you're talking about the revenue?

Sehat Sutardja

Right, right.

Mike Tate

The number of units will gain market share?

Sehat Sutardja

Right.

Allan Mishan - CIBC World Markets

Okay. Thank you.

Operator

Your next question comes from the line of Chris Caso with Friedman, Billings and Ramsey. Please proceed.

Chris Caso - Friedman, Billings, Ramsey

Hi, thank you. Guys, I wondered if you could clarify, given that you haven’t seen seasonality or I guess, what we consider typical seasonality in the storage market for a while. What do you guys consider the typical seasonality in the storage market?

Is it for the second quarter, is that inline with what we kind of think about PC units down sort of low single digits sequentially?

Mike Tate

Typically for the hard drive market, the Q1 has the bigger drop. It's going to be down 7 to 10% historically and Q2 would be down maybe 2 to 5% historically and then you see the back half of the year pickup.

The past two years have been a little more muted, as you have seen DVRs and gaming and handhelds, the video iPODs these types of device adopt hard drives kind of offset the normal seasonality, but this year you're seeing that will be more typical.

Chris Caso - Friedman, Billings, Ramsey

Okay. And then that down 2 to 5% then would be a fair assessment of what you guys are expecting for this upcoming quarter for you?

Mike Tate

For the industry, yeah. We have a mix. We're across the enterprise, the laptop and the desktop. The enterprise market is actually, doesn't exhibit those types of seasonal trends and it's actually reasonably healthy in the first half of the year.

Chris Caso - Friedman, Billings, Ramsey

That's very helpful. Just as a follow-on, I know you guys had been qualifying some foundry product in your handset business to augment some of the capacity constrains that you were facing from Intel, could you give us an update of just the progress of that in terms of your manufacturing and in terms of the qualification?

Do you expect to get some revenue and handsets out of the products that Intel will ship to you this year?

Mike Tate

I think we have seen samples in-house, so very, very promising. Either we have shipped samples to customers, or we’re about to ship the samples to customers. I'm not so sure, but the progress so far is very, very promising.

We're talking about existing products. They were design and manufactured with Intel’s fab now moving to the foundry. So that's very, very promising.

In terms of new designs, the new designs, as I say, they are all 100% from the ground up using the foundry process. So we'll be taking out quite a few products this year in the 65-nanometers at the foundry.

Chris Caso - Friedman, Billings, Ramsey

Okay. And just as a clarification, the products that are coming to the foundries that are I guess copies of the existing Intel designs, will that require a full qualification or, will that be somewhat expedited on the part of customers?

Sehat Sutardja

Okay. Yeah, so the product initially is exact identical, exact identical logic functionalities, so we didn't even try to save, try to optimize the dye size, because we can maybe improve the presence also. So we just purely simply porting the process so that the qualification that comes from the customer is, with zero effort, basically it's qualifying the fab instead of qualifying the product.

So we have already done phone calls, even three or four months ago in-house in our lab. So we are very confident that qualifications should be very, very straightforward from our customers.

Chris Caso - Friedman, Billings, Ramsey

Okay, great.

Sehat Sutardja

Without changing software.

Chris Caso - Friedman, Billings, Ramsey

Okay, great. Thank you.

Operator

Your next question comes from the line of David Woo with Global Crown Capital. Please proceed.

David Woo - Global Crown Capital

Yes, good afternoon. Sehat, can you just maybe answer two questions. The first one is I didn't understand whether the HSDPA base span in the application processor that you are sampling, are they two dyes on one chip, or are they integrated at this point already? That's the first one.

The second one is regarding application processes, when you go to the customers and using the XScale, which is I guess a superset of the ARM chip, do you run into issues where it's not a standard ARM and, they are, ARM-7 are nice kind of how many ARM there are that have come out that sort of a standard plain vanilla ARM, is that an issue, and what do you think about those Intel effort to get back into the smart phone business through a low power X86?

Sehat Sutardja

Okay. So I think there are three questions, so the first one, what was the first one again?

David Woo - Global Crown Capital

It is the single chip

Sehat Sutardja

Okay, all right. The answer to that is very clear. If it's a single chip device, one dye consisting of a stand alone application processor with integrated HSDPA edge, basically full, full 2G, 3G modem in a single piece of silicon. So it's not a 2-chip solution. A 2-chip solution, we already have actually its shipped, we have been shipping it a 2-chip solution for quite a while, already. This is the first time we have shipped very high performance application processor together with HSDPA functionality.

David Woo - Global Crown Capital

I see. So that's currently sampling?

Sehat Sutardja

That's correct. Currently sampling, making phone calls in IOT, progressing very, very well. And we will expect customers to be shipping in volumes by the end of the year.

David Woo - Global Crown Capital

In the one Chip?

Sehat Sutardja

One Chip solution.

David Woo - Global Crown Capital

Yeah. And how about versus the standard vanilla ARM application processes and what do you think about that Intel low power X86?

Sehat Sutardja

Okay.

David Woo - Global Crown Capital

Smart phone?

Sehat Sutardja

The XScale processor is an internally developed processor architecture utilizes the ARM instruction set just like the Feroceon processor that we developed at Marvell originally in the last five years. Also, it's a processor architecture, family of processor architecture that utilized the ARM instruction sets. So in terms of the instructions, they are fully compatible with the standard instruction sets.

XScale, however, incorporates enhancement over the standard ARM processor, namely in the areas of video signal processing, image processing through the adoptions of the wireless MMX instructions that Intel originally developed for the PC desktop.

In fact, if you look at the instruction sets for the MMX of the desktop versus the XScale wireless MMX they are very, very close and that's the reason why it's a lot easier for the customers to port the video signal processing algorithms that people have developed in the PC space into the XScale platform.

So that provides our customer with improved performance at the same megahertz. Now, on top of that, XScale is designed from the ground up to be higher frequency, to operate that frequency, as well as today is the only processor, processor out there that have advanced power management capabilities. So be able to sleep, I mean to have very low standby power, at the same time be able to run at high frequencies when needed.

So if you look at the RIM, example of the RIM smart phone, you open up the battery and when it compared to -- the size of the battery compared to the size of the battery from competitors that used -- other people that use competitors application processors, you will notice that the battery is about, typically it's about half the size of competitor solutions.

At the same time, the standby power is like many, many times longer than the competitor solutions. So, the main difference is really between XScale and ARM, between XScale of Feroceon and ARM processor, really just the implementation. How we implement the architecture of the processor. The instructions, whatever runs on ARM processors, whatever runs on ARM processor will run on both on XScale and Feroceon. So we just provide them with better processor. What was the other one?

David Woo - Global Crown Capital

Intel is talking about coming out with this silver phone, which I guess is the Ultra-mobile PC kind of smart phone, smart phone application that supposedly is going to run Windows in a full scale as opposed to somewhat of a compromised Windows environment right now on ARM processors.

Sehat Sutardja

We are obviously aware of that activity, but before we acquired the XScale business from Intel. So I mean they were not hiding their wish to focus on the IA architecture across the board. So, the way we look at it, the market is quite different. The XScale class of processors targeted for truly ultra low power application versus the IA targets more for application that will require software compatibility to the PCs.

If you do not meet software compatibility with the PCs you do not want to tie yourself to SIS architecture. In the RIS architecture, inherently the RIS architecture have power advantage compared to SIS architecture just because RIS architecture were designed a lot later than the SIS architecture, as well as the RIS architecture were designed from the ground up, not worrying about network compatibility with all instruction sets, they tends to be not efficient. If you look at the RIS, I can go on and on.

I'll give you an example. RIS architecture typically the processors are designed with larger number of registers in registered file versus in the SIS architecture you typically have limited number of registers and as a result, the efficiency, the bits per megahertz, a RIS architecture typically is much higher for a given number of gates compared to a SIS architecture.

You can always make the SIS architecture to be equal performance as RIS architecture but typically requires about 3 to 4X the number of gates. So if you have the same smart number of engineers working on RIS and SIS. If the SIS guys can develop processor to run at X megawatt, then RIS guy will be able to get a quarter of that. So that's kind of range that. The fundamental range that you will see; the difference within the SIS and RIS architecture and obviously we are focusing on the cell phone, truly handheld portable applications.

David Woo - Global Crown Capital

Thank you.

Operator

And this is all the time we have for questions today. I would now like to turn the call back over to Dr. Sutardja for closing remarks.

Sehat Sutardja

Thank you, Tammy. This completes our Q1 fiscal year 2008 conference call. I would like to thank you all of you for joining us, and look forward to updating you next quarter. Thank you.

Mike Tate

Thanks.

Operator

Thank you for attending today's conference. This concludes the presentation. You may now disconnect, and have a great day.

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