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Executives

Dr. Sehat Sutardja - Chairman of the Board, President, Chief Executive Officer

Michael Rashkin - Interim Chief Financial Officer, Vice President

Analysts

Cody Acree - Stifel Nicolaus

Seogju Lee - Goldman Sachs

Craig Ellis - Citigroup

Shawn Webster - J.P. Morgan

Romit Shah - Lehman Brothers

Uche Orji - UBS

Shaw Wu - American Technology Research

David Wu - Global Crown Capital

Marvell Technology Group Ltd. (MRVL) F3Q08 Earnings Call November 27, 2007 4:45 PM ET

Operator

Good afternoon, everyone and welcome to Marvell Technology Group Limited third quarter fiscal year 2008 financial results conference call. Participating on today’s conference call are Dr. Sehat Sutardja, Chairman and CEO; and Mike Rashkin, Marvell's Interim Chief Financial Officer.

Before we begin the call, I would like to remind all participants that the discussion today 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 sales trends, revenue growth, gross margins, operating expenses, other income and expense, cash accounts and receivables, and inventory.

Such statements are usually preceded by words like expects, anticipates, believes, should, will, may, or words with similar import and actual results could differ materially from current expectations.

To understand the risks that cause results to differ, please refer to Marvell's 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 important risk factors that may affect Marvell's business, results of operation, and financial conditions.

Please be reminded that the company undertakes no obligation to revise or update publicly any forward-looking statements for any reason.

In addition, this presentation includes non-GAAP financial measures with respect to historic information. The most directly comparable GAAP information and reconciliation between the non-GAAP and GAAP figures is provided in Marvell's Q307 press release, which has been furnished to the SEC on Form 8-K and is available on Marvell's website in the investor relations section and at www.marvell.com.

With respect to prospective information, the most directly comparable GAAP information and a reconciliation between the non-GAAP and GAAP figures is provided on the website in the investor section.

In addition to disclosing financial results calculated in accordance with GAAP, Marvell also reports non-GAAP measures. Marvell's management believes that non-GAAP information is useful because it can enhance the understanding of the company’s ongoing economic performance and Marvell therefore uses non-GAAP reporting internally to evaluate and manage the company’s operations. Marvell has chosen to provide this information to investors to enable them to perform comparisons of operating results in a manner similar to how the company analyzes operating results.

Non-GAAP measures exclude the effect of stock-based compensation and amortization of acquired intangible assets.

I would now like to turn the call over to Dr. Sehat Sutardja. Please go ahead, sir.

Dr. Sehat Sutardja

Thank you, Antoine and welcome everyone to our third quarter fiscal 2008 conference call. Joining me on today’s call is Mike Rashkin, our Interim Chief Financial Officer.

This quarter we have achieved record revenues and reached a $3 billion annual run-rate. Our Q3 revenues, operating margins and earnings per share have each exceeded our expectations.

Our Q2 revenue of $758 million represents a year-over-year increase of 46% and a sequential increase of 15% from the prior quarter.

Last quarter, we had guided our Q3 revenues to approximately $710 million. However, as a result of very strong customer demand in our major markets, our Q3 revenues greatly exceeded those expectations. The overall market demand for our products continues and we expect further revenue increases in Q4, which Mike will detail in a moment.

As we indicated in our Q2 call, our increasing sales trend is a result of our investment in a broad range of technologies and from our ability to efficiently integrate these technologies into superior products across many markets.

Despite the significant increase in revenue this past quarter, our operating expense level remains outside the parameters of our financial model. So we are taking action to reduce operating expenses through a reduction in force that was announced today, which we expect to complete in the fourth quarter.

I would like now to turn the call over to Mike for a detailed look at our financial results for the quarter. After that, I will discuss what we are doing in some of our businesses, the solid progress we are making, and the growth drivers in place to continue our momentum into fiscal year ’09. Mike.

Michael Rashkin

Thanks, Sehat and good afternoon, everyone. As Sehat mentioned, earlier today we reported that net revenue for the third quarter of fiscal 2008 was $758 million, an increase of 46% over the $520 million reported for the comparable quarter in fiscal 2007, and a sequential increase of 15% from the second quarter of fiscal 2008.

Our third quarter revenues exceeded our guidance of $710 million on particularly strong sales in certain businesses registering strong quarter-to-quarter gains. Non-GAAP net income for the third fiscal quarter was $86 million, or $0.14 per diluted share, compared with fiscal Q2 non-GAAP net income of $40 million, or $0.06 per diluted share.

Our non-GAAP tax rate for the quarter was minus 8%, and is about 6% year-to-date. The rate declined dramatically in Q3 as a result of a settlement of a foreign tax audit during the quarter and a reversal of previously reserved taxes.

For comparison purposes, fiscal Q3 non-GAAP EPS, if normalized at the Q2 tax rate of 19%, would be $0.10 per diluted share, representing an increase of 62% quarter to quarter.

Shares used to compute non-GAAP earnings per diluted share for Q3 fiscal 2008 were 631 million, slightly over the 630 million shares used for the prior quarter.

Net loss under GAAP for Q3 fiscal 2008 was $6 million, or approximately $0.01 per diluted share, compared with a net loss under GAAP of $56 million, or $0.10 per diluted share for the prior quarter.

Now I will speak to the performance of some of our growth drivers for this quarter. We are very pleased with our Q3 results in storage. Overall we have experienced strong demand for storage products across all customers and market segments, with revenue for hard disk drive related products growing 16% from Q2. The majority of the growth is driven by the demand for 2.5-inch notebook drives at some of our major customers.

For our wireless LAN business, the third quarter was a record quarter both in terms of revenue and of units shipped. Begin seasonally the highest quarter of the year, Q3 saw revenue grow over 200% year over year and over 50% sequentially quarter over quarter. We have maintained our leadership position in the invented wireless space and products such as handsets, portable media, imaging devices and gaming.

For our 802.11n products, we have secured leading tier one design wins for our enterprise class wireless solutions, as well as for consumer class gateways.

In the printer business, we continued to be a leading SOC supplier. For the quarter, we exceeded our revenue plan in this area and achieved record shipments of platform components for both laser and ink products, with over 20% quarter to quarter revenue growth.

In the cellular and handheld business, momentum continued in the third quarter as product shipments exceeded our plan, delivering quarter-over-quarter growth of about 10%, driven by strong customer demand and growth in the application processor business.

Let me talk a moment about our gross margins. You will recall that on our Q2 conference call, we’d indicated that our Q3 non-GAAP gross margin percentage would be slightly higher than 48%. Our actual non-GAAP gross margin percentage was 48.3% versus 49.4% in the prior quarter.

Consistent with the prior quarter and as described in our 10-Q, our gross margin included the fair market value adjustment of inventory that was supplied under the agreement with Intel. The gross margin impact of this fair market value adjustment in Q3 declined by approximately $17 million quarter to quarter. This decline was greater than expected and offset an otherwise strong margin performance resulting from favorable product mix and cost improvements.

The cost improvements are part of initiatives begun in Q3 to improve our gross margin by managing our costs, controlling our ASPs, and improving our operational efficiencies. We expect to see some impact in Q4 and even greater impact in FY09. I will indicate the impact of these changes in our guidance section.

Our non-GAAP operating expenses for the quarter ended up slightly higher than expected, due mostly to legal expenses of approximately $9 million related to the ongoing SEC inquiry and litigation regarding stock option matters. We expect that these expenses will decline as we resolve these outstanding actions.

As you know, these matters are subject to ongoing litigation and we will not be able to discuss them any further today.

Further, in order to control costs and operating expenses and meet our financial targets, today we announced the reduction in force that will reduce headcount by approximately 400 people, or 7% of our total workforce. We expect to take a one-time charge of up to $8 million in Q4 related to severance and other expenses due to this force reduction.

We expect the reduction in force will reduce operating expenses by approximately $10 million per quarter once implemented. Of course, it is difficult to announce changes to our workforce but we have done this with the utmost care and respect for the hardworking and talented individuals involved.

Our other income and expense of $6 million was consistent with expectations and a breakdown of the components of other income and expense has been posted on our website.

Our Q3 cash and short-term investments increased from Q2 by $33 million from $496 million to $529 million, primarily due to increased stock option exercises and operating income net of capital expenditures. Our Q3 account receivable DSO was 46 days, an improvement from the last quarter due to the greater-than-usual linearity in sales.

Our inventory increased from the prior quarter by $86 million, primarily due to the advance purchase of inventory under our Intel supply agreement. Under our current forecast, we continue to believe this inventory will be utilized under our normal operations. Excluding the Intel inventory, inventory turnover in fiscal three -- Q3 fiscal 2008 showed steady improvement.

Before discussing our guidance for the fourth quarter, let me turn the call back over to Sehat to discuss our longer term growth drivers.

Dr. Sehat Sutardja

Thank you, Mike. This really is an exciting time for Marvell. We are executing on all cylinders and we have real and achievable goals. As we move forward, we are well-positioned to continue our upward sales trend in Q4 and growth drivers are in place to continue that growth in fiscal year 2009.

Let me give you an idea of some of the newer things we are working on and the progress we are making.

In the storage market, next year we will be in full production for our iterative technology, which we announced in earlier calls. We have been sampling a standalone iterative base re-channel to our customers for over 10 months now and this quarter, we sampled a hard disk drive SOC utilizing this iterative technology.

To put this in perspective, using our previous generation re-channel SOC technology, which we introduced a year ago, today our customers are able to ship a one-terabyte drive in a three-platter configuration. The three-platter configuration is the most cost effective solution as opposed to competitive solutions that require four or even five platters to achieve the same one-terabyte capacity.

With out iterative SOC, our customers will be able to deliver a two-terabyte solution in the same three-platter configurations just one year from now. We consider this to be one of the most revolutionary technology breakthroughs in the storage industry. We believe these advances in the storage area will enable strong growth for these products well beyond non-traditional storage for PC products.

As a result of our strong execution in the drive space and our ability to deliver industry-leading solutions to the market significantly ahead of our competitors, in the traditional segments of our customer base, we have now captured all the new designs for product that will be going to production next year.

We feel confident that we can maintain double-digit growth year over year. We expect our shipments to continue the momentum of Q3 into Q4, due to the success that our customers are having.

Now, moving to a new part of our storage business, in Q4 we will start shipments of our serial attached SCSI host-bus controller or adapter. This business is a new area of focus for us and we are confident we can succeed by introducing significant technology advancements into this market.

Moving to optical storage, the optical storage market is one of the biggest markets for us to tap into. As we have announced in the prior quarters, we have design wins for our optical SOC products. We continue to show progress on the software side with our customers in preparation for volume ramp in the next year.

To complement our optical strategy, we have invested in the video processing area. Our technology in this area will enable the delivery of high quality HDTV content into the mass market. One of the first products we announced in this area is our video format converter with QDO technology.

In the short time since we announced QDO, we have made significant progress in market acceptance. The visibility of QDO technology has increased dramatically over the last quarter as we have garnered endorsements from leading industry experts.

More recently, Meridian, the industry-leading video equipment supplier, became the first adapter of the QDO branding. Furthermore, four of the top consumer electronic brands, LG, Panasonic, Pioneer, and Sharp have all demonstrated products that incorporate QDO technology.

We have high hopes that in the future, this technology will become standard in all forms of video devices.

I also want to take a minute to talk about an initiative we recently announced that I believe has enormous potential for Marvell.

For those of you who have known us for a long time, you know that Marvell has a proven track record of using breakthrough innovations to enter mass markets. Our success in the storage industry is an excellent example of where we have done this in the past. In that vein, earlier this month Marvell introduced a new digital technology for power supplies that saves energy and helps reduce the issue of carbon footprint for today’s consumer electronics.

This truly is a technological and environmental breakthrough. We are pleased to say that after five years of development and research, Marvell is able to offer cost effective solutions to our customers that will save up to 50% of power currently being used by consumer electronics.

While existing solutions to conserve energy are currently available, these analog solutions have not been broadly implemented due to the additional significant cost. At the same time, the analog solutions were impractical as they increased the size and weight of power supply adapters for portable applications, in many instances doubling the size of the adapter. Our technology solves these problems.

We believe the market opportunity for our digital power supply products is huge. It’s simple to understand if you look at the number of power supplies utilized by virtually every consumer electronic device from PCs, LCD TVs, set-top boxes, cable DSL modems, printers, and more. There are almost a billion products manufactured every year that could use our technology.

Marvell more than any other company is uniquely positioned to capitalize on this enormous market opportunity and we are actively engaging with public and private stakeholders to raise awareness of this important issue and what we can do about it. We have long supported green technologies and it is our hope that Marvell's smart energy efficient technology will eventually be used across all types of consumer electronics.

We are confident that the initiatives I just discussed will extend our technology and leadership and undoubtedly enhance our ability to compete in the marketplace.

Now Mike will discuss our fourth quarter guidance.

Michael Rashkin

Looking to the fourth quarter, we expect our storage sales to improve over Q3 as a result of continuing customer demand and consumer electronic seasonality. In addition to strong PC sales, this continuing demand is caused partially by the proliferation of hard drives into non-traditional applications, such as PVR security, DVD recorders, external storage for attachment, to all kinds of devices and other peripheral or non-computing applications.

Likewise, we expect continuing growth in our ethernet infrastructure and connectivity business segments. After a seasonally high Q3, we expect our wireless business to be relatively flat.

Based on these expectations, we currently believe that our Q4 revenues will be approximately $780 million. We also expect our gross margin percentage to improve 40 basis points over Q3, despite even less benefit from the fair market value adjustment with regard to Intel inventory.

As a result of our gross margin improvement initiatives, we expect to see gross margins of 50% by the second half of FY09. We expect our pro forma operating expenses in Q4, a 14-week quarter, to remain approximately at Q3 levels when normalized for an extra week, excluding the charges related to the reduction in force and certain payroll tax expenses of up to $6 million related to our recently launched tender offer.

As indicated by the reduction in force we have announced today, we remain focused on controlling our expenses and expect our expenses to grow at a rate below our rate of revenue growth for fiscal ’09. Shares used to compute non-GAAP net income per diluted share are expected to increase to approximately $640 million for Q4.

With that, let me turn the call back over to Sehat.

Dr. Sehat Sutardja

We will turn to Q&A in just a minute, but first let me briefly discuss a few other items.

We are, as you know, actively engaged in searches for a permanent CFO and a permanent General Counsel, and these searches are ongoing. When we are prepared to make an announcement on either of these positions, we will do so.

So as you have seen, we have achieved record revenues, taken serious action to improve our gross margins and control operating expenses, and our tax rate has declined. And with the growth opportunities I have outlined, we are well on our way to achieving our financial goal.

Antoine, could you please poll for questions?

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Cody Acree with Stifel Nicolaus.

Cody Acree - Stifel Nicolaus

Thank you and congrats on a good quarter. Can you talk a little bit more in detail about when you expect to start seeing some benefits from the reduction in force efforts? It sounds like $10 million per quarter but when do we start to bake that into the model?

Michael Rashkin

We are going to see some benefits in Q4. We expect to see a reduction in expenses of about $4 million in Q4, and then in Q1 we will see the full effect of $10 million.

Cody Acree - Stifel Nicolaus

Great. The gross margin impact, if you excluded the $17 million write-down of the inventory, if that was the right number, could you give us that net amount, what the gross margin would have looked like excluding that?

Michael Rashkin

I think the $17 million translates into almost 2.5%, almost 2.5 margin points.

Cody Acree - Stifel Nicolaus

So that would be -- that’s a clean number then, 2.5 points higher?

Michael Rashkin

That is correct.

Cody Acree - Stifel Nicolaus

Okay, great. And then lastly, we’ve seen shortages in some areas of hard disk drives throughout the quarter. Has that had any impact on your order trends, on your customer base? Is that playing any into what you expect out of next quarter’s outlook?

Michael Rashkin

No, we don’t see shortages as being a problem. Maybe you’re referring to the double ordering issue that has been raised and we don’t see any of that in our markets. Our customers are we feel some of the most efficient in the world at managing their inventories and the parts that we build for them, especially in the storage area, are custom parts so there’s no need for them to be double ordering.

Cody Acree - Stifel Nicolaus

And then very lastly, we didn’t get an update specifically on the progress of porting over to TSMC. Could you give us maybe a little help there as to when you’d expect to start to get the margin benefit of that?

Michael Rashkin

We have ported products over. Where they are is basically in qualification with the customer and in the cell phone industry, it’s difficult because it’s not only the people we’re selling to but their carriers and so this process is moving along and we expect to ship -- we hope to ship this quarter some TSMC parts and then we expect a higher volume production in Q1.

Cody Acree - Stifel Nicolaus

All right, perfect. Thanks, guys.

Operator

Your next question comes from the line of Seogju Lee with Goldman Sachs.

Seogju Lee - Goldman Sachs

Thank you. Just to clarify on the OpEx and the tax rate guidance for next quarter, when you talked about the OpEx being flat in third quarter from an -- you said something about a normalized rate. Can you help me think about that? Is it $280 million or how should we think about that?

Michael Rashkin

Sure. By a normalized rate, we are meaning taking a look at it as if it were a 13-week quarter instead of a 14-week quarter, so we are looking at operating expenses of approximately $283 million on a normalized basis.

Seogju Lee - Goldman Sachs

Okay, great. And then what is the expected tax rate for the fourth quarter?

Michael Rashkin

The expected tax rate, we’re looking at somewhere about 10%.

Seogju Lee - Goldman Sachs

So you get back to your old traditional model and all the past items that you were expecting in this quarter are resolved?

Michael Rashkin

You know, in terms of the way that the tax rates are now computed under FIN-48, it’s something that we have to look at on a quarter by quarter basis. It depends on the income in the quarter, the expense in the quarter, reserves, and any particular events that occur that affect taxes for the quarter. So this particular quarter looking forward we think is going to be about 10% but that rate can vary from quarter to quarter.

Seogju Lee - Goldman Sachs

Okay, great. And then just two last questions for me; you talked about getting to gross margins of 50% as you get into the second half of fiscal ’09. Can you talk about the drivers there?

And then, just in terms of the OpEx as we look at the first quarter, if I think you are having $10 million of savings, should we think that would be $10 million off the $280 million base, right?

Michael Rashkin

Right. So first, let me handle the gross margin question; gross margins is something that have become a central focus of the company. We look at it from an operating viewpoint, from a design viewpoint and we’ve made a very determined effort to approve gross margins by looking at operational efficiencies, such as improving the way we do our testing, buying better equipment, the way we do packaging. We’ve also looked at it from the point of view of controlling our costs by working with our vendors and also by managing ASPs by working with our customers. And we think that these initiatives are starting to have an impact and each quarter it’s going to get a little bit better. And we think by the second half of the year, we will be at 50%.

And in terms of the operating expenses, right now it’s a little too early for me to give you an indication of whether we could just take the number for Q4 and reduce it by $10 million to come up with the expenses of Q1, so I think I’m not prepared to make any comment on that at this point.

Seogju Lee - Goldman Sachs

Okay, great. Thank you and good luck.

Operator

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

Craig Ellis - Citigroup

Thanks. Guys, can you just clarify how you are looking at staffing plans for fiscal ’09, given the reduction in force? Does that mean that staffing adds are on hold for a period? How should we think about that?

Dr. Sehat Sutardja

In general, [we have now] become sensitive in terms of launching new programs that are more of a long-term basis. In the past, we had no choice to do that because the rapid acceleration, the consolidation of the industry, so we have to invest in many different areas simultaneously.

So we have invested significantly over the last say year or two years, and we felt that the things that we have on hand are sufficient for us to deal with, to drive our revenue growth in the next couple of years. So we don’t -- I don’t personally feel that we need to increase our headcount on the general basis.

We may have to hire very specific areas that we -- like critical mass, otherwise we will -- our goal is to control the rate of growth of the hiring.

Craig Ellis - Citigroup

Okay, that’s helpful, Sehat. Michael, on the inventory side, the increase in the quarter was higher than I would have expected. Is there any risk of obsolescence, given the volume of or the amount of inventory that you now have on the balance sheet?

Michael Rashkin

Most of that inventory, I’d say $50 million of that increase in inventory related to inventory, advance purchase of inventory under our supply agreement with Intel. The rest of it was just normal inventory growth as a result of our large sales.

With regard to the Intel inventory, based on our forecast and design wins that we have, we feel that we will be using that inventory for our normal operations.

Craig Ellis - Citigroup

Okay, that’s helpful. Thanks, guys and congratulations on the quarter and the gross margin progress.

Operator

Your next question comes from the line of Shawn Webster with J.P. Morgan.

Shawn Webster - J.P. Morgan

Thank you for taking my question and good results for the quarter. Can you talk to us a little bit about order linearity as we go into Q4? You talked somewhat about storage being seasonal. Have you seen changes in your order patterns as you’ve gone through the month of November? And I guess the context is that with the general anxiety out in the marketplace about what’s happening in the demand environment, if you could give some color on how orders are tracking there.

And then as a follow-up to that, what was your headcount for the quarter? And as we go into Q1, do you expect your headcount to be down that 700 heads from where we are today? Thanks.

Dr. Sehat Sutardja

I just want to clarify; it was 400.

Shawn Webster - J.P. Morgan

I’m sorry, 400, yes.

Dr. Sehat Sutardja

Seven percent, approximately.

Michael Rashkin

With regard to linearity, in Q3 we had extremely good linearity from the point of view that our shipments in the first two months of the quarter were much greater than general, and that as we go into Q4, our backlog in Q4 and as we ended Q3 is also very strong.

So with regard to the headcount, your question is what is the headcount at the end of -- as of this moment?

Shawn Webster - J.P. Morgan

Yeah, at the end of October.

Michael Rashkin

I don’t have that exact number. It will be about 400 less though. It’s between 5,500 and 6,000 but I don’t have the exact number right now.

Shawn Webster - J.P. Morgan

Okay, and then after you have your headcount reduction plan implemented, is your intent to keep headcount flat from that point?

Michael Rashkin

I think Sehat had addressed that. We’re going to -- that’s our intent, only to hire essential personnel for important projects, projects where we need critical mass but that we feel that the investing phase of our activity is passed.

Shawn Webster - J.P. Morgan

Okay, and then final question; the pricing environment, can you give us a sense of how pricing is relative to what you consider normal for your storage and wireless LAN businesses?

Dr. Sehat Sutardja

I think pricing is normal. We’ve been trying to -- in certain areas, we are trying to hold on pricing or at the very least, reduce the rate of pricing erosions in the last quarter. So in general, we are in the business of semiconductors that eventually prices will go down, will continue to go down, and our job is to develop new products with better features or using more advanced technology with high integrations to recapture the value of the products that we sell to our customers.

But in the last quarter, it’s been on the positive side -- basically help us improve the margin.

Shawn Webster - J.P. Morgan

Okay. Thank you.

Operator

Your next question comes from the line of Romit Shah with Lehman Brothers.

Romit Shah - Lehman Brothers

Just to clarify, the January quarter is a 14-week quarter so on an adjusted 13-week basis, you are forecasting revenues to decline about 4% to 5%. Is that correct?

Michael Rashkin

Well, if you normalize it that way, I’m not sure that in our industry the amount of revenue we would receive in a quarter would really correlate so strictly to how many weeks are in the quarter. But I think you are right if you took it at that -- if you did it in a mathematical way that way.

Romit Shah - Lehman Brothers

Okay, thanks. And then you guys talked about reaching 50% gross margins in the second half of fiscal ’09. I guess baked into that forecast, what percentage of [X scale] products are you assuming will be shipped from TSMC?

Michael Rashkin

By Q3 -- let’s say by Q3 we should be -- and I’m just going to give you a rough estimate -- we should be shipping somewhere over 30% from TSMC.

Romit Shah - Lehman Brothers

Okay.

Dr. Sehat Sutardja

It will be a while before it reaches 100% because of the inventory of the Intel products, so it will reach 100% once the inventory gets depleted.

Michael Rashkin

Yes. We shouldn’t be buying anymore -- after Q2, we shouldn’t be buying anymore product, Intel product, and we would just be basically burning down the inventory we have.

Romit Shah - Lehman Brothers

Okay, so longer term, is the operating model target still 50% gross margins and 20%, 20%-plus operating margins?

Michael Rashkin

I think longer term, we would like to improve upon a 50% gross margin. It’s probably a little too early to put that in stone or anything but that’s -- we want to see how things go, whether or not the improvements we’re making, we can bake into that financial model and that our operating profit model is actually 24%. But that first we are going to try to achieve a 20% and then maintain our expenses, improve our gross margins, and then with the growth of our business, move into that 24% model and in addition, we believe that our tax rate should be lower than we previously used for financial modeling purposes, which was 10%. We think over the long-term, that will come down to 8%.

Romit Shah - Lehman Brothers

Okay. Thank you.

Operator

Your next question comes from the line of Uche Orji with UBS.

Uche Orji - UBS

Thank you very much. Mike, when you were talking about backlog, I think in response to Shawn’s questions, are you able to give us a metric just for us to understand what a strong backlog means? Can you tell us what backlog coverage of say your guidance is? If you can just give us that metric just for us to understand.

Michael Rashkin

You know, I don’t have that number in front of me, but it’s --

Uche Orji - UBS

Would you think it’s higher than normal level of backlog you would normally have at this point to [accommodate] sales you have forecasted?

Michael Rashkin

I would say that it is high enough that it makes us very confident in meeting our guidance number.

Uche Orji - UBS

Okay. Just give us a metric. Normally, will you have 70% coverage, 80% coverage at this normally?

Michael Rashkin

I don’t remember that. But my understanding is we -- okay, the confidence level is higher than historical.

Uche Orji - UBS

Okay, that’s good enough. Let me just ask you about your inventory, on the line inventory outside of what you build for Intel. Did your inventory for your other products go up in the quarter? [inaudible] how much [inaudible] for Intel?

Michael Rashkin

Yes, our overall inventory went up. I think our inventories went up about $85 million to $90 million and of that, $50 million was the Intel and the rest was the other products, which given the amount of increase in sales, it really wasn’t unusual. And actually, our inventory turns for the non-Intel related products have actually improved.

Uche Orji - UBS

Okay, that’s good. Thank you. [I also have other] questions, please. Can I just ask you, on the hard drive, is there any margin difference between the SOCs you are selling to desktops versus into notebooks and [inaudible] -- is it the same product you sell or do the margins vary because of the various end markets?

Dr. Sehat Sutardja

Roughly notebooks and desktop are about the same. They have similar margins.

Uche Orji - UBS

And consumer?

Dr. Sehat Sutardja

Yeah. The consumer -- the consumer drive -- our regular consumer drives our consumer, other consumer products. Yeah, they are about the same.

Uche Orji - UBS

It’s all the same. Okay, and let me just ask you a different question; if I look at your connectivity strategy in general, WiFi has been doing very well. Can you give us an update as to where you are in Bluetooth? And also, if I look at GPS as part of what completes the entire connectivity strategy, is that something you are looking at at all? And what would be your preferred strategy?

Dr. Sehat Sutardja

We didn’t talk too much about it, the GPS. In the past we talked about Bluetooth, yes. Bluetooth [we’ve continued] to be introducing products. We have previous products. We have WiFi plus Bluetooth, Bluetooth plus FM and all the different combinations. So we are being qualified at customers with respect to Bluetooth.

With respect to -- you mentioned about GPS. This is an area that we are also looking at and it’s too early to talk about the GPS at this point, and we have something to talk about and we’ll talk about it later.

Uche Orji - UBS

Okay, that’s great. Thank you very much, Sehat.

Operator

Your next question comes from the line of Shaw Wu with American Technology Research.

Shaw Wu - American Technology Research

Sure, thanks. Just two questions; could you comment on any 10% customers? And then second, just on your -- you commented about your SAS business where you are going to start ramping in Q4. Just to clarify, are those standalone controllers and rechannel? Or are they single chip SOCs? Thanks.

Dr. Sehat Sutardja

I’ll take the SAS. The SAS that I mentioned earlier in the call is the host bus adapter, or controller, or sometimes called the HDA. This is a controller that will sit on an errand card on a server motherboard. This is mainly targeted for high-end computing devices, computing equipment and high-end and server platforms. So this is a device that will eventually talk to the flash drive.

Michael Rashkin

With regard to your other question as to our 10% customers, we have two this -- in Q3, one Western Digital, the other Research in Motion.

Shaw Wu - American Technology Research

Okay, and Sehat, just to clarify on your SAS comments, so these SAS controllers are on the host bus adapter side. Any comment on the drive side and whether they will be discrete or SOCs?

Dr. Sehat Sutardja

Yeah, so it depends on the customer. Some of our customers -- I guess the majority of the customers feel today discrete SOCS -- no, discrete controller plus discrete rechannels, the majority of our customers.

In the future, this will be integrated so just like what has been done in the desktop and mobile so the trend of integration is something that will happen and it’s happening, so we will talk more about it later when some of these products will go into production.

Shaw Wu - American Technology Research

Okay, and just to follow-up on that, you commented about winning new design wins at your existing hard drive customers. Is that for -- is SAS part of that or is that more existing programs in desktop and mobile?

Dr. Sehat Sutardja

Yeah, I think that’s -- we referred to -- when we referred to the existing markets where we have practically -- basically just win all the design wins for the products that are going to go into production next year, so that refers to the desktop and mobile devices, as well as the enterprise side. So basically all the customers that we have.

Shaw Wu - American Technology Research

Okay, thanks a lot.

Operator

Your next question comes from the line of David Wu with Global Crown Capital.

David Wu - Global Crown Capital

Good afternoon. I just want to get some clarification; of the 400 people that are going to be, jobs are going to be eliminated, it sounded like it’s mostly U.S. and Israel and I was wondering whether this is particular business functions or business areas that these headcounts are coming out of.

And I also have a question about -- Mike, you talked about the $17 million fair market valuation adjustments. How do you -- I guess, are these things you look at it every quarter and adjust these inventory down? What metrics do you use to do that? Could you give a little bit of an explanation on that?

Michael Rashkin

Okay, first with regard to your question as to the reduction in force, I would say most of the people are from the U.S. and there are some around the world as well, that the -- it involves functions across the board, not any particular kind of function. And we will be announcing this to the employees tomorrow.

David Wu - Global Crown Capital

I see. When I look at the charges for those 400 people, it’s about average $20,000 per head. I assume that that tells me we’re not talking about mostly engineers or sales engineers or FAEs, that kind of people.

Michael Rashkin

Well, as I said, it’s across the board. It’s not one particular group. We looked at places where we had duplication and inefficiencies and wherever that was, we tried to improve it.

And the amounts that you see there are the actual amounts that we totaled up.

Dr. Sehat Sutardja

[inaudible] does not translate -- I guess the short answer to that is not equal -- the charges is not equal to one-year salary.

David Wu - Global Crown Capital

I understand, I understand but it’s a young company also. I understand. I was just wondering whether it was concentrated in any particular business units, like you actually -- I remember a few quarters ago when you bought the Intel business, you actually kept more people than you originally anticipated and I was wondering whether those 400 people came out of that business unit or not.

Michael Rashkin

Well, at this point we’d prefer not really to discuss that any further. We could discuss that maybe at a future date.

With regard to the fair market value adjustment, what that relates to is -- and this gets a little complicated, but when we acquired the Intel division, there was a supply agreement that’s part of that and that -- the amounts that we had to pay for the wafers under the supply agreement, they are valued for accounting purposes at fair market value. And when we process these wafers through sales or they go into inventory, there’s an adjustment from the actual price down to fair market value and only the fair market value goes into the cost of goods sold or into inventory. So this is done by a unit calculation and it’s a very structured calculation. There’s no real discretion on our part as to how this works, and it’s audited very carefully by our accounting firm.

David Wu - Global Crown Capital

So the unit, the price you pay to Intel is not -- isn’t that based on “fair market” price?

Michael Rashkin

No, the price we pay to Intel that is the price that was negotiated under the supply agreement.

David Wu - Global Crown Capital

I see.

Michael Rashkin

Yeah, the fair market value is the price that was determined by an appraisal firm as to what the actual fair market value was.

David Wu - Global Crown Capital

I see. So those adjustments will continue until you stop -- well, until you finish all your Intel inventory.

Michael Rashkin

Actually, we -- after Q3, we have a very small amount of adjustment left, so there will be a very small adjustment in Q4, maybe about $8 million worth.

Dr. Sehat Sutardja

I think there’s a confusion between the fair -- with the continued adjustment. Actually, what we are saying we have less adjustments in Q3 compared to Q2.

David Wu - Global Crown Capital

I see. It’s coming down.

Michael Rashkin

Yeah, that’s right. That’s correct. In -- the amount of adjustment was $17 million less in Q3, so that -- and in Q4, there will only be $8 million of adjustment.

David Wu - Global Crown Capital

In total?

Michael Rashkin

Yes, so in spite of the adjustment basically going down, going away, that our margins for Q4 will be going up 40 basis points.

David Wu - Global Crown Capital

Well, I assume that lower adjustment has something to do with that.

Michael Rashkin

Well, it’s the other way around, actually, because if we were able to get more adjustment, we would have a higher margin. I think what it shows really is the strength of our margins that basically without any of this adjustment, which the adjustment positively affects our margin. Without any of this adjustment, or a very small amount of this adjustment, we are basically increasing our margin by 40 basis points and after that, it virtually goes away. And what we are saying is that on an ongoing basis as we look forward, despite having none of this adjustment and still having the Intel inventory at full value going for our cost of goods sold, we never the less expect to hit a 50% gross margin in the second half of the year.

David Wu - Global Crown Capital

I see. Last one is on your revenue guidance of flat revenue, essentially, it sounded like storage is going to be up, gigabit ethernet is going to be up, and the only thing that may not be up is wireless LAN. Is that right? Is that the 14 versus 13 weeks, which that extra week in your fiscal fourth quarter really doesn’t do you any good, because it’s got Christmas and New Year’s in there?

Dr. Sehat Sutardja

I think our quarter -- as you understand, our quarter is about one month off from the regular quarter, so our Q4 ends at the end of January. So it is actually overlapping with a lower, seasonally lower rate. I mean, a seasonally lower part of the quarter in additional businesses.

David Wu - Global Crown Capital

I assume consumer electronics and WiFi, those kind of things probably go down on a sequential basis for Q4.

Michael Rashkin

Well, yeah, as we’re saying, that’s generally the case although our wireless LAN business, even though we had a very strong Q3 it is going to be relatively flat in Q4.

David Wu - Global Crown Capital

Okay. Fantastic. Thank you very much.

Operator

This concludes the question-and-answer session. I would now like to turn the call back over to Dr. Sehat Sutardja for any closing remarks.

Dr. Sehat Sutardja

We would like to once again express our thanks to all of our investors and analysts on the call today. We are more focused than ever on executing against and achieving the goals set forth in our financial model. While some challenges will remain over the next year, it’s our intention to manage our business efficiently and position Marvell for a great close to fiscal 2008 and an even better fiscal 2009. Thank you all.

Operator

Thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect and have a good day.

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Source: Marvell Technology Group F3Q08 (Qtr End 10/27/07) Earnings Call Transcript
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