Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Marvell Technology (MRVL)

Q4 2006 Earnings Conference Call

February 23rd 2006, 4:45 PM.

Executives:

Sehat Sutardja, Chairman and Chief Executive Officer

George Hervey, Vice President of Finance and Chief Financial Officer

Weili Dai, Executive Vice President of Communications & Consumer Business Group

Analysts:

Karl Motey, Wachovia Securities

Shaw Wu, American Technology Research

William Lewis, J.P. Morgan

Charlie Glavin, Needham & Company.

Arnab Chanda, Lehman Brothers

Cody Acree, Stifel Nicolaus & Company, Inc

David Wu, Global Crown Capital.

Shelby Rafi, Hoffman Brothers.

Michael Masdea, Credit Suisse First Boston.

Allan Mishan, CIBC World Markets

Operator

Good afternoon, my name is Miles and I will be your conference facilitator. At this time I would like welcome everyone to the Marvell Technology Group Ltd. Fourth Quarter and Fiscal Year 2006 Financial Results Conference Call. As a reminder today's call is being recorded, February 23, 2006. For opening remarks and comments I would now like to turn the conference over to Dr. Sehat Sutardja, Chairman and Chief Executive Officer of Marvell Technology Group. Sir, please go ahead.

Dr. Sehat Sutardja, Chairman and Chief Executive Officer

Thank you, Miles. Welcome everyone to our fourth quarter and fiscal year 2006 conference call. Weili Dai, Executive Vice President of the Communications and Consumer Business Group; and George Hervey, Vice President of Finance and Chief Financial Officer are joining me on this call. Today I am pleased to announce the results of another record year and fourth quarter for Marvell. First, our fiscal 2006 annual revenue increased 36% from the prior fiscal year and our annual pro forma non-GAAP net income grew by 71%. Also our sequential Q4 revenue increased 15% from the prior quarter to mark our 33rd consecutive quarter of revenue growth. We are experiencing strength and strong momentum from both the consumer and enterprise markets. During the quarter, our enterprise solutions in particular for the hard disk drive and Ethernet market experienced a very strong quarter of revenue growth.

The success that we are enjoying in these markets is the result of the huge investment we have made over the last ten years in developing our world-class enterprise solutions. Leveraging our proven enterprise class analog, mixed-signal DSP and processor technologies for the development of our consumer products we are experiencing similar success with these products.

This all comes at a time when consumer OEMs are rushing to introduce highly converged sophisticated devices that combine high performance processing, networking and storage. All of which plays right into the proven strength of our technologies that we have been shipping for years in the enterprise markets. Today as a result, we are very excited about the strength and positioning of our advance solutions to serve the needs of our customers in both the enterprise and consumer markets. Also with our consistently strong financial performance and prospects for continuous solid growth, the Board of Directors believes it is now an appropriate time to approve a two for one split of our stock. Once certified and approved by our shareholders at our upcoming annual general meeting, we believe this split will offer our investors and enhance the liquidity of our shares and make them more attractive to a broader range of investors.

I will elaborate more but our opportunities and our business progress but first I will have George give our Safe Harbor statements and provide more insight into our Q4 as well as fiscal 2006 financial results.

George Hervey, Vice President of Finance and Chief Financial Officer

Thank you Sehat. Good afternoon ladies and gentlemen. I would like 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, revenue growth, gross margin expectations, operating expenses, other income, accounts receivable and inventory. Such statements will be preceded by the words like "expects", "anticipates", "believes", "should", "will", "may", words with similar input.

These statements include those related to the pace of our business for fiscal year 2006 and the impact that if we could use adoption of our solutions or 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 increased competitions 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. But we direct your attention to our annual report on Form 10-K, recent quarterly reports on Form 10-Q, recent current reports on Forms 8-K and other Securities and Exchange Commission filings, all of which discuss other important risk factor that may effect our business, results of operation, and financial condition. Please be reminded that we undertake no obligation to revise or update publicly any forward-looking statements for any reasons.

Now moving to the Q4 financials. Marvell reports net income and basic and diluted net income per share in accordance with GAAP, and additionally on a non-GAAP basis referred to as pro forma. Marvell’s managements believes that non-GAAP information is useful because it can enhance the understanding of a company's ongoing economic performance and Marvell therefore uses pro forma non-GAAP reporting internally to evaluate and manage the company operations.

Marvell has chosen to provide this information to investors to enable them to perform comparisons of operating result in a manner similar to other company analyzes its operating results. Today, we reported the net revenue for the fourth quarter of fiscal 2006, was a record $489 million. An increase of 44% over to $340.3 million reported for the comparable quarter in fiscal 2005, and a sequential increase of 14.8% in the third fiscal quarter of 2006.

Pro forma non-GAAP net income which excludes the effect of the amortization and write-off of acquired intangible assets and other amortization of stock-based compensation and charges related to facilities consolidation was $134.6 million or $0.42 per share diluted for the fourth quarter of fiscal 2006, compared with pro forma non-GAAP net income of $75.2 million or $0.24 per share diluted for the fourth quarter of fiscal 2005. $134.6 million pro forma non-GAAP net income for Q4 represents 79% increase from the Q4 '05 pro forma non-GAAP income.

Shares using computing pro forma non-GAAP earnings per share diluted for the fourth quarter of fiscal 2006 increased to $322.6 million as compared to $38.3 million shares for the fourth quarter of fiscal 2005. Net income as a generally accepted accounting principles or GAAP for the fourth quarter of fiscal 2006 was $97.5 million or $0.30 per share diluted compared with the net income on the GAAP of $54.9 million or $0.18 diluted for the fourth quarter of fiscal 2005. We have provided on our website in the investor section at www.marvell.com a reconciliation of GAAP net income to pro forma non-GAAP net income for the quarter report today plus the prior 8 quarters.

Net revenue for fiscal 2006 was $1 billion $670.3 million, an increase of 36.4% over net revenue of $1 billion $224.6 million for fiscal 2005. Pro forma non-GAAP net income for fiscal 2006 was $429.6 million or $1.36 per share diluted compared with $215.6 million or $0.84 per share diluted in fiscal 2005. I would like to mention some additional comments on our Q4 results.

Our Q4 revenue of $489 million was another quarterly record for Marvell, and the 14.8% increase in revenue from Q3 to Q4 reflects strong business momentum and it was at the high end of our guidance of 13% to 15% sequential increase in quarterly revenue. The increase in Q4 represents the 33rd consecutive quarter of revenue increase. Positive seasonality in Q4 continued the trend from Q3. Q4 seasonality was consistent with our expectations and continued to be below historical norm. During Q4 we continue to experience revenue growth from a number of our established products including storage SOCs for both enterprise and consumer products with particular strength in the 1.8 inch market.

Continuing the revenue momentum from Q3, our Prestera Switching products for the network infrastructure shows significant growth in Q4. Additionally, our wireless SOCs for consumer products continue to expand into early production on an increasing number of gaming products, mobile phones, PDAs, Digital Still Cameras and printers. As we mentioned on our Q3 call, our Q4 revenue will include a partial quarter of revenue contribution from the hard disk controller products acquired from QLogic in early Q4. The revenue contribution from those products was consistent with our expectations. This broad contribution shows the strength of our core enterprise market positions as well as the growing potential of the consumer market.

We ended fiscal 2006 with strong momentum and we are encouraged as we enter fiscal 2007. For Q4, our enterprise market represented approximately high 70% of revenue, with consumer the balance. We had four 10% customers in Q4, were Digital, Toshiba, Samsung and Fujitsu. Q4 gross margin percentage of 54.9% was 50 basis points above our guidance and continues to reflect a very high level of manufacturing efficiency.

In addition, the slightly richer enterprise product mix contributed to the increase in gross margin percentage. We continue working closely with our foundry and backend assembly test partners to reduce our cost, positioning us to remain competitive in our targeted markets. This focus on operational excellence has kept our gross margin above our long-term model of 51% to 53%.

During Q4, we increased our dollar investment in new product development and the migration to advance process geometries to keep us in the leadership position in our targeted markets. This resulted in Q4 operating expenses increasing slightly as a percentage of revenue from 25.4% in Q3 to 25.6% in Q4. However, headcount increased to 2,500 employees. For the 18th consecutive quarter, we increased our pro forma non-GAAP operating income percentage. Consistent with our guidance, our operating income percentage increased by 100 basis points to 29.3%. The increase was again primarily as a result of our strong business momentum, driving substantial revenue growth and our increasing gross margin percentage. Our operating income percentage continues to be above the high end of our long-term model.

Shares using computing pro forma non-GAAP net income pre share for the third quarter increased to 320 million compared with 316 million for the third quarter in fiscal 2006. The increase in shares is primarily driven by the use of the average of the higher average stock price for Marvell shares in the treasury stock lending calculations.

Our balance sheet continues to remain very strong, since we continue to increase the level of our profitability our cash flow generation continues at healthy level. Our Q4 cash in short-term investments increased slightly to $921 million. During Q4, we actually generated approximately $185 million in cash and paid $180 million to QLogic for the purchase of the Hard Disk Controller business. Q4 DSO's decreased to 45 days from 54 days in Q3, the larger than normal decline in DSOs was a result of the combination of improved sales linearity, as well as several large collections occurring prior to the Chinese New Year period.

During the last several quarterly calls, we have been discussing our concern regarding the capacity tightness throughout the supply chain. Beginning at the end of Q1 fiscal '06, we increased our production levels to ensure a smooth supply for our customers. As we progressed through the second half of the calendar year 2005, we remain concerned of our capacity, and several of our logic customers also expressed concern. As a result, we have positioned inventory at both the front end and back end of our production flow to ensure an uninterrupted supply for our customers.

During Q4, we began the process of decreasing our production level to a level which going forward will keep us in the most favorable position, respond to customer demand for our products. We would expect to see the first impact of these actions in Q1 fiscal '07. We expect a decline inventory days from the Q4, 86 days.

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

Dr. Sehat Sutardja, Chairman, Chief Executive Officer, President

Thanks George. As George stated, we continue to enjoy strength, both from our established position in the enterprise market, as well as our emerging penetration into the consumer market. In the enterprise market, we continue to enjoy strong revenue growth from our Gigabit products. During the year, Gigabit Ethernet continued it's transition as a replacement for Fast Ethernet in the infrastructure market as gigabit products grew to represent about 35% of the total infrastructure support in Q4 from the 25% at the beginning of the year. We are clearly seeing the benefits of this strong adoption rate and we are leading this transition with our total system level solutions, which combine our high performance software and silicon.

As we look into next year, we expect another very strong year of market adoption of Gigabit along with our continued leadership across the internetworking market segments. In the high-end segment, we continue to win many new designs as the metro continues to migrate to low cost Ethernet technology. Our production proven metro class solutions continued to ship in high volume, while the competition is only now just realizing the need to invest in this segment. And in the high volume SOHO and SMB markets, we are having great success as we enable our customers very quick time to market with our complete system level approach and integration of such advance features as wireless switching and advance switching capabilities.

On the client side, we are entering fiscal 2007 with great momentum as we have recently won a number of very high volume new designs with our Yukon Controllers for a number of new tire-one PC OEMs, such as Apple. This new designs will begin to rollout in the first half of the year. We continue to have great success in migrating our Yukon devices from the white-box to some of the highest performing computers in the world, even the tremendous advantages we offer for both performance and power.

In the Hard Disk Drive market, we continue to enjoy great success and look forward to yet another strong year in fiscal 2007. The Hard Disk Drive market continues to be very healthy even the strong unit growth enjoyed by the entire market. An ever increasing number of non-PC application are demanding high capacity storages such as PBRs, game consoles, personal media players, GPS systems, high-end cell phones and video cameras. Additionally, we are very focused and we continue to invest heavily on expanding upon our world class technologies for the Hard Disk Drive markets including for the 1-inch and 0.85-inch small form factor drives.

We continue to be very excited about the market opportunity for these tiny drives and are working very closely with our customers to further increase the capacity points of these drives to address a wider range of consumer application, as well as to stay ahead of the recent capacity increases of NAND flash technology.

Now moving to the consumer markets, we continue to aggressively capitalize on our positioning as the only supplier with two Embedded Wireless LAN solutions for the consumer markets. With our unique low power Embedded Wireless LAN solutions including our very advanced software, we continue to have great success in winning many additional designs for cell phones, PDAs, cameras, printers, games, MP3 players and a whole variety of other consumer devices that are adopting Wi-Fi technology for the first time.

To some extent we can understand, why there is a lack of competitive solutions as we clearly appreciate the huge amount of effort and complexity involved to successfully develop embedded solutions, supporting many different usage models and as well as with the ability to support large variety of software environments and host devices, while the competition works on the developed and on their first embedded solutions to continue to aggressively increase the level of feature integration, and performance of our solutions, and expand our lead to serve this huge market opportunity.

In addition to the strong positioning of our embedded wireless LAN solutions, we are also very excited about the strength and positioning of our new 802.11n family of products. We are very pleased with the progress made by the (indiscernible) in voting for the EWC specification, to get a draft 802.11n standard last month. As a founding member of the EWC, we helped drive the ratification of the standard. Now that draft is approved, we are going to even more aggressively drive the adoption of this technology across the entire market with our high performance 802.11n solutions for the enterprise, retail, PCs, media distributions, and embedded applications.

Given the significant increase in performance and sophistication of the 802.11n standard, the advantages and breadth of our advanced technologies will further differentiate our solutions, we have leveraged all of our expertise and experience from our proven and highly successful embedded wireless LAN solutions in the development of our family of 802.11n solutions. Thus as in the embedded space, our unique architecture, we lead the way in performance, our consumptions, integration and size. Now with the throughput of over 300 Megabits per second, our ability to integrate our own high performance low power processors is critical to handle the high speed-processing requirements also lowering the overall power consumption of the overall system.

Our power advantage is becoming especially important in today's Laptops, which are continually trying to reduce its power budget even with the implementation of such new advance features. With the highest performance and the first solution made available in the market we are wining various exciting designs with tier-one customers and are on track to begin volume shipments this quarter. Additionally, we are also leveraging our processor technology into a number of other exciting end applications and markets. At CES in January, we announced our Orion product family that is targeted as the range of media vault platforms. This device leverages our storage networking and embedded processor technology combined with software to enable a variety of standalone and integrated storage appliances for the home. We have been winning a number of designs with this exciting solution and expect initial shipments, to start this quarter.

Another exciting market opportunity that we are applying our embedded processor technology is for the printer market. We have developed custom SOCs based on our processors, specifically for the printer market and have been enjoying various strong design wins with our high performance low cost printer solution. By combining such exciting SOCs with our strong portfolio of technology such as our system controllers, wireless LAN and wireless networking, power management and storage, we are in an excellent position to serve the needs of the printer market by helping increase performance and lower system cost of today's printers.

Tuesday's announcements – announcement this week of our acquisition of the printer business from Avago Technologies fits like into our strategy to address this large market. This acquisition strengthens our engineering team and system level skills, with a dedicated engineering team to serve the needs of Hewlett Packard with our advanced technologies. I would now like to turn the call back to George for additional comments regarding our financials and guidance for the next quarter and fiscal year.

Mr. George Hervey, Chief Financial Officer

Thanks Sehat. Consistent with past years, we will be including as part of our Q4 call guidance for the new fiscal year, and specifically for Q1. Additionally we will update our long-term operating model. Fiscal '06 was a very strong year for Marvell and as we made significant progressing growing our revenue in the consumer market, and our expansion into the VoIP market. In storage products, we introduced our solutions to address the optical DVD market and completed the acquisition of the enterprise Hard Disk Controller business with QLogic. We also continue with the development of our embedded high performance microprocessor, and introduce the Orion products family at CES.

Entering fiscal '07, our position in our served markets continues to strengthen, that we are executing on our objective of significantly increasing our addressable span. Having reached the $1.7 billion revenue level in fiscal '06, we are now ready to continue our growth to the next level. In fiscal '07, our revenues should range between $2.250 billion to $2.300 billion. At the mid point of this guidance, our annual revenue growth from fiscal '06 to fiscal '07 would be 36%. This annual guidance excludes the recently announced planned acquisition from Avago of their printer ASICs business. Consistent with our other acquisitions, we will update our guidance once the acquisition has closed.

Gross margin percentage for fiscal '07 should be above 54% plus or minus 50 basis points. And pro forma non-GAAP operating expenses should range between 25% to 26%. During fiscal '06, we were very successful in exceeding our previous long-term operating model. As we continue with our business strategy of growing Marvell into a very large semiconductor company, we believe that our long-term operating model will change from the current level. While our long-term model for gross margin percentage is 53%, the pro forma and non-GAAP operating expenses of 25%.

Given our anticipated growth prospects moving forward, we feel this long-term model will continue to generate strong profitability for Marvell. Beginning with Q1 fiscal '07, we will be adopting FAS 123R. The impact will be included in our GAAP financials, but excluded from our pro forma non-GAAP financials.

And moving to the Q1 guidance, our business momentum in Q4 was strong, and we entered Q1 expecting growth. Our visibility remains good with ordering patterns from our customer's remaining consistent with prior quarters, and has been the case in past years both Q1 and Q2, should experience some level of seasonality. In fiscal '06, Q1 seasonality was below historical norms, and we expect Q1 fiscal '07 to be similar to Q1 fiscal '06.

We are comfortable that our strong business momentum will more than offset the seasonal softness and expect Q1 fiscal '07 revenue to grow 5% to 6% from Q4 of fiscal '06. While we do expect a decline in long-term gross margin percentage, we expect Q1 gross margin percentage to be flat with Q4 at 54.9%. This reflects our continued manufacturing efficiencies and positive product mix. Pro forma non-GAAP operating expenses for Q1 should increase about 90 basis points from Q4. In Q1 pro forma non-GAAP operating expenses reflect our annual employee reviews, and increase in payroll taxes associated with New Year.

We expect interest income to increase by approximately 400k with our balance sheet inventory remaining strong. Shares using continued pro forma non-GAAP net income should increase to 326 million shares. I will turn it back to Sehat.

Dr. Sehat Sutardja, Chairman, Chief Executive Officer, President

Thanks George. That completes our commentary. Miles, would you please poll for questions.

Question-and-Answer Session

Operator

Operator Instructions Your first question comes from the line of Allan Mishan of CIBC World Markets.

Q – Allan Mishan

Hi, guys, very good guidance. I just have a couple of quick questions on the QLogic business, could you tell us about how significant that was for you this quarter, whether it will reach the run rate that you had talked about previously in the coming quarter here? And also do you expect any impacts when Fujitsu moves to Serial Attached SCSI in a greater way? Thank you.

A - George Hervey

So, as I said, Allan, you know for Q4, we gave the guidance for that on our Q3 call. The revenue level for QLogic products, was consistent with that level, which was not a complete quarter, and so here in Q1, it is going to be a complete quarter and I feel comfortable, although we won't continue to break it out, but we are comfortable in telling you that it is going to be at the historic quarterly rates.

A – Dr. Sehat Sutardja

Regarding some impacts on the SCSI, there will be some impact, but then it will be taken into comps from day one when we acquired the business from QLogic.

Operator

Your next question comes from the line of Michael Masdea of Credit Suisse First Boston.

Q – Michael Masdea

Thanks a lot. I am looking at that fiscal '07 guidance, I guess what some of those are trying to figure out is just what you think are true organic businesses and your acquired business growth is for the year? And really, how do we think about that going forward, where do you think the organic growth rate from Avago is? And then, as you add acquisitions on what that incremental going to be?

A - George Hervey

Well, I think couple of things about it, we will probably will be doing more acquisitions as we move forward. You know we are already seeing that, and so you can start seeing the blend of the organics and the acquisitions and then the organic products starting to effect the revenue of the acquired operations as well. I think what we will say basically is that we will, in most instances give you a starting point for major piece of business like we did with the QLogic and then beyond that everything is just folded together into our guidance. So that 36% is really the combination of what was the traditional Marvell products pre-acquisition but they are all Marvell products and our growth rate is overall Marvell.

A – Dr. Sehat Sutardja

Okay, let me get a little bit color about organic versus of that acquisition. In general, our philosophy is that, we would like to do things as much as possible organically, but there are certain things like the printer ASIC business from Avago, this is something that’s in - I don't know like to see them years. At least those things doesn’t make sense for us to build organically, so acquisition make a lot of sense and this gives us actually a bulkhead because we have developed numerous technologies, we had a synergistic to that existing business, but by combining the resources from their site, from the Avago's printers theme sites with I’d say the embedded processor technology or the wireless LAN technology, we could come up with a more effective products to in this case, for Hewlett Packard. So this is, we are doing the acquisition from the synergistic point of view in this case.

Operator

Your next question comes from the line of William Lewis with J.P. Morgan.

Q – William Lewis

Great thank you. Looking at your guidance and also your mix of business, enterprise, it sounds like it was up…

Operator

Next we will go to the line of Shelby Rafi with Hoffman Brothers.

Q – Shelby Rafi

Yes. Thank you very much, may be you can talk about expectations for the sequential growth in your storage business, in the first quarter, you know the 1.8" drive market, in fact I think effected, for example by product shipments decline, do you expect your storage business to grow better or worse than your corporate growth rate?

A - George Hervey

Shelby, you know we don't go to that level of detail of specifically talking about individual pieces of our business, clearly our storage business, because it is PC component, is you know, exposed to seasonal impacts but with the expansion of mobile computing across 2½ inch, 1.8 inch as well as form factor, there is lot of momentum in that business, so clearly we would not be giving a 5% to 6% overall corporate growth because we didn't expect growth on to that point of our business.

Operator

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

Q – David Wu

Yes. Can you perhaps give us a little bit more guidance on two things. Number one, as you talked about the printer ASIC business that you bought, obviously it is going to be more of an SOC business overtime, do you have a, give us an idea, rough idea of how long it will take as you enrich the product to more to an SOC solution that the margins in the business would approach the corporate average, I assume the ASIC business quite a bit lower than your current corporate level? And secondly can you comment about Maxtor, your Maxtor desktop business, I assume it is ramping as expected, and can you talk about what are the gating factors, just to on the decision of a combined Seagate Maxtor design in the next 24 months, how do you see it working as the two product lines merge once the acquisition takes place?

A - George Hervey

I think we are going to split that up.

A – Dr. Sehat Sutardja

I will take the Maxtor…

A - George Hervey

You will take Maxtor, David, give me the first of the question, because I am...

Q – David Wu

The easy one is the gross margin on the ASIC printer business presumably is kind of typical ASIC, and quite a bit below your corporate average gross margin, and can you give us a timeframe of when by incorporating your own IT into the total solution, that you can make that business approach the corporate margin at this point.

A - George Hervey

Okay. Well again, you know we are very excited about the opportunity there, and you are absolutely correct, you know a traditional ASIC business does not generate the same gross margin percentage as an ASSP type of business does, which is the majority of the our business and the opportunity for is as we have stated is to, number one improve the base product with own technology, and our own manufacturing capability, that will take at least one generation of total to incorporate some of the technology that we have into those products, although I believe it could have a quicker impact on the actual cost of the existing product by having a big part of Marvell versus, you know being part of what it was previous into the acquisition. And then of course the real side benefit to this is all of the other revenue that comes with growing alongside this product which should be at you know typical corporate contribution margin, so I have to say the ASIC business itself will never be equal to the rest of our business, just by the definition of what it is, but we do anticipate over the next say one to two years, seeing an improvement in the actual margin even from that part.

A – Dr. Sehat Sutardja

And then moving to the next part of the question, the Maxtor production will start at the 160 gigabyte of 3½ inch platform. So that’s on schedule, I guess the success is up to them, so...

A - George Hervey

Should be sometime in second calendar quarter.

A – Dr. Sehat Sutardja

So, we are very excited about obviously about their production, from as far as I know the product certainly to be a very very competitive product, the family of the 160 gigabyte platform production is going to be very, very competitive products, is going to be very, very exciting for Maxtor, and it is also for us. We are also very excited in our Maxtor, its going to be part of Seagate, we have very good relationship with Seagate for about like 10 years now.

A - George Hervey

It was one of the first customer.

A – Dr. Sehat Sutardja

It is our first customer, in fact, so we have a lot of engagement, discussion with them already so, if looking at, all that I can say is the future is, it should be good.

Q – David Wu

Okay. How long do these technology cycle last before we go to 250 gigabytes per platter?

A – Dr. Sehat Sutardja

It is hard to pinpoint that but if you look from the historical experience, every generation will last longer and longer like the 40 gig generation was shorter than 80 gig, the 160 gig generation would be probably is going to be longer than 80 gig, and then the 320 gig generations will come quite a bit later. The 250 gigs will not be as strong a note, so it will a minor note, just like in the old, just like the 120 gig, it is just a minor note. Nobody talks about the 120 gig, even though it exists. So it is going to be a long, most likely it is going to be a long cycle.

Q – David Wu

Okay great, thank you.

A – Dr. Sehat Sutardja

Thank you very much.

Operator

Your next question comes from Cody Acree with Stifel Nicolaus & Company, Inc

Q – Cody Acree

Thanks guys, and George, thanks for finally raising the gross margin target. Can you talk specifically, the Wi-Fi competition, obviously a lot of the current Wi-Fi incumbents more in the desktop, laptop access point market are now realizing the potential benefits of the embedded markets, starting to move more in that direction, how long of a window do you believe you have before this becomes much more price sensitive, and do we ever start to see kind of price declines in the embedded Wi-Fi space that we have seen in the desktop, laptop market?

A – Dr. Sehat Sutardja

Okay, maybe I can take care of this. So obviously as you are aware, as you are aware, and that’s what we say for the last several years, the embedded market is the bigger market opportunity, for many years nobody believed, nobody took us seriously on this one, because the market, there was no market for embedded Wi-Fi at that time. We had actually to build this market, we have to build a huge application team, software teams, to write all the codes for all the different usage model, that we had mentioned about it earlier, the different usage model for cell phones, for VoIP, for digital cameras, for wireless printers, for wireless music, there’s so many different software’s that we have to write. So, it's not just about making the chips to be able to work at low power, which we have done at the product level. But more importantly is to get all these all applications to work with each other, everyone of those are different, yet everyone of them wants to be able to talk to each other. And it’s all about, putting the years and years of software effort into this. So, we believe, as the first player to get into this market, we have a huge advantage but because this market is huge, there will be always be a in fact people they will effect, they will try to get into this market and they will introduce price pressure into the products, I mean, price pressure will always be there. But that’s okay, we live in this business, okay as the volume goes up, the price begins to go down, and it has to work there with, it works both ways, but the volume, for the volume to be big the pressure has to be lower.

A - George Hervey

Well, as that’s play into, again our view of the long-term operating model of the company that has the consumer opportunity in '06 was still relatively small, is going to much, much bigger over the next 2 to 3 years. And while it's still very profitable, that’s is what Sehat was saying, it is going to…

A – Dr. Sehat Sutardja

Of course, I forget to mention, this is the reason why we proactively work on new generations of devices like we introduced our 90 nanometer Wi-Fi, single chip Wi-Fi device, embedded Wi-Fi device, several quarters ago? And then meaning that we will work on that like two years ago, basically, so we have been proactive in investing for the future to addressed the fact that devices in the future has to be lower cost and lower power and more advanced capabilities.

Q – Cody Acree

And guys, I would like to add just one quick follow-up, the ASIC ASP, which are getting more on to Hewlett Packard, may be if you could give us some idea on what those are running but, may be more importantly on a percentage basis, what do you think the opportunity as you move Orion in and a few other tertiary items, where can we see the dollar content in the printer market and how quickly could you start to begin benefiting from that crossover?

A - George Hervey

Okay, frankly you know that we don’t go to the specific ASPs for product expect to say that, those are very complex systems that are currently being produced by the Avago team and they are actually system level, they are more than just ASICs they are actually system level and increasing the amount of system level of sales, so those are very good products from an ASP standpoint. We would hope obviously that as we bring more technology to the platform that we will get a fair ASP return for the technology that we add, so we hope to see that grow overtime but again, we don’t go to that specific breakout.

Q – Cody Acree

But is there an opportunity to increase by a small percentage or a magnitude with the products that you plan on targeting in HD?

A - George Hervey

Well, I think there is lot of opportunity right now, I mean, the printer group is excited about being a part of Marvell and having access to the IP portfolio whether that be wireless LAN, it’s the processor, Gigabit, there is just whole bunch of things that they can see, that they can incorporate into the system. I think, realistically you should be thinking of one generation out there, at a minimum to see some of the impact coming to, of that type of thing come in.

A – Dr. Sehat Sutardja

May be, I want to add a little bit on this, that we are seeing from other printer customers that would, they are building things from scratch like this last one year, the benefits that we provide to our customers are very very significant, remember we came into this business very very late in the printer business, there were other big big players out there in the past and for us to come in the market in the last minute, and be able to take market shares away from our competition, new design wins, for some of this printer players, obviously the benefits has to be there. And the same benefits that was, that other customers seeing will the same benefits that HP will be seeing.

Q – Cody Acree

Great, thanks and congratulations.

A – Dr. Sehat Sutardja

Thank you.

Operator

And your next question comes from the line of Arnab Chanda with Lehman Brothers.

Q – Arnab Chanda

Thank you. A question, I would like to ask a question maybe for either I assume for either Sehat or even George. You’ve talked historically about sort of three growth major drivers, the desktop storage market, wireless LAN as well as gigabit Ethernet for ’07 and '06. Could you talk about just qualitatively if there are any different drivers for say, the first quarter versus the whole year or are we missing any new ones such as maybe Orion or anything else? Thank you.

A - George Hervey

I think Arnab, in general the three main growth drivers encompass much of what we do. But I think that still you know going to be evident even in Q1, we are very excited about the networking business right now. Prestera has just been a real, a real successful product family for us, you know the second half of last year, it grew dramatically from where it had previously been, so we are thinking and expecting that to be, you know very strong moving into the first half of this year. Well, all of them will play, I mean as we have talked about previously, we have just scratched the surface on the wireless LAN - embedded wireless LAN from a standpoint of platforms actually going into production. And you know as we said in our commentary, now we have seen an increase in the number of platforms which i.e. equate to a product, actually starting into production. So, you know that would be good and then of course it will be new Maxtor ramp that place into the desktop, I think so. Again the three main things still will be there, I am sure, Sehat wants to add couple more.

A – Dr. Sehat Sutardja

Yeah. I mean talking about spending more than three years like in the software pool, let us say for cell phone Dual Mode, cell phone GSM plus Wi-Fi or CDMA plus Wi-Fi. It was like two years, more than three years efforts to write the codes, it is not, this is like investment for the future. Potential growth is on the rose for this Dual Mode phones. Again these are the, there are lot of things that we have been looking organically for the last several years to enable some of these new markets, these new markets once it takes off, it could be very very positive to us. In the meantime obviously the acquisition for Avago will be, there is more of combining this leverage of technology investment across certain areas together. That is more quicker activity, so, and then, we did talk about automatics, so this also continued to gain, continued to have new product lines, but I have thoughts to talk about it, when we have so many different products that we introduce into the markets, there are so many customers there, they are so many different wins, but because there are spread out for so many different statements, it is very very hard to talk about it, but overtime, as more and more people find out about the diverse product that we are coming out with, this business is also going to be more and more important over the next several years.

Q – Arnab Chanda

One thought if I could Sehat, you didn't talk about the optical storage market, where are we and what are we looking for in the market, you know to see your products based on your technology to come out, is it this year or next year, are there certain things that need to happen before your products are launched? Thank you.

A – Dr. Sehat Sutardja

Yes, we are still working with our customers in porting all the different firmware's to our platform, as well as building several new devices we did talk about, again it is very hard to talk about it, where we have new certain features requirements for certain customers, we have to build different chips for different customers, these things take time. But, we have numerous activities, several chips there have been taking out, or going to say for additional chips so, for the next couple of years, the next year alone we are capable for several more chips with different features for different customers or different target markets.

A - George Hervey

I think it is an interesting question, Arnab, because may be I should have highlighted it, our guidance that we gave has no revenue expectations for the DVD market in that number and so we are looking, it doesn't mean we are not going to have revenue this year, while we feel that we want to be again putting those realistic and conservative plan about going forward for this year. I do believe that we will see revenue it will be modest. You know, but it should occur in the second half of the year.

Q – Arnab Chanda

George, Sehat, thanks for the clarifications.

Operator

Your next question comes from Charlie Glavin with Needham & Company.

Q – Charlie Glavin

Thanks. Sehat, I think Lewis got cut off, I can hear him, but as far as you guys.

A - George Hervey

We never – we never heard him.

Q – Charlie Glavin

It sounds like there is a cross line. Sehat, if you could go in a little more detail in terms of the synergies within the printer business, if I am not mistaken, it is obvious that previous ASP we look at more mixed base and your embedded certainly is more on an arm base, can you explain some of the synergies off of that, and how long will it take, or if you already started to do some of the software bridging with either Asia or somebody to reconcile those differences?

A – Dr. Sehat Sutardja

So, obviously it is like, the businesses we have, we have number of processors that we use across many of our different businesses from PowerPC, MIPS and ARM processors. Over the last several years we have decided to consolidate our platform into ARM based, more and more products into ARM based, the way it is for the networking or printers, so the last four, five years investment in developing high performance embedded ARM processors, it will be very important for us to gain market shares in high end printers, okay, I forgot to mention, we do gain – we are gaining design wins in high end printers with using our ARM processors against MIPS already. So if we could gain design wins at the very high end, it will be very straightforward to get design wins on the mid end and low end of printer business using ARM.

Q – Charlie Glavin

So, is it fair to say that historically HD has used more of a network processor based on management’s scores that…

A – Dr. Sehat Sutardja

I am sure that if that is correct or not.

Q – Charlie Glavin

Well, CMPC are in, I think has been going in based on what we have seen from a big margin maker such as PowerPC, it seems that they are going to more standard days, is this fundamental shift that they are doing from the traditional enterprise based in more lower end, which would favor your AMR processor or you are going to be attaching together in ARM, with their MIPS based...

A – Dr. Sehat Sutardja

Okay, I understand the question. So historically, if you look at the in a very very high end printer business, or very very high end networking processor business, this all MIPS may seem all PowerPC based. And the reason for that is because ARM processors are not at the level to competing against high end MIPS or high end PowerPC processors, which is the fact, in the past. We have changed that, the dynamics, our Feroceon ARM processor, is just as good at the high end MIPS processor in terms of MIPS of megahertz, in terms of number of megahertz that we could run, this is at the absolute maximum performance, so we are, I would say we are competitive if not we are better than the high end MIPS processor. But the difference is that our processors are not targeted for standalone devices. Our processors are designed for embedded purposes, for integration. So the benefits will be smaller die size, lower power and a lower cost. And sometimes give the same performance as using dedicated standalone excellent processors. So, and because this are huge business, it is going to be an advantage for anyone that can put this technology into a single chip device.

Q – Charlie Glavin

George, just one clarification, going back to Michael's question in terms of not too much organic growth but it looks, it sounds, if you reiterate that, you are still on track to have a 50-50 split by the end of 2007. Are we talking - pardon me..?

A - George Hervey

On the consumer versus the enterprise?

Q – Charlie Glavin

Yes.

A - George Hervey

No, that's still the objective and I think we – we’ve done a lot, I think what you are seeing Charlie is there’s a lot of exciting things going on and we set an objective as you move from, setting the objective to ultimately getting there, there's a lot of things to happen on the way, some are enterprise related such as QLogic, some are going to be consumer related such as the printer and so forth. So, it’s really haven't as it flows, but yes our objective is still to by the end of next year to be the 50-50 split.

Q – Charlie Glavin

Make sure that the question that I had was, the way you started off responding now there is certainly last thing to business sounds like here including in the '07 guidance, kind of molding in Michael's question, are you looking forward from this point forward the need to acquire companies in order to hit that 50-50, or do you believe that your organic growth rate right now can enable you to hit the 50-50 split by the end of '07?

A – Dr. Sehat Sutardja

Well, first of all again, our target 50-50 that means that we are substantially make that to be exactly 50-50 by sacrificing our enterprise business, if we can grow enterprise business to the enter the 50-50 is not to able to be achieved, I mean,

A – Sehat Sutardja

We are able to make sure, that the enterprise business will continue to give the investments so to continue to capture the design wins, like the SONETs against Ethernet and the metro space. We will make sure the Ethernet in the metro to win against SONET. So we are going to invest heavily into this area.

A - George Hervey

So Charlie, I think, your question actually is that are we doing more acquisitions, that I think, the answer to the question is probably, just we probably will, as we look for complementary things to match up with our core competencies but we have a lot of, as I said earlier, we just scratched the surface on the wireless LAN and the processor into the consumer, so, I understand the question is very difficult to be specific, except to say that, we think, we see a lot of opportunities moving forward.

Q – Charlie Glavin

Got it, thanks guys.

Operator

Next we go the line of William Lewis with J.P. Morgan.

Q - William Lewis

Can you hear me now?

A - George Hervey

Can hear you now.

Q - William Lewis

Oh great.

A - George Hervey

With Verizon of what?

Q - William Lewis

What's that?

A - George Hervey

Is that Verizon or Tmobile?

Q - William Lewis

I think, it was their mistake, I had a hard line owing to Charlie's office, but, I guess, what I wanted to ask was, I guess, also about the guidance and little bit on this consumer enterprise mix question. I am assuming you expect to make progress in terms of growing the consumer faster making a higher percentage, how much of that is behind kind of the higher enterprise mix behind the 54% gross margin guidance you are able to provide for the year versus other factors?

A - George Hervey

Well, if you look at it Will, we were running pretty close to 54% where we made any, even before we did the QLogic acquisition. So, clearly even our existing business is performing very well and it had even improved in Q4, so clearly, when we acquired the business which has very high gross margins which everyone know, understand that's contributes positively but we are, one of the things that we are very proud of is our ability to have cost reduced our products to a level that we are able to do it such that even though, we have pricing pressures and so forth like other people in our market that we are able to outperform because of that. So, I wouldn't read more, they all contribute positively and that's why we gave a range by the way its 54 plus or minus 50 basis points, so it can swing either way.

Q - William Lewis

Okay, and then on the operating expense, I think, you said, up 90 basis points as a percent of sales, so, could you just talk about, where the, what the drivers are of the significant increase in operating expenses this quarter?

A - George Hervey

Yeah, Q1 is always a quarter that begins the year, for us, it’s the, we do annual reviews, so we have an increase in our obviously, labor cost and associate fringe cost in Q1 and of course also everyone starts paying tax again, so we have both quarter taxes that will effect us in Q1. So clearly those things are there, and I think that probably and the appropriate comment would be, you shouldn't expect to see the same rate of increase from going beyond Q1. But Q1 is the quarter that does have higher high expenses than some of the other, that from an increase percentage standpoint than other quarters.

Q - William Lewis

Okay and lastly at what point should we expect some more detailed commentary from you relative to the financial impact from the Avago acquisition?

A - George Hervey

Very close.

Q - William Lewis

Alright thanks.

Operator

And your next question comes, Shaw Wu with American Technology Research

Q - Shaw Wu

Thanks George, first of all great quarter, just two quick ones, can you provide little more color on in terms of your hardware IP business, like how you have been doing in terms of other areas like the preamps and motor controllers? And the second question I have is do you have the strategy with these new combo drives that some other drive makers are talking about, you know the Combo, Nand, Flash drive which is like a controller or something? Thanks

A - George Hervey

Well, I think the first part, let me take the first part. Shaw, we did a very, I think - in letting Wall Street know that we are not just an SOC provider for the storage business, we have a world-class preamps, motor controllers, our management memory technology and we are working very closely with our customers to see if in fact we can have them utilize more than just a be a SOC. We have made some very nice progress across all the segment by the way, its not just limited to one of the traditional segments in the market so, we will like to see, in general SOC might represent 50% of the building materials, semiconductors building materials for the drive and we would like to see that grow, significantly we report. We are having the success, it is contributing to the growth of our storage business and its primarily in those areas.

A - Sehat Sutardja

And I just want the second part is the relating to the Combo, NAND and the HDD, well you are starting to hear about it, but the only thing I can say about it, we have been talking about it ourselves internally for the last two to three years. So finally people are starting to looking into it, so I don't know what’s beyond that I can talk about, it has been really looking at for more news for the future.

Q - Shaw Wu

Okay, and just a quick follow-up, in terms of, George you talked about like, the contribution from these areas, would you saying, is your storage stream now its more of a function of kind of the core unit growth but chosen like the 1.8 inch program that you mentioned or is it up selling, I know upselling is the word but I guess co-selling more of these other additional storage HDD IP products?

A - Sehat Sutardja

Well Shaw I think if you are just to talk about the general growth of the market then I say might be a valid in other words just the unit growth of the market and the growth of these other technologies, so there is a both kind of going along at the same pace but as you know on the storage market that isn’t really what drives growth, what drives growth is taking some major platform, adding it to your portfolio of customers and so we are excited about the BackStar opportunities Sehat said and that will fall out, you know strip anything that would be of the other things.

Q - Shaw Wu

Okay thanks

Operator

And your next question comes from Arnab Chanda with Lehman Brothers.

Q – Arnab Chanda

Hi thank you very much. Sehat, I have a follow-up question, you started the discussion about the processor architecture and historical obviously people have been very religious as to, in the high performance in Nands, maybe got to see, ARM has been a low powered, does this suggest that you are going to continue to sort of proliferate ARM in multiple places and just curious as to how if you think yourself some qualitative ideas where you are let say you working you talked about printers and there is a whole transition to I mean 32 with ARM controllers from the sort of 8-bit microcontroller markets so if you are doing anything there, sorry for the kind of long question? Thanks

A - Sehat Sutardja

Yeah, I guess just to reiterate the mix we probably see is traditionally have been targeted for very high-end, high performance well the ARM was targeted for low power, low performance, cell phones as so low power, low speed from the market. From the architectural point of view there is no reason in the world why ARM cannot made to run just as fast as of mix of RPC. It just, we have been always the choice by ARM to develop the target, to target deeper market segment via higher volumes, maybe they would be ignoring that the lower volume seems to market to handle processors type of market in the past, so this is where we came in, we came in with our own architecture development internal, internal development, the standard ARM processor can with a single user device, single user processor. So for example we are in the high-end intermediate develop processor we have a dual chip machine, meaning that we can execute up to 3 instruction per cycle. As of they’re with that running in the deeper pipeline so you can run at higher frequencies, so all those things combined it is reason why our ARM processor now is on par with the best of the best MIPS of PC, now again to deepen this we are not targeting this for standalone devices we are targeting for integration with our SOC, and whether SOCs with storage or for Nand or for printers, its really developing for as far as our development of the processors, because they all can use the same processors, majority of the course therefore for all this application have recent only in - so the 14 from mix of RPC's to ARM is basically going forward, it is very very, we have done this our self in our system controller with additional with that we use mix MIPS in PowerPC, and then we have got a few customers and we converted to ARM just like practically overnight. And what was the other one?

Q – Arnab Chanda

The 32 meg, you know the transition from 8-bit microcontrollers to ARM based.

A – Sehat Sutardja

Yes, so regarding questions about- I guess you are referring to this huge-huge market of 8-bit microcontrollers, what is with the most of 32-bit like the ARM based, its still out there, so I don't know how to answer that. The only thing I can say is if it happens we will be there if it happened, if the customer want to move from 8-bit, cheap ADBC one to higher performance 32-bit arm processor will be there, we are not guiding in our revenue for the next several years for this to happen but we have our processor technology, it stands our internally developed architecture stands from full to high performance to ultra low power and in a small Wi-Fi’s. So if the market once suitable to get, and they really need to have very low cost for 8-bit microcontrollers, we have the technology, just that I think probably surely to talk about it at this point because may be 8-bit is sufficient for now. And if the market moves okay we will be there.

Q – Arnab Chanda

Thanks a lot.

A - Sehat Sutardja

Thanks

Operator

Your next question comes from Karl Motey, with Wachovia Securities

Q - Karl Montey

Thank you, question on gigabit controllers, you mentioned the Apple design win, I know traditionally the partnership program with Intel was targeted at the tier 1, we expect to see Marvell, more Marvell design wins at tier 1 OEMs. And if that's the case could you give as some update on with your, George? Thanks

A - Weili Dai

On the interrelationship, it’s been very healthy and Apple as you know since almost 5 years ago Apple has been using our gigabit file for their laptop for the migration to integrated single chip with 8-bit controllers that - and we are very pleased to be on their platform as prior to Intel joined partnership has been very successful

A – George Hervey

We are supporting Intel's PCI Express, which were completely behind, in two places.

Q - Karl Montey

Thanks

Operator

Ladies and Gentlemen, we have reached end of the allotted time for questions and I will turn the call back to the management for closing remarks

Sehat Sutardja, Chairman and Chief Executive Officer

Thank you Miles. This completes our Q4 and fiscal year 2006 conference call I would like to thank you, everyone of you for joining us and looking forward to updating you in our next quarter. Thank you very much.

George Hervey, Vice President of Finance and Chief Financial Officer

Thank you.

Weili Dai, Executive Vice President of Communications & Consumer Business Group

Thank you.

Operator

Ladies and gentlemen, we do appreciate your joining us today, this does concludes our conference call, you may now disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Marvell Technology F4Q06 (Qtr Ending Jan 28, 2006) Earnings Conference Call Transcript (MRVL)
This Transcript
All Transcripts