Analyst Conference News Summary

conference date: August 21, 2014 @ 1:45 PM Pacific Time
for quarter ending: August 2, 2014 (Q2, second quarter fiscal 2015)

Forward-looking statements

Overview: Continues expansion of revenue and profits, but only hit midrange of prior revenue guidance; beat EPS guidance.

Basic data (GAAP) :

Revenue was $961.5 million, up slightly sequentially from $957.8 million, and up 19% from $807.1 million in the year-earlier quarter.

Net income of was $138.9 million, up 40% sequentially from $99.5 million million, and up 125% from $61.8 million year-earlier.

EPS (diluted earnings per share) were $0.27, up 42% sequentially from $0.19, and up 125% from $0.12 year-earlier.

Guidance:

Revenue for fiscal Q3 is expected between $960 million and $1 billion. GAAP diluted EPS between $0.19 and $0.23; non-GAAP EPS $0.27 to $0.29. Free cash flow near $150 million.

Conference Highlights:

Storage demand was better than expected, but overall revenue was weakened by lower than expected 3G wireless revenue.

Non-GAAP numbers: net income $181 million, up 26% sequentially from $144 million, and up 53% from $118 million year-earlier. EPS was $0.34, up 26% sequentially from $0.27, and up 48% from $0.23 year-earlier. Excludes $35.0 million non-cash stock-based compensation, $4.2 million amortization, and $3.1 million in other charges.

Non-GAAP gross margin was 50.6%, up sequentially from 48.8% but down from 53.0% year-earlier. GAAP gross margin was 50.3%, up sequentially from 48.4%.

The HDD market (storage) market revenue was up 6% sequentially and was about 46% of total revenue. Demand was better than expected, with strong HDD and SSD growth, from market share growth. Enterprise units doubled compared to year-earlier. Investing in next gen HDD technology that should lead to market share gains. Continues to be the top SSD controller supplier in the market. Introductions included high-end PCIe devices. In Q3 expects storage revenue to be flat to up.

Mobile and wireless revenue was softer than expected, and was down 9% sequentially. Represented 30% of overall sales. 4G performed well, but one 3G smartphone OEM dropped purchases sharply. But up 65% y/y. Expanded customers from just Tier 1 OEMs to Tier 2 OEMs, and expect to launch soon in Europe. Wireless connectivity was up both sequentially and y/y. Gaming was strong, doing well in Chromebooks. Lighting, appliances and home automation device demand is growing. In Q3 expects modest sequential growth, led by 4G new product ramps, but still soft 3G.

Network processing segment market revenue was up 6% sequentially and represented 19% of total sales. Solid growth in North America and ARM-embedded products. Expects Q3 growth to be flat.

Video connectivity business up over 50% y/y, but down slightly sequentially, mainly from Google Chromecast sales.

Cash and equivalents balance ended at $2.3 billion, up sequentially from $2.1 billion. Cash flow from operations was $157 million. Free cash flow was $137 million. No cash was spent on share repurchases. The dividend required approximately $30.8 million.

Cost of goods sold was $477.7 million, leaving gross profit of $483.8 million. Operating expenses were $363.4 million, consisting of: $294.8 million research and development; $34.0 million selling and marketing; $31.3 million general and administrative; $3.3 million amortization. Leaving operating income of $120.5 million. Interest income $12.3 million. $6.2 million income tax benefit.

The quarterly dividend per share will remain at $0.06, payable on October 2, 2014 to shareholders of record on September 11, 2014. Marvell's ability to pay the dividend depends on Bermuda law, where Marvell is incorporated.

Q&A:

3G v. 4G? We expect 4G to grow while 3G continues to drop, but in Q2 3G was still the larger part of the business. One Asian OEM had some issues in Q2.

Decreased gross margin? Every quarter has plusses and minuses. We expect mobile revenue growth in Q3, and it has lower than average margins.

MediaTek 4G solution competition in China? We also introduced 64-bit 4G solutions last quarter, and they will ramp up this year. There is nothing unique about Mediatek 64-bit solutions. We did not use to compete in the ultra-low cost segment, but we will compete in it for 4G. As the low-cost 4G solutions replace 3G, we believe demand will explode. We believe competition will be fierce, but we are not concerned. Some companies are going out of the business. We were not late in the LTE space, so we are in a better space than we were for 3G as long as we can deliver low cost 4G solutions. We are expanding our OEM customer base; we have design wins for that.

Lack of aggressive buy-back program? Our general strategy has not changed: we are opportunistic in our share repurchases. We are paying a healthy dividend. We are using cash to invest for future growth. We are waiting for clarity on the litigation before making any changes. See the FAQ at the web site about the case (v. Carnegie Mellon University).

Is there any further 3G design going on right now? Mostly switched to 4G, where the demand is. This could be the transition year to 4G, with 2015 being the low cost 4G year. We don't spend much effort trying for new 3D design wins.

Ultra-low cost 4G will have lower margins, but the unit volume will be much bigger. There are really only 3 suppliers for 4G, against 6 or 7 for 3G.

Lack of normal Q3 seasonal growth? It is mainly the 3G softness offsetting growth elsewhere. Storage is a difficult comparison for Q3 vs. Q2, because we did better than expected. But storage is likely to even out on a 2-quarter basis.

Base band efforts, number of units? We don't report unit sales in this business. We have invested in base band, and are leading in the LTE space. We released 10 devices late last year and have next-gen devices in the pipeline. But most of the effort is in the application side. In the 3G space we were a tiny player in the past; we will gain market share in 4G.

Any color on SSD revenue? It is getting bigger, but we do not intend to disclose its size.

PC storage TAM? We guided storage up flat to up slightly. We see good trends with our one North American customer. The PC market tends to be conservative, but may be improving in the next few quarters due to new Intel 14 nm processor shipments, but it depends on how they are priced. But we have to be as conservative as our customers in projecting unit demand, until we see such a change.

Any FinFET in your roadmap? We have been working on FinFET for over a year, but the cost structure does not make sense yet. It will be important for the very high end performance market.

4G milestones to look for? The most significant would be when our ultra-low cost 4G devices go to production. Most of these phones will be made in China or Korea, whatever the destination market is.

We still have a lot to invest R&D in, including hybrid drives and larger, smaller drives, where many things remain to be invented to make these practical. We could reduce R&D spend somewhat by eliminating duplication of effort.

SSD competitive markeplace? We are the longest-running investor in SSD. We ported a lot of HDD tech to SSD. We continue to invest heavily. We won this business because we provided better performance, yield, and pricing. We have a very strong IP portfolio that protects our business.

Color on networking business? It is mostly enterprise. Growth was broadbased, ethernet and switch businesses, datacenter as well as service providers. The NPU business was soft after a strong Q1.

We believe there will be opportunities to build more advanced Chromecast devices. We also are seeing settop box wins, which is a new business for us.

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