Analyst Conference News Summary

conference date: May 21, 2015 @ 1:45 PM Pacific Time
for quarter ending: May 2, 2015 (Q1, first quarter fiscal 2016)

Forward-looking statements

Overview: Missed original (but not revised) revenue guidance by a mile. Nor is Q2 guidance strong. Major y/y decline in profitability.

Basic data (GAAP) :

Revenue was $724.3 million, down 16% sequentially from $857.5 million, and also down 24% from $957.8 million in the year-earlier quarter.

Net income of was $14.1 million, down 83% sequentially from $81.7 million, and down 86 % from $99.5 million year-earlier.

EPS (diluted earnings per share) were $0.03, down 81% sequentially from $0.16, and down 84% from $0.19 year-earlier.

Guidance:

Revenue for fiscal Q2 2016 is expected between $710 and $740 million. GAAP EPS between negative $0.01 and positive $0.02. Non-GAAP EPS between negative $0.01 and positive $0.11.

Conference Highlights:

Weaker demand in Q1 was due to near-term macro economic conditions, and expects it to persist in Q2. Believes second half will show improvement. Demand was weak in the PC and storage markets, and in emerging markets.

Non-GAAP numbers: net income $71 million, down 46% sequentially from $131 million, and down 51% from $144 million year-earlier. EPS was $0.13, down 48% sequentially from $0.25, and 52% from $0.27 year-earlier. Excludes non-cash stock-based compensation, amortization, and other non-cash or one-time charges.

Non-GAAP gross margin was 51.6%, down sequentially from 51.8%.

GAAP gross margin was 51.5%.

The HDD market (storage) market revenue declined 20% sequentially, with decline in both HDD and SSD, but believes retained market share. 48% of total revenue. Expects continued decline in Q2. Believes FLC (final level cache) will enable HDDs to perform like SSDs. This will require better hybrid drives. Mobile device users expect the HDD to be asleep when not in use. FLC fixes that, so hybrids behave like an SSD, so an HDD will be almost as fast as an SSD, but be built for $40 for 1 terabyte. Marvell's FLC silicon is sampling now, with first production runs expected early in 2016.

Mobile and wireless revenue was down 13% sequentially. 25% of total revenue. This was mainly seasonal, and despite the launch of new Marvell-based smartphones in China. Connectivity revenue was hurt by seasonal game console downturn. Existing 11ac products continue to gain traction. Expects to be flat to slightly up in Q2.

Internet of Things (IoT) is continuing to gain design wins. Believes microcontroller-based devices will be moving to 32-bit from 8-bit, to run more sophisticated software to provide was sequentially connectivity and functionality. Kinoma software addresses this.

Network processing segment market revenue declined 7%, but believes gaining share in telecom. 21% of total revenue. Believes will be flat sequentially in Q2.

In the quarter Xiaomi launched a series of smart home products based on Marvel's silicon. The Samsung Galaxy J1 LTE smartphone is based on ARMADA PXA1908. Among other innovations Marvell launched is ARMADA 1500 platform for 4K entertainment.

Cash and equivalents balance ended at $2.5 billion, flat sequentially from $2.5 billion. Cash flow from operations was $59 million. Free cash flow was $44 million. $22 million was spent on share repurchases. The dividend required approximately $31 million. Will continue share buy backs on an opportunistic basis.

Cost of goods sold was $351.2 million, leaving gross profit of $373.1 million. Operating expenses were $359.9 million, consisting of: $280.1 million research and development; $36.2 million selling and marketing; $41.0 million general and administrative; $2.6 million amortization. Leaving operating income of $13.3 million. Interest and other income was $5.2 million. $4.3 million income tax expense.

It is notable that General and Administrative expense was up over $10 million from year-earlier, despite the decline in revenue.

The quarterly dividend per share of $0.06 will be paid on July 1, 2015 to shareholders of record on June 11.

"Well positioned to return to growth in the second half of the year."

Q&A:

HDD shipment TAM down 10 or 11% sequentially, why did you go worse, what will happen if growth resumes? Our SSD business was down more than the HDD business. We have customers who are seeing drops in their business, and our business tracks that, not the overall TAM. If PC industry does rebound when Windows 10 is introduced, we all will benefit. At this point we are not counting on it.

Strategic options given competitive environment in mobile? With the FCL deployment we will be more competitive in the mobile space. We are open to any strategy or opportunity that prevents itself to us. Meanwhile we will push the technology.

CFO transition timing? The CFO transition will have no impact on strategy.

Is one of the big notebook companies now using their own SSD controller? You are probably on the right track in you assessment But we have a very strong SSD controller portfolio. We have multiple other customers for a growing SSD market. Our HDD solution will help make HDDs more attractive compared to SSDs. "When the dust settles we believe we will have the majority of the market share in this area."

Customer inventory levels? Some customers are managing inventory tightly, as well as their own product supply and production. We don't have visibility, but if they step up production it would have a benefit for us.

FLC timeline? The silicon cost of deployment is quite insignificant. We have been working on the technology for 3 years, and have mastered it, so it can be very low cost. You just add a flash chip and FLC to a hard drive, and you have SSD like results, at HDD like prices. It should be adopted rapidly, the timing is just for software porting and validation, which is a 9 month to 12 month process. After that the whole HDD industry should go that way. It addresses the mobile market because it requires much less power.

Does FLC require more Flash? For the same size chip the hit rate goes from 50% to near 100%. So accessing the HDD will be a rare event, and so will HDD spin ups. Same Flash size can work fine, especially since Flash chip memory is improving per chip, now mostly 16 Gbytes.

FLC cannot address weight and form factor? In laptop market the weight difference is insignificant. The main difference is instance on capability of SSDs. We expect the market acceptance of hybrid drives to be very good. Thinnest HDDs now are 5 mm, and we are working with partners to develop 4 mm hybrid drives, which are very light.

We think Q1 was the bottom for our mobile and smartphone group. We have new technologies and new design wins that will drive unit and revenue growth going forward. We are enabling mid-range phones to have responsiveness similar to current high-end phones, as well as much lower battery consumption.

Chip pricing should be better with FLC because it will no longer be the price of the chip vs. competition, but the price of the finished system.

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