Good day, ladies and gentlemen, and welcome to the Q2 2015 Marvell Technology Group Ltd. Earnings Conference Call. My name is Whitley, and I'll be your operator for today. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session.
As a reminder, this call is being recorded for replay purposes. I would now like to turn the conference over to your host for today, Mr. Suki Nagesh, Vice President of Finance. Please proceed, sir.
Thank you, Whitley, and good afternoon, everyone. Welcome to Marvell Technology Group's Q2 fiscal 20 16 earnings call. With me on the call today are Sahad Suttarja, Marvell's Chairman and CEO and Mike Rashkin, Marvell's CFO. We will all be available during the Q and A portion of the call today. If you have not obtained a copy of our current press release, it can be found at our company website under the Investor Relations section atmarvell.com.
We have also posted a slide deck summarizing our quarterly results in the IR section of our website for investors. Additionally, this call is being recorded and will be available for replay from our website. Please be reminded that today's discussion will include forward looking statements that involve risks and uncertainties that could cause our results to differ materially from management's current expectations. The risks and uncertainties include our expectations about our overall business, our R and D investment, our product and market strategy, statements about design wins and market acceptance of our products, statements about general trends in the end markets we serve, including future growth opportunities, statements about market share and statements regarding our financial outlook for the Q3 of fiscal 2015. To fully understand the risks and uncertainties that may cause results to differ from our expectations and outlook, please refer to today's earnings press release, our latest quarterly report on Form 10 Q and subsequent SEC filings for a detailed description of our business and associated risks.
Please be reminded that all of our statements are made as of today, and Marvell undertakes no obligation to revise or update publicly any forward looking statements. During our call today, we will make reference to certain non GAAP financial measures, which exclude the effect of stock based compensation, amortization of intangible assets, acquisition related costs, restructuring costs, litigation settlement and certain one time expenses and benefits that are driven primarily by the discrete events that management does not consider to be directly related to our core operating performance. Pursuant to Regulation G, we have provided reconciliations of the non GAAP financial measures to the most directly comparable GAAP measures in our 2nd quarter earnings press release, which has been furnished to the SEC on Form 8 ks and is available on our website in the Investor Relations section. With that, I would now like turn the call over to Sahad.
All
right. Thanks, Suki, and good afternoon, everyone. Today, we reported 2nd quarter revenue of approximately 962,000,000 dollars slightly higher from the prior quarter and in line with our guidance range. Revenues in the quarter were driven by better than expected demand from our storage and networking customers, offset by softer 3 gs Mobile business. We delivered the following non GAAP results for Q2.
Gross margin of approximately 50.6 percent, operating margin of 17% and earnings per share of $0.34 We also paid approximately $31,000,000 in dividends during the quarter. Now I would like to provide a brief update on each of our end markets. In storage, revenues came in higher than expected driven by strength in both HDDs and SSDs. For Q2, revenues from our storage end market increased 6% sequentially. Starting with HDDs, our business grew sequentially as we continue to gain share.
This growth was despite a flat industry TAM and as we continue to improve our 60% plus 60 plus percent share of our total HDD market. Our 500 gigabyte per platter solution continues to gain momentum, and we believe this technology could continue to strong growth for the foreseeable future. In the enterprise type space, we continue to see steady share gains with units in Q2 compared to the same time last year. For reference, our share of the largest HDD manufacturer's enterprise business is just over 50% and growing. In addition, we are continuing to accelerate our investment in next generation HDD technologies.
We believe this will allow us to further increase our share and solidify our leadership position in the market over the next few years. Next in SSDs, we had another record quarter driven by double digit sequential growth in both volumes and sales. We continue to be the top SSD controller supplier in the market. During the quarter, we announced several new products that expanded our industry leading SSD offerings. These included our 5th generation SATA product with a new LDPC technology that support 3 d NAND as well as 50 nanometer 2 d NAND.
We also introduced a low cost, but higher performance PCIe based SSD solution with a similar price point to our previous generation SATA solution. In addition, we introduced a very high end enterprise, PCIe product for the data center and high end client markets, with which we already have multiple customer engagements. We expect mass production of these products starting in calendar 2018. In the meantime, our business remains on track to grow strongly in fiscal 2015 on the strength of our existing product lines. For Q3, we expect our storage end market to be flat up modestly driven by stable HDD fundamentals and continued strength in SSD.
Turning next to networking. Q2 results grew 6% compared to the prior quarter. We saw strong double digit sequential growth from our Ethernet product lines across enterprise, data center and service provider, with the latter also providing growth in our PON product line. We saw solid growth in our North American customer base, especially in IP networking for enterprise and data center solutions. We also saw continued growth in our ARM based embedded networking SoC products.
Design win momentum continued this quarter with new programs that cover low end fixed solutions to high end modular platforms in enterprise and service provider markets. In summary, our networking business remains steady and we believe we are well positioned for growth going forward. For Q3, we are expecting flat to modest growth in our networking end market. Now next move moving to mobile and wireless. Our revenue in this end market came in softer and declined approximately 9% sequentially.
Although our 4 gs LTE and wireless connectivity businesses continue to perform well, we saw weaker than expected 3 gs demand from 1 of our major Asian smartphone OEMs, which led to most of the downside. However, on a year over year basis, our mobile and wireless business still increased over 65%. Specifically in mobile, we continue to see growth across our customer base in 4 gs LTE and saw double digit sequential unit growth in Q2. During the quarter, we expanded our customer list from Tier 1 OEMs to now include Tier 2 OEMs. We expect new smartphone launches with our LTE solution in the coming quarters and are confident about holding a market position in China.
We're also seeing good expansion of our 4 gs LTE products outside of China with a leading OEM already launching our LTE solution in the European market. In addition, Samsung recently launched the new Galaxy Mini 4 gs LTE smartphone and a multimode mobile hotspot, both powered by our LTE solutions. Samsung has also selected our Quadco SoC to power their new 7 inches Galaxy tablet. In summary, for Mobile Air, we are well positioned for 4 gs in 4 gs LTE to meet any competitive challenges. Next in wireless connectivity.
Q2 performance was slightly better than expectations with double digit growth both on year over year and quarter on quarter. For our 1 by 1 MIMO solutions, we saw strength in gaming market for both console and portable devices as well as continued growth in our 4 gs smartphone platform. Gs smartphone platform. For our 2x2 solutions, customers continue to adopt our combo solutions in set top boxes, tablets and Chromebooks. And we expect to see more products launching later this year.
Finally, in the 4x4 devices, we are seeing stronger traction at the as the access point and gateway market move towards the higher end. Moving next to the IoT market, which is a part of our wireless connectivity business. We have already introduced, as you know, a Zixby solution in the past. Now we recently enhanced our family of wireless microcontroller SoC with Wi Fi and Bluetooth. These SoC targets a broad spectrum of IoT, for wearable and smart home products for which we are currently seeing strong customer interest.
We are seeing strong design traction in the lightning, appliances and home automation markets. We expect volume ramps of these devices later this year. We're also thrilled to be supporting Apple's new HomeKit accessory protocol. HomeKit enables home electronics manufacturers to easily add the ability for the customers to securely pair and control devices throughout the home, including integration with Siri. We expect HomeKit enabled products to be launched later this year.
For Q3, we expect our mobile and wireless end market to grow modestly on a sequential basis. Similar to Q2, we expect continued strength in 4 gs LTE and connectivity to be partially offset by ongoing challenges in 3 gs at a major Asian customer. Now moving to Audio business. Although revenue in Q2 declined seasonally, on a year over year basis, sales increased over 50%, mainly due to shipments of Google Chromecast, which has now launched in 18 countries. Additionally, we continue to gain traction at new service providers with our Armada 1500 family of set top box SoCs.
In summary, excluding 3 gs weakness, most of our end markets in Q2 came in better than expected with storage, networking and connectivity delivering higher revenues. Looking ahead, we expect to see growth in Q3. Our 4 gs mobile decent traction remain solid with many new customers just starting to ramp into production. We also have new products coming up that will further enhance our competitiveness. Our connectivity business remains strong due to demand from enterprise gaming and higher tax rates to our mobile business.
Our storage business is also healthy, driven by market share gains in HDDs and strong growth in SSDs. Finally, our networking business remains stable. With that, I would like now to turn the call over to Mike to go over our Q2 financial results and the Q3 outlook. Thank
you, Sahat, and good afternoon, everyone. Moving to our financials. As Sahat mentioned, we reported record revenues of $962,000,000 for the 2nd quarter, which was slightly higher than the prior quarter and an increase of 19% year over year. The in line revenues were driven by better than expected growth in storage and network and offset by a larger than anticipated decline in 3 gs Mobile. In storage, our overall revenue grew 6% sequentially and represented approximately 46% of total sales.
Q2 sales in this area were better than expected and we saw growth in both our HDD and SSD businesses. In networking, our revenue grew 6% sequentially and represented approximately 19% of total sales. Networking sales in Q2 were better than expected and driven by strong growth in our Ethernet product lines and continued adoption of our embedded SoC solutions. Our mobile and wireless end market came in softer than anticipated declining 9% sequentially and represented 30% of overall sales. Although sales of 4 gs LTE and wireless connectivity products increased during the quarter, 3 gs shipments declined more than expected mainly due to weakness at one of our major Asian based OEMs.
Moving next to margins and expenses, our non GAAP gross margin for the second quarter was approximately 50.6 percent, which was above the midpoint of our guidance range and improved 180 basis points sequentially. The main reason for this was a more favorable product mix during the quarter. Non GAAP operating expenses came in at 3 $23,000,000 at the low end of our guidance range due to excellent expense controls by our business units. This resulted in a non GAAP operating margin of 17% for the quarter, improving 2 60 basis points sequentially, which was better than our expectations. Net interest and other income was about $12,000,000 mostly due to an investment gain that occurred in Q2.
We recognized a tax benefit of approximately $6,000,000 in the quarter due in part to the expiration of the statute of limitations certain foreign jurisdictions. This resulted in non GAAP net income for the Q2 of 181,000,000 dollars or $0.34 per diluted share. This was approximately $0.06 higher than the midpoint of our guidance. The shares used to compute diluted non GAAP EPS during the Q2 were 533,000,000 dollars Cash flow from operations for the 2nd quarter was $157,000,000 and free cash flow for the 2nd quarter was $137,000,000 or approximately 14% of revenue. Now summarizing Q2 results on a GAAP basis, we generated GAAP net income of $139,000,000 or 0.27 dollars per diluted share.
The difference between our GAAP and non GAAP results during the 2nd quarter was mainly due to stock based compensation of 35 $1,000,000 related to amortization and write off of intangible assets $2,000,000 of indemnity guarantee costs associated with ongoing litigation and $1,000,000 due to restructuring and legal settlement costs. Now turning to the balance sheet. Cash, cash equivalents and short term investments as of the end of the second quarter was approximately $2,300,000,000 an increase of 7% from the previous quarter. We also paid dividends of $31,000,000 in the quarter or equivalent to $0.06 per share. Net inventory at the end of the second quarter was approximately 394,000,000 dollars an increase of about $43,000,000 from the previous quarter in order to meet demand for our products in the coming quarters.
Days of inventory increased 15, we currently project revenues to be in the range of $960,000,000 to 1,000,000,000 dollars At the midpoint, this would equate to a roughly 2% sequential growth. We expect our storage and networking businesses to be flat to up modestly, while mobile and wireless business is expected to grow slightly. Within our mobile and wireless business, we expect continued growth in 4 gs and connectivity to be partially offset by a decline in 3 gs. We currently project non GAAP gross margin of 50% plus or minus 100 basis points and currently anticipate non GAAP operating expenses to be approximately $330,000,000 plus or minus 10,000,000 We anticipate R and D expenses of approximately $270,000,000 and SG and A expenses of approximately $60,000,000 dollars At the midpoint of our projected guidance, this should translate to a non GAAP operating margin of approximately 16% plus or minus 100 basis points. The combination of interest and other income should net out to approximately $1,000,000 and we expect tax expense to be approximately 6,000,000 dollars We currently expect the diluted share count to be approximately 535,000,000 shares.
In total, we currently project non GAAP EPS to be $0.29 per diluted share plus or minus a couple of pennies. On the balance sheet, we currently expect to generate $150,000,000 in free cash flow during the quarter. We anticipate our cash balance to be about $2,400,000,000 excluding any M and A activity, share buyback or other one time items. We currently expect our GAAP EPS to be lower than our non GAAP EPS by about $0.08 per share. With that, I would like to turn the call over to the operator to begin the Q and A portion of our call.
Operator?
Our first question comes from the line of Craig Ellis with B. Riley. Please proceed.
I wanted to follow-up on some
of the points made about the mobile business on the 3 gs and the 4 gs. Mike, can you or Sahat, can you give us the mix of 3 gs versus 4 gs? And how should we expect the mix of that business to change as we look out over the back half of calendar 2014 and through calendar 2015?
Well, we don't provide the mix of those products. But as time goes on, we expect the 4 gs to exceed the 3 gs with the 3 gs really on a downward ramp?
Yes, Frank, this is Suki. 3 gs was still if you remember in Q1, we said 3 gs was a predominant part of our business in Q1 and 4 gs was a small part. That was still the case in Q2 as well. And as you know, I think it's pretty clear out there that there's one Asian OEM that's had some issues. And we will not we didn't escape that in Q2.
Thanks for the help there. And then the follow-up question is on gross margin. It looks like the mix of business is unchanged quarter to quarter, but the gross margin midpoint is down sequentially. So what accounts for the decrease in gross margin when mix is flattish?
Well, there's always pluses and minus every quarter, Craig. And we do we are going to see growth in our mobile business in Q3. And I think we have mentioned this in the past that from a mix standpoint, mobile and wireless generally commands lower than corporate average margin and that would be a contributor to the lower margin really.
Thanks guys.
Your next question comes from the line of Harlan Sur with JPMorgan. Please proceed.
Hey, guys. Thanks for taking my question. Good to see the continued 4 gs growth in your Q3 guide. But MediaTek is ramping its 32 bit and 64 bit multi core 4 gs solutions into China Mobile this quarter. And there's been a lot of concern that your market share is going to drop significantly.
Sahat, any way to help give us confidence that you're still capturing a high level of 4 gs design wins that will ramp beyond just the Q3, and that you'll continue to build scale in 4 gs smartphones? Maybe, I don't know, quantify the number of 4 gs handset design wins you have in the pipeline that you've yet to ramp or some sort of confidence that you can continue to grow your 4 gs business in Q4 and into the first half of next year? Anything you can provide would be appreciated.
Sure. We talking about 64 bit, so we also introduced 64 bit 4 gs solutions last it's it's not there's nothing unique about MediaTek, okay, building 64 bit. We have 32 bit solutions, we have 64 bit solutions. The area that we haven't played in the past on the ultra low cost side that in the future, we will be addressing as well. So those are the designs are in the pipeline, and they will be going in production sometime next year.
So if you're talking about where the volumes are going to grow, I do believe that as 4 gs LTE price goes down, I mean, no, as the market as we in the market means us and our competition starting to address the ultra low cost side to replace the 3 gs, we believe the market for 4 gs LTE is going to explode. So this market is going to be so big that it is clear that, again, the competition is going to be fierce. But we're not concerned about that. Every time we enter like a big market opportunity, there's bound to be a lot of companies going to get into this business. Now the good thing is a lot of companies also going out of this business.
So only just 3 of us are going to be left in the LTE space. And being not being late this time around in the LTE create set us up in a much, much better position in our in the customer base. All we have to do is make sure that we deliver the lower cost solutions to address the 3 gs replacement sometimes that's going to happen sometime next year.
Okay. Thanks for that.
To set up the point, we also mentioned, Sahad mentioned this in the prepared commentary, right, we are expanding our customer base from Tier 1 OEMs to now include Tier 2 OEMs as well. And you can do that with that. Obviously, you need to have design wins to do that, right?
Yes.
We already have. Okay, great. And then my follow-up question is, when the stock was last at these levels, the team was aggressive in its buyback program. I think the last time around, you were probably using 100% of your quarterly free cash flow to buy the stock kind of here in the $12 $13 range. Can you guys just give us an update on when you think you will finalize some of the remaining issues with the CMU appeals process and be in a position to start to aggressively buy back your stock again?
Good question, Harlan. I think we've talked about this in the past as well. We mentioned, right, I mean, our capital allocation strategy has not changed. It continues to be the same. We will be opportunistic in our share repurchases.
And just to put that question in perspective, we spent a significant portion as you've said, we spent a significant portion of our free cash flow in the last 3 years in share repurchases, right, close to $3,000,000,000 in share repurchases. So this is a significant significantly better than pretty much most of our competitors out there. And we are also paying a heavy a pretty healthy dividend to our shareholders. The management of the company board continues to evaluate the business needs every quarter about the capital structure and capital returns. We are using our cash.
I think we've mentioned this to you as well for appropriate investments to drive future growth as well as return capital to our shareholders in the form of buybacks and dividends. The near term, however, I think as we mentioned in the past, we are waiting for further clarity in the ongoing litigation before we can proceed forward.
Any visibility in terms of timing on when you're going to be able to resolve some of these remaining issues?
We're just waiting.
Okay. All right. Thank you.
The other thing, we've just recently updated our website and FAQ. I urge everybody to take a look at that just happened today. So we've had obviously, we filed our appeal on CMU case. So there's a bunch of new information that's probably good for you to take a look at.
Okay. Thank you.
Your next question comes from the line of Quinn Bolton with Needham and Company. Please proceed.
Hi, guys. Just wanted to
come back to the mobile
and wireless business. Obviously, you talked about 1 OEM in the 3 gs business that's gone through some market share issues. But can you talk about whether there's any real active 3 gs design going on right now? Or is most of the design work you're seeing on the LTE side of the business?
Yes. Most of the activities are 4 gs LTE. Pretty much, if you talk to the OEMs in Asia, they all working and they're all seeing that the demand is in the 4 gs space. So this is okay. I think this year could be a transition year from 3 gs to 4 gs.
And next year will be when the LTE is when the ultra low cost LTE is, okay, finally is available in the market. Nobody will have a will talk about 3 gs any longer next year. So we a result, we don't spend too much time on trying to get new design wins on the 3 gs side.
Great. Thanks for that clarification, Sahib. And just a follow-up question. You talked about the ultra low cost LTE. Do you have any sense on how the margin profiles of those solutions will compare to your current 3 gs business?
Obviously, the LTE is going to be better than the 3 gs, especially when you're talking about the 3 gs, it's almost at the end of life. So I don't see any concern on that side.
But Quinn, are you referring to the low cost LTE?
I'm just wondering if you do a one for one replacement of a 3 gs design today for an ultra low cost next year, is that margin accretive?
Yes. Yes. Yes, it's okay. It's obviously, the ultra low cost is going to be slightly lower margin than the higher end. That's always going to be the case.
But the volume is going to be so much bigger. But you also need to be to put it into perspective that in the 3 gs, we have a lot more competition today than in the 4 gs. 4 gs, we're talking about is only just today the 3 suppliers. So okay, with 3 suppliers versus more than, okay, like 6, 6, 7 suppliers in the 3 gs, the margin profile is going to be significantly better in the LTE space.
Great. Thank you.
Your next question comes from the line of Doug Freeman of RBC Capital Markets. Please proceed.
Great. Thanks guys for taking
my questions. Congratulations on the strong results. If I could dig into a little bit, be if you could highlight for us what is causing revenue growth to be maybe a little bit less than you would normally see in this quarter? Is it literally all related to the 3 gs softness that you're seeing? Or is there other things occurring in the storage or networking businesses?
For Q3, Doug, it's predominantly, I would say, the 3 gs business that's offsetting growth elsewhere. Plus remember, I mean, if you talk about Q2, right? I mean, Q2, obviously, we had initially expected our storage business and network business to be flat. They came in better than expected, right, 6% growth for each of those end markets for us. And our Q2 has the month of July in it as well.
So clearly, for us to I know where you're going with storage guys have been guiding their end market to be up a lot more. Should that be up for us as well. But we expected on a 2 quarter basis, it will probably even out for us. So the main difference really for us is the 3 gs going down.
Okay. If I could focus in a little bit on the baseband efforts the company is pursuing. Your competitors have offered up a number of units they expect to ship this year. Would you like to counter that with the number of units you think you can ship either this year or next? And if you could maybe give us a better understanding of the amount of your R and D or OpEx that is going towards your baseband efforts?
Yes. What was the first question, Budd?
Just the total number MediaTek has offered us that they expect to ship a certain number of units this year. And I was wondering how you still feel about what the how many units you think you can ship and what that is in terms of the market size maybe?
Yes. We never we haven't divided the units yet. Okay. We never talk about units in this business. We are still obviously a new company, relatively a new company, so we also have to be careful about talking about our units.
But in terms of our investment in the basement, we are actually quite leading in the LTE space. So we already sample release 10 devices, for example, early that was late last year. So we have prototypes in the new the next generation devices in the pipeline. So we are so in terms of the amount of efforts to do this, actually, it's not in the baseband side. Most of the efforts, okay, they require a lot of investments is in the supporting the application side.
So those things are the one that, okay, we've been working even starting from the 3 gs time frame. Now it's our solutions are being more mature. Actually, this is helping us, our customers, to be able to ramp up production on our 4 gs solutions sooner, I mean, at a faster rate than used to be when we presented the 3 gs space. So as I said earlier, the volumes in if we look at in the 3 gs space, we are tiny, tiny player in the past. So if we look at the positive side, next year when the volume moves from 3 gs to 4 gs, we're talking about getting market share away from our competitions in the 3 gs volumes.
So if anything is okay, it's going to be for the industry to move to 4 gs, it's going to be better for us than if the industry stay with the 3 gs. So my expectation next year about volumes unit wise without name number putting the numbers is going to be bigger than this year on the 4 gs.
And then my last question is one that I think I've asked in the past and the question really is in your storage business. Has SSD revenue gotten to be the size that it's large enough that you can separate it for us? Or highlight for us what percentage of your storage business it is?
Well, it is getting bigger for sure, Doug, but we have not disclosed that. We don't intend to disclose that at this point.
Got it. I also mentioned in the past that we will not disclose that, especially in this business. It's not just HDDs, you have FFDs. And then down the road, there will be SSDs for smartphones, which has nothing to do with SSDs for PCs or enterprises. And not to mention, Sakia, about hybrid HDDs, it's too complicated.
And some of these devices actually are going to be the same device, just retargeted from one market versus the other market. So we rather not split the numbers for comparative reasons.
All right. Thank you, guys.
Thanks, Doug.
Your next question comes from the line of Hans Mosesman with Raymond James. Please proceed.
Thank you. A couple of questions on the storage side and specific to the PC side of that business. It seems that you're guiding to flattish TAM in the current quarter. What is going on there? And can you provide some clarity in terms of PC refresh on the enterprise side of things that was ongoing earlier this year?
Thanks.
Yes. Hans, I think we mentioned, if you look at it on a 2 quarter basis, Q2 plus Q3, it probably evens out for us, right? I mean Q2 HDDT was flat. We grew our business, right? I mean our storage business overall grew 6% in the quarter.
And we've guided to our storage business to be flat to up modestly, back calendar month, you should be looking at it that way. In terms of back calendar month, you should be looking at it that way. It probably evens out and it's relatively in line to the market.
Can you provide any kind of qualitative data on the enterprise or commercial PC refresh that we saw earlier in the year?
On the enterprise side, as Sahat mentioned, we continue to do very good trends. We see very good trends at our 1 North American customer. Our share continues to creep up steadily. It's grown over 50% on a year over year basis. So we feel pretty good about that business continuing to grow throughout this year.
Yes. Well, maybe I'll give a little bit qualitative feedbacks. So if you look at this in the I mean, I've been maybe a little bit somewhat conservative at this point. But because of what they've seen in the last couple of years of PCs PC markets not growing or even going down slightly. But I believe the market may change a little maybe improving in the next few quarters.
I guess this is just my gut feeling is. And maybe the reason is this because the part of the reason is the Intel shipping new these 14 nanometer processors, which depending how they're priced, okay? If they price the new 14 nanometer FinFET Processors correctly, the market may grow, okay? The PC market may see a cycle replacement cycle, okay, in the next few quarters. But again, I cannot I don't know how to predict that.
I'm just making a decision statement if the supply I mean, the suppliers the key suppliers in the market are eager to drive the market for replacement cycle. I think this market will move. But in the meantime, we have to be just as conservative as our customers in terms of projecting the units in HDDs. And if the numbers go up goes up, they need to supply the parts to our customers.
Great. Thank you very much.
Your next question comes from the line of Sanjay Choriza with Nomura. Please proceed.
Hey, Sahad. A question on LTE market. Could you give us some more color on the demand for LTE chipsets in the second half of this year? Your chipset competitor in China, they are indicating a very strong demand. I was wondering if you could provide any color that you are seeing from your customers.
And if not the unit shipment color, I was just wondering if you'd like to use to do that with TDAC DMA, if you could provide your market share for this year in TDLT?
Yes. So talking about the units, as we said earlier, in Q2, units shipments going up. We already say in Q3, unit shipments also get to go up. So
the
shipments on LTE, we expect to continue to go up. As we said earlier, for the reason that we have in our mobile business because of the softness in the 3 gs side. It has nothing to do with the 4 gs. Despite the MediaTek going into the business in the 4 gs, it's just only making this business even more attractive, okay, for us. If we as the supply chains sees the media tax came to the market, they know that these markets are going to be ripe for high volume production.
So as long as we continue to deliver our new products on time to take I mean to serve the different price points of this market. Okay, we believe that we will continue to grow our business. Next year, as I said earlier, that when our ultra low cost is ready, we will our volumes can only go up significantly.
And another question is, is FinFAT next year a necessary element in your roadmap to be successful? Your other competitor in this space, they have indicated some FinFET based roadmap for next year. I was just wondering what is your strategy to deal with that?
Yes, talking about FinFET. Yes, we've been working on FinFET for, I don't know, like a year, 1.5 years now. The challenge right now in FinFET is the cost structure, and it just does not make sense for ultra low cost segment yet or even for the medium cost segments. Infinvent will be important for the very, very high end market where you need performance where cost is not an issue. So yes, we're working on that, but we don't we're not going to use TIMPAD for the lowest cost product to the market first, okay?
It will be bad for gross margin if we do that.
Thanks.
Thank you, Sung Ji.
Your next question comes from the line of Ian Ng with MKM Partners. Please proceed.
Yes. Thanks for taking my question. So for 4 gs, what sort of milestones should we look for at this point outside of China? You talked about an OEM launching in Europe. Your modems are certified at some U.
S. Carriers. Should we look for some other milestones to see some progress there?
The significant milestone, obviously, will be when our ultra low cost going to production because those are the ones that are going to replace the 3 gs. And as I say, because our 3 gs business is tiny compared to the rest of the world, the ultra low cost 4 gs is going to be an important milestone for us as those are the ones that are going to allow us to get a much bigger percentage of the cell phone market.
So it largely be China OEMs selling into the rest of the world? That's the overseas model you think?
They're all going to be I think by this time, we're all going to agree that most of the phones are making to be manufactured in China Korea. I think we are thinking it's the nobody is going to argue against that. So yes, it's whether the market is for the U. S. Or for Europe is going to be built in China or Korea.
Okay, great. And then as my follow-up, R and D expenditures, 28% of sales, that's a bit high versus peers, but understandably a lot of things are in investment mode. You have a sense of like which businesses are likely to move out of investment mode into harvest mode shortly? I mean, I think some parts of storage are already in harvest mode at this point.
Okay. I'll let me address the storage. Even the storage, we are not playing the harvest mode. There's still a lot of things that could be that needs to be invented to allow our customers to move to terabytes per drive at low cost. Not I mean, we can build terabyte drives now, but it's coming about 2.5 inches But the price is starting to make sense for them for the end users.
So building investment in hybrid, that's a lot of investment to do, how to build the proper hybrid for the hard drive. And then continued investment of the building more advanced SSDs to allow TLCs to be just as reliable as MLC in the past. So a lot of investments still yet to be done in the next several years. I think the harvest mode for that probably will be 5 years from now at the earliest. A lot of times, people made a mistake thinking that there's nothing left to be invented.
That's when they made a mistake. And we'll be happy when they made that mistake.
Having said that, Sahad, I think we do agree that it's important to control our R and D expenses. And you'll notice that our overall OpEx for this past quarter has gone down below our guidance by $7,000,000 So we are very active in controlling our operating expenses. And part of that is to direct our operating direct our R and D expenses into those areas where it's much most productive and to reduce it in those areas where it's not so productive. Yes. We're going to continue to invest, but we're going to continue to invest into those areas where it's going to
be most fruitful. Okay. I agree with that. But also I want to add another thing. One of it's okay of the even when we continue to invest, we can also do better investment, better allocations of R and D investment, meaning like, for example, doing less duplication as a company it's a big company.
So in the past, okay, we have some duplication efforts in certain areas. If we can have those areas, we are working on this. As we are okay, as we're able to improve the synergy in the different businesses, we could continue to invest in R and D, but without increasing the R and D dollar.
Right. So we intend to increase our investment, but reduce our expenditure.
Okay. Thanks, thanks Mike.
Your next question comes from the line of Joe Moore with Morgan Stanley. Please proceed.
Great. Thank you. I wonder if you could talk about the SSD market competitively now that the LSI Sandforce business has gone to Seagate is probably not going to pursue aggressive merchant market wins. How do you see the competitive landscape in the merchant market there? And we hear about Fison and others kind of coming into the market.
How competitive do you think that's likely to be in a year or so?
Yes. And SSD is an area we've been out of all the companies in this business investing in SSE, we are the oldest one. We have the one that have been working on the longest, more than 7 years by this time. That's on top of the things that we leverage from the HDD. So a lot of technology we developed HDD for more than a decade ago being ported, okay, even when we started this business 7 years ago.
So a lot of new inventions continue. We continue to invest heavily in this area. So we have a lot of new inventions coming. So the reason we won this business is because we have better performance, better which translate also better yield, better quality, which translate into lower cost to the end products. So the cost of our so a lot of our competitors that are trying to get into this business a few years back, okay, did not create this business properly.
They don't invest the right amount of investment to compete properly to win this business. So I am confident. I feel good about that. We have a okay, we have extremely strong IP portfolio. We have tons of patents in this area.
So we are very confident that we will be able to protect this business for the long run.
Great. Thank you very much. And then a quarter ago, you had mentioned that the $100,000,000 target on the PD LTE side from China Mobile was probably the upper end of the range that you would look at for the year. Do you have any update on that how big the PV LTE market will be in 2014?
Yes. I did say that. I did say that $100,000,000 was delayed on the high end. But I still believe it's still on the high end. But nobody knows what's going to happen in December of this year.
But based on the rate that they are running, I think maybe a little bit higher than what our early projection, but okay.
The jewelry is still out.
Yes, jewelry is still out, yes. But the beauty is it doesn't matter, like I say, I think it doesn't matter whether it's $100,000,000 this year or not. For sure, next year, it's going to be more than 100
Thank you, Joe.
Your next question comes from the line of Kevin Cassidy with Stifel. Please proceed.
Thanks for taking my question. Your networking business was up 6% quarter over quarter. Can you break it down a little more? How much was Yes. So our networking business is
Yes. So our networking business is comprised mostly of enterprise customers, Kevin. So I think we mentioned that in the past. We saw very nice, very broad based growth in Q2. We saw some double digit growth in our Ethernet PHY businesses.
We saw some pretty good double digit growth in our switch business as well. And both for the data center as well as the service provider markets. Some of those things that you know before, you may have an idea, the Prestera switching line, the Alaska PHY lines, all did pretty well. Our Moda SoC devices did really well. The one thing, our own NPU business was a little softer in the quarter, mainly because we saw a significantly stronger Q1, but we expect that to rebound nicely this quarter.
Okay, great. And maybe just housekeeping questions. The tax rate going forward seems to be fluctuating quite a bit last couple of quarters. What should we expect?
Well, the tax rate is affected by releases of accruals based on reserves that were set up because of liabilities in foreign countries. And when those statutes of limitations and those liabilities expire, it provides a reversal of the reserve. Going forward, we believe the rate is going to be less than 5% for the year and subject to these kinds of fluctuations that occur because of accounting reasons.
Okay, great. Thank you.
Your next question comes from the line of Steven Chen with UBS. Please proceed.
Thanks for taking my questions. The first one is I want to drill down a little bit more on the Armada SoC business.
So, Sahat, you
mentioned earlier some of the activity on I was wondering if you could talk a little bit more about the growth opportunity there, whether you see further growth from Chromecast or if it's Armada in TVs or some of these set top boxes? And if you could talk a little bit about whether they're an IPTV type of design or if it's more of an OTT, over top video type of delivery paradigm there?
All right. So there will be a lot of okay, obviously, okay, we are as the first to enter I mean, the only ones still enter in the broadcast market. We believe there will be significant opportunities to continue to invest in building more Airband, okay, Comcast devices to address better new generation codecs, H. 2265, VP9, okay. So those are the you can think about the Chromecast as a device like a set top box, like a micro set top box, set top box inside a dongle.
So the difference between that versus the real set top box, the real set top box, okay, will have, okay, more memories, more a little bit more features. And as a result, also it's also natural for us to address. That's why when we say that we have several design wins on the Armada 1500 set top box SoCs. So this is just actually the same family of products, just one optimized for the download and one more optimized for the set top So set top box is a new business for us. But as we have proven to as we prove ourselves to be to serve this market, we believe in the long run, we could grow this business as well.
Okay. That's helpful. And my follow-up is on the SSD business. Just wanted to drill down a little bit on the latest 5th generation SATA SoCs that you mentioned that support 50 nanometer and also 3 d NAND. I was wondering what kind of time frame you're looking at or expecting for the ramp up of SSDs that use the 5th generation SoCs And also what the I guess the SoC or sorry, the ASP would be or at least the directionally, is that a big boost up in the ASP for that future generation?
So yes, the production targeted all this which we said they introduced the 3 new products last quarter, those are the productions targeted for sometimes early next year. So we and then we're not stopping still. We are going to we're also building newer devices. Some of them could simply be like a stripped down device, let's say, for the lower end market. Some of them will be a new generation, even more advanced solutions.
So as we build more advanced solutions, okay, the price obviously will go up. But as we also build lower priced markets for, let's say, for new generations for either the ultra book, okay, that require much lower cost solution, those products, okay, will be will as designed to be obviously, to be lower cost. But the volume will be much higher. So and those are not cannibalizing the existing market. Those will be just addressing new markets opportunity.
So we feel good, okay, that this is a business that we invested properly many, many years earlier before anybody thought what's important to invest in this area.
Okay, great. Thank you.
Your next question comes from the line of Ross Seymore with Deutsche Bank. Please proceed.
Hi, guys. Thanks for letting me ask a question. Just wondered when you think that 3 gs headwind is going to be done and what influence if any it might have on the typical seasonality that customer puts into place that affects your January quarter?
That's a good question, Ross. We will continue to see some headwinds this quarter on the 3Q side and that's the reason for what we guided to. As far as Q4, it's a little too early for us to comment on that. We recognize there is seasonality with that customer in Q4. But as we mentioned in the past, right, we are also looking at design pretty solid design traction elsewhere and other customers for 4 gs.
So it's a little tough for us to make that call at this Got you.
Then the 4 gs side
is my second question. I think, Sahat, in your prepared comments, you said that the 4 gs units were up double digits sequentially. Was there anything we're supposed to imply on the ASPs from that statement in that you didn't mention revenues also being up sequentially? Or am I kind of overcomplicating things?
It's always a very competitive market. I don't think you should read anything more into it. Our 4 gs business, we grew our units. It's from an ASP side, it is a very competitive market and it will remain over the rest of this year.
For competitive business, I think we prefer not to talk about pricing. Okay. Our customers are very sophisticated in these areas. They always say, okay, they always going to say so and so is going to have a lower price than yours, and they want to see who's blinking first. And so it's not a good idea to for us to talk about pricing.
It's only been the negative the result will be negative, okay? So it's better for us, okay, to talk about units at this point.
Your next question comes from the line of Mark Delaney with Goldman Sachs. Please proceed.
Thank you very much for taking the question. The Chinese government has been more focused on growing its own domestic semiconductor industry. And I'm wondering, have you seen any impact on Marvell or if you expect to see any impact on your business going forward?
Well, if you look at our if you look at our 4 gs LTE, our design service, well, okay, the one see, we're shipping all the products that we're shipping is all done in China. So if anything, this is this should be positive for us, being we have the vast majority of our resources in this for this business in
Okay. Thank you for that. And then for a follow-up
question, I realize you guys
have the CMU lawsuit appeal as an overhang and that's creating some uncertainty around the potential cash balance. But if for hypothetical or for argument's sake we put that aside for a minute. Can you just talk about what sort of minimum cash balance you think you need to keep on the balance sheet?
I think we've mentioned this in the past Mark. Roughly we have said roughly 3 quarters or so of operating expenses is what we would like to keep on our balance sheet. Obviously, we have excess of that. And given the circumstances that we have right now, we're just being a little more cautious.
Yes. Also I also mentioned in many, many years ago, I got this question. I said that when while it is true that we don't need much cash to run the business under normal circumstances, In the past, right now, we need money to borrow money. We have always had a hostage by the bankers. So it's better for us to be to have more money in hand so that, okay, when we need to do something, we have the money to draw on.
So I would rather be on the safe side to have more money than to have not enough.
It's not like we haven't returned cash to shareholders.
That's on top of that, right? Yes, we're not holding cash. We're needing more cash than we have money in the bank. Right.
Thank you, Mark. We'll take one last question, please.
Our final question comes from the line of Jon Pitzer with Credit Suisse. Please proceed.
Yes, guys. Thanks for letting me sneak in a question. First question just on the inventory build. I know you talked about in the prepared comments and that you talked about building ahead of demand. But just given the revenue growth forecast for the current quarter, I'm just kind of curious if you could give me a little bit more color on why inventory is growing so much faster than revenues?
And do you have a target for inventory at the end of the current quarter?
Yes. It's a good question, John. We do have a target for the end of the quarter. Our inventory should drop sequentially at the end of this quarter. One of the reasons we did build inventory was for certain products that we given the tight capacity that we're seeing at the foundry side.
For the next few quarters, we've decided to build a little bit of inventory for certain key products. But that being said, we are pretty confident that we should see our inventory trend move down.
Perfect. And then as my follow-up just quickly back to the LTE market. Saad, I'm just kind of curious given the level of investment in the business, are you guys now at a revenue level for LTE where that business is making money? And then you said in your prepared comments that you felt profitability in TD LTE would be higher than 3 gs. And I'm just going to kind of question why you believe that.
And the devil's advocate question is sort of that was a similar dynamic review from 2 gs to 3 gs that didn't really hold up as the 3 gs market matured. And so why should we think profitability in LTE will be structurally better than 3 gs? Thanks.
Sure. If you look at the okay, if you're talking about maybe if you're talking about the 2 gs to 3 gs, the 2 gs to 3 gs transition for many, many years, for the 1st 5 years of the transition, 5 or 6 years of transition, the 3 gs market was so much more profitable business than the 2 gs. The only the 3 gs being so competitive was only happening in the last year or so. So in 4 gs, 4 gs situation is different than it's better than the 3 gs transition from 2 gs to 3 gs. From 2 gs to 3 gs, there were like a dozen players in the market, like give and take.
Now we have now that that is settling, we really only have 3 players in the 4 gs LTE space. So with 3 players in the market, I think, yes, the markets will still be competitive. That's true. But I think it's a different scale of people are going to be more rationalized in terms of pricing so that they all can we all can make the right investments for the future. So I'm not concerned about, okay, that this market being competitive.
It's more important that with this 2,000,000,000 units market opportunity down the road when everything moves to 4 gs LTE, Do we have the right new technology? I mean, the key word system. Do we have the new technology that will allow us to deliver products that will be low cost, yet at the same time, to be high performance. And while it's still too early to talk about it, we are working on developing new technology to enable the kind of price point that people expect to see in the handset. So when those when we are done when we are ready to disclose those the result, then you can see what I'm talking about, okay?
But it's too early for us to talk about it. Some of these technologies are so bleeding edge that, okay, even we are not so sure whether the result is going to be, okay, how it's pretty challenging to build this, but I mean, some of it to build ultra low cost stuff, but high performance at the same time. So only times can tell, okay, when we're finally able to deliver such a product.
That concludes our Q and A. And now I will turn the call back over to Mr. Suji for closing remarks.
Thank you. And I would like to thank everyone for their time today and the continued interest in Marvell. We look forward to speaking with you in the coming months. Thank you and goodbye.
Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect. Have a great day.