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Marvell Technology CEO Discusses F2Q2011 Results - Earnings Call Transcript

Marvell Technology CEO Discusses F2Q2011 Results - Earnings Call Transcript

Marvell Technology Group Ltd. (MRVL)

F2Q2011 Earnings Call Transcript

August 19, 2010 4:45 pm ET

Executives

TST Recommends

Jeff Palmer – VP of IR

Sehat Sutardja – Chairman, President and CEO

Clyde Hosein – CFO and Secretary

Analysts

Glen Yeung – Citi

Sukhi Nagesh – Deutsche Bank

James Schneider – Goldman Sachs

Uche Orji – UBS

Harlan Sur – JP Morgan

Nicholas Aberle – Janney Capital Markets

Craig Ellis – Caris & Company

Craig Berger – FBR Capital

John Pitzer – Credit Suisse

Sanjay Devgan – Morgan Stanley

Presentation

Operator

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Good day, ladies and gentlemen. Welcome to the second quarter 2011 Marvell Technology Group Limited earnings conference call. I'll be your coordinator for today. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions) As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the presentation over to your host, Mr. Jeff Palmer, Vice President of Investor Relations. Please proceed, sir.

Jeff Palmer

Thank you, Keisha, and good afternoon everyone. Welcome to the Marvell Technology Group's second quarter of fiscal 2011 earnings call. With me on the call today is Dr. Sehat Sutardja, Marvell's Chairman, President, and CEO; and Clyde Hosein, Marvell's CFO. All of us will be available during the Q&A portion of the call today.

If you have not obtained a copy of our current press release, it can found at our company website under the Investor Relations section at www.marvell.com. Additionally, this call is being recorded and will be available for replay from our corporate website.

Please be reminded that this call will include forward-looking statements that involve risks, uncertainties that could cause Marvell's results to differ materially from management's current expectations. The risks and uncertainties include statements regarding macroeconomic trends, trends within the PC and HDD end markets, our expectations about the sale of new and existing products, the sustainability of a long-term business model, our ability to fund common share repurchases out of current and future cash balances, general market trends, and specific statements regarding our financial projections for the third quarter of fiscal 2011.

To fully understand the risks and uncertainties that may cause results to differ from our outlook, please refer to Marvell's latest Annual Report on Form 10-K and subsequent SEC filings for a detailed description of our business and associated risks. Please be reminded that Marvell undertakes no obligation to revise or update publicly any forward-looking statement.

During our call today, we will make reference to certain non-GAAP financial measures, which exclude stock-based compensation expense as well as charges related to acquisitions, restructuring, gains, and other charges that are driven primarily by discrete events that management does not consider to be directly related to Marvell's core operating performance.

Pursuant to Regulation G, Marvell has provided reconciliations of the non-GAAP financial measures to the most directly comparable GAAP measures in our second quarter of fiscal 2011 earnings press release, which has been furnished to the SEC on Form 8-K and is available on Marvell's website in the Investor Relations section at www.marvell.com.

Now, I would like to turn the call over to Sehat. Sehat?

Sehat Sutardja

Thanks, Jeff, and good afternoon, everyone. During our fiscal second quarter, we generated revenue of approximately $896 million, a 5% sequential increase and a 40% increase over the same period a year ago. We delivered non-GAAP earnings per share of $0.40 and generated approximately $292 million in free cash flow.

The quarter was challenging due to a softening macroeconomic environment that impacted demand for PCs, which in turn led to excess inventory buildup in the supply chain. Marvell was not immune to these effects, but despite these challenges, we delivered excellent results. We believe this demonstrates the robustness of the Marvell business model, our ability to sustain revenue growth and manage excellent profitability in spite of the challenges experienced in the – in one of three end markets we serve.

Now, let me provide some color on what transpired during the quarter, and beginning with the storage end market. The sale of products into the storage end market declined approximately 15% sequentially versus our original forecast for revenue to be flat to down a few percentage points.

As most investors may recall, over the last year, our industry has been supply constraint and the hard drive industry even more so. In hindsight, we believe the PC and the hard disk drive supply chain built inventory to address these constraints during what is usually the seasonally slow first and second quarters ahead of what was expected to be a normal back-to-school build period. The assumption of a tight supply environment was the basis of our forecast entering the second quarter.

As the quarter progressed, negative macroeconomic events starting in Europe began to affect the end market demand for PCs. As a result, the supply chain reacted quickly, cutting build plans and tightening on-hand inventory. Marvell was subjected to these inventory rationalizations and the resulting erosion of demand on us.

We believe the consumption of the excess inventory is largely behind us now. For example, since the middle of July, we began to experience improved component tools at the hard drive product consignment hubs, providing evidence to us that the excess inventory has worked through the system.

We think it is important to note that the – to note the speed by which the supply chain has responded to the challenging market dynamics. We see this as a positive long-term trend. We believe the disruption in the hard disk drive supply chain started and ended pretty much within our second fiscal quarter. While there may be questions on the growth trajectory of the PCs and the HDD hard disk drive going forward, we believe the inventory correction is behind us.

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