Marvell Technology Group Ltd- Earnings Call

Good day ladies and gentlemen and welcome to the Q2 2010 Marvell Technology Group Ltd. Earnings Call. My name is Anita and I'll be your operator for today. At this time, all participants are in a listen-only mode. We will conduct a question-and-answer session towards the end of this conference. (Operator Instructions).

As a reminder, this conference is being recorded for replay purposes. I would now like to turn the call over to Mr. Jeff Palmer, Senior Director of Investor Relations. Please proceed.

Jeff Palmer

Welcome to the Marvell Technology Group's fiscal second quarter 2010 earnings call. I'm Jeff Palmer, Marvell's Senior Director of Investor Relations, and with me on the call today is Dr. Sehat Sutardja, Marvell's Chairman, President and CEO; and Clyde Hosein, Marvell's CFO, and Interim COO.
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 be found at our company website under the Investor Relations section at www.marvell.com.

Additional 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 and uncertainties that could cause Marvell's results to differ materially from management's current expectations, including our expectations about our product sales, and general market trends, statements regarding our financial projections for the third fiscal quarter of 2010, our expectations regarding the current economic environment and impacts to industry demand.

To fully understand the risks and uncertainties that may cause result 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 statements.

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 fiscal quarter, 2010 earnings press release, which has been furnished to the SEC on Form 8-K and is available on Marvell's website in the investor relation section at www.marvell.com.

This time I would like to turn the call to Dr. Sutardja. Sehat?

Sehat Sutardja

Good afternoon everyone. Today we reported fiscal second quarter of 2010 revenues of $641 million, reflecting a 23% sequential increase, better than our revised guidance provided on June 22. We are pleased with the revenue growth we delivered in the second quarter, as we experienced improving order momentum throughout the quarter.

Our visibility into future demand is beginning to incrementally improve, and we are encouraged by the level of order stabilization. Our results within the second quarter demonstrate our continued focus on financial discipline as nearly all profitability metrics and cash-flow generation improved significantly.

During our second quarter, on non-GAAP basis, we reported gross margin of 55%, the highest level we have reported since the first quarter of fiscal 2003, and that is nearly seven years ago. We continue to keep discretionary operating expenses and a tight control, delivering operating margins of about 20% and generated $175 million in free cash flow or the equivalent of 27% free cash flow margin during the quarter.

These are excellent results which we believe clearly demonstrate our focused efforts to achieve best in class financial performance. We are ahead of plan on achieving our stated long-term operating targets. A significant accomplishment, given the challenging economic environment we have operated within over the last 12 months. I would now like to review the performance achieved in our various addressable markets.

During the second quarter, 25% of the sequential revenue growth came from new products, and made up approximately 5% of our total revenue. To be clear, we are designing new products as complete new devices launched during this fiscal year. Looking out into our third quarter, we anticipate this trend will accelerate as new products should contribute nearly half of our sequential revenue growth, and represent just over 10% of our total revenue.

The sale of products in our storage end markets grew over 20% on a sequential basis, contributing approximately half of our total revenues. We anticipate the sale of products to our storage customers should improve sequentially by low to mid-single digits during our third fiscal quarter. In line with the projected unit growth rate of the overall hard disk drive industry.