邁威爾科技 (MRVL) 2016 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Marvell Technology Group fourth-quarter and FY16 earnings conference call.

(Operator Instructions)

As a reminder, this conference is being recorded.

I would now like to introduce your host for today's conference, Mr. John Ahn, Head of Investor Relations.

Mr. Ahn, you may begin.

Thank you, Andrea, and good afternoon, everyone.

Welcome to Marvell Technology Group's fourth fiscal quarter and FY16 earnings call.

With me on the call today are Rick Hill, Marvell's Chairman; Matt Murphy, Marvell's President and CEO; and Dave Eichler, Marvell's Interim CFO.

We will all be available during the Q&A portion of the call today.

If you have not obtained a copy of our press release, it can be found at our Company website under the Investor Relations section at Marvell.com.

We've also posted a slide deck summarizing our FY16 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 until August 19.

Please note that since we are still in our quiet period, and will continue to be so until we are fully up-to-date on our financial filings.

Our commentary today regarding Marvell's business trends and finances will be largely limited to past periods -- specifically, to fiscal Q2, Q3 and Q4, and full-year FY16.

We will not be providing any specific financial guidance for future periods on today's call.

Please keep this in mind when posing questions during the Q&A portion of the call.

We thank you in advance for your understanding.

Please note that we anticipate releasing the results of our first quarter of our FY17 results during the week of July 25, and we will hold a conference call to discuss those results.

We will announce the exact timing of the Q1 release and call via press release several days before the event.

Please be reminded that today's discussion may contain forward-looking statements as defined under the Private Securities Litigation Reform Act.

These statements are based on currently available information as of the date of such statements, are subject to risks and uncertainties that could cause our results to differ materially from Management's current expectations.

To fully understand the risks and uncertainties that may cause results to differ from our expectations and outlook, please refer to today's earnings release, our latest quarterly report on Form 10-Q and Form 10-K, 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 takes no obligation to revise or update publicly any forward-looking statements, except as required under applicable law.

During our call today, we will make reference to certain non-GAAP financial measures which exclude the effect of stock-based compensation, amortization of acquired intangible assets, acquisition-related results, restructuring costs, litigation settlements and certain one-time expenses and benefits that are driven primarily by 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 second, third and fourth fiscal quarters, and FY16 earnings press release which has been furnished to the SEC on Form 8-K and is available on our website in the Investor Relations section.

With that, I would like now to turn the call over to Dave Eichler.

Thank you, John, and good afternoon.

I would like to thank everyone in our investor and analyst community for your patience over the past nine months as we have worked through a number of issues including the completion of the independent Audit Committee investigation, the hiring of Deloitte & Touche as our independent public accounting firm, and the completion of the audit of FY16.

We anticipate filing our annual report Form 10-K, as well as our second- and third-quarter 10-Qs, within the next week, followed shortly thereafter by our 10-Q for Q1 FY17.

We will then be current with our required SEC filings, and compliant with listing requirements of NASDAQ.

Now let me spend a few minutes highlighting our financial results for FY16 and the fourth quarter, before turning the call over to Rick Hill, our Chairman.

In FY16, we reported total net revenues of $2.7 billion, a decline of 26% from FY15 revenues of $3.7 billion.

On a GAAP basis, our gross margin in FY16 was 45.2%, compared to 50.3% in 2015, while our operating expenses were $2 billion compared to $1.4 billion in 2015.

Please note that operating expenses in FY16 included $655 million related to the CMU settlement.

And I want to point out that the total CMU settlement amount of $750 million contained multiple elements which we were required to allocate under the accounting rules, with $655 million allocated to operating expenses as the settlement and covenant not to sue component.

$79 million was allocated to cost of goods sold, as the fair value of the license related to prior periods, leaving $16 million to be amortized in future periods.

R&D spending in FY16 was $1.1 billion or 40% of net revenues, compared to $1.2 billion in FY15 and 30% of net revenues.

SG&A expenses were $292 million or approximately 11% of revenues, excluding the $655 million related to the CMU settlement, which I talked about previously, compared to $290 million or 8% of net revenues in 2015.

Also please note that our FY16 GAAP results included restructuring charges of $63 million, which was primarily related to our decision to exit the mobile handset business, compared to restructuring charges of $10 million in FY15.

The end result is that for FY16, we reported a GAAP net loss of $811 million or $1.59 per share, which was largely the result of the CMU settlement and restructuring.

This compares to GAAP net income of $435 million or $0.84 per share in FY15.

Now shifting to non-GAAP results for FY16, our non-GAAP numbers for FY16 exclude the impact of $134 million of stock-based compensation, $63 million related to restructuring, $751 million of litigation matters including CMU, the amortization of acquired intangibles of $13 million, and $43 million of other items, all of which are detailed in our GAAP-non-GAAP reconciliation contained in these financial tables.

Our non-GAAP gross margin in FY16 was approximately 49%, compared to 50.5% in FY15.

And our non-GAAP operating expenses were $1.2 billion, a decline of 10% over the prior year.

Please note that the non-GAAP operating expenses exclude the impact of the $750 million Carnegie Mellon University litigation settlement.

Again, of which $655 million was allocated to operating expenses I mentioned previously.

Our non-GAAP R&D expenses for FY16 were $945 million or 35% of net revenues, compared to $1.1 billion in FY15 or 29% of net revenues.

SG&A expenses, on the other hand, were $213 million or 8% of net revenues, ignoring the impact of the CMU settlement, compared to $223 million and 6% of net revenues in FY15.

Please note that non-GAAP SG&A expenses for the third and fourth quarters of FY16 include $6 million and $11 million, respectively, of legal and accounting fees related to the Audit Committee investigation and government inquiries by the SEC and the US Attorney's office.

In summary, on a non-GAAP basis, our fiscal year earnings per share in FY16 were $0.37, down 68% from $1.15 per share in FY15.

Now shifting to Q4 2016 for a minute.

For the fourth quarter of FY16, we reported revenues of $616 million, which was a decrease of 9% sequentially, mainly driven by the anticipated decline in revenue resulting from Marvell's exit of the mobile handset business.

The decline in mobile and wireless was partially offset by growth in our storage and networking products.

Our GAAP gross margin percentage for the fourth quarter of FY16 was 50.9%, compared to 43.8% for the third quarter, and 51.4% for the fourth quarter of 2015.

Operating expenses on a GAAP basis for the fourth quarter were $311 million or 12% lower, compared to $355 million in the third quarter, and 14% lower compared to $360 million in the fourth quarter of FY15.

R&D expenses in Q4 were $239 million or 38.9% of net revenues, compared to $284 million or 42% of net revenues in Q3, and $260 million or 33% of net revenues in Q4 2015.

SG&A expenses were $69 million or 11% of net revenues in Q4, compared to 10% in Q3 and 8% in Q4 2015.

Again, operating expenses in the third and fourth quarter of FY16 include $6 million and $11 million, respectively, of legal and accounting fees related to the Audit Committee investigation and related shareholder litigation inquiries by the SEC and the US Attorney's Office.

In summary, in Q4, we generated GAAP net income of $4 million or $0.01 per share, compared to a GAAP net loss of $58 million or $0.11 loss per share in the third quarter of FY16, and a GAAP net income of $82 million or $0.16 per share for the fourth quarter of 2015.

The difference between our GAAP and non-GAAP results during the fourth quarter were mainly due to stock-based compensation expense of $32 million, $4 million of restructuring expense, $4 million related to litigation matters, and $11 million related to the amortization and write-off of intangible assets and other expenses.

Now, focusing on our non-GAAP Q4 numbers for a minute.

Our non-GAAP gross margin for the fourth quarter was approximately 52%, compared to 46% for the third quarter, with the improvement due to more favorable product mix due to a lower volume of mobile handset products.

Non-GAAP operating expenses came in at $267 million, a 6% decrease from the third quarter, and a 15% decline compared to the fourth quarter of 2015.

This resulted in non-GAAP operating margin of 9% for the fourth quarter, compared to 4% for Q3 and 15% in Q4 2015.

Non-GAAP R&D spending in Q4 was $209 million or 34% of revenue, compared to $229 million or 34% in Q3, and $260 million or 30% of revenue in Q4.

Non-GAAP SG&A expenses were $58 million or 9% of revenue in Q4, compared to $54 million in Q3 or 8% of revenue, and $55 million or 6% of revenue in Q4 2015.

Again, please note that the non-GAAP SG&A expenses for the third and fourth quarters of FY16 include $6 million and $11 million, respectively, of legal and accounting fees, as I mentioned previously.

The end result is, in Q4 2016, we reported non-GAAP net income of $55 million or $0.11 per diluted share, compared to $0.06 per share in Q3, and $0.25 per diluted share in Q4.

If you exclude the impact of the added legal and accounting fees, our non-GAAP EPS in Q4 would have been $0.12 per share versus $0.11, as I mentioned a minute ago, and $0.08 per share in Q3 versus $0.06, as I commented on.

The share is used to compute diluted non-GAAP EPS during the quarter to $519 million.

Cash flow from operations for the fourth quarter were $53 million, and free cash flow of $47 million or approximately 8% of revenue.

Moving on to details of our various end-markets.

For the full FY16, our storage revenue decreased 31% and represented approximately 44% of total sales.

The revenue decline was mainly due to soft PC demand environment that affected hard disk drive, or HDD, builds.

In Q4, storage revenues grew 12% sequentially, reflecting improved demand from ATV customers, but was partially offset by slightly lower SSD controller sales.

Storage revenue represented 47% of total Q4 sales.

In networking, for FY16, our revenue declined 18% and represented approximately 20% of total sales.

In Q4, our networking revenues grew 8% sequentially and represented 22% of Q4 sales, as we started to benefit from our increased focus on our core technologies into new enterprise and data center applications.

For our mobile and wireless business, revenue for FY16 decreased 27% and represented 29% of overall sales.

In Q4, our mobile and wireless business declined 34% sequentially and represented 26% of revenues.

The drop in revenues in Q4 and FY16 was mainly attributable to our exit from the mobile handset platform business.

Now, turning briefly to the balance sheet.

Our balance sheet included $2.3 billion of cash and short-term investments at the end of FY16, and no debt.

As noted in the press release, we paid the $750 million settlement to CMU in the first quarter of FY17.

No share buyback occurred in the fourth quarter, with the blackout due to the delayed filing of the financial statements.

And currently, we have $180 million remaining in our authorized share repurchase plan.

We also paid dividends of $30 million in fourth quarter, or equivalent to $0.06 per share, and then subsequently declared and paid dividends in Q1 and Q2 of FY17 at the same level.

With that, I'd like to turn the call now over to Chairman Rick Hill to provide additional color on our FY16 revenues, and to introduce our new CEO, Matt Murphy.

Thank you, Dave, and good afternoon, ladies and gentlemen.

This is Rick Hill.

I would like to thank all of you for joining the call today.

And I know it's been a very long time since the Company has had an opportunity to communicate with you.

We have decided to break this up into separate calls for finishing FY16, and then the first quarter of FY17, which we will hold on the 27th, which is a week from now -- a week and a day from now, just so you are aware.

Today we're going to focus on FY16 and the three quarters where we have been in the dark.

Now, before I start, I want to make a few opening comments to refresh everyone's memory on how we have gotten to where we are today.

In August of 2015, before we announced Q2 of FY16, we started an investigation of pull-ins.

The Board and the Audit Committee launched an investigation to determine the facts of the situation.

As a result of the investigation, the Audit Committee and their legal representation determined that there were no fraudulent activities that they could find in the organization, nor were there any material misstatements within the FY16 which would have needed to be restated.

So the financials for 2016, there were no material changes to any of those numbers and so therefore, no restatement was necessary.

And we filed an 8-K to this effect, I think, on March 1 of this year, the findings of the Audit Committee.

All right, a team of people that included the Board, our outside counsel of Gibson and Dunn, as well as Sheppard Mullin, KPMG, E&Y, several other auditing firms, were all poring over, working tirelessly in order to help the Company be able to come to the determination that there were no material misstatements or fraudulent activity with the finances.

And as a result, we've been able to file the fiscal year -- or will be filing the FY16 financial results in the next week.

The Audit Committee, along with the entire Board, have addressed many of the issues relative to controls.

While there were no fraudulent activities identified or material misstatements, it was identified by the Company that we did have control issues which, if not properly corrected, could lead to misstatements in the future.

And we have been busily fixing those situations.

Personally, having been here only since the first of May, I have received nothing but total unwavering support by the entire Board of Directors, including both founders, who have recognized the need to enhance internal control and take Marvell to the next level of performance.

Both Sehat and Weili have been instrumental in helping bring me up to speed on technology and the customers of Marvell.

They have also supported and been involved with the selection and recruiting of Matt Murphy, our new CEO, who started on July 11, 2016.

They were also instrumental in supporting the settlement with Starboard Value partners that added Peter Feld, Oleg Khaykin and Rick Hill to the Board, as well as bringing on Bob Switz and Mike Strachan, two individuals steeped in valuable financial acumen.

Over the last 10 weeks, we have made tremendous progress assembling a team of individuals, establishing an organization structure of checks and balances, in order to execute the business strategy.

We have hired the following.

First, the young, capable CEO with knowledge and a vision for our business, Matt Murphy, who will be speaking in a few minutes.

We hired a Chief Legal Counsel to help craft our internal controls and monitor compliance, Mitch Gaynor.

We have added a VP of Marketing and Sales who can coalesce the organization around a single strategy, Chris Koopmans.

We've hired a Chief Operations Officer, Andy Micallef, who can streamline our operation and improve our cost structure globally.

We also hired a new VP of Finance, Willem Meintjes, who has a strong controls background and accounting technical expertise, as we build a robust financial organization.

We still are conducting a search and expect to complete shortly a search for a CFO and a Chief Accounting Officer.

The reason that I feel it is important to talk about these changes is, it shows the commitment of the founders and the Board to win back the confidence of our investors, who are vital to our success.

And we thank you for staying with us.

As Dave Eichler as brought you up-to-date on the finances through quarter-four of FY16, I'd like to make some observations.

We dropped about $1 billion in revenue from FY15 to FY16 -- that's pretty obvious -- and we exited Q4 with revenue of $616 million.

As you all know, Q1 is normally seasonally down from Q4 of the prior year.

Market expectations for the first quarter are $612 million.

Our expectation is lower, due to seasonality and restructuring of the mobile business.

Also I would like to point out, it's clear our operating profit at 7.1% is way too low.

R&D expenses as a percent of revenue are way too high.

Our gross margins have stabilized, but need to continue to improve.

Both Matt and I agree, there's no reason Marvell, with its existing structure today, can't perform at the level of all of our peers, or better.

During the last 10 weeks, we introduced strategy 1.0.

Over the next month, month and a half, Matt Murphy will take us to the next level of strategy 2.0, as he evaluates the first changes we've made to focus the business on the storage of business.

Where we are dedicated to making sure that we decline less than a market that is in secular decline, grow within that market to shift to solid-state drive, where we have a leadership position.

And in addition to that, we want to grow networking and wireless by re-focusing our efforts on cloud and enterprise, and drive down our cost structure in these areas.

With that, I'd like to turn it over to Matt Murphy to say a few words before we open it up to Q&A.

Great, thank you, Rick, and good afternoon, everyone, and thank you for joining our call.

It's truly a pleasure to meet all of our investors and analysts today, and I look forward to speaking to many of you personally over the coming months.

Today I'd like to talk a little bit about my background, why I joined Marvell, some initial thoughts on the Company, and what I plan to work on in the near-term as I formulate a strategy to take Marvell to the next level.

Turning to my experience.

I spent the last 22 years at Maxim Integrated.

And in that capacity, I took on a number of different roles and responsibilities.

Most recently, I was running all of the business units, sales and marketing, product development, sales field applications and central engineering.

Prior to that, I led the Communications and Automotive Solutions Group, and I also -- during my career at Maxim spent five years as the Head of Worldwide Sales and Marketing.

I'm thrilled to have this unique opportunity to join Marvell during, in my opinion, a very exciting time for the Company.

Marvell has always been well-respected in the semiconductor industry as a leader in engineering and innovation.

It's really an iconic global brand, filled with talented people and cutting-edge technology.

I feel that very few semiconductor companies today offer true systems and platform solutions, and encompass silicon, software, firmware and support.

And Marvell is one of those few companies.

I give a lot of credit to the founders of the Company, Sehat and Weili, for having the vision to create and grow this special Company into what it is today.

I have tremendous respect for them, and I'd like to thank them for all of their contributions.

Now, I realize that Marvell has had some challenges lately, but I believe that this is the best time to join a Company to help lead it to the next level.

So today is officially my seventh day at Marvell.

And in that time, I've had a chance to meet with our Board, management team, employees and customers and my initial impressions of the Company are overwhelmingly positive.

It's filled with phenomenally talented people, and these people are the foundation of our Company.

We have many solid businesses where we have a leadership position, and many innovative technologies that form the core of our Company.

As I mentioned, I've also had a chance to meet several customers already, in order to understand their needs and how Marvell can help solve their problems.

And what I've found is that Marvell has a long track record of closely partnering with its customers, and as a result, we have a long list of very loyal customers.

Over the coming weeks and months, I will be delving deeper into our product portfolio, financial structure and organization, in order to formulate a long-term vision for the new Marvell.

I see tremendous potential for the Company to participate in growing markets and to increase its profitability.

I'm also committed to investor outreach, and I look forward to updating our investor community on a go-forward strategy, and providing regular reports on our progress.

With that, I would like to turn the call back to John to open it up for Q&A.

Okay, thank you, Matt.

We will now open the call up to your questions.

As indicated initially in my opening remarks, we will not be providing any guidance into future periods on this call, so please keep that in mind when you are posing your question.

So with that, Andrea, we will take the first question, please.

(Operator Instructions)

Craig Ellis, B Riley.

Thanks for taking the question, and, Matt, congratulations on the move.

The first question I had was following up at a comment that you made, Rick.

I think you said you wanted the business to have a margin structure that was at peers'.

Can you be a bit more specific on what you would expect there, even if broadly speaking, from a gross margin -- an operating margin standpoint?

Well, I don't want to put Matt into a box at this particular point in time, so I have been hesitant to give you a range of numbers.

But needless to say, there has to be always a minimum of a five-handle, and then ideally, a six-handle on the number, from a gross margin standpoint.

And the follow-up is for Matt.

Matt, I know you've been there just seven days, and maybe it will require some input from Rick on this too.

But as you look at the product portfolio and as you look at the operating parameters of the business, what you think the greatest opportunities are for growing the revenue profile of the Company?

And what are the greatest opportunities for improving its margin structure?

Sure, I will take that, Craig, thanks.

Again, as you mentioned, this is with seven days of data, but I have been digging in quite a bit, so here is what I would say.

I think there are many businesses in Marvell where they have a -- where we have a strong leadership position, and a strong base of profitability.

And actually, in some of those businesses, even where we have a strong position, we have the ability to grow those.

I think there's also a lot of other businesses in the Company that potentially are smaller in scale, maybe they are not the largest player.

And so really, portfolio management and the decisions around where we're going to invest and not going to invest is going to be the biggest portion of the time I spend over the coming weeks as we develop the new strategy.

And, Craig, I want to add something on this.

If you look at Marvell, one of the things I've been most impressed with over the last 10 weeks is the quality of the design capability that we have within the Company.

In particular, when you look at the storage market, we have a core competency in storage.

Whereby, there is a huge opportunity focusing on growing segments within the storage business that we need to take better advantage of, particularly, in the enterprise and the cloud space.

And we have the knowledge, skills and ability to do that.

Also, we've lived with a luxury of being more efficient in our designs, and as a consequence, have maybe slipped a little bit on really focusing at driving our supply chain costs down.

And so we see a huge area in storage with an opportunity to do that.

In the area of networking, it's another area where we have a strong core competency, and, frankly, we missed -- we took our eye off the ball, as we tried to really focus on the Internet of Things, which is often difficult to get your arms around.

And we sort of got away from our knitting.

And again, we have this core competency and an ability to do a lot of data manipulation and data crunching, which are essential in this arena.

And by refocusing, again, on the cloud and the enterprise infrastructure, we believe, and we've already begun to see our ability to win incremental sockets that lead to long-term growth in this business.

And so again, if you look at what's going to limit the world going forward, it's the pipe, and it's the area where Marvell has the greatest expertise.

And finally, from a growth standpoint, clearly, virtual reality and augmented reality are two new emerging opportunities where, again, Marvell's core competency will come into play.

And I think you'll see during the Christmas season this year, strong growth in this area.

And Marvell is going to be part of it, and a big part of it.

I hope that helps.

Thanks for the color, guys.

Good luck.

Great.

Next question, please.

Tim Arcuri, Cowen & Company.

Thank you very much.

First of all, Rick, let me say that, having known you for many years, the Company is in very good hands.

There's not a better person that could be leading the ship.

So that's great, first of all.

Thanks, Tim.

And I had a question for both you, Rick, and also Matt.

The first step seems to be the costs.

OpEx is more than 40% of revenue in FY16.

Semiconductor's average is more like 20%.

So it seems like you could pretty easily take out $250 million to $300 million out of OpEx, and that would still leave you higher than most of your peers.

So can you just talk generally about OpEx, and how you think about what you could cut and what you can't?

Thanks.

Well, we're going to talk more about that after Matt has been on the ground a little while.

But I can tell you one thing, Matt was mentored by a friend of mine who is probably the toughest guy in costs on the planet, and that was Jack Gifford over at Maxim.

So I have no doubt in my mind that nothing on the income statement has escaped Matt's eye in the last seven days.

So I'll toss it over to him as a softball, but go for it.

(laughter)

Thanks for setting it up for me there, Rick.

I was fortunate to have worked for Jack Gifford for many years.

But yes, I think we have to dig in, and clearly, it's well-understood by me and the Company where the peer group sits and where large semiconductor companies of this size run from an OpEx point of view.

I think my focus is really starting with the strategy and which product areas we want to focus on.

And then from the strategy, obviously that will derive what kind of spending we need to support those businesses, and win and be wildly successful.

And then also we'll have to pick the businesses that we don't want to participate in.

And I think that will really be the framework which shapes our operating expenses going forward.

Got it.

Thank you for that.

And then just a quick follow-up -- it's more of a logistical question.

But once you get current on the filings -- which, it sounds like is going to be next week or maybe shortly thereafter -- once you get the filings out, would you be able to theoretically begin to buy back your stock at that point?

Well, first of all, Tim, just so you know, we will report Q1 next Wednesday.

I believe that's the 27th, right?

And then it takes us a little while to get all the paperwork filed, so it will be whenever we get the Q filed.

So that's what we have to do with Q1, but it's just forthcoming, hopefully.

And relative to capital allocation, I think that's something we need to take a hard look at.

And we don't want to ad lib it on the call, but it's a very, very good question, and it's something that we've certainly started to look at.

But job one is going to be to get the cost structure in line, as well as making sure we've got a long-term growth strategy in a business that really is attacking markets where there is clearly growth.

And there aren't a lot of businesses you can say that about.

There's many, many commodity businesses, but Marvell is more than a commodity semiconductor Company.

It is a Company that is steeped in system-on-a-chip design capability, and it's something essentially needed for where the industry is going, with the Internet of Things that's going to be attached to it.

So make no mistake, we will get onto capital allocation.

But it isn't going to be in the next month or two months, but it will probably be within -- before the end of the year.

Hopefully, that's helpful, Tim.

Thank you, Rick.

Appreciate it.

Christian Schwab, Craig-Hallum.

Congratulations to the team for being very close to wrapping up the accounting.

Can you give us an update at the end of FY16 where your market share was in disk drive controllers, in your viewpoint?

As well as your market share in solid-state drive controllers, non-captive?

Well, unfortunately, I don't have that information right in front of us.

But I can give you a generalization from the standpoint of, our decline in the storage business -- I have looked at it quite extensively -- is a combination of things that occurred.

All right?

In the solid-state drive arena, okay, there was one major customer that we lost, and there were some competitive losses that we had.

But overall, that business is continuing to grow very positively, even during the year, after we lost the one major customer.

So that's on a very bright note.

The HDD business declined by 28% overall, which was worse than the industry, okay?

And the reason behind that was our focus largely on the mobile business, or the PC business, which, the industry came down.

Also we were heavily weighted where we're very strong at Toshiba, and they declined more, declining 24.4%, which was greater than the industry at 16%.

And aside from that, we were weak on a mix between the enterprise systems and the PCs.

So the enterprise HDD was actually flat, while the PCs were down 19%, and we were more biased to the PC business.

So there was some loss of market share.

We have refocused that.

We've also broadened our product offering, and our offering system solutions to the equation now.

And we believe that we can basically outperform the market going forward.

Hopefully, that helps, Gregg.

Yes, that's great.

And my second question is, what amount of the discontinued mobile business, as far as either a percentage or a revenue amount, was in Q4?

Do you know that, Dave?

In Q4, no.

I know the difference between FY15 and FY16.

So in FY15, our mobile handset business was $505 million.

In 2016, that dropped $281 million.

And we still have a residual amount in FY17, very small.

Okay, that's helpful.

And then a follow-up, if I may, on that question.

When you decided to exit the mobile business in September of 2015, you talked about reducing annual expense, which did include stock-based comp at $170 million to $220 million.

At the end of FY16, is that complete?

No.

Do you mean as far as the restructuring?

Yes.

Are we done restructuring?

Or how far are -- of the targeted range of $170 million to $220 million, how much of that has been accomplished at the end of FY16?

Okay.

So initially, there was an estimate that was put out that the restructuring would be between $100 million and $130 million.

And the restructuring that we've recorded in FY16 was about $60 million-some.

There's a small piece that's left.

Initially, we were looking to reduce headcount by 1,100 employees.

And the initial cut, we had terminated 825.

With additional 100-some people, we decided to stay on, as we relate to the mobile product business.

And we had some people that were basically on temporarily as we winded down some of these products.

But we didn't achieve -- to answer your question, we didn't achieve what we had hoped to achieve.

Some of this equipment we thought we would basically get rid of.

We decided to re-purpose all target uses in the Company.

So to answer your question, instead of reducing headcount by 1,100, we're going to wind up reducing headcount, as it relates to the mobile business, by I think about 950 employees.

Great, thanks.

I guess that's my two questions.

Congratulations on being almost done with this accounting.

It's been painful.

Harlan Sur, JPMorgan.

Good afternoon, thanks for taking my question.

And Matt, congratulations on your new role.

Questions for both Rick and Matt.

I know you haven't been onboard that long, but just given all of the disruption over the past nine months, what has been the feedback by your customers?

Has there been any loss of design engagement?

Has employee retention been an issue, and the ability to keep the workforce focused on critical programs?

Harlan, I'm going to answer that, because I've been around the employees.

In fact, Wade Lee made the joke that, even though I've been here eight weeks, it seems like eight years.

It must have been that painful for everybody.

But the bottom line is, I cannot tell you how impressed I am with the talent that, given the disruptions that we have, that we have within the Company.

I have no question in my mind that we've retained and attracted additional extremely good talent to the business.

And it's a credit to the culture of the Company of really recognizing knowledge, skills and ability, and the ability to really get in the complex design opportunities for people.

Now, relative to customers, when I first joined, one of my first actions were to visit customers, to reassure them that, in fact, the Company is going to continue to invest in the semiconductor business, and we are not having a going-out-of-business sale.

And I think we've been successful in convincing our customers that we are here for the long term.

I even made a trip to Asia, which I hadn't done in over four years.

And as much as I love Asia, I don't like the trips over there.

But it was very fruitful.

I met with a key customer in China and a key customer in Japan, and I think they believe we are here for the long term as well.

And I think Matt will have no problem at all demonstrating the ability to convince the customers that not only are we stable, but we're back in a growth mode.

That's my feeling, Harlan.

Our right, good to hear.

The data cloud and cloud networking segment primarily switching in size -- that's a double-digit growth segment going forward.

I know, Rick, you talked about focusing on this area.

When should we expect the Marvell team to start launching products targeting this segment?

I think you should see it imminently.

All right, thank you.

Quinn Bolton, Needham & Company.

Hi.

I want to just add my welcome to both Rick and Matt.

And maybe a question for both of you just to start off, as a follow-up on the last question.

As you look at the product focus, obviously the core storage or HDD market is in decline, which you talked about.

Matt, as you refine the product strategy, focus on which markets you want to target, do you think that takes a year or two before you can turn this ship?

Or has there been product development underway, especially cloud and the like, to be able to get those new products and to start to see some revenue growth in a shorter period than, say, a year or two?

Yes, sure, great question, Quinn, and I will give you my initial observations.

We spent a lot of time on the FY16 look back, and you can see the implications of the performance of the Company relative to some of the markets it serves.

And as you can see, a lot of the emphasis on things like the cloud and data center, both in storage as well as in the networking business, that doesn't appear -- that was not apparent in FY16.

However, as I have dug in with team so far, it's very clear that in the key markets that both Dave and Rick talked about -- storage, networking and wireless -- the teams have already underway pivoted their businesses to more B2B-oriented segments.

You could talk about the shift away from PCs and storage to things like cloud computing and data center.

Same in the networking business.

Harlan indicated sub-segment growth very high in some of those opportunities.

That's already underway.

And at the same in the wireless business.

So I don't think we're starting from scratch at all.

I think the instincts of the team were right, and the pivots have been made in R&D.

The question is execution and getting the products out.

So I think there is a good head-start, and I'm optimistic in these core areas where Marvell already has a leading position, that there's been some really good work done.

Okay, great, and look forward to obviously some of those new product launches.

The second question I have is -- what started the Audit Committee investigation seemed to be the pull-ins on the storage side of the business.

Obviously as you pulled revenue into current periods, that means that at some point, the future periods were affected.

As you exited FY16, do you feel that the business was back to shipments matching consumption in that market?

Or is there still, as we are coming to the first quarter, still some overhang from previously pulling in shipments into FY16?

There are no pull-ins going on within the Company whatsoever.

I believe that quarter one, seasonally, is always down, and we don't expect it to be any different.

And relative to going forward, we are optimistic that things will continue to improve.

But you don't feel that there's inventory of your controllers at the customer level that still needs to be burned through as a result of that pull-in activity?

I guess that was what I was driving at.

No, no, we do not.

Great.

Thank you very much.

Go ahead, Dave.

I was going to say, we intentionally stopped the pull-in practice in the third fiscal quarter of 2016.

And we've officially ended it in the first quarter of FY17.

We are no longer doing that.

So there may have been a little bit of a catch-up in the third fiscal quarter, but certainly by now, the inventory has been bled.

Great, thank you.

Ian Ing, MKM Partners.

Yes, congratulations on all the milestones, and getting close to the finish line here.

My first question is on gross margins here for the fiscal first quarter rebounded nicely consequentially on the mobile exit.

But still, gross margin is about 30 basis points higher than the first fiscal quarter, when you had a full mobile business.

So I am just trying to understand why it's not a little bit higher?

Is it residual smartphone business still in that mix, or some pricing pressure?

Thanks.

I think that's a good question to ask next Wednesday when we talk.

So let me defer that for a week, okay?

Have you got a follow-up?

Yes, sure.

I mean, you had some interesting comments about doing some R&D pivots already to B&B applications.

So should we think there is going to be some reset in terms of the new product pipeline?

In the past calls, it was talked about, things like Final-Level Cache and modular chips and search engines and things like that.

Should we consider those are going to get re-assessed?

Well, I think from the standpoint of those particular FLC and also MoChi, which I think is what you are articulating.

We see those as key building blocks for the challenges that face people who want to use integrated circuit technology, complex integrated circuit technology, going forward.

As everyone knows in this industry, the cost of a design is escalating exponentially.

And Marvell has a vision that, in order to continue to optimize the use of integrated circuits over a larger volume of people, okay, we've got to be able to not have to do a custom design for every single application.

And as a result, MoChi is a very interesting design alternative, in order to address a broader set of the market who needs complex IC design to solve their challenges.

And so they'll be a vital part of our portfolio.

But they and of themselves are not products that will be introduced to the marketplace -- at least not over the next couple of quarters.

Matt, you might want to comment.

Yes, and I would just add to that, Ian.

I think what I would say is, within the, again, limited discussions I've had already with the various teams on the road maps, both FLC and MoChi have a lot of enthusiasm around and in the Company.

And they are both part, depending on the product line and the technology, they are part of the Marvell product road map.

Okay, (multiple speakers)

Hey, (multiple speakers), Ian.

This is John.

You mentioned the search engine, and I think you're talking about a TCAM that we had talked about for a brief period.

That pertains to our networking business, and we have really moved to refocus the networking business on our core technologies.

And I think we've talked about this before.

Core technologies are Ethernet switches in size, and are embedded networking processors, okay?

So the search engine that you're talking about is no longer a focus for the Company.

In the past, we've also talked about switch fabric products -- that is no longer a focus as well.

So those three things that I just mentioned -- Ethernet switches in size and embedded networking processors is what we are going to be promoting a lot more.

Thanks, that's helpful.

It sounds like the founders are still busy with the product development.

I don't know what that means, but thanks.

Joe Moore, Morgan Stanley.

Great, thank you.

I wanted to ask, you guys at one point had been facing an inquiry from the SEC and the US Attorney's Office.

Is there any update on that?

And can we safely conclude that that's behind us?

Or is there still uncertainty around that?

Yes, Joe, that's a voice from the past.

I haven't talked to you in years.

Hi, Rick.

How are you?

Good.

The inquiry continues to go on.

We are hopeful that the extensive communications with them, along with the thorough investigation we've done, we hope we can end that at some time in the future.

But at this time, we have no update on it whatsoever.

Okay, thank you for that.

And then I think you had mentioned gross margins could have a six-handle.

I thought that was a curious comment.

And I don't want to try to pin you down on any specifics on that, but as you think about that, is that -- with the current plan portfolio, does that require you to exit businesses?

I was a little surprised.

That number seems pretty healthy.

Well, there is two ways to go there, right?

One way is to improve your cost structure, okay, which is really optimize your supply chain management, and make sure you're not overpaying in areas where you may have been in the past.

The second thing is, I've always looked at gross margin in a systems business as a function of the quality of engineering, because it allows us to value-price.

And one of my observations about this Company is, when you look at the heart of IC design, it's basically your ability to efficiently use silicon.

And I've been extremely impressed on the design capabilities of the people at Marvell, and their efficient use of silicon.

And so that's why I firmly believe that the Company can obtain margins others can't.

And it remains to be seen.

And as I said, I don't want to box Matt in, but I know how good he is, and I know he knows how to get at the cost line.

I also know he knows how to identify markets where we can add value.

And so I'm optimistic, and I wouldn't throw that number out the door.

Great, thanks very much.

Congratulations on getting the (multiple speakers)

Sure.

Thanks, Joe.

Okay.

I think at this time, we will probably have time for two more questions -- two short questions, please.

Ross Seymore, Deutsche Bank.

Hi, guys, thanks for sneaking me in.

And Matt, congratulations.

I will just make it one question to keep it timely.

You had talked about the OpEx and how, I think, everybody realizes there is opportunity to unlock value by trimming fat.

In that trimming process, do you think the revenues have to be trimmed as well?

That's, I guess, a third way to get the gross margin up, per your last question, Rick.

So did you have to get smaller to get stronger, before you start growing?

Or is this the base off of which you think you can start to grow?

Well, from my standpoint, I don't think we need to get much smaller.

We always have -- we have the residual decline that Dave talked about, from the standpoint of the handset business that we have to get through.

And we have this overwhelming downward trend in the storage business that's been going on for a while.

We've got to make sure we can get into the parts of the segment of the business that have growth opportunity, particularly in enterprise and cloud.

But I think those are the headwinds we have to a growth model.

But I believe quarter-over-quarter, we ought to start seeing growth beyond the first quarter, if that's helpful.

All right, thank you.

John Pitzer, Credit Suisse.

Good afternoon, Rick and Matt.

And Matt, congratulations.

I will follow Ross's lead and just have one question.

I guess, guys, can you help me understand a little bit, given that the SSD controller market is going to be a focused area in storage, how big is that market relative to your storage business?

How did it fare in the fiscal year?

And you said in your prepared comments it was flat to down a little bit sequentially in the fiscal fourth quarter.

I'm just trying to kind of circle the square.

With some tipping point within SSDs right now and some other controller companies showing pretty good growth, what happened in your fiscal fourth quarter?

And why are you confident that you've got the secret sauce you need there to be successful?

Well, I think the major reason is the re-focus on how we are attacking the SSD market and the HDD market, from a standpoint of not only providing hardware, but also software.

And again, when you're dominant in a business like the PC business, that suddenly takes a sort of a precipitous decline, it takes you a couple of quarters to re-focus.

But we believe that we do have the design capability.

We also have an opportunity to enhance our position due to pre-amps that we will take advantage of.

And so we believe those are the biggest things that we can change in the short term.

I think a majority of the heavy growth in the storage has come on the SSD side, and it's come from smaller companies with a healthy growth.

And we think we will get a larger share of that going forward.

Rick, that's helpful.

Could you give us a sense of how big the SSD business is inside of storage today?

We don't disclose that, so I can't pull that out right now.

I don't want to start announcing that every quarter, especially since Matt has only been here seven days.

But John, you haven't changed.

That would have been the same question you would have asked me in the systems business.

(laughter) Thank you, John.

Appreciate it, guys.

Thank you.

And this concludes our Q&A session for today.

I would now like to turn the call back over to John Ahn for any closing remarks.

Okay, great.

I'd like to thank everybody for their time today, and your continued interest in Marvell.

We look forward to speaking with you again next week.

Thank you and good-bye.

Ladies and gentlemen, thank you for participating in the conference today.

This does conclude the program, and you may all disconnect.

Everyone, have a great day.