邁威爾科技 (MRVL) 2017 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Marvell Technology Group third-quarter FY17 earnings conference call.

(Operator Instructions)

As a reminder, this conference call is being recorded.

I would now like to turn the conference call over to John Ahn, Head of Investor Relations.

Please go ahead, sir.

Thank you Abigail.

Good afternoon, everyone.

Welcome to Marvell Technology Group's third-quarter of FY17 earnings call.

With me on the call today are Matt Murphy, Marvell's President and CEO, and Jean Hu, Marvell's CFO.

We will all 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.

We have also posted a slide deck summarizing our third-quarter FY17 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 December 17.

Please be reminded that today's discussion may contain forward-looking statements.

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 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.

Marvell undertakes 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 costs, restructuring costs, litigation settlements, and certain 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 third-quarter FY17 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.

Please note that Marvell Technology Group announced a significant restructuring action on November 2 of our fourth fiscal quarter.

During the prepared remarks section of this call, Matt and Jean will be providing details of our third-quarter results before our restructuring actions.

Then Jean will provide comments on our restructuring actions and provide our fourth-quarter FY17 guidance for continued operations.

With that, I would now like to turn the call over to Matt Murphy, Marvell's President and CEO.

Great.

Thank you, John.

Good afternoon everyone, and thank you for joining us.

Before I review Marvell's results from our fiscal third quarter, I want to provide you with some insight into our recent announcement and strategy going forward.

As I mentioned on our last call, we completed a comprehensive evaluation of how our R&D resources are allocated across our product development efforts.

This included a thorough review of product lines, discussions with customers, and feedback from key stakeholders throughout the Company.

Our assessment confirmed that Marvell's core strengths are in the high-speed movement of data, particularly in the storage, network infrastructure, and wireless conductivity markets.

As a result of this review we are focusing Marvell on these strengths and have developed clear strategies to grow in each of these markets.

Let me share the details on our strategies for each market, starting with storage.

Data storage is in Marvell's DNA, and we hold leadership positions in both and solid-state drive controllers.

For our HDD business, our strategy is to maintain our leading position in client drives and continue expanding into cloud and enterprise storage with our higher performance solutions and strong OEM relationships.

This strategy is already yielding design win momentum, and we are gaining traction in the high end of this market.

In SSD, our strategy is to extend our leadership in this fast growing market by leveraging the breadth of our portfolio and continuing to expand our solution offerings.

We continue to set the industry standard across a range of interfaces, from SaaS and SATA to our leading PCIe-based solutions.

Our portfolio includes cost-effective DRAM-less solutions, custom ASICs, mainstream client products with firmware that provides full turnkey solutions, and new generations of ASSDs for the rapidly growing cloud and data center markets.

We are of the first merchant controller provider to offer products built on advanced process nodes and, along with our proven error correction technology, enable higher performance, lower power and smaller footprint, all capabilities that our customers desire.

Innovation is equally important, and we are also leading in the deployment of emerging standards, such as NBME, which is enabling a new generation of high-performance computing systems.

Altogether, we are very excited about the profitability and growth potential of our storage business.

Network infrastructure is another area of historical strength for the Company.

We are one of the pioneers in low-power, low-cost CMOS-based Ethernet transceivers.

Today we have reenergized this business, and our 2.5- and 10-gig Ethernet 5 switches and versatile multi-core ARM SoCs are gaining traction in the marketplace.

We expect this to continue, as our recently announced 25-gig solutions for the data center and private cloud markets are also showing promise.

We are continuing to invest in this business and moving up the value chain to grow in this market, particularly in products that target the cloud and enterprise data center.

Wireless conductivity is a core strength and one that we have grown organically as we have established Marvell as a market leader.

Our strategy is to refocus on Wi-Fi technology and invest in high performance areas.

For example, our innovative 802.11ac integrated wireless solutions deliver industry-leading performance with a reduced footprint at a lower cost.

As a performance leader, we are shifting from the low end towards markets that value high performance, such as enterprise access point, automotive, and connected home and gaming.

Overall, Marvell's core strengths align with the broad trends emerging in the marketplace.

Literally billions of connected devices, not just appliances but also cars, cities and entire industries are moving to the cloud.

Virtual reality, artificial intelligence, autonomous cars, smart cities depend on high bandwidth video and data multiplied by social sharing.

This is creating an explosion of digital traffic.

Data needs to be moved and stored, not just to the cloud but also to the edge for greater accessibility at ever increasing speeds.

Enterprise infrastructure and cloud providers are being forced to innovate at an unprecedented rate just to keep up.

Building on our core strengths in storage, wired infrastructure, and wireless connectivity, and providing different solutions, Marvell is well-positioned to transform how data is moved and stored across a range of markets from the consumer to the cloud.

Now, as part of our R&D review, we looked at our total portfolio from a product-by-product and holistic perspective.

We examined where we had differentiated technology and a path to market leadership that would produce profitable growth.

We also identified areas where we could improve the return on our current technology investments and which markets don't make sense for us to participate in.

Based on this analysis, we announced on November 2 that we will exit or divest non-core businesses, consolidate R&D sites, and eliminate approximately 900 positions worldwide.

These difficult but necessary actions focus Marvell on areas where we can win and deliver a higher return on our R&D investments.

This restructuring is the first phase in our efforts to improve Marvell's performance.

Our next phase includes the continued improvement in gross margins and operational efficiency.

We've had a number of initiatives in place to increase our supply chain efficiency, including consolidating purchasing and other functions to leverage our scale.

We are raising the bar on our R&D investment so that new products have clear differentiation and yield a higher return on investment.

Our goal is to achieve 58% to 60% gross margin within the second half of our FY18.

With a renewed focus on our core product portfolio and on markets in which we are a leading technology provider, we are confident that with discipline and execution we will deliver profitable growth.

As we achieve greater cash flow and profitability, we are also committed to returning cash to shareholders.

With this in mind, I am pleased to announce that our Board of Directors has authorized a $1 billion stock repurchase plan.

As part of this, we intend to return $500 million to shareholders through share repurchases over the next 12 months, while also maintaining our current dividend plan.

In summary, we have made significant progress over the four months that I have been with Marvell, and I want to thank the entire team for their efforts.

We have assembled a strong management team, refocused our R&D on the Company's core strengths, developed strategies that will put Marvell on a path to faster and more profitable growth, and implemented changes to make more effective use of our capital.

Altogether, I am very confident that these actions will improve our execution as a Company, accelerate innovation, and yield greater returns for our shareholders.

Now I would like to review the results of our third quarter.

We delivered strong financial performance for the third quarter of FY17.

Our revenue came in above the high end of our guidance, growing 4% sequentially to $654 million.

This was driven by stronger demand from our storage and networking businesses, as well as from our mobile and wireless sales, which came in as expected.

We achieved non-GAAP gross margin of 56.7%, which is a significant improvement from 45.9% one year ago.

We also generated non-GAAP operating income of $115 million and delivered $0.20 in earnings per diluted share, beating the high end of our range.

In terms of business highlights, storage revenue came in stronger than expected, driven by growth in both HDD and SSD solutions.

Our HDD revenue grew as customers saw continued stabilization and demand for client drives.

In SSD, Q3 was a record quarter with revenue increasing significantly both quarter over quarter and year over year.

SSD controller sales now represent approximately 20% of our total storage revenue.

In the networking market, Q3 sales of Marvell solutions were better than anticipated.

They grew 20% compared to the third quarter of last year, driven mainly by continued traction of our solutions for the campus and enterprise markets.

In the wireless connectivity market, our third-quarter revenues came in as expected.

This was mainly due to anticipated decline in wireless connectivity solutions related to mobile handsets and low-margin modules.

Now I'd like to turn over to our Chief Financial Officer, Jean Hu, to provide more details for Q3 and our outlook for Q4.

Go ahead, Jean.

Thank you, Matt.

Good afternoon, everyone.

First, I will review our third-quarter financial results.

Then I will discuss our restructuring actions and provide our fourth-quarter FY17 guidance for continued operations.

As a reminder, our Q3 results do not include any impact of our restructuring actions, which we announced share on November 2 in our Q4 FY17.

Our revenue in the third quarter was $654 million, which represents a 4% increase from second-quarter revenue of $626 million.

Our Q3 revenue included a $60 million of storage shipment be forwarded from Q2.

Normalizing the $60 million deferred revenue between Q3 and Q2, our storage revenue in Q3 would represent an 8% sequential increase and a 21% increase year over year driven by higher HDD and SSD demand.

Networking revenue in the third quarter of FY17 decreased 16% sequentially, but it grew 20% year over year.

Mobile and wireless revenue declined 11% sequentially, as expected.

Mobile handset related revenue was $4 million.

Our GAAP gross margin for the third quarter was 56.3%.

Non-GAAP gross margin was 56.7%, above the high end of our guidance range provided in our Q2 2017 earnings release.

This increase was primarily driven by product mix and improvement of operational efficiency.

Our GAAP operating expenses for the third quarter were $285 million.

Non-GAAP operating expenses were $256 million, lower than our guidance primarily due to better operating expense management.

Non-GAAP R&D expenses in the third quarter were $202 million, and the non-GAAP SG&A expenses in the third quarter were $54 million.

Non-GAAP operating income increased to $115 million from $27 million a year ago.

This represents an operating margin of 17.6% versus a 4% operating margin a year ago.

Our net other income was $5.5 million.

Tax provision was $16 million.

GAAP net income was $73 million for the third quarter, and the non-GAAP net income was $105 million.

Third-quarter GAAP earnings per diluted share was $0.14.

And our non-GAAP earnings per diluted share was $0.20 versus $0.06 a year ago.

We have made significant progress to improve our financial performance.

Turning now to our balance sheet.

Our cash and marketable securities were $1.65 million, or over $3 per diluted share at the end of the third quarter.

Net cash provided from operations in the third quarter was $121 million.

During the quarter, we have resumed our stock buyback and our original plan.

We returned $87 million cash to shareholders, which included $30.7 million in dividends and $56.5 million in stock repurchases.

As noted in our press release, our Board of Directors approved a $1 billion share buyback program.

This newly-authorized program replaces in its entirety the prior $3.25 billion stock repurchase program, which had approximately $150 million of repurchase authority remaining.

Now I would like to recap the restructuring actions we announced on November 2, which included two initiatives.

First, we are discontinuing specific R&D programs, streamlining engineering process, and consolidating R&D sites for greater efficiency.

These actions will result in eliminating approximately 900 positions worldwide, which is about 17% of our total headcount.

We estimated the revenue associated with this R&D programs was about 7% of our Q3 FY17 revenue.

This revenue is primarily under our mobile and wireless, as well as other end markets.

We do expect this revenue to decline over the next several years, but to have a very long tail.

We will classify this revenue under other markets in Q4 so we can provide more transparency of our core business in storage, networking and wireless connectivity.

We also expect a significant reduction in legal and accounting costs.

Altogether, these actions are expect to reduce annual operating expenses by $180 million to $200 million.

In addition, we are divesting non-strategic businesses with approximately $60 million in operating expense and $100 million in revenue, based on first-half 2017 annualized run rate.

These business have a gross margins of approximately 14%, and they will be classified as asset held for sale and reported as discontinued operations in Q4.

Our guidance for Q4 is excluded estimated results of this business, which will primarily affect our other end market revenue category.

Now I would like to move on to our guidance of Q4 FY17 for continued operations.

We expect our Q4 net revenue to be approximately $565 million, plus or minus 2%.

Excluding the impact of the $60 million deferred revenue in storage, we expect our storage revenue to be down slightly in Q4 compared to Q3, but will grow year over year.

Networking revenue is expected to be flat sequentially, but to show double-digit growth year over year.

Our wireless connectivity revenue is expected to decline sequentially due to normal seasonality.

Our GAAP and net non-GAAP gross margins are expected to be approximately between 57% to 58%.

Our GAAP operating expenses are expected to be in the range of $322 million to $332 million.

And the non-GAAP operating expenses are expected to be in the range of $225 million to $235 million.

GAAP and non-GAAP net other income is expected to be approximately $3 million.

And the GAAP, non-GAAP tax benefit is expect to be approximately $1 million.

GAAP and the non-GAAP diluted share count are expected to be approximately 524 million and 532 million shares, respectively.

This will result in GAAP income per diluted share in the range of negative $0.01 to positive $0.03, and the non-GAAP income per diluted share in the range of $0.17 to $0.21.

Looking ahead, we will detail our strategy for profitable growth, including our long-term target financial model and the capital allocation strategy, at an upcoming Analyst Day in early 2017.

We will send out more specifics on this event soon and look forward to seeing many of you in person.

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

Thank you, Jean.

We'll now open the call up to your questions.

Operator, we'll take the first question, please.

Thank you.

(Operator Instructions)

Craig Ellis, B. Riley.

Thanks for taking the question.

The first question is on gross margins.

So one, congratulations on the significant progress you are making there and in other parts of the business.

As we transition from the improvement in gross margins to 56.7% and then 57.5%, can you talk about what changes in the business to drive it towards 58% to 60% over the next 3 to 4 quarters?

And should we think about that 58% to 60% being the peak level margin for the business, or is that just an intermediate level with potentially higher margins down the road?

Hi, Craig.

This is Matt.

Hey, Matt.

Hey, there.

Yes, we're clearly pleased with the progress the Company's made in short order to really address the cost side with respect to the product margin.

Additionally, we are benefiting from improved mix with higher sales of our networking and storage.

That's helpful.

And helping in the near term.

As we look out into the longer term model we are communicating for the second half of 2018, we see further mix improvements and additional benefit that we anticipate in really addressing cost of goods in a very strategic and meaningful way.

As far as anything above 60%, we are not going there yet.

It's a tough crowd.

I think we are pretty happy after this period of time to come out and be comfortable guiding in that range.

But we do feel confident that the quality of the business that we are winning and that we are delivering is very good.

And that the roadmap of new products that we are going to be introducing also has a gross margin profile that supports that type of guidance.

So overall we are pleased with the progress on gross margin.

That's helpful.

The follow-up question is more of a operational question.

It was helpful to get the summary of which businesses you think are growth businesses and which are more maintenance businesses.

As the Company brings down its operating expenses in R&D significantly in the near term, when do you think you will have the R&D allocated to your satisfaction in growthier areas versus maintenance areas?

And when do you think we'll start to see sustainable revenue growth out of the business, as you have gotten the R&D teams in place and as you make whatever tuning adjustments are necessary with field engineering and the marketing program?

Sure.

Let me break in two pieces.

The first part of your question was around when do you think we will have the R&D movements allocated appropriately to the areas we believe we can grow?

And what I would say on that is, and Jean gave some numbers on it.

What we have really done is edit and address the areas of the Company where we had R&D applied that we did not see acceptable returns and meaningful growth prospects.

So in the core businesses of storage, networking and wireless, we are pretty comfortable with the R&D allocation there.

There are some moving pieces within each of those businesses.

But overall we have been investing in those businesses so there is some fine-tuning going on.

But actually I'm quite comfortable with the roadmap, the team and the execution we are seeing out of those three businesses.

That being said, there are minor tweaks we are making.

So really what we are doing is addressing the part of the portfolio that is not part of the long-term roadmap.

Thank you.

Good luck.

Go ahead, Jean.

Just to add to Matt, it's really if you look at the restructuring actions we are taking, largely if you [poke] down those non-core areas, we should have very a large R&D but a very small revenue and the return on investment.

And I think we articulated that over the next four quarters that we'll reduce those R&D programs which [to the point], which has the run rate comfortably at a quarterly $210 million.

That's the objective exiting Q4 FY18.

I think then the question is, we are investing all those core areas that Matt talked about, which we are very comfortable and we do believe the revenue growth will come from those markets we're focusing on.

Thank you.

John Pitzer, Credit Suisse.

Yes.

Good afternoon, guys.

Thanks let me ask the question.

Congratulations on the strong results.

Matt, I guess even if I adjust for the divestitures and I look at an apples-to-apples point to compare, you are guiding gross margins for the quarter for the flattest sequential, despite the fact that storage is going to be down.

Matt, I guess help me understand a little bit better as you drive towards this new model on the gross margin line.

Do you think all of your different products, or the vast majority of your product portfolio, will sit inside of that gross margin range such that the gross margin variability is not going to be as dependent as historically has been on the storage business?

Or how should I think that?

And I guess, how are you achieving flat gross margins sequentially, despite a mix that seems to be moving against you a little bit in the quarter?

Thank you, John.

On the gross margin question, if you look at our portfolio, over all some of the portfolio we are investing going forward above our corporate average.

There are a few areas that we are investing in we do think there is a greater potential in the future that the gross margin actually, they are below our corporate average.

So we do have the product mix that will continue to be [long] for the drivers of our gross margin going forward.

As Matt talked earlier, we're going to focus on the differentiation of our product going forward.

So over longer term we're certainly try to get our gross margins higher.

The second question is on the guidance for Q4.

You are right, the mix is changing in Q4.

But we are making effort to really improve cost of sales through the operation efficiency.

So we do get benefit from operation efficiency.

But on the other side, the revenue compared to Q3 is lower.

We do have the overhead assumption and all those headwinds.

So in balance, that is what we are guiding, and of course will continue to be disciplined and try to do better.

That's helpful.

As my follow up, Matt, one of the things that was holding you back from reinstating the buyback was just trying to decide what kind of M&A strategy you might follow.

I'm wondering if you could update us on your M& A philosophy now that you've reinstated the buyback, and should we read anything into that philosophy with the restatement of the buyback?

Thanks for asking about the buyback.

We are pleased to put a sizable authorization out there, which I think signals our confidence in the Company and the business.

And yes, we felt it was important to get that communicated and authorized and announced at this call, and get moving on it.

In the context of the buyback, clearly we have looked at our capacity and our capital structure today, and also comprehended the reality that M&A is real in the semiconductor industry today, and we have to think about that.

And we do have some thoughts around it.

We're not ready to communicate those, but clearly that is a reality we have to deal with.

I'd say in the context of an industry that is going through the transformation it's going through, it is on our minds.

But first and foremost we're focused on driving Marvell's organic improvements.

That's first and foremost.

We think we have a good opportunity with the products that we have.

And second, we felt it was important to put out an authorization and a commitment to return a significant portion of our capital to shareholders while still maintaining dry powder.

Perfect.

Thanks guys, and congratulations again.

Harsh Kumar, Stephens Inc.

Hey, guys.

Congratulations as well.

Stellar results.

I wanted to follow up on the first question asked.

If I heard it correctly, it was 58% to 60% gross margin in the second half FY18.

What are the some of the levers that still need to happen in a big way for you to get there?

And then I had a follow-up as well.

Harsh, thank you.

To get to 58% or to 60% in the second half of FY18, there are two major drivers.

The first is we will continue to refine our product strategy, just based on the portfolio Matt articulated we're investing storage, networking and the wireless.

We're going to look at it areas where we really can get the return back in the investment in those areas.

Secondly, I think within the next several quarters the most importantly is we are focusing our supply chain efficiently, not only just your typical operational streamlining improvement of cost, but also like testing, consolidating test to labs, all those things we do think we have a lot more that we can accomplished.

Some of them, as you can imagine, will take some time when you want to consolidate a testing facilities across all the global locations of Marvell.

So those are the very important drivers, the product mix and cost reduction effort.

And Harsh, this is Matt.

Let me just add to that.

I think what we've found is on the cost side, as we brought in a very seasoned and experienced operations management team, we have come to a few conclusions.

And one is, as Jean mentioned, there is really tremendous opportunity to rationalize our supply chain in the back end by consolidating some of our spend with key partners.

If you think of the drivers of our cost, it is obviously in wafers, obviously in the packaging, and it's in the back end.

Some of that back end is done inside Marvell, but most of it's done with partners.

So those levers are being pulled, negotiating and partnering with the right people to drive our cost structure in a much more positive way.

There is also programs we are implementing that are very structured around leveraging our strong product engineering and test engineering teams to drive yield improvement.

That's another big lever we can pull.

And then finally is the fact of the matter is Marvell has always been very, very strong in small die size and optimized design techniques (technical difficulties) we also have that advantage as well.

So I'd say it's very much a comprehensive approach we are taking from design to supply chain on the cost side, which has some short-term benefits which you're even seen today in our current results.

And we think that those efforts are going to continue to yield gross margin leverage over the next four quarters.

Okay.

Thanks.

And for my follow-up, I think one of the key things that has to happen for Marvell to grow is the wins in, for example, enterprise and cloud.

Both have networking and storage.

And I think I heard you guys say that you are starting to get some of those.

I was wondering, how should we as investors measure that success?

Would you have some metrics like number of design wins this year versus last year, or anything else you can give us to buy into that data?

I think what you can expect going forward as we get into a rhythm of these earnings calls is now that we have gotten restructuring announced, buyback, we have gotten through the strategy; we will begin to give more color on our business, things like design wins, pipeline and where we see the opportunities in a lot more detail.

I am seeing them firsthand.

I am visiting customers and I am very encouraged.

But as far as the data points, I think those are things that we would like to call -- we would like to cover as we make progress as a Company and start highlighting some those things.

And then ultimately call them out as we see them in our business results.

(Multiple speakers ). That's also another good topic for our Analyst Day that's coming up.

So we'll have -- you'll have the opportunity to meet with a lot of our business unit heads, especially in networking.

You'll get a lot more details about what you are looking for.

I think that's the best forum for it.

Fair enough.

Congratulations again, guys.

Thank you.

Chris Rolland, Susquehanna Group.

Hey, guys.

I [call] my congrats as well.

Perhaps you guys can drill down a little more on the nonstrategic businesses with the $100 million in rev?

In mobile and wireless, what exactly was this?

Was it a stub that remained in cellular investments?

Or was it something else?

And then what are we talking about in the other bucket, as well?

And then lastly, how shall we think about the potential drag on gross margins from these businesses, as well?

Thank you.

So I'll answer your first question on the discontinued business side, is those businesses are currently under the category of other end market.

That is the most I can tell you, because we are running a sale process.

As you can imagine, at this stage we will not be able to disclose which business we are trying to run a sales process.

And on your second question about other category.

Look at the other revenue that get impacted by those R&D programs we discontinued investment.

They are largely under either mobile and wireless, all under our other market.

Some of the ones, it's probably albeit at least under mobile and the wireless, we do have the mobile computing like application processors, those kind of business, Marvell (inaudible) had long time.

For instance, application processor, it tend to have a very long life.

So we're going to stop investing for the future generation for product, but we do expect the revenue to last for several years and declining.

From margin perspective, of course we are going to try to optimize the gross margin of those products when we don't have any investment in the R&D any more.

And so we do think from the few margin dollar perspective, those business will continue to contribute to the operating margin line.

Okay, great.

Thank you.

That was helpful.

And then pacing on the $1 billion of buyback.

You guys I said $500 million over the next 12 months.

I guess my first question is, should we just kind of expect that to be somewhat linear, or do you guys have a different strategy around that?

And then secondly, should we just assume another $500 million the next year, or is this a multi-year plan in your eyes?

I think we will try to do the buyback in the most efficient way we can.

And so frankly, when we guided our Q4, we did not include any buyback impact in our guidance.

I think for modeling purpose, you probably can streamline it for the year.

I think we are really focused on the first $500 million right now.

The Board authorized $1 [billion], which is multi-year plan.

And right now we are really focused on the first $500 million.

Okay, great.

Thank you.

Quinn Bolton, Needham and Company.

Congratulations on the nice margin results.

Jean, just want to make sure I heard you right.

When you talked about the discontinued ops, you said it's about $100 million of annual revenue and I think $60 million of annualized expenses.

Did you also say it was running roughly a 40% gross margin?

Yes, that's exactly what we said.

This business is about $100 million revenue, about 40% gross margin, and $60 million operating expenses roughly.

So as that business gets categorized as discontinued ops in the January quarter, you clearly get a little bit of a positive gross margin effect since you take that 40% gross margin revenue stream out of the continuing operations.

Is that right?

Yes, absolutely you're right.

Got it, great.

And then the second question, it sounds like most of the products that you are walking away from on the mobile side or looking to categorize as discontinued ops are in the other category.

Within what is left then within mobile, it sounds like most of the wireless LAN will be focused on segments are you expect to continue to invest.

I just want to make sure that -- I know you are stopping the investments in wi-fi for mobile handsets.

But is anywhere else that you are stopping the investment in the wireless LAN, or are you looking to kind of continue that investment in sort of higher performance wi-fi across the remaining segments of that wireless business?

Hey, Quinn.

This is Matt.

I'll take this one.

The way to think about it is we had this category, mobile and wireless, and within that is our wi-fi business is a piece of it.

It's the largest piece today, and we are investing there.

When we've looked at that business, the handset portion now is pretty de minimus.

It is almost down to nothing.

When we look at the wi-fi market non-mobile, you break into a few categories like enterprise access points, we actually have a leading position there.

When you look at automotive, we have a leadership position there as well, connected home, high-end gaming.

So these non-mobile higher performance, more robust wi-fi-enabled applications is a place where Marvell has got a market position.

It's got traction, it's got design wins.

And we are going to try to build off of that.

So that is how we're thinking about the investment portion of the mobile and wireless category.

Matt, correct me if I am wrong, but it sounds like most of those wi-fi designs will be more access point solutions, perhaps with integrated CPUs rather than lower-end client devices.

Is that right?

That's the way to think about it, yes.

Great.

Thank you.

Timothy Arcuri, Cowen and Company.

Hello?

We did not hear your question.

Hello?

Can hear me?

We can hear you, Tim.

Hi.

Okay, great.

My question is, the first one on margins within storage.

Really, how much higher SSD gross margins are than HDD gross margins?

Sorry, we don't disclose that information.

And I think the only comment I'll say is that our overall storage margin is higher than our corporate average.

Okay, great.

And then I guess a question really for Matt.

There is some concern that if you did a M&A deal right now that it could interfere with your ability to basically take cost out of the current businesses.

But you obviously have about $2 billion worth of liquidity between your real estate and your cash and what you could borrow against.

So the question is, would you be willing to do a deal while you're still right-sizing the cost of the existing business?

Thanks.

Sure.

Thanks, Tim.

What I would say, you are absolutely right.

The key focus of the Company right now is to execute, execute on the plan that we laid out to the investment community, lay out the plan that we've discussed internally, and really drive that.

If we do that, we think we can unlock a lot of value in the Company.

We have comprehended what you mentioned with respect to our buyback thoughts.

But at this point, again, we are laser focused on the internal development and we have all hands on deck on executing.

Okay.

So I guess the right way just to think about that would be that you want to take the cost of the existing business before you go out and do a deal, to be clear, right?

Yes.

I think all I'd say is this.

That's clearly the priority.

We have to keep our eyes open.

We are not unaware of what is happening in the industry.

And we do think that over time as we execute our plan, Marvell is a phenomenal Company, it's a phenomenal platform.

We have a great brand, great infrastructure, great engineering talent, and great scale.

Over time we think we can grow this Company organically and inorganically, but first things first.

Okay.

Awesome.

Thank you, Matt.

You're welcome, Tim.

Joseph Moore, Morgan Stanley.

Hi.

This is [Eveni] calling in for Joe.

Thanks for taking my question.

I wanted to follow up on your SSD business.

Can you talk about the growth you are seeing there?

Your share position [as it relates to] the pricing and the converted profile of the market?

Sure, happy to take the question.

We are very pleased with our performance of our SSD business.

As I mentioned in my prepared remarks, it is now becoming a meaningful portion of our overall storage revenue.

It is growing much faster than our overall storage revenue.

And it is in a market that is growing quite fast.

We have a wide range of technology that we offer there.

We participate primarily at the higher end of the market.

And we are also seeing traction, especially in the last year or so, even in the lower end of the market where really having not only the hardware but the software and the firmware and a full turnkey solutions is required.

So I could not point to any one individual specific growth driver, meaning all the area that we our investing in SSD, all the different sub-markets are actually all performing quite well.

And we are encouraged by the traction we see, especially as large OEMs who are transitioning from hard drive based systems to SSD based systems start thinking about tailoring their storage requirements around their own special needs.

And when they do that, they can think about using Marvell technology and controllers in conjunction with sourcing their own NAND and coming up with their own solutions for their tailored applications.

So we really participate, again, in a broad range from, all the way [8/6] at the high end for high-end applications, down to broad-based solutions for the retail market.

Got it.

That's helpful.

For a follow-up, can you touch upon what traction you are seeing for Fnal-Level Cache and MoChi?

That's something you guys were pretty vocal about last year.

Any comments on customer traction there?

Sure.

So the way we look at those two technologies is they are both technologies that are -- continue to be in the Marvell roadmap.

With respect to MoChi, we are in production today with devices that are based on the MoChi architecture.

But I'd say more broadly the Company really took that vision of MoChi as an interface and as a design standard, and actually has embraced modular design and modular technology in a number of different ways outside of just the MoChi-specific interface.

So we see modular design as important for Marvell, especially as processor cores want to migrate down to advanced nodes but I/O really still can be efficiently designed and leveraged at legacy nodes.

That's a technique we are taking advantage of today.

FLC is a little further out, and that is leveraged primarily from our storage group.

So both of them are in our new product design pipeline.

MoChi is farther along.

And we're going to continue to leverage those technologies that have been incubated inside Marvell for our own product benefit.

Very helpful.

Thank you.

Ian Ing, MKM Partners.

Thank you.

First question for Matt.

Marvell largely a OEM business, but in your past you also had extensive experience with this distribution, representatives, and other types of channels.

So do you foresee perhaps adding other types of channels to help sell Marvell products?

I know IoT and conductivity, some competitors use a channel, distribution channel.

Thanks.

Great question.

And it is not something we've talked a lot about, but I'll will spend a little time here on it.

You are correct.

Marvell historically has been a very much a OEM direct account, R&D to R&D partnership type of Company.

That's great.

I'm very impressed with the level of relationships that have been developed over the years in Marvell up to very, very senior levels at our customers.

That's an asset we have, and that's great.

We do have business that goes through distribution.

And you are right, some of it is in connectivity.

Actually, a lot of it is in our networking business, insides that sell into the broad market as well as some of our switches.

So that revenue today is not terribly large as a percentage of Marvell so it hasn't gotten looked at in a lot of detailed, but in an aggregate dollar amount it's actually not insignificant.

And when I look at our distributor network that we have in place today, it really has not been actively managed, in my opinion.

It has not been a priority.

So think of it this way, we sell a lot through distribution to a lot of customers.

And our view here is, this is next sort of phase of Marvell now that we have the strategy in place and the restructuring and the things I've mentioned, our attention is now turning to, how do we take the technology we have in Marvell and sell it much more efficiently and much more broadly?

And distribution can be a great mechanism to do that.

And I think there is a lot of low-hanging fruit in distribution today to really leverage that revenue we already have with those partners.

Maybe think about how to focus within distribution on some key partners and actually motivate them and enable them to sell Marvell products much more competitively.

That's something I think you'll be hearing more from us on.

I think it is an opportunity for the Company to get incremental sales with technology we have already developed.

Thanks, Matt.

For my follow-up now that the strategic review is done, do think there is any opportunities in terms of the process of green-lighting new products investment, perhaps revisiting the hurdle rates or ROI and investment requirements?

You have got my playbook figured out.

That process in the Company -- I mean, again it is a very, very innovative Company.

That innovation and that level of creativity in Marvell has created a lot of technology that's very, very valuable to the Company.

That's something that I am very focused on making sure we maintain as we go forward.

But that being said, the rigor in the Company around having a very robust process to evaluate all the new investments that we are going to make in R&D, all the new projects, what's the true realistic derisked return on investment for those?

Does it meet the hurdle rate that we need to grow the Company over time?

Is it differentiated?

What's the development cycle time?

What is the cost?

That whole process in the Company something that I think can really be improved upon a lot.

It's something that have a lot of passion around.

And myself and the whole management team as we think about Marvell going forward are going to be spending a lot of time with our engineering groups and really make sure that what we are putting into the pipeline on this very precious R&D budget that we have is being spent wisely.

And again I think that is just, like you said on the other question with distribution, it is just another opportunity to optimize what is already working in the Company and do a much better job at it.

And I think we should start seeing dividends paid on that next year and the year after.

But to really manage a Company of this scale for the long term, we have to have a very efficient capital allocation process and R&D budget in process.

And we are putting that in place.

Thank you, Matt.

Kevin Cassidy, Stifel Nicolaus.

Thank you.

My question is along the same lines.

You had mentioned revitalizing your networking, especially ethernet networking.

I wonder if you could talk little more details about that of, say, you mentioned the 25-gig [FIS].

What are going to be bringing to the market that isn't there already?

Sure.

So you are right.

I think many of you know the history of the Company.

Marvell really, one of the ways it made its mark in the industry was that at 1-gigabit ethernet the Company really took the market by storm and gained a leading position.

And along with the pioneering and the rechannel area in HDD, as well as in wi-fi, these are kind of the core businesses that grew Marvell to what was -- what it is today, excuse me.

Company did get behind, for a number of reasons.

And starting in early 2015 there was a leadership change.

And within the Company, within the networking business, and a real refocusing in that area.

We do see strong demand and opportunity for us, both to do some refreshing on the existing portfolio and we've now started to get products out that are leading products and what we call end-based (inaudible), which are things like 2.5-gigabit ethernet, 5-gigabtit ethernet that are addressing new segments of the ethernet market, as well as 10-gig, which even though that is standard has been around for some time actually has not -- does not represent a material portion of the gigs -- of the ethernet shipments today.

We have our 10-gigabit solution as well.

And we think we can participate there, especially because of our strong position in switches.

And selling our switches and FIS together as a solution to our customers is a very powerful prospect and one that one of our largest competitors has done really well for many years.

We think there is plenty of market to participate in.

Marvell is very well recognized in this area.

And we have a suite of products from 1-gig, 2.5, 5, 10, gear boxes and other interface IT to 25 and beyond.

And again, coupled with our switches and our ARM-based SoCs, by the way, it's a very nice solution for a wide range of our customers.

So we are investing there.

We're seeing traction.

Just to add to Matt, is that it's right.

If you look at our networking revenue, for the past four quarters we had experienced the year-over-year growth consistently.

So we do see strong momentum from that business, not only during the past several quarters but going forward.

Okay.

Thank you.

And Matt, my follow-up question was around adding the Armada, or the ARM-based processors to the strategy, too.

Maybe if you could expand on that a little more.

Sure.

I think that was a very good decision that was made.

That was done before me.

And that product line has actually -- if you look at our networking revenue, and as Jean mentioned, it has been growing pretty nicely.

Actually, the fastest growing piece of it has been the Armada family.

It is getting traction across a range of applications and range of geographies.

It is doing well in products for campus, SMB, even small cell play stations and things like that.

And we also see that there are some legacy architectures out there, like PowerPC or MIPS, that ultimately customers want to see a migration path to the ARM architecture, which is really, as everyone knows, become the industry standard.

As that transition happens and people moved to ARM, Marvell's got a pretty competitive offering there.

So we do see some positive trends in the SoC area.

It's still relatively early days.

But we are getting revenue growth.

As I mentioned, it is growing faster than our overall networking business.

So we are encouraged.

Great.

Thank you.

Congratulations.

(Operator Instructions)

Mike Burton, Brean Capital.

Hi.

Thanks for taking my questions, and congratulations on the results.

I would like to follow up on the SSD comments you just gave, and congrats on the record quarter there.

Did I interpret you correctly that the majority of the revenues currently are for enterprise SSDs?

And when you look at those newer opportunities on the low end, Matt, are you looking more at client PC as the low-hanging fruit, or are you looking in mobile flash controllers?

Maybe I'll take the question.

It is a combination of [upstage] revenue between enterprise and the client side.

I think when we look at to continue to grow this business, or especially like Matt said, we are going to focus on the high end.

We're doing [ASIC] for a lot of customers.

Those are great foundation business.

Or expand it to the client side.

Not mobile handset where more folks (inaudible) the PC, the things we could add of more value.

Okay, understood.

I know it is early, but with the change in mix of businesses can you give us a sense of what seasonality looks like in your segments?

Any initial thoughts relative to market trends as we contemplate the April quarter in our models?

Thanks.

That is a good question.

As you can imagine, the business if you look at last year also had changed very significantly.

We used to have a very large portion of our revenue from mobile side.

So the seasonality has been all over the place, frankly.

I would say going forward if you look at the Q4, when we guided Q4, on the storage side Q4 seasonality, you have a 2% to 4% decline sequentially.

We actually are, excluding the $60 million before the revenue shipment, our guidance actually is better than our seasonality.

On the networking side, I think Q4 typically is flattish sequentially.

I think right now we could see networking and storage are quite consistent.

The wireless connectivity side, Q4 is very significantly sequentially decline quarter, as you can imagine.

A lot of consumer mobile gaining, those are the really seasonally down quarter.

In the going forward I think things are (inaudible) now going to focus on storage and networking and the wireless connectivity.

And over time those three businesses' seasonality will dictate overall Company seasonality.

We will give you more color next quarter when we have a clearcut of all three segments and so we can provide more insight.

Fair enough.

Congrats again.

That does conclude today's question-and-answer session.

I would now like to turn the call back to John Ahn for closing comments.

Thank you, Abigail.

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

Please note that we will be presenting at the Credit Suisse TMT Conference in Scottsdale, Arizona, a couple weeks from now, Wednesday, November 30.

So we look forward to speaking with you either there or again very soon.

Thank you very much.

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

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

Everyone have a great day.