邁威爾科技 (MRVL) 2017 Q4 法說會逐字稿

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

(Operator Instructions)

As a reminder, today's program is being recorded.

Now I'd like to introduce your host for today's program, Peter Andrew, Vice President of Investor Relations.

Please go ahead.

Thank you very much, Jonathan, and good afternoon, everyone.

Welcome to Marvell's fourth-quarter FY17 earnings call.

I'm very excited to join Marvell and I look forward to reconnecting with all of you to talk about the Marvell story.

Joining me on the call today is Marvell's President and CEO Matt Murphy; and CFO, Jean Hu.

Matt will begin with an overview of our performance, after which Jean will provide more financial detail and our outlook for the first quarter of FY18.

We will then take your questions.

Certain comments today will include forward-looking statements, which are subject to significant risks and uncertainties, which could cause our actual results to differ materially from management's current expectations.

Please review the cautionary statements and risk factors contained in our earnings release, which we filed with the SEC today and posted on our website, as well as our most recent 10-K and 10-Q filings.

We do not intend to update forward-looking statements.

During our call today, we will make references to certain non-GAAP financial measures.

A reconciliation between our GAAP and non-GAAP financial measures is available on our website in the Investor Relations section.

Please note that we have classified certain product lines as discontinued operations in the fourth quarter of FY17.

As such, all financial information we will be discussing today are from continuing operations unless otherwise stated.

With that, let me turn the call over to Matt, Marvell's President and CEO.

Great.

Thank you, Peter, and welcome to all of you on the call.

FY17 was a year of significant transformation for Marvell.

I joined the company last July at the midpoint of the fiscal year.

Since that time, we have built a new management team, including this past quarter the hiring of a new Head of Worldwide Sales and Marketing, Tom Lagatta; and a New Chief Human Resources Officer, Karen Rohde.

And just this week, Gary Ignatin and Peter Andrew joined Marvell.

Gary is leading Corporate Development for us, and Peter is leading Investor Relations.

Marvel is attracting proven industry talent of this caliber because these individuals, as well as our employees, see the potential of this great Company.

And I am very excited to have them on our team.

In FY17, we put a number of distractions behind us and began refocusing the business around our core strengths in storage, networking, and wireless connectivity.

These are strong businesses that capitalize on the explosion of data as a result of the connection of billions of network devices to the internet.

These connections are creating huge and increasing demands for data storage and network bandwidth.

Marvell is one a few select companies with the IP, system knowledge, products, and customer relationships to capitalize on these major market opportunities.

Our recent refocusing actions have repositioned the Company for profitable growth, and I'm proud to report we finished the fiscal year strong.

We increased our non-GAAP gross margin to 57.6% in the fourth quarter, up from the 53.3% in the first quarter, and improved non-GAAP operating margin to 19% in the fourth quarter, up from just 2% in the first quarter.

Let me turn now to our fourth-quarter results.

We delivered a strong performance in Q4.

Revenue was $571 million, above the midpoint of our guidance.

We also showed significant progress in improving our profitability.

As I mentioned, we achieved non-GAAP gross margin of 57.6%, and we now expect our non-GAAP gross margin to be approximately 59% in the first quarter of FY18.

Non-GAAP operating expenses were $218 million, significantly below our guidance of $230 million at the midpoint.

Our team is executing very well, and we are one quarter ahead of schedule on our restructuring plan.

During the fourth quarter, we also returned $155 million in cash to shareholders through $30 million in dividend payments and $125 million in share repurchases.

Now let me turn to our businesses.

In the fourth quarter, storage revenue grew 8% year over year, driven by better-than-expected HDD demand and the continued ramp of our SSD business.

During the quarter, our SSD business performed very well, growing both year over year and sequentially, and again accounted for more than 20% of our total storage revenue.

While we have seen the impact of NAND shortages at some customers, we continue to benefit from 20-plus years of expertise in storage, our broad IP portfolio, and market position with tier one customers.

Looking ahead we expect our SSD controller revenue to be flat in the first quarter of FY18 rather than experiencing the typical seasonal decline.

We're also making excellent progress in our HDD business to expand into the enterprise and data center markets.

As a result of the ramp of products which serve the enterprise and data center, we expect our first-quarter HDD revenue to be approximately flat sequentially, better than the normal seasonal sequential decline.

In our networking business, our fourth-quarter revenue was up again double digits year over year, as we continued to benefit from ramping design wins of our new products for the enterprise and campus markets.

Over the past 24 months, we have refreshed our Ethernet product portfolio to strengthen our competitive positioning and our core target markets of campus and enterprise.

During the quarter, we saw the production ramp of our 10-gigabit Ethernet switch design wins with multiple customers, and we continue to see strong adoption of our ARM-embedded SoC in the enterprise, driven by the technology transition, away from legacy architectures to ARM.

We also saw preproduction ramps of some of our new 25 gigabit Ethernet products, which leverage our mix signal and PHY expertise to provide optimized solutions for the data center.

These include our Gearbox and retimer products, which enable existing switch and [nick] platforms to support the emerging 25-, 50- and 100-gigabit Ethernet standards.

All of these represent early progress for Marvell in the data center market.

Our wireless connectivity business was down in the fourth quarter sequentially, in line with our expectations.

We believe our wireless connectivity revenue is stabilized because we have transitioned out of WiFi products for mobile platforms and refocused our efforts on high-performance markets such as enterprise access points, automotive, and smart home gateways.

As we look toward the first quarter of FY18, we expect our wireless connectivity business to grow by double digits sequentially; better than normal seasonality, driven by better customer demand in gaming and smart home gateways.

Overall, I am very proud of what the team has accomplished so far.

We've made a lot of progress and our employees are embracing the changes, which combined with the caliber of count we're attracting is accelerating our transformation.

As you can see in our first-quarter outlook, at the midpoint of our guidance, we expect to deliver 20% non-GAAP operating margin.

This would be a significant milestone in our progress towards delivering predictable, profitable, and sustainable growth.

My team and I will provide more details on our strategy and growth plans, as well as our long-term financial model at our upcoming Investor Day in New York on March 10th, and look forward to seeing many of you there.

With that, I will turn the call over to Jean.

Thank you, Matt.

In order to better align with our investment decisions to focus on storage networking and wireless connectivity, we're refining how we categorize our revenue.

We'll provide comments on four categories of our products for continuing operations, which are storage, networking, wireless connectivity, and other products.

Storage product remained the same and are comprised primarily of SSD controllers and enterprise storage solutions.

Networking products are primarily comprised of Ethernet switch, Ethernet transceivers, embedded Arm processors, and automotive Ethernet, as well as few (inaudible) networking product lines where we no longer embed, but will generate a long pay of revenue for several years.

We moved microcontroller WiFi combo product to wireless connectivity.

Wireless connectivity products are primarily comprised for WiFi solutions, including WiFi only, WiFi Bluetooth combos, and the WiFi microcontroller combos.

We moved (inaudible) communication and the application processors into the other product category.

Other products now include the printer solution, [WiFi] communication, and application processors and others.

We have limited our investment in these products and the revenue from them will gradually decline, but they will yield profit for many years to come.

We have included in the update a historical [quality] revenue breakdown in our earnings release presentation deck in the Investor Relations section of our website.

As a reminder, we have classified certain of our product lines as discontinued operations in Q4 FY17.

We have made progress in divesting this product line.

On February 8, we signed a definitive agreement to sell our G.hn product line to MaxLinear for $21 million.

Now I will discuss our Q4 and FY17 financial results, and provide current outlook for continuing operations in the first quarter for FY18.

Please note that these comments are from continuing operations, and you can see the reconciliation in our press release and on our website.

Our revenue in the fourth quarter was $571 million, down 5% year over year, primarily due to the decline of mobile handset-related revenue.

Our call business revenue in storage networking and wireless connectivity grew 5% year over year.

Our Q4 revenue from storage products accounted for 54% of our revenue and it grew 8% year over year.

Networking revenue in the fourth-quarter for FY17 accounted for 26% of our revenue and it grew 13% year over year.

Wireless connectivity accounted for approximately 12% of our revenue and it declined 19% year over year, primarily driven by the decline of mobile WiFi product revenue.

Other product accounted for 8% of revenue and it declined more than 50% year over year due to the decline of mobile handset platform revenue.

Our GAAP gross margin was 57.3%.

Non-GAAP gross margin was 57.6%, about the middle point of our guidance range.

Our GAAP operating expenses for the fourth quarter was $340 million, inclusive of $101 million in restructuring charges and $21 million in stock-based compensation.

Our non-GAAP operating expenses were $218 million, much lower than the midpoint of our guidance of $230 million.

As Matt mentioned earlier, we are ahead of our restructuring schedule by one quarter.

Non-GAAP R&D expenses in the fourth quarter were $169 million, and the non-GAAP SG&A expense in the fourth quarter was $49 million.

Non-GAAP operating income was $111 million.

This represented an operating margin of 19.4%.

Net other income in Q4 was $3.8 million.

Our GAAP income tax provision for Q4 was $68.5 million due to our restructuring actions to consolidate the international design [venture].

We recorded approximately $50 million in tax expenses associated with the potential distribution of earnings from this occasion.

These tax liabilities will only become payable upon the actual distribution of cash from an associated location and may be partially offset by any available tax credit and the deductions at the time of distribution.

We also recorded the additional tax expense of $16.8 million due to related office closures and headcount reduction.

Our non-GAAP income tax provision was $0.5 million.

GAAP net loss was $77 million and non-GAAP net income was $114 million.

GAAP loss per diluted share from continuing operations was $0.15 and the non-GAAP earnings per diluted share was $0.22.

Let's now turn to our balance sheet.

At the end of the fourth quarter, our cash and marketable securities were $1.7 billion, or more than $3 per diluted share.

Net cash provided from operations in the fourth quarter was $119 million.

During the quarter, we returned $155 million cash to shareholders, which included $30 million in dividends and $125 million in stock buybacks.

Now let me summarize the FY17 financial results.

As Matt mentioned earlier, we have made significant progress in the second half of FY17.

Revenue was $2.3 billion.

We delivered a non-GAAP gross margin of 56% and a non-GAAP operating margin of 14%, and we returned $304 million cash to shareholders through $122 million dividend payments and $182 million share buybacks.

Now turning to Q1 FY18 guidance.

We expect our Q1 net revenue to be approximately $570 million, plus or minus 2%.

We expect our storage revenue to grow double digit year over year and to be approximately flat sequentially versus the normal seasonality of sequential decline.

We expect networking revenue to grow single digit year over year and to be down slightly sequentially.

We continue to see new product ramps within our networking business, but the revenue ramp is being offset by the decline of our (inaudible) networking product line.

The headwinds from the decline of (inaudible) product lines will continue for next few quarters.

We expect our wireless connectivity revenue to be flat year over year and to grow by double digits sequentially, better than normal seasonality, which is primarily due to (inaudible) customer demand in gaming and connect to the home market.

Other products will decline 30% year over year.

As noted earlier, we expect the non-GAAP gross margin to be approximately 59%.

We expect our GAAP operating expenses to be in the range of $250 million to $265 million, and the non-GAAP operating expenses to be between $220 million and $225 million, as we see approximately $4 million of normal payroll taxes back up in Q1.

At the middle point of our guidance, we expect to achieve 20% of non-GAAP operating margin in Q1 FY18.

GAAP and non-GAAP net other income is expected to be approximately $3 million, and the GAAP tax probation is expected to be 6%, and non-GAAP tax probation to be 4%.

GAAP and non-GAAP diluted share count to be approximately 521 million to 526 million shares.

This will result in GAAP income per diluted share in the range of $0.12 to $0.18, and non-GAAP income per diluted share in the range of $0.19 to $0.23.

With that, we'll now open the line to answer your questions.

Operator, we'll take the first question.

(Operator Instructions)

Timothy Arcuri, Cowen & Company.

Thank you very much.

Matt, I wanted to ask you about storage, and there was some comments last night from your peer that storage is going to hold on into the first calendar quarter, but then it's going to roll over a little bit into the second calendar quarter.

So I know that you don't want to guide out that far, but can you talk a little bit what you see in storage and whether as HDD rolls off, whether your SSD business can buffer that.

Thank you.

Sure, hi Tim.

So you're right, I'm not going to be in a position to guide out that far at this juncture.

What I would say is that, and as you have seen from our results, we're very pleased with our performance in storage, both in HDD and in SSD.

I think if you look at our guide for Q1, we're definitely projecting our business to be strong and bucking seasonality.

So we actually see HDD strong, and then if you look at our SSD business, that's also performing well.

I think for us, most of that is due to new products that are ramping and new programs.

So we, again, we're very comfortable with our outlook for both HDD and SSD, and our storage segment overall.

Beyond Q1, I'm not able to really postulate on what it's going to look like.

Got it.

Okay.

And then just a bigger picture question about connectivity, and now that it's now down to a level where it's -- it's still a decent sized business, but relative to your other businesses, it's just not that big.

The question is, strategically, how important is that business to you?

Because it seems like it's structurally lower margin and maybe you could redeploy some of those assets into networking.

The question is just on why be in that business?

Is it really strategic?

Thank you.

Sure, great question, and I'll give you my view on WiFi.

First of all, in general, standards-based businesses come with their challenges.

And so for us at Marvell, really the key has been to try to identify the areas of value in WiFi.

And as it turns out, when you strip out the mobile-related WiFi revenue that we have, along with some module business that was inherent with low gross margin, what's left in the portfolio and where we believe we've bottomed now, is a portfolio that's actually levered to the higher performance segments of the market within wireless connectivity where customers and end applications actually care about performance.

So examples of that would be like in enterprise access point, which is highly performance-driven.

Automotive is highly performance-driven, not only on the fidelity of the radios, but as well as the quality required and the supply chain to support it.

And then even when you start looking at things like smart home gateways, the bandwidth requirements and the demands on those are quite high.

So, as we look at it, we -- the business itself looks quite different than it did a year ago structurally.

I'd say also on top of that, which is that I think that segments of WiFi we're participating in are inherently higher performance and higher value, when you also look at our strategy going forward, and we're going to be giving more details on this at the Investor Day.

But if you look at our customer set where, for example, in campus and enterprise networking, that story is really about wired and wireless growth and data traffic exploding really even at the campus enterprise and SMB markets.

So we think it's valuable to have both.

I think the last thing I would add is that we do get leverage, because many of the products we're selling in WiFi now either have an integrated SoC along with them or they sit next to one of our SoCs.

Sometimes we're able to sell our solo switches and PHYs.

So there's also overlap from a portfolio set.

So, today in summary, we're comfortable with our WiFi portfolio.

We think it's a much higher value mix of products and applications, and we'll be giving some more insight into what we see some of the growth drivers being in that business on March 10.

Thank you, Matt.

Appreciate it.

Yes, thanks, Tim.

Harlan Sur, JPMorgan.

Hi, thanks for taking my question and solid job on the quarterly execution.

On the better gross margin guidance for Q1, you're already trending within your target range that you had previously targeted to get to in the second half of this fiscal year.

I would assume that you have more positive mix-related impacts moving forward.

Obviously, Matt, as you said, you're moving more and more into near line, high capacity, high gross margin HDD segment of the market.

Your networking products are doing extremely well, and we're also at the very early stages of manufacturing optimization.

So should we assume gross margins can get to greater than 60% as we move to the second half of the year, given all of the margin tailwinds that you potentially have?

Yes, hi Harlan, so great to hear from you and appreciate the comments on the gross margin.

I think at Marvell, as I said even the first week I was here, we're really laser-focussed on this, because we view it as a management team and as a Company as a direct proxy of the quality of the IP and the engineering and the value that we can deliver.

And quite frankly, I always looked at Marvell from the outside and wondered why a Company with such a phenomenal technology set was running in the low 50% gross margins when comparable types of companies with people the sort of people Marvell had, were much higher.

So we have been on this mission, as you're aware and you pointed out, some of the benefit we're seeing is that what I would call, quote, better mix within our segments.

So higher quality revenue within storage, within networking, and within wireless.

But the other one has been a real focus here and embracing operational [exceplences] is a core competency of Marvell, and I think you can see some of that now flowing through into the COGS side.

And I'd say on that subject, there is no silver bullet when it comes to improving gross margin and fundamentally lowering your cost structure.

I was raised and trained that good general management is doing a lot of things well simultaneously.

And so, whether it is yield improvement, leveraging our great product engineering team here, supplier negotiations, freight and logistics, design for cost, you name it, we're attacking really the COGS side on all fronts so we can truly unlock the value of Marvell.

With respect to guiding on gross margin, we're going to be talking at the Investor Day about our long-term model.

We are ahead of plan.

I'm ahead, quite frankly, of where I thought we could be as a Company.

I'm very pleased with it.

I think the team has executed well, and it just shows you the progress that we're making.

Last point, you all remember six days into the Company as well, Rick Hill, my Chairman, decided to throw out a six-handle as a target.

He had the benefit of being with the Company for a couple of months; I had only been there for a few days.

In November, when we did the restructuring, we guided for the second half of FY18 being in the 58% to 60% range.

I acknowledged that I thought aspirationally we can get there, and so certainly, putting out a gross margin guide next quarter of 59% gives us comfort that we're going to be in line with the commitments we already made.

And again, we're excited to talk about what we see even beyond that from a long-term model perspective at the Investor Day.

Great, and then, thank for the insights there.

If I look at industry analysts' forecast, the SSD market is targeted to grow about 20% this year.

And within that, enterprise and cloud SSD is targeted to grow about 25%.

So relative to these growth rates, how do you think your SSD business will grow?

And can you give us just a rough sense of what percentage your SSD business is enterprise and cloud focused versus client side?

Thank you.

Sure.

So let's make this the last question and move on to the next one.

So just quickly on that, while we're not going to give a year projection, you can back into and infer that our SSD business currently has been growing at much faster than the market.

Even if you look into our Q1 guide, relative to what I think you're seeing out there, our performance is quite strong.

And we don't break out the exact composition of our enterprise or cloud-based SSDs versus client, but you should assume that's an important part of our business that we think is going to drive a lot of growth going forward.

Thanks, Matt.

You're welcome.

(Operator Instructions)

Craig Ellis, B Riley.

Thanks for taking the question, Matt and Jean, nice job on the execution.

Peter, welcome aboard.

Matt, the question I wanted to ask was a little less quantitative and a little bit more qualitative, on the front end.

I know you've put high priority on product development and progress on that front with the team.

I was hoping you could talk about that a little bit and maybe couple that with any quantification you can give on design win successes that the team is having and how they compare quantitatively in the recent past to what we would have seen a quarter or a few quarters ago was a barometer of progress on that front.

Thank you.

Great, yes, I'll break it into two pieces.

On the first part of your question, which was the qualitative side, how is the product development side doing, how is the R&D execution doing, what strides are we making there?

If you really think about it, and the way I've described it and talked about it inside the Company to the team is that calendar 2017 for Marvell was really about getting the Company back on track, refocusing it, fixing aspects of it that weren't working well, getting the new management team in place and being very operationally focused.

I came out of the holiday break, along with my management team, and we really said, look, this next 12 months is really about focusing on product development, innovation, customer traction, and really running the Company and getting out of triage mode and moving into, programmatically, running Marvell to drive our business.

So that's going very well.

We've had -- have been able to kick off now very detailed assessments of our R&D that's in process.

We've also got some rigor now around what programs we're putting in to design and having appropriate hurdle rates and thresholds for those.

So that qualitative side is going well; we're off to a strong start this year.

And then the quantitatively, unfortunately, as many of you on the call know, one of the challenges with Marvell, again phenomenal Company, but one of the gaps has always been having clean, repeatable historical data on things that you would normally expect you would have to run your business.

So unfortunately, our history on having really good -- a really good baseline of design win data isn't where I'd like it to be.

We've actually got a tool now to do it.

And more importantly, we've got a leader in Tom Lagatta, who already has hit the ground running and is driving our sales force and our BUs and our whole Company quite hard on the design win side.

So I think that's something you could expect to get more color from us in the future.

But I can tell you that, and I think we saw many of you at CES, you could see the level of customer activity at our booth.

That is a proxy for the global engagements right now.

So there's a tremendous interest in Marvell and our pipeline, and I'm excited about the design wins I see.

But unfortunately, that's a qualitative statement not a quantitative one

John Pitzer, Credit Suisse.

Good afternoon, guys.

First, let me welcome back Peter.

It's good to have you back, and congratulate both Matt and Jean on the strong results.

Matt, my question is on the networking side.

Oftentimes, we investors get well ahead of trends.

When you look at the 10-gig market it doesn't actually peak until next year, I think, by third-party sources.

I'm curious, what growth opportunities do you think you have there?

How should we think about your ability to gain share on the 10-gig side?

And then conversely, any early milestone you can share with us on 25?

Okay.

Maybe I'll take part of that question, and I'll let Jean comment as well, because we've been spending a lot of time talking about this subject.

So I think that's an astute observation that while today, and I don't want to take anything away from it because we're very excited about the hyper-scale market and those technologies in Ethernet that support that, like 25-gig, 50-gig and 100-gig.

As you point out, even in 10-gig, we have not hit our peak from a market point of view.

It's been talked about for a long time, but I think people that follow it recognize that there was a significant delay in the industry in moving from gigabit Ethernet to 10-gigagit Ethernet.

So from a Marvell point of view, we have been quite focused on that market because that transition in the campus and enterprise, is happening.

We've got a whole suite of new products which are not only optimized, high density, advanced node switches, but also a modernized line up of Ethernet PHYs to support that market, and that's been part of what's been driving our growth in networking is the ramps of those products.

So we actually see a very good opportunity for us in 10-gig and below.

And in particular, maybe, Jean, you want to mention some of the end-based [tease] things we're seeing in between.

But we think that, that segment of the market, while it doesn't have as much hype as the data center side, actually represents a huge portion of the ports that are shipping today and there is still performance requirements on it.

Jean, would you like to?

Absolutely, just to add to what Matt said, there are other two dynamics that really benefit us.

One is that we are very strong in enterprise and campus market.

There is a new upgraded cycle for 2.5, 5 gig.

That upgraded cycle, we have optimized the product for volume, like Matt said, to address that market and we're ahead of our competitor.

And the other thing to add to what Matt said is that we have very strong relationship with the China OEM customers.

And we have lots of design wins, 10 gig and refresh the portfolio.

So those design wins are going to be coming to the market exactly as you said, 2017 and even 2018, because for a lot of emerging countries, adoption over 10 gig actually is right in the peak.

So we're actually very excited about the opportunity for our business and to really get momentum in the next several years.

Thanks, guys.

Chris Rolland, Susquehanna.

Hi, guys, nice execution on the quarter and great next step in this transformation.

And welcome, Peter.

So, you guys mentioned some tightness in NAND.

Perhaps you can talk about how that nets out in your business model.

If you're selling, let's say, fewer SSDs or growth slows there, that's a market where you have higher ASPs, but lower share versus the HDD market where you guys have higher share but lower ASPs.

As you have a movement back and forth, let's say towards hard disk in this case, is it a net positive for you or a net negative?

Sure.

So I think it's a good question.

Let me answer it in two pieces, maybe the second half, first.

From our point of view, we're very comfortable with the profitability of both of our HDD and SSD businesses, such that if one is moving directionally differently than the other, we don't see a big impact on that.

It's not material.

It really depends on actually within the details, which customer, which program, which design.

But in aggregate, I would say you shouldn't assume that there's, either from an ASP or profitability point of view, it's that big an impact.

I think the reason we called it out proactively is we expected the question, candidly.

I think it's out there from everybody.

So supplying into that market, we figured we'd address it in the comments.

And really our comments were just meant to suggest that while we see some tightening, we're hearing that, anyway.

Again, we're the supplier into the drives not -- we don't have all the insight in the world, but we do hear it from some of our customers.

But we think we're very well positioned to perform through this cycle because the customer base that we have is really the tier one customers in the SSD world.

Many of these companies control their own NAND.

So we're supplying to those companies, so they actually control it.

Or we're selling to partners who have actually partnered with an end OEM, like a cloud OEM or somebody like that who is going to have enough influence on the supply chain that they should get their part.

So we think we're positioned to perform very well through the cycle here, but we're staying close to it.

Again, the reason for the comment was just to address it proactively versus wait for the obvious question.

Great.

Again, great quarter.

Thanks, guys.

Thank you.

Joseph Moore, Morgan Stanley.

Hi.

This is (inaudible) calling in for Joe.

I want to talk about your HDD business.

Like can you talk about the market dynamics you're seeing there?

Any opportunities you're seeing to gain share and what are you seeing on the pricing front?

Yes, so our SSD business, if you look at the market, is certainly it is very different from HDD side.

That is mature market, it's really customers to suppliers.

On the SSD side, really it's very dynamic.

You do have the vertically integrated part of the market, but the merchant market is actually growing very significantly.

I think earlier, somebody mentioned it's growing 20%.

When you look at the market, basically you have the client side and you have an enterprise side.

Marvell is actually very well positioned with both.

We're especially strong in the enterprise segment, providing solutions for tier one OEMs and some of the cloud data center customers through our partners.

On the client side, we also have a very strong position, too.

So we feel quite good about participating two different, both client side and the enterprise side.

And also, we have a strong IP, strong engineering expertise we can leverage, so we do have (inaudible) business too.

So overall from all different angles for SSD market, we feel like we are participating, so that's why we're gaining share and growing faster than market.

Got it.

Thank you.

Harsh Kumar, Stephens.

First of all, congratulations, solid execution.

Matt, if I can ask you a quick question on HDD side, it's performing better than seasonal.

We know that there is stabilization in the PC market, but I was wondering if you could distinguish how much of your success is from that versus the new products?

And then what's so special about the new products that you're able to gain share?

Hi, Harsh, thank you for the question.

This is Jean.

So when we look at our guidance for Q1, our HDD business is performing better than normal seasonality.

I think as Matt mentioned during our prepared remarks, we do see the ramp up of our new product design wins in enterprise and the data center market.

I think the way I would look at it is, if you look at the overall market, look at the some of our major customers' guidance, their guidance sequentially declined but it's still better than seasonality.

So I would say our performance of sequential flattish included two factors.

One is the overall market is better, and we certainly performed better.

But we certainly feel strongly we're gaining share here.

Okay.

And then for my follow-up could you give us an idea, Jean, on OpEx, it's coming down again.

Remind us on where you are with your restructuring and how we should expect OpEx to trend as the year goes by.

Yes, so for Q4, our operating expense was 2. -- $280 million, which was much better than we guided at $230 million.

Primarily due to two reasons, we're ahead of our restructuring schedule by one quarter.

Part of the reduction is the legal accounting spends, and the other is our team executing extremely well ahead of plan.

If you look at our Q1 guidance, we actually guided flattish with $4 million to payroll taxes step up.

Really the restructuring action, there is some of the actions that takes a long time, likes six to nine months, because the local requirement over some foreign locations when we try to consolidate facility and also transition programs.

So what you're going to see is the Q2 and Q3, you would see the operating expenses step down and get to Q3 will be our target run rate, which is one quarter earlier than we guided in the past on the restructuring schedule.

Christian Schwab, Craig-Hallum Capital.

Great.

Great quarter, guys.

Matt, my question is a follow-up to a statement you said earlier about only being there for a few days, and then being told that you could do 60%-plus gross margins.

Now that you've been there for a while and the transformation has begun, looking forward, are you more -- most excited about Marvell's opportunity for growth, gross margin expansion, greater OpEx optimization, or even some of the hidden assets that could generate a bunch of cash like sales leaseback on your corporate headquarters or sale of the Singapore facility?

Sure.

No, it's a great question, and you're right.

Especially for those of you that know my chairman, he's also from the south side of Chicago.

So when you get a target described to you, you've got to take it seriously.

So, no, in all seriousness, I did come to the same recognition that he did, that this Company had a lot of value to unlock.

So we continue to be excited about the gross margin opportunity for Marvell.

Primarily because not only do -- we're seeing a path with respect to building a culture of operational excellence and bringing some discipline into the supply chain.

But also, more importantly, the quality of the design, the quality of the engineering and the quality of the business that we're driving here, is in very differentiated, unique applications.

It's not commodity, consumer-type of business, like maybe a big portion of Marvell was in the past.

So that gives me optimism.

I think I'd phrase it this way.

When I joined, I felt that there was tremendous value to be unlocked by just improving the existing Company and getting the expenses in line and getting the margins up and doing the portfolio review and management.

The more exciting part, and this is going to be the anchor next week of our Investor Day, is that we are also excited that we can grow the Company.

And so when you take a look now at a business model whereby you've got expanding gross margins, in a predictable, programmatic way, you have got end markets that are growing faster than the overall semiconductor industry, and we'll make an argument next week from a long-term perspective that we can grow with those.

And then we've got very good discipline in OpEx and controls, and the combination of those, from a financial model point of view gets us excited.

But as I mentioned, we're really more excited about the participation that we're able to have in this incredible revolution that's happening in technology, which is the growth of the data center and the explosion of digital data and Marvell's ability to use its IP and assets to grow the Company and allow our engineers here to actually contribute their intellect in IP into growing something great.

So, yes, as you can hear from my language, I'm quite enthusiastic about not just the cost and operational side, but the growth prospects that we could have.

And ultimately, the goal is to deliver a very sustainable, repeatable, predictable Company, from a results point of view.

And that would be a great thing.

Stephen Chin, UBS.

Hi, thanks for taking my questions, and also wanted to do add my congratulations on the solid results and execution.

Jean, if I could, I just had one quick working-capital-related question.

In terms of inventory days, it seems pretty well managed for much of last year, down in the low 60s.

But just with all of the commentary about new products ramping on both the storage and the networking side, should we be expecting any meaningful increases in inventory ahead of big-box shipments in the coming -- for this quarter and possibly next quarter?

I think we are very disciplined in managing our inventory, and as Matt mentioned, we are really building our process internally to try to do better on [for] custom side on managing inventory and the supply chain sales operations side.

I think what you should expect that we're going to try to manage the inventory turns at a level -- this level and maybe even better.

So that's our objective.

So if we are now getting higher revenue, of course, inventory will be higher, but we're manage it -- the inventory turns are really leading industry-level inventory turns.

That is the target we're driving to.

Quinn Bolton, Needham & Company.

Let me add my congratulations.

Welcome, Peter.

I wanted to come back and follow up on a question Harlan asked earlier about your mix, but this time on the HDD side.

I think your share on the client side of HDD (inaudible) probably approaching the high 60s.

Can you give me some sense (inaudible)?

Quinton, you're breaking up quite a bit.

Contemplate the mix shift you guys gained share, so just hoping you can provide some details there, what you think the opportunity would be.

Thanks.

Quinn, can you please try repeating real quickly.

You were breaking up quite a bit.

Yes, I just was hoping you could give us some sense where you are in the enterprise and near line in terms of market share in HDDs.

The client side, I think you guys have been north of 60% now for some time.

And I was just trying to think, from a mix perspective as you mix to enterprise, how much opportunity do you have in terms of those share gains?

Sure.

I'll take it.

I heard you much clearer on that one.

Thanks.

So we don't want to get into the exact details in our estimates of who's got what share and what segment at what particular time.

It is a pretty established market, it takes a while to move share.

It's really dependent on individual products, individual programs, so we try not to get into all that.

We are encouraged and we said publicly that we are interested in applying our team's effort to designing products for the segments of the market that you mentioned, which is the enterprise, data center, near-line type of drives.

Primarily because that market opportunity is where those -- that segment of the drive market is growing.

And it has higher than average ASPs, and there is all kinds of reasons why we like that market.

It's also a technical challenge.

But, remember these things take a long time in established markets to move the needle.

We're simply calling out the fact that we're pleased with our progress because it's one of the things that we have been noting since I got here, which was a goal.

And we achieved -- we're happy to see we actually got some ramps projected for Q1 that, if this all goes according to plan, it actually helps us buck the seasonality trends.

Beyond that, we're not going to be the kind of Company that gets into a quarterly discussion of market share by segment by individual business.

This is a long-term journey that we're on.

Atif Malik, Citigroup.

Thanks for taking my question and good job on the (inaudible) guide.

Matt, a question on your growth strategy.

It sounds like you're pretty confident you can grow the Company with the three pieces that you have.

Can you just talk about your appetite for M&A in the current environment?

And then I have a follow-up.

Sure.

So, yes, and I think, again, as you point out, there is a great opportunity in New York on the 10th, where we're going to -- it won't even be me talking about it, you'll actually hear myself, my business unit leaders, Jean and other executives from Marvell try to articulate that growth story, the modest growth story and I think it's going to be a good one.

On the M&A side, the way we think about it here is that we have a belief among the management team that one of the drivers of shareholder value creation through the last cycle and the consolidation cycle, has been really smart M&A.

And so we view that as a thing that when done right, it's good for shareholders; and so that's something that we clearly comprehend when we thought about our buyback as an example.

We tried to take a balanced view of returning cash to shareholders, but also maintaining flexibility.

That being said, you should assume that we're going to be disciplined if we take a look at anything.

We're going to be thorough.

And anything that we would look at large or small would be something that would be in line with what we know how to do.

That being said, we are still heads down in this Company on turning it around, focused on achieving.

Look, we're ahead a quarter on our restructuring.

We want to make sure we execute on that.

We still have a good gross margin opportunity in front of us.

We're going to drive for that 59 next quarter.

So we have got to have a balance here of trying to turn around this Company, which as many of you know, was within a little bit of a state of a challenging state a year ago.

So we try to balance all those things.

What's our capacity?

But we also recognize that if you do these things right, it's been a tremendous opportunity for the companies that have done it right, the employees of those companies, and the shareholders.

Kevin Cassidy, Stifel.

Thank you, and congratulations on great results.

Within the SSD controller market, are you seeing opportunities or maybe you can talk about the market size for 4-bit per cell flash devices and SSDs made up for those?

Sure.

I think on that one, we're going to tell a little bit more of a detailed story on SSD next week.

So I'd prefer, if you will, let's wait till we can put the whole technology story together on how we see the SSD market evolving and what segments we think we can address and leverage our IP against.

If I do that, I'm going to steal my team's thunder talking about this kind of thing on the call today.

They've been preparing for like three months, okay, so let's give them another week and then we'll --

Harlan Sur, JPMorgan.

Yes, thanks for taking my follow-up.

As you think about your position as one of the leaders in enterprise networking and moving into data center markets, potential area I can see for SAM growth is optical.

Obviously Matt, you drove a very strong optical business at your prior company.

It would certainly complement your switching and PHY products; you have all the right technology building blocks to capture a key portion of this value chain.

What are your thoughts around this?

Do you have any internal programs on the way here?

Yes, so, yes, thanks for remembering.

You're right, although I wasn't -- considered to be an analog guy and a catalog guy, as you know, at my other company, the optical transceiver business was a very good business for us.

And, I actually had quite a bit early insight running that group into the early developments that were happening, actually at 40.

We were the first company at my old company to have a chipset to support that.

And so I -- on the optical side I've seen how that's played out.

And look, that is a pretty established segment.

What we see, though, is that as you go from copper-based PHYs to optical, as you hit the 25-, 50- and 100-gigabit nodes and legacy 40, if you want to talk about that too, where Marvell's playing that is that we do have technology and we do have products now to address the gearbox market or the retimer market, or the MUX/DMUX markets, whatever you want to call it.

These are products that basically sit between the switch and the optical module or the PHY, and they allow us to connect higher frequency switches down to, for example, you could take 40 gigabit and make 10 gigabit.

You could take 50 gigabit and make 25 gigabit.

So these optical PHYs, as we're calling them, or gearboxes are an area of investment.

We actually started shipping those products.

I called it out in my note, or in my comments.

I don't know if you picked up on it.

But this is something we'll give a little bit more of a view to you on at the Investor Day.

But it's a nice way for Marvell to actually establish a foot hold in the data center using our mix signal and PHY technology, but without having to go into the [SIGGY]-based module business, compete against large-scale incumbents that use a China module supply chain.

That's a different business than we see at Marvell.

But we do see a way to actually participate in the growth and optical module deployment by enabling it through these -- through the gearbox products.

John Pitzer, Credit Suisse.

Yes, thanks for letting me ask another question.

Matt, I apologize if I misheard you, but I thought in your prepared comments relative to wireless you talked about opportunities in auto.

I'm wondering if you could just elaborate a little bit about how you're thinking about the autos' market?

And then in general, when you look at your IP portfolio in wireless, are there things that would make it look attractive to go into industrial 4.0, or are the connectivity standards going to be still too standardized even in that type of market?

How are you thinking about those two opportunities longer term?

Sure, so yes, I'll break it into two pieces.

You're right, we do like to talk about automotive because we see the connected car as a real opportunity for Marvell.

The first leg of that is in the products we're shipping today, which are primarily our WiFi or WiFi Bluetooth combo products, where we've got really a leading position.

And, if you just looked at the chart that showed vehicles per year and how many of them were coming with WiFi capability, you'd see that chart, obviously, going significantly up and to the right.

So connected car is happening.

I think there is a nice opportunity for Marvell to participate in.

There's some adjuncts off of that market, which would be things like 802.11PD, or vehicle-to-vehicle for, let's say follow-on wireless standards that may do some unique things around enablement of the connected car.

So there's a nice wireless opportunity there.

But more importantly, the reason that I am continuing to push internally and the team is continuing to push internally in automotive, is that behind that, we see a large opportunity, multiple years out, on the adoption of Ethernet as the in-car networking standard.

And this is something that we'll give some discussion on next week as well as at Investor Day.

This is a longer-term growth driver for Marvell.

But as you guys know, I had quite a bit of experience in automotive from my prior company, and we're seeing great opportunities there as well, albeit out a little bit farther.

So WiFi for automotive looks like a nice business on its own, but it actually plays to a bigger strategy we have to push our way over into automotive.

And then quickly on industrial 4.0, what I'd say there is I think just in general, the Company has been totally underserved and starved to even think about calling on industrial customers.

I think the distribution channel we have today is quite fragmented.

And more generally speaking, overall, tactical in nature.

So one of the big initiatives that Tom Lagatta and his team have this year is to actually put together a broad market distribution plan where we can take some of these products like catalog WiFi, standard switches, PHYs, even some of our ARM-based SoCs, and make those more broadly available to customers.

And there is a desire, by the way, from the general market, to get their hands on Marvell technology.

We just didn't have a sales and marketing distribution network and the collateral capability.

So those are all future opportunities, but nothing would stop us, certainly, in the future from addressing what we would call the industrial IoT or industrial -- or industry 4.0, which we think could be quite value added for Marvell.

But that is an optionality longer-term growth driver for us, along with automotive.

Thank you, and this does conclude the question-and-answer session as we've reached the end of our time.

I'd now like to hand the program back to Peter Andrew for any further remarks.

Okay.

Thank you very much, Jonathan, and thank you, everyone, for your time today and for your continued interest in Marvell.

Please remember we will be holding our first Investor Day in New York City on March 10, and we look forward to seeing everyone there.

Thank you very much.

Bye.

Thank you, ladies and gentlemen, for your participation in today's conference.

This does conclude the program.

You may now disconnect.

Good day.