邁威爾科技 (MRVL) 2018 Q2 法說會逐字稿

Thank you for joining the Q2 2018 Marvell Technology Group Earnings Conference Call.

(Operator Instructions) As a reminder, this conference may be recorded.

I would now like to turn the call over to your host, Vice President of Investor Relations, Mr. Peter Andrew.

Sir, you may begin.

Thank you, and good afternoon, everyone.

Welcome to Marvell's second quarter of fiscal year 2018 earnings call.

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

Before I turn the call over to Matt, I wanted to remind everyone that 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 statement 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 our forward-looking statements.

During our call today, we will makes reference 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.

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

Great.

Thank you, Peter, and good afternoon to everyone on the call.

Today, I'm pleased to report that our second quarter results demonstrate Marvell's continued progress as a company, including growth in our core businesses, improved execution and increased profitability.

In our second fiscal quarter of 2018, Marvell achieved revenue of $605 million, above the midpoint of our guidance, led by our growth in our core businesses of storage, networking and connectivity.

Together, these businesses grew 6% year-over-year.

Our non-GAAP gross margin also showed continued improvement, increasing to 61.2%, up over 0.5 percentage point from last quarter and 6 percentage points from a year ago.

We are already operating above the target we established at our Investor Day in March.

As we continue to improve the mix of our business by ramping new products with differentiated features and reducing costs through efficiency, we believe we will continue to drive gross margin improvement going forward.

Our non-GAAP operating margin improved from 14.5% a year ago to 25.8% this past quarter, marking significant progress towards our long-term goal of 30%.

During the second quarter, we also announced the definitive agreement to sell our multimedia product line to Synaptics, with the transaction scheduled to close later this quarter.

When completed, it will mark the successful divestiture of all operations we identified for sale during last November's restructuring announcement.

We remain committed to returning capital to our shareholders.

During Q2, we returned $251 million, including $221 million in buybacks and $30 million in dividends.

We have now repurchased over $500 million of Marvell stock under the $1 billion repurchase plan we announced last November, well ahead of schedule.

In total, including buybacks and dividends, we have returned more than $690 million to shareholders since the third quarter of fiscal 2017, which equates to almost 170% of free cash flow.

Now turning to our business performance.

I'm pleased to report that in Q2, our storage business performed above expectations, growing 13% year-over-year despite headwinds in the HDD market.

We achieved this upside by stronger-than-expected growth of our SSD products for the enterprise and data center market.

Our SSD business grew sequentially and now accounts for more than 25% of our storage revenue.

We achieved this growth despite supply constraints in the NAND market.

Customers continue to choose Marvell because we offer one of the industry's broadest family of client-to-cloud controllers spanning all key protocols, including SATA, SAS and NVMe, as well as best-in-class power and performance.

Our solutions, which feature Marvell's unique NANDEdge error-correction technology, are also helping enable new generations of 3D and QLC NAND memory.

This demonstrates that Marvell is well positioned to benefit as the overall storage market continues to shift from hard disk drives to solid-state drives.

We've also been making significant progress diversifying Marvell's HDD business.

We're expanding in key growth segments such as the cloud and data center as well as into growing consumer markets.

In addition, as our mix shifts to higher-capacity HDD products, we have the opportunity to capture more content.

As a result of these diversification efforts, we estimate that our exposure to the HDD notebook segment represents less than 15% of total company revenue.

I want to pause here and make an important point.

We continue to believe that the storage market transition from HDD to SSD will be positive for Marvell.

As an example, we estimate that our total storage sales into notebooks will grow in fiscal 2018 versus fiscal 2017, with growth in SSD sales more than offsetting the decline in HDD sales.

Overall, we are pleased with the performance of our storage business and our Q2 results validates the growth strategy we outlined at our March Investor Day.

Let's move on to networking.

Networking was up 2% sequentially, slightly above our expectations.

During the quarter, we started to see our customers announce significant upgrades to their existing switching platforms for the campus and enterprise markets.

These upgrades will utilize multi-gigabit Ethernet to increase speed and also feature enhanced security, traffic analytics and greater support for mobility.

Marvell is well positioned in this upgrade cycle with our refreshed portfolio of switches, PHYs and SoCs, offering unique features such as Layer 3 Fabric to the edge.

We're also seeing continued design win traction with our gigabit and multi-gigabit Ethernet switches at the enterprise access layer, and with our 10-gig switches for access and aggregation.

These design wins are moving towards production and we are very pleased that one of our major customers has already announced their first products based on our new 10-gigabit switch family.

Finally, our connectivity business enjoyed a seasonally strong quarter, driven by broad-based strength in the enterprise access point, gaming, streaming, voice assist and automotive markets.

New products we introduced in the quarter included a family of Wi-Fi combo solutions that enable advanced infotainment, telematics and Wi-Fi gateways for the connected car.

These solutions complement our Ethernet PHY and switch products and put us in a strong position in the growing automotive market.

In summary, I'm very pleased with our performance in Q2, and I want to thank Marvell's employees for making this success possible.

Our progress is a direct result of their efforts and I am proud to be part of this team.

And with that, I will turn the call over to our CFO, Jean Hu.

Thanks, Matt, and good afternoon, everyone.

I'll discuss the highlights of our second quarter for fiscal 2018 and provide our current outlook for continuing operations in the third quarter of fiscal 2018.

As a reminder, we have reclassified the LTE thin-modem product line we sold in Q2 as part of the discontinued operations.

And the recast of our financials can be found on our website.

Our discussion today will be focused on continuing operations only.

Revenue in the second quarter was $605 million.

Our core business of storage, networking and connectivity grew 6% year-over-year, above the midpoint of our guidance range and accounted for 92% of total revenue.

Storage accounted for 52% of revenue and grew 13% year-over-year, driven by the rapid revenue ramp of SSD products and our increased market presence in the enterprise and the data center market with our broad HDD and SSD product portfolio.

Networking accounted for 24% of revenue and has declined about 6% year-over-year, primarily due to the decline of our legacy network of processor product lines.

Connectivity accounted for 16% of revenue and grew 6% year-over-year.

Finally, other products accounted for 8% of revenue and declined 35% year-over-year, consistent with our expectations.

GAAP gross margin for the second quarter was 60.4%, and the non-GAAP gross margin was 61.2%, an increase of 6 percentage points from Q2 last year.

Gross margin improvement initiatives and the strong execution enabled us to continue to expand the gross margin in the midst of a revenue mix headwind in the second quarter.

GAAP operating expenses were $241 million and the non-GAAP operating expense was $214 million.

Non-GAAP operating expenses were below the guidance range we provided.

We are on track to achieve our $250 million annualized run rate cost reduction we announced last November.

GAAP operating margin was 20.6% and the non-GAAP operating margin was 25.8% versus the 14.5% a year ago, highlighting the strength of our financial model and the continued progress toward our target operating margin.

GAAP and the non-GAAP earnings per diluted share were $0.26 and $0.30, respectively.

Our non-GAAP earnings per share were up 58% from a year ago due to improved sales and significant expansion of both gross and operating margins.

Let's now turn to our balance sheet.

At the end of the fourth quarter -- second quarter, our cash and the marketable securities were $1.6 billion or roughly $3 per non-GAAP diluted share.

We are very pleased with our second quarter results and how we are positioned heading into the second half of the year.

In addition, as Matt mentioned earlier, we have successfully divested both of the product lines classified under discontinued operations in addition to the LTE thin-modem business.

In total, after we closed the sale for the multimedia business, we will have generated over $170 million in cash from the sale of this product line.

As a result of additional cash proceeds from the asset sales and the confidence in our long-term business prospects, we accelerated the share repurchase activity during the quarter and returned $221 million cash through share repurchases, bringing the total amount of repurchased to over $500 million under our $1 billion program announced last November.

We are committed to return cash to shareholders and we expect to continue to repurchase our shares under the current plan.

Now turning to our fiscal third quarter of 2018 guidance.

We expect our total revenue from continuing operations to be in the range of $595 million to $625 million.

At the midpoint of our guidance, we expect our storage revenue to be approximately flat sequentially, reflecting our cautious view of HDD demand in the near term.

We expect our networking revenue to return to year-over-year growth of low single digits in the third quarter, which is consistent with what we said last quarter, that our new product ramps are expected to offset the legacy decline in the second half of fiscal 2018.

We expect our connectivity revenue to decline slightly sequentially and other products category to be approximately flat sequentially and decline more than 20% year-over-year.

We expect our GAAP and non-GAAP gross margin to be in the range of 61% to 62%.

We expect our GAAP operating expenses to be between $230 million and $240 million and the non-GAAP operating expenses to be between $205 million and $210 million, successfully reaching our target non-GAAP operating expense level we announced last November ahead of the schedule.

At the midpoint of our guidance, we expect to achieve 27% non-GAAP operating margin, making another positive step towards our long-term target.

We anticipate the GAAP income per diluted share in the range of $0.25 to $0.31 and the non-GAAP income per diluted share in the range of $0.30 to $0.34.

With that, we will now open the call for questions.

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

(Operator Instructions) Our first question comes from the line of John Pitzer of Crédit Suisse.

Matt, I'm just kind of curious, I know that Jean, in her prepared comments, said embedded in the October quarter guidance was a view that storage is flat.

I'm just kind of curious if you can give us a little bit more granularity as to what you're embedding in the HDD side of the business versus the SSD side of the business.

And as you answer that question, in your prepared comments, you did mention that supply constraints in NAND, and I was wondering if that was an industry comment or that was specific to your business.

And if it was the latter, kind of what was the revenue that you missed because you couldn't get enough NAND?

And did that started to alleviate itself in the back half of year -- calendar year?

Great.

Okay.

So I'll lead off and I'll let Jean add to it.

But on the storage side, our primary caution, if you will, is really on the HDD portion, and that's specifically related to the inventory challenges that are pretty well understood and I think have been well understood since even starting in the beginning of calendar 2017.

So with that portion of our business, we're being a bit cautious.

We still do see strength and, leading to your second question, in our SSD business, the NAND comment, in industry, the situation there is really an industry comment.

We've been fortunate that the customers we supply to and the technology that they're using from Marvell is giving them an advantage in the market, and as such, those solutions with Marvell inside, if you will, are selling well and you've seen that in the sales growth.

So we don't -- while that's an industry comment, I would say, we fared pretty well from that point of view.

Jean, did you want to add anything?

No.

I think in Q2, right, as Matt mentioned, we did see some softness in HDD side, so we did guide conservatively.

And certainly, if you look at our Q2 results, our storage actually performed better than our guidance.

Our next question comes from Karl Ackerman of Cowen and Company.

I guess maybe first is a follow-up to John's question.

One of your primary competitors on the SSD controller market has been struggling with the ability to fully procure NAND.

So I was just hoping you could talk about the opportunity to gain share in the low-end SSD, SoC market and maybe some of this market dislocation going into the back half of the year.

And I have a follow-up, please.

Sure.

I'll comment on that.

So yes, again, we've performed very well as a company in SSD.

And we have gained substantial market share if you look and integrate back over the last year or so, so that business continues to be on a very positive trajectory.

We do view ourselves as being a very -- the broadest supplier of IP and solutions from client all the way to the cloud and the enterprise and the data center.

As you mentioned, there's a -- we have competition as some of those competitors are focused in very specific segments, some in the lower end.

That's the segment that we're not ignoring.

We have purpose-built solutions for that market and we plan to be competitive.

Certainly, in that segment, whether it's Marvell or a competitor or just in general in the market, the bulk of the NAND is not being allocated there.

So that's just an industry issue, but we certainly intend to benefit.

When the overall industry rebounds, we intend to be competitive across the span of our portfolio.

Understood.

I just have a question on OpEx.

Now that you've completed the restructuring and divestiture actions you laid out last November, your guidance for October puts you squarely at your $820 million, $830 million annual run rate on OpEx.

How sustainable do you think that is on a go-forward basis?

Beyond the January quarter, I know it's an extra week, but as you look out in the next few quarters, if you take the core business to advance at least mid-singles on a year-over-year basis, again, how sustainable do you think that run rate level is?

So as we said, right, we reduced $250 million run rate cost during the last 9 months and achieved our target.

Our view is this target is the right investment level for the company.

And just as a reminder, Q4, we do have 14 weeks.

So you will have that 14 weeks OpEx tick up in Q4, and that will cause -- Q1, next year, you will have a payroll tax.

So -- but those are just the normal, either the seasonality, or next year, some of the merit increase.

For us, this is the right level of investment and we feel quite comfortable with the OpEx level.

Yes.

And Karl, I would just add as an even broader comment.

When you look at our business model and what we're trying to achieve here from a company perspective and a financial perspective, when we drive towards what we view as goals to get us really in a leading position from a financial performance perspective on operating margins, which is to drive to this 30% level, we have multiple levers that we're pulling, and we said this back at Investor Day as well.

And sort of in order of priority, clearly, we're trying to grow this company.

And we're putting substantial time and energy and retooling the entire organization to go do that.

So that's one lever that's being pulled.

And I think so far, if you look at our progress in our core businesses, we've been very pleased with that, but we want that to continue.

The second is on gross margins.

And we put out 61.2% this past quarter.

You saw us guide with fairly modest revenue growth, 61% to 62%, and we believe even beyond this quarter, we anticipate that to continue to expand.

So we've got leverage on the gross margin side.

And then it flows down to OpEx.

And I agree with Jean.

We've sized the organization to compete effectively, to grow the company, and with the new products coming, we think we have some gross margin leverage.

At the same time, we're not stopping on driving efficiency.

There are a number of programs inside the company to get Marvell to be more nimble, more effective in our R&D execution.

And so to the extent we're getting benefit from those efficiency savings, we're reinvesting those back into the company for growth.

But we always have that flexibility in our model to make adjustments.

So I think we're in a very good position right now as a company.

We're in markets that are growing and we've got, really, leverage and flexibility on all aspects of our -- of the financial model to drive towards our goals that we committed to get to.

Our next question comes from Craig Ellis of B. Riley.

Matt, I wanted to go back to the networking business and just see if you could give us some more color on some of the underlying dynamics that are going on in the portfolio.

At Analyst Day, I think you and the team talked about a business that had different dynamics, very strong share and a strong market position in China.

What's happening with networking geographically right now?

And as you go from an enterprise position, potentially, a data center position following some product announcements late last year, how should investors think about the ramp-up of that business as we look ahead over the next 4 to 6 quarters?

Sure.

Yes, great.

So a few points on networking.

We had indicated to everybody earlier this year that we had a challenge, which did manifest itself, which was we have legacy networking business rolling off, albeit gradually, offset by new product ramps in our core areas of switch, PHY and SoC.

And as you mentioned, primarily targeting today the campus and enterprise markets.

I think we're pleased to have seen that play out.

Our Q3 guide returns us to growth in networking and it's really on the heels of, again, strong new product ramps in our core businesses that are now offsetting this sort of headwind that we had for a quarter or 2. We said, I think, on the last call that we did anticipate a strong second half to the fiscal year for networking.

And we continue to have a belief that that's tracking nicely.

So I think -- and again, it relates to some of our prepared comments around the multi-gigabit products, our 10-gig solutions and even some of our refresh gigabit switches, PHYs, are all, I think, seeing design wins.

From a geographic standpoint, China continues to be a focus area for us.

We think that, that particular segment of customers will continue to do well globally.

And we're very well positioned there with the new design wins we've gotten.

But even traditional customers in the U.S. have also done their own refreshes.

So I think it's a combination of a multitude of things where there are customer successes that are happening, but also there's a larger upgrade that's going on that we think will drive some nice growth in the campus and enterprise segment.

Our next question comes from Ross Seymore of Deutsche Bank.

This is Sidney Ho for Ross Seymore.

Just a quick question.

You mentioned earlier that you are being more cautious on hard disk drive for Q3.

Does that more relate to the PC market versus more related to the enterprise data center market that has been the source of strength for you?

And what kind of inventory are you looking at, at the channel at this point?

So this is Jean.

So what we said is we're cautious because the HDD market -- and largely because of the supply chain side, right.

It's very well published in the news that not only there's some inventory build with our customers, and also there are some factory transitions with the tools for the 3 major customers.

So that's really what we were talking about.

Of course, as a component supplier, we actually don't see the China inventory or customer inventory level.

We're cautious about [what] our customers and the [population of data], basically.

So it's primarily supply chain related to inventory.

Yes, just to add to it, I would say it's clearly not market share related.

It's not -- in some cases, we're not even making specific commentary about one sub-segment.

As Jean mentioned, there's been multiple factory transitions, shutdowns, closures and other things within the HDD supply chain upstream from us that are happening.

And we see those things being worked through.

And demand, I think those numbers are pretty well understood.

So we're hopeful to see this inventory correction complete quickly and move on to a more normal situation, but we're going to monitor it as we obviously progress through the quarter.

Our next question comes from Chris Rolland of Susquehanna.

So you guys are definitely right.

I think the bridge inventories at Seagate and Western Dig are pretty well known, but do you guys have any idea how long it might take to kind of work out all of that bridge inventory or perhaps the magnitude overall?

Is there any other details you can give us in terms of your view?

Yes.

I think I'll give you my take here, Chris.

Jean can add, too.

I think having been through a large number of these issues over my career and trying to project exactly when inventory actually draws down and when you rebalance is really tough.

Given that we've got pretty good visibility of why it's happening, we don't think it's going to be protracted, but we really -- unless, Jean, you've got a different view, it's really hard for us to predict, "Hey, it's x many weeks and then in y many weeks, it's going to be at a certain level." But we -- all I can say is we're going to watch.

And that's why we guided the way we did.

We tried to be judicious about this and kind of prepare for all scenarios.

But I think given that's it's really bridge inventory, if you will, that's a much better bucket to sort of put it in and manage around versus if there's wild things happening in the end market demand, which become harder to modulate.

So I'm not -- I can't be real crisp on that one, but we don't think it's going to be a long and protracted issue, assuming that the customers' factory transitions happen per their plans.

Okay.

Agreed.

And now on the wireless side.

You guys previously said 2Q was going to mark the top for game consoles.

Now you guys are saying that the whole segment is just a slight decline there.

Should we interpret that as perhaps a bit stronger than expected, particularly on the game console side?

And then maybe if you can talk about the content opportunity outside of consoles?

I think it's mostly like enterprise access points and stuff like that.

How is that contributing and what kind of opportunity do you see there?

Yes.

This is Jean.

So on the wireless business, the seasonality, typically, the way we look at is the first half and second half.

Typically, first half, you have a really strong season.

And then second half, the overall revenue would drop.

So if it's Q3 or Q4, sometimes it varies.

So the view we have is right now, it looks like Q3 is slightly down and Q4 probably was down a little bit more, more like a seasonal 20% to 30%.

But in general, second half is much weaker than the first half.

It's just the wireless seasonality.

And on the wireless focus side, certainly, Matt talked about this.

The enterprise access, the automotive, there are a lot of new opportunities for us.

Our next question comes from Joe Moore of Morgan Stanley.

I wonder -- you talked about continued potential to improve gross margin.

Obviously, you did pretty well in the quarter where mix went pretty strongly against you.

Can you give us any kind of qualitative indication of how much upside there still is?

And then how much -- is there -- is it mix related?

Is there also opportunity for you to sort of structurally improve the gross margin from some of the other initiatives that have been underway?

Sure.

Yes, great.

Yes, so I think first high-level statement I'd make is we -- I'll give you some more commentary than I've given maybe the past on this.

But just to frame it, we're not in the position to set a new gross margin target range just yet.

But clearly, it's been performing well.

And I think it's been performing better than a lot of people thought it could.

I think to answer your question, I think there's multiple opportunities.

I think one is, and we're seeing it -- and you can even see it if you look at our guide, where, you're right, our mix really worked against us in Q2 based on the way that we guided for Q3 with fairly modest revenue growth and not a whole lot changing on mix.

You can see that there's still leverage in gross margin.

And it is due to multiple factors.

One of them is structural.

I mean, we've fundamentally -- I think our operations team has done an outstanding job of really getting our cost structure very competitive, working very closely with a handful of suppliers and doing a lot of consolidation there.

And just, quite frankly, managing the overall supply chain and manufacturing operations much more efficiently than we have.

So I think that -- and they haven't stopped.

Just because we hit 60, they -- sort of they didn't decide to go take a break.

They're still heads down and we're still driving that very hard.

So that's one sort of company-wide structural advantage and set of improvements that we're driving.

But I think the other factors of richer mix coming in even within our segments, so the new products, particularly in storage and networking that are ramping, are accretive to gross margin.

They're higher than the company average.

That's helpful.

And certainly, as you kind of get out of Q2 and Q3, even if you get into quarters where revenue is seasonally lower, then you start getting -- but you get the benefit of mix and new products within the mix, that's why I made the comment I made that we think it's going to keep going up.

Where it's going to land exactly, we're not giving that range yet.

But you should expect that we understand -- should -- we understand that that's an investor question out there, is where do we sort of see this set in, we're just not ready to give a limit there yet.

But we've been very pleased as a company.

And I'd say, fundamentally, it reflects the belief I had when I got in here over a year ago, which was the quality of the engineering in this company and the quality of the end markets that we're in, really, we believe, commanded a premium gross margin for what we're offering and what we're delivering.

And I almost feel like now, it's been a matter of just unlocking the potential of Marvell and letting us actually grow our way into what we think can be, hopefully, industry-leading kind of gross margins.

So that's how we think about it at this juncture.

Our next question comes from Mark Delaney of Goldman Sachs.

Two-part question on storage.

First, specifically around HDDs.

Matt, you talked about seeing some success with some of the growthier areas in enterprise hard drive, sort of the opportunity in preamps that you talked about.

Can you just give a sense to me, the relative -- a rough sizing of some of those newer parts as a percentage of your total hard drives and what sort of cadence we should have in mind for those to grow?

And then second on storage overall, Matt, you made the point in your prepared comments about how you think your notebook storage business holistically can grow this year.

Any more detail can you give us on how you arrived at that assumption will be helpful.

Sure.

So I'll take a stab at both of these.

So let's start with the first one, which is how's the diversification going into newer areas.

So I'll take the preamp one first.

That's still in the early stages.

We did start shipping for revenue a couple of quarters ago.

That is more of a fiscal '19 event, but that's a product line that we're investing in.

We've got an outstanding team there.

We think there's a great match between the SoCs that we're selling, and obviously, the preamps as a combined solution, in particular as you go into the near line and enterprise-class drives, where you're driving aerial density and actually the fundamental system performance is really important.

So having that pairing, we think, is going to be a strategic advantage.

Our sort of non-client HDD business has been performing well.

And so we're not breaking that out in detail just yet.

But overall, we started to see, I think, 2 quarters ago, ramps in enterprise and near-line drives, which should help us in the first half of the year.

We see that continuing.

And then your second question was?

On the PC, HDD in PC, 15%.

So that was one -- I think, Mark, you were one of many analysts asking this question and being concerned.

And we've actually done a lot of work here to go through and really unpack in a very detailed level our HDD business.

And not only is it sort of client or enterprise or near line, but where do we think that those particular drives are going.

And it's taken us some time to get there, but I know one of the big concerns out there has been, hey, Marvell's got a very high percentage of its business in HDDs.

There's an investor concern always that a big portion of that was -- an outsized portion was in notebooks, in particular.

And that, that was too big a portion of Marvell as it caused concerns for some investors.

So we called it out as being less than 15% because we wanted to give people a sense that, that number has certainly come down from where it was, say, a year or 2 or 3 years ago.

And not only that, but that the -- we called out the SSD example just to show that while our share obviously is quite high in the notebook HDD space because of the value we bring in SSD, our share in that particular segment in client, that there we're actually managing that transition quite well as a company.

And so this notion that HDD going into notebooks is a real risk factor for Marvell, our attempt in our commentary today was just to start providing some more color around that, so investors could get more comfortable that not only is it not as big a portion of our company as people maybe thought, but that we are mitigating some of those declines that are happening because we've got good share in the SSD side for notebooks.

Our next question comes from Kevin Cassidy of Stifel.

There's an effort for a standard of open-channel SSDs.

Can you say how that would affect Marvell?

I don't think -- I think we have a really broad portfolio and we're positioned to address all different markets and different solutions.

So we feel pretty good about where we're positioned with our SSD portfolio.

Okay.

Well, maybe I can move over to the automotive market.

Can you say the traction you're getting on automotive and when you think that would be a significant portion of revenue?

Sure.

Kevin, I'll take that one.

So we, today, have really 2 technologies that we sell into automotive today.

The one that's got legacy and that's been around for a while is Wi-Fi and Wi-Fi/Bluetooth combo.

And that business continues to do well for us.

It's been growing, it's going to continue to grow.

We just announced our newest chipset, which is an 802.11p-compliant radio for vehicle-to-vehicle communications in the U.S. We're putting R&D there.

And we hope and intend that, that business becomes a bigger and bigger portion of our Wi-Fi business over time.

So we think connected cars are important.

The second is in Ethernet.

And that's still small revenue today, but tremendous opportunity.

I've been following this potential for Ethernet to be adopted in the vehicle for some time.

It's been talked about probably for the last 6 or 7 years.

And BMW is obviously an early adopter there.

But slowly but surely, the other car OEMs have really come around.

And to my pleasant surprise when I joined Marvell a little over a year ago, it really appears as though that transition is going to happen.

And so we're very well positioned, not only with having the industry's first and only gigabit PHY that's automotive-qualified, but also we've got small port-count switches, 100BASE-T PHYs and other products we can sell and there's a lot of traction and activity there.

Beyond that, I think there's other opportunities in Marvell which are longer term to leverage storage, solid-state storage controller technology and maybe some other product areas that we haven't mentioned yet.

So we think automotive actually is going to be an important part of our company.

And it starts with Wi-Fi, moves to Ethernet and then probably goes to SSD after that.

And we look forward to updating you as we make progress in this area because I think it's going to be an exciting one for us as we make progress.

Our next question comes from Harsh Kumar of Stephens.

Congratulations on solid execution in a tough HDD market.

Matt, I wanted to ask you if you could perhaps try to summarize the HDD market?

Do you think you've seen the worst?

And how would you tell us and investors to think about quarters past this with this inventory overhang?

And then I've got a follow-up.

Okay.

Well, again, as I said earlier, when Chris asked this question, we do attribute the challenges that we see to people that supply the hard drive industry, really, because of the supply chain and factory transitions, with inventory at our end customers being built to support how they're retooling their global footprints.

So that one, it's sort of hard to say we've hit the worst.

Normally, those comments are -- there's some other supply-demand market effect that's going on and then you need to call those.

So I don't -- we guided it flat in terms of storage.

We obviously have a range on our guidance.

We're going to manage around that.

It really depends on how fast they consume inventory and what happens in the overall HDD market.

So I don't know if I have a great answer, but it's one that we just -- we feel we're managing it.

As Jean pointed out, we were pretty judicious when we guided Q2 and we're pleasantly surprised that we actually came in with storage a little bit higher.

So our plan is to kind of keep managing it that same way.

I don't know, Jean, if you want to add anything.

Yes.

Actually, I just want to just follow what Matt just said, right?

If you look at our storage business, just based on the middle point of our guidance for Q3, our first 3 quarters of fiscal '18 compared to last year is actually up 7% year-over-year, right?

So certainly, our SSD business has been ramping up rapidly, but on the HDD side, frankly, it's quite reasonably stable.

So I think at this point, we feel pretty good about our prospects going forward about the overall storage business.

Got it.

And then for my follow-up, Matt, you guys mentioned that you have some legacy overhang.

I was curious, in networking, if you could quantify how much that was for the July quarter?

How are you thinking about that?

And is October the last of this legacy impact and then we're off to kind of pretty good growth?

Yes, I mean, this is Peter.

With regards to the legacy exposure, it's roughly in the 15% to 20% of total networking range.

Now please remember that legacy is going to have a long tail to it, but it's going to be on a slow, gradual glide path down.

But the good news there is that the ramp of the new switches we've been talking about over the last couple of quarters are starting to get to a size where they will enable growth as we look into Q3 and Q4, which is right in line with what we said last quarter.

(Operator Instructions) The next question comes from the line of Craig Ellis of B. Riley.

And I wanted to use the follow-up just to ask a question that's a little bit less in the here and now and less modeling specific and more of an opportunity, Matt, for you to reflect back on the last year.

Because in the last year since you and Jean have been hosting the calls together, we've seen gross margins rise, I think it's 600 basis points; operating margins, 1,200.

You're minimizing your PC HDD exposure, you're getting growth back in networking.

So if we looked ahead a year from now to mid-2018, what would be the things that you would want the business to have accomplished over this coming year?

Sure.

Thanks, Craig, for the reflective and forward-looking question as well.

So no, I think it's important to point out though, because I think when you think about the future, you've got to really understand, obviously, the past and the trajectory you're on.

And so we are pleased with the turnaround that's been accomplished by the team here at Marvell.

And it's been on multiple fronts.

The one that we're most excited about is that we're growing this company again while we're expanding our profitability and our margins and we're attacking and going after some very exciting areas.

I think we want to continue to see progress and make sure we capitalize, I'd say, first on our networking opportunity.

We do see a strong second half here in fiscal '18 and we certainly hope that that's going to continue and should continue into '19 and beyond as the R&D pipeline that was really in kind of full effect when I got here starts to bear some fruit.

So I think we clearly want to be -- and regain some of our past glory in networking.

Storage, which I think when investor transparency wasn't all that hot a year ago and people didn't really know what was going on, I think people sort of assumed that, that business was going to be really challenged.

And again, we feel very good at opportunities in both HDD.

Again, growing in the near line and enterprise drives, taking advantage of some of the technology transitions which are going to enable more content, more features as capacity increases.

And then clearly, SSD is just a growth driver in the industry in terms of that being a much more relevant memory technology that goes -- continues to go fully mainstream.

We intend to be right in the middle of that.

And so I think continuing to bolster storage and networking and really making that the anchor of the company is critical.

Clearly, we've got nice opportunities within the areas in wireless where we can really innovate around the standards that are out there.

And we think certainly things like automotive and infrastructure kind of Wi-Fi lend itself to that.

And then finally, I'd say that -- there was questions earlier from Kevin Cassidy about automotive and we are excited about that one.

And I'd like to be, a year from now, talking about more progress that we're making there.

And that one's a longer journey, but I think if we can get to a point where we're having some milestone updates on that in 2019, I think that'd be a win, too.

So I think really it's about growth, Craig, is the bottom line.

It's been the one big concern that's sort of left on Marvell.

Gross margins in good shape, management team in good shape, operating expenses under control, predictability very good.

You're going to say, "Okay, great guys.

But what's next?" And it's grow the top line.

And that's why we brought in Tom Lagatta from Broadcom, that's why we've put in tremendous effort to not only do a better job for the customer we've got, but to also expand our customer reach and acquire those customers where we didn't have a strong relationship, drive the distribution channel.

And you could imagine there's a whole host of things that you go off and do when you pivot from being in restructure and transformation mode and into growth mode.

And that's really the exciting, I think, kind of act 2 here in Marvell is moving into growth mode.

We have a follow-up question from Harsh Kumar of Stephens.

Matt and Jean, you guys in Wi-Fi and Bluetooth have traditionally been on high-end, high-performance-type applications.

What precludes you from getting into some kind of high volume-type wins?

First of all, is that something you guys think about doing or want to do?

And then if you want to do that, is there a design hindrance or some other kind of problem that precludes you from doing that or is it just the lack of effort so far?

So Harsh, on the Wi-Fi side, right, we have been really focused on the high-performance, the connected home, the ones that our solution can offer a unique differentiation.

And we are really trying to choose the business that can also maximize the profitability of our wireless business.

And so we are taking a very balanced approach with our Wi-Fi business to just focus on the areas and segment we can take advantage of our unique offering and also get the margin, which is most similar to -- closer to our corporate average.

That's really the objective for us for our wireless business.

At this time, I'd like to turn the call back over to management for any closing remarks.

Okay.

That's it.

I want to thank everyone for joining us today.

And we'll talk to you next quarter.

Good night.

Thank you for your participation, and have a wonderful day.

You may disconnect your lines at this time.