Good day, ladies and gentlemen, welcome to the first quarter 2020 Marvell Technology Group Ltd. earnings conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session, Instructions will follow at that time. If anyone should require assistance during the conference, please press star then zero on your touchtone telephone. As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Mr. Ashish Saran, Vice President of Investor Relations. Sir, you may begin.
Thank you, Good afternoon, everyone. Welcome to Marvell's first quarter fiscal year 2020 earnings call. Joining me today are Matt Murphy, Marvell's President and CEO, and Jean Hu, our CFO. I want to remind everyone that certain comments today may 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 press 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 refer 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, I'll turn the call over to Matt for his comments. Matt?
Great. Thank you, Ashish, Good afternoon to everyone on the call. Before we discuss our recent performance and outlook, I'm going to walk you through the three significant portfolio changes we've recently announced and put them into strategic context. As you may recall, when we began our transformation back in calendar 2016, we restructured Marvell, pivoting to a new strategy with an intensified focus on storage and networking as our core markets. We put in place a number of key initiatives to organically improve margins and ignite top and bottom-line growth. We delivered significant improvements from these initiatives in 2017, with substantial margin expansion and revenue growth. In November of 2017, we announced our intent to leverage our strong balance sheet and share price to fund the transformational acquisition of Cavium.
We closed this highly complementary merger midway through 2018, adding processing and security to our portfolio, along with additional scale and a more complete networking technology platform. Since then, we have successfully completed the integration of Cavium, raised our synergy target over our initial estimate, and driven multiple new high-growth vectors for the combined company in 5G, automotive, Arm servers, and AI. As you are well aware, 5G is rapidly emerging as one of the most exciting growth catalysts for Marvell. While we are on this journey, primarily focused on execution and integration, we continue to closely monitor our end markets and the broader semiconductor industry. We recognized that the market was softening late last year, and our view is that after many years of growth, our industry was bound for a contraction, particularly against an increasingly uncertain geopolitical backdrop.
Nevertheless, we determined that despite the challenging environment, we would sustain our R&D investments and continue to collaborate closely with customers in each of our growth markets. Rather than just wait out the down period, we continued to assess the external market for inorganic opportunities and systematically managed our current portfolio to accelerate our pivot to infrastructure solutions. This culminated in the three transactions we recently announced, namely our planned acquisitions of Aquantia and Avera, as well as the divestiture of our Wi-Fi business. I'd like to comment on each specifically. First, Aquantia. This is a highly complementary acquisition, which upon closing, will immediately add scale and breadth to our PHY business, while also accelerating our reach into the fast-growing multi-gig enterprise and automotive Ethernet areas.
Marvell has been very successful with copper PHYs at speeds of one gigabit and below, while Aquantia has been a leader in higher speed solutions of 2.5, five, and 10 gigabit. As we look longer term, with advanced driver-assist and autonomous driving continuing to gain momentum, we expect that our processing security and AI capabilities will add on to our automotive networking platform to establish Marvell as a leading supplier to the connected car of tomorrow. Second is our acquisition of Avera, originally part of IBM's microelectronics business. This acquisition was motivated by the growing list of requests from our customers for new custom products, including full ASICs. Avera, with its proven track record in ASIC design, was the ideal partner to complement our standard products and semi-custom capabilities. We have immediate opportunities in 5G, which we can now transition into design wins.
Marvell's broad technology platform will also enable the Avera team to help us become a leading-edge ASIC provider to a wide range of networking and cloud customers. Third, we're equally pleased about the planned sale of our Wi-Fi business to NXP. Marvell has a two-decade history delivering innovative Wi-Fi and Bluetooth products, and this business has been transformed over the past three years to focus on high-performance solutions, including next-generation Wi-Fi 6 products. Recently, we were approached by several companies interested in acquiring this business to help leverage their scale in the fast-growing connected consumer and IoT markets. Unlike Marvell, these companies already possess both microcontrollers and a broad distribution channel critical for these markets but were missing Wi-Fi capabilities.
As we evaluated these opportunities, it became clear to us that our high-performance connectivity assets would yield much greater economic value at a company with a strong microcontroller franchise than they would as part of Marvell. This resulted in our agreement to sell this business to NXP. Fundamentally, the transaction value is significantly higher than what we could have extracted from this business over time on our own. While these three announced transactions are significant independent events, they accelerate our strategic transformation into a leading supplier to the infrastructure market, and they are a reflection of how we actively manage our overall portfolio and allocate capital to invest in the markets where we can generate the highest returns. Let me just put this into perspective.
Once we complete all three transactions, in the first year post-close, we will be replacing approximately $300 million in Wi-Fi revenue that we are selling for a 6x revenue multiple, with greater than $400 million in combined Aquantia and Avera revenue we are purchasing for a 3x revenue multiple. This new revenue will be on a faster growth trajectory and will accelerate Marvell's ability to capitalize on two critical industry trends, 5G and connected cars, and will also command higher gross and operating margins over the long term. Proceeds from the sale of the Wi-Fi business will pay for both Aquantia and Avera and will net us at least $500 million in cash to add to our balance sheet. I'm also equally excited about the tremendous engineering talent and capabilities these two acquisitions will bring to Marvell.
Hiring talented engineers in our industry is highly competitive, so being able to add entire R&D teams with well-established track records of execution enables us to capitalize on market opportunities much faster than building teams one hire at a time. We recognize that these are bold moves, and I'm very pleased that we were able to negotiate and announce all three deals in such a short timeframe. Over the next year, we will be focused on integrating these new businesses and successfully transitioning our Wi-Fi business to NXP, while ramping our newest design wins in 5G, data center, automotive, and enterprise applications. Let's shift gears to discuss our recent performance. Revenue for the first quarter was $662 million, above the midpoint of our guidance range, as our storage revenue was higher than anticipated.
Notwithstanding this result, we recognize that the recent increase in trade tensions, including U.S. government export restrictions to a Chinese OEM, has further dampened demand in an already challenging macroeconomic environment. These factors are reflected in our outlook for the second quarter. Specifically, with respect to the customer export restriction, our direct revenue exposure is approximately a mid-single-digit % of our total revenue, primarily in our networking business, although there is an impact on storage revenue as well. The export restriction was implemented in the second week of our quarter, limiting revenue from that customer to shipments during that short window. In addition, there are indirect impacts to our business, which we cannot quantify to the extent that some of our other customers' products may incorporate Marvell's chips inside. It could also be impacted by the export restriction.
While these issues are obviously beyond our control, we will continue to monitor the situation closely. Moving on to the performance of our two core businesses. In the first quarter, our networking revenue was $341 million, down 12% sequentially. As you may recall, we had expected a double-digit sequential decline reflecting seasonality, tight inventory control at key customers, and a cautious outlook from our Chinese customers. Most product lines declined sequentially, which is not unusual for this time of the year. In addition, we saw the start of an expected decline in demand from our base station customers as they prepare to transition from 4G products to 5G later this year. During this transitional period, they are also shipping pre-5G base stations, but we do not see the full benefit from these shipments as OEMs are using FPGAs for processing in the interim.
Our 5G solutions, including our OCTEON embedded processor and Fusion baseband processors, remain on track, and we have now successfully taped out and sampled both of these products. Our lead customer is set to ramp production on schedule in the fourth fiscal quarter of this year. As I mentioned in our last earnings call, we secured a second tier 1 OEM design win for our Fusion baseband processor, and I'm pleased to report that we are on schedule to sample the semi-custom product in early calendar 2020. I'd like to share some new developments for Marvell in the 5G market. As you may know, modern macro base stations are comprised of two separate sections, the baseband unit and the radiohead. Today, our processors reside only in the baseband unit, with embedded OCTEONs managing control and data plane functions, while Fusion basebands encode and decode data signals.
As we have continued to closely partner with our customers, they have asked us to solve power and bandwidth challenges across the entire base station and not just in the traditional baseband unit. I am very pleased to announce that two of these opportunities have now translated into new design wins. The first is a front-haul interface solution that connects baseband units to remote radioheads in 5G deployments. The substantial increase in bandwidth in 5G is driving the need for efficient protocol translations for transport of radio data over front-haul links. We expect this custom chip to ramp production in the second half of calendar 2021. Second, and even more exciting, we now have our first design win for a processor in the 5G remote radiohead itself. In 5G, there is an increase in the use of massive MIMO to enable higher capacity and throughput.
The complex beamforming needed in these deployments is generating new demand for our optimized low-power processing capabilities, enabling us to capture entirely new content within the radiohead. To meet the fast deployment timeline for 5G, customers will go to production with our existing Fusion processor by the end of this fiscal year. On top of this, customers have also engaged with us to architect custom purpose-built solutions for massive MIMO processing. This trend greatly expands Marvell's addressable market. Both of these strategic design wins reflect Marvell's expanding beachheads in areas that are currently dominated by FPGAs. Driven by the increase in processing requirements in 5G, including in the radiohead, our expertise in power efficiency and processing is opening new, significant opportunities.
Together, we estimate these wins could add, on average, approximately $500 of new Marvell content per base station, assuming a conservative 20% attach rate for massive MIMO in 5G. Industry analyst forecasts are actually predicting higher attach rates within the timeframe we expect to start shipping our solutions. These are just two examples from our expanding pipeline. While we have been organically increasing our R&D headcount, including the recent opening of our Raleigh design center , the addition of Avera's talented team and extensive custom design expertise will further accelerate our ability to capitalize on these growing opportunities. Moving now to our second quarter outlook for networking in fiscal 2020. After taking into account the export restriction, we expect revenue to be down slightly on a sequential basis. Without the export restriction, we would expect networking revenue to be up sequentially. Turning to our storage business.
Storage revenue for the first quarter came in above our expectations at $279 million, declining 12% sequentially. This expected sequential decline was due to a combination of seasonality and excess inventory in the supply chains of our storage controller customers. Within the quarter, fiber channel revenue was weaker than expected, but the shortfall was more than offset by higher than expected revenue from storage controllers. Our fiber channel business was impacted by a very soft server market in the first quarter, with server units declining by about 18% sequentially, much worse than typical mid-single digit seasonal declines. It appears that the weakness in compute demand extends beyond just the cloud and is now showing up in the enterprise as well.
In our storage controller business, while we benefited from better than expected revenue, we do not think that this was indicative of any real resurgence in demand from the end market. We believe that the upside was primarily driven by a customer building buffers to manage a factory transition. We have taken this dynamic into account in our revenue projection for next quarter. For the second quarter of fiscal 2020, we expect that the demand for Marvell storage controllers will remain soft, reflecting continued weak macroeconomic conditions. After incorporating the impact of the export restriction and accounting for the customer factory transition I just discussed, we expect an approximate mid-single digit sequential decline in our storage second quarter revenue.
Looking at the first two quarters of fiscal 2020 collectively, and after adjusting for the export restriction, storage revenue is tracking close to what we would expect given the current market conditions. We continue to believe that we will be under-shipping the end market for our storage controllers through a significant part of this fiscal year. That said, our customers continue to signal a strong demand environment in the second half of the year. In the meantime, we remain focused on efficiently managing our storage business and continuing to pivot this business towards the enterprise and data center market. In closing, despite a challenging macroeconomic environment, we are executing to our strategy and taking bold steps to accelerate our transformation.
With the production ramp of our first 5G products on track for later this year and expanding pipeline of design wins, we are well-positioned to realize our vision of becoming a leading supplier of infrastructure semiconductor solutions. With that, I'll turn the call over to Jean for more detail on our recent results and our outlook.
Thanks, Matt, and good afternoon, everyone. I'll start with a review of our financial results for the first quarter and then provide our current outlook for the second quarter of fiscal 2020. Revenue in the fourth quarter was $662 million, versus our guidance of $650 million at the midpoint. Networking represented 52% of our revenue in the first quarter, with storage contributing 42%. Other products accounted for 6% of revenue. GAAP gross margin was 54.6%, and the non-GAAP gross margin was 64.1%. GAAP operating expenses were $383 million. Non-GAAP operating expenses were $295 million at the low end of the guidance range provided in March. We continue to tightly manage OpEx in a difficult environment. I'm also very pleased to report that we successfully integrated Marvell and the Cavium ERP systems early in the first quarter.
With ERP integration complete, we expect to achieve our OpEx synergy goal from the Cavium acquisition in the upcoming second fiscal quarter, six months ahead of our plan. GAAP loss per diluted share was $0.07. Non-GAAP earnings per diluted share was $0.16 at the top end of our guidance range. Turning to our balance sheet. In the first quarter, we paid down $50 million of our long-term debt and returned $89 million to shareholders through $50 million in share repurchases and $39 million in dividends. We exited the quarter with $572 million in cash and cash equivalents and a long-term debt of $1.7 billion. As Matt mentioned, through the two acquisitions and the one divestiture, we have actively managed our portfolio to maximize the shareholder returns.
We currently plan to use the expected cash proceed of $1.76 billion from the sale of Wi-Fi business to pay for both the Aquantia and Avera acquisitions. The resulting excess cash is expected to be at least $500 million. In addition, we expect our business will continue to generate a strong free cash flow. As a result, we'll have significant financial flexibility to pay down debt over the next year to achieve our target gross debt to EBITDA ratio of 1.5 times, also return a large amount of cash to shareholders through share buyback while maintaining our current dividend level. As a reminder, we currently have approximately $900 million in outstanding share repurchase authority. Move on to our current outlook for the second quarter of fiscal 2020.
This guidance takes into account our estimated revenue impact from the U.S. government's current export restriction to one of our customers. We expect our revenue to be $650 million ±3%. Our expected GAAP gross margin will be approximately between 53%-54%, and non-GAAP gross margin will be in the range of 63%-64%. This projection for gross margin reflects a weaker product mix due to impact of the export restriction, relatively lower storage revenue, and a seasonally strong consumer-based product ramp. We do expect our non-GAAP gross margin to return to above 64% in the following quarter. We project our GAAP operating expenses to be between $370 million-$380 million, and the non-GAAP operating expenses to be in the range of $285 million-$290 million. We expect net interest expense to be $19 million and the non-GAAP tax rate to remain 4.5%.
We anticipate GAAP loss per diluted share in the range of $0.09-$0.05, and the non-GAAP income per diluted share in the range of $0.13-$0.17. Operator, please open the line for questions.
Thank you. Ladies and gentlemen, if you have a question at this time, please press the star then the number one key on your touchtone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. Again, that's star then one to ask a question. In the interest of time, we ask that you please limit yourself to one question and one follow-up. Our first question comes from Vivek Arya with Bank of America. Your line is now open.
Thanks for taking my question, and congratulations on the Wi-Fi transaction. Very impressive. Matt, does that exit require China approval? As part of that, would be very helpful if you could help us quantify the revenue and gross margin and OpEx impact from a fiscal 2020 or 2021 perspective so we can focus on your base business.
Sure. Yeah. Hi, Vivek. On the first question, the transaction on Wi-Fi does require China approval. Jean, do you want to comment on the second part?
Yeah. Vivek, on the revenue side for fiscal 2019, this business revenue is approximately $300 million. For fiscal 2020, it's about the same level. The gross margin is around 50%. I think the operating margin within Marvell is much lower than our corporate average. It's around 15%-20% of operating margin. That's the way how you can think about this business.
Got it. From a bigger picture perspective, at your analyst day, you had outlined very strong operating model of high single digit kind of sales growth and over 65% gross margin and higher operating margins. Given all the transactions you have announced, Matt, is that still the operating model, or should we think about something else at this stage?
No, I think you should think about that as the operating model. There's a number of moving pieces, but part of the comprehension of doing all three of these was that we would maintain the operating model that we had committed to. Certainly, as Jean mentioned, having Wi-Fi coming out and these two others coming in, plus what we're planning on doing with it, we're going to stick to the same operating model.
Okay. Thank you.
Thank you. Our next question comes from Ambrish Srivastava with BMO. Your line is now open.
Hi, thank you very much. Apologize for the background noise. I just have a question on, Jean, this is for you so that we are all on the same page. Would you rather that we take out the mid-single digit Huawei exposure from our model? If the answer to that's yes, how should we think about modulating OpEx? I guess gross margin is going to be lower by 100 basis points, 150 basis points based on the mix, change in mix to Huawei. Then I had a quick follow-up.
Yeah, that's a good question. On the Huawei side, it's mid-single digit impact. In Q2, we have assumed no Huawei shipment for the remaining of the quarter and going forward. From that perspective, Huawei revenue is completely out after the ban of the government. When you think about from the operating expense perspective, first, we have to invest in our portfolio and opportunities to address across all different product lines, different regions. Huawei is only one mid-single digit revenue customer. We don't think this Huawei ban will impact our investment level. Of course, we're very mindful, we're managing discretionary expense to make sure we are disciplined to manage OpEx. That's the way how we are thinking about it, where we're going to manage it through this Huawei issue and make sure we drive the long-term revenue growth and the margin expansion.
Okay. For my follow-up, real quick, Matt, I just wanted to make sure I understood this. On the storage side, has the outlook changed versus what you were thinking in Q1? Sorry, when you talked to us last time, or is it about the same in terms of You had said that time that you were shipping below end demand as well, has anything changed or it's kind of in line with what you're expecting?
Yeah, Ambrish, it's very much in line from where we were a quarter ago. Obviously, we had some outperformance in Q1 that was relative to this factory transition I mentioned. No update other than if you think about kind of Q1 plus Q2, it's in line with what we were discussing the last time we talked. We do believe we're still going to continue to undership demand in Q2 as well.
Yeah. On the gross margin side, maybe what I'll add to the question you asked on the gross margin side is, if you look at our Q2 gross margin, there are a few headwinds that impact gross margin. The Huawei ban certainly has some impact, also we do have a seasonal strong consumer-related product ramp, which actually has a bigger impact. When you look at going back to Q3, that seasonal impact is going to come down from a mix perspective. We do expect our gross margin to go back about 64%. As Matt mentioned earlier, we're not changing our long-term target model. We continue to believe we'll be able to drive our gross margin to go up going forward.
Thanks for circling back on that, Jean. Appreciate it. Thank you.
Yeah.
Thank you. Our next question comes from Harlan Sur with JPMorgan. Your line is now open. Harlan, please check your mute button.
Sorry, can you hear me now?
Yeah, go ahead, Harlan.
Okay. Thank you. Assuming that the Huawei ban continues for the remainder of the calendar year, off of the Q2 guide, I would assume that the team would see sort of normal seasonal growth in Q3. Then if you do start shipping 5G to your lead customer and some continued inventory improvements on the storage side, you should probably see some sequential growth in Q4 as well. Is that kind of the right way to think about the overall trajectory of the business for the remainder of the year?
I think you're absolutely right. I think the simple way to look at it is Huawei is about mid-single digit revenue. When you look at your model, the seasonality for Q3, Q4, the simple way to do it is just take out the mid-single digit revenue out from the ramp, the typical seasonal ramp from the rest of the quarter will be fine.
Okay, great. On the two new 5G opportunities, one is front haul. I assume that it's the high-speed CPRI connection. You said calendar year, second half 2021 ramp. On the second design win with your processor solution, I'm assuming that this is doing more of the digital front-end functionality. When does this design win start to ramp? Are both of these wins with your two existing 5G customers, or are they with different 5G customers? Thank you.
Sure. Okay. Yeah, you're in the ballpark on the front haul. That's the type of socket we're talking about. On the second one, it's not doing the digital front end. Think of it as when you go to massive MIMO. First of all, every radio head's gonna have some digital front-end processing in it. When you go to massive MIMO, there's gonna be additional processing that's required. What we've seen is one of our customers, and we're not gonna go into who and when on as we talk about these different sockets from today. Think of it as that processing needs to get added to support massive MIMO. Our products are actually well-suited to do that, and so those are being designed in, and those are gonna ramp in Q4 of this year. That's one that's a pleasant surprise to us.
Thanks, Matt.
Yeah.
Thank you. Our next question comes from Ross Seymore with Deutsche Bank. Your line is now open.
Hi. Thanks for letting me ask a couple questions. Matt, first for you on the networking side of things. Obviously, people know you're taking the Huawei business out, and so that's in the networking side, but your guidance is for that to be relatively flat or just slightly down, I think is what you said. Can you talk a little bit about what's going on with the core business growing, what's driving that? Maybe in a bigger picture sense, what sort of reaction are your other customers having if the Huawei side of the equation can't ship? Are those customers getting more eager to take share and attack the Chinese market? Is that leading to some of the new design wins you have? Just want to see what the competitive reaction is in a broader sense.
Okay, sure. Let me take them one at a time. On the first one, just to go back, networking, we guided to decline in Q2. What we said was if you put in Huawei back in, so it was apples to apples, then networking would be up sequentially. That's a positive. You should assume ex Huawei, networking is going to increase sequentially. That's offset a little bit by the fact that some of our customers in 4G, there's been some slowdown there as pre 5G systems are shipping, and then there's some anticipation of production 5G coming online in the second half. There's a few moving pieces, but the net is that networking ex Huawei is up. On the second question, the design activity we see, let me just take it high level first, is very robust, okay?
It's across a number of different products and technologies that we sell across a number of different customers. None of these design wins are related to any issue with what's going on the Chinese customer that's going through the export restriction. Whether or not, the other competitors are going to take share, I think all those CEOs are getting those questions right now, and there's a bunch of articles you can read from those guys about how they're viewing that situation. Just to be clear, the opportunities we see are just a result of, quite frankly, deep engagements with the customers in this space, a very compelling platform of switches, processors, PHYs, all the key pieces, and now some high-speed connectivity, all the key pieces that are required to enable 5G. Hope that's helpful.
Yeah, it is. For my follow-up question, switching gears over to the storage side. I know you just answered to a prior question that throughout the first half of the year, it's really doing what you have expected, but you mentioned in your preamble that the enterprise side was starting to show signs of weakness, and it wasn't just a cloud dynamic anymore. Could you give a little more color on that? Is that just within the fiber channel side? Is that a broader dynamic? How is that the same as before, if it sounds like that's a new development?
Sure. I'd say that, while we gave the commentary around fiber channel, the market numbers I gave you, which was the 18%, that's a market number. That's a server decline. It's not all cloud. The commentary was really, we're seeing some of this in fiber channel, but I think it's related to a bigger picture. When we've unpacked sort of where the market is going, the declines are not all cloud. It's actually happening in the enterprise space as well. We thought it would be appropriate to comment on that given that we've got reasonable exposure there. You could sort of speculate on why, but I think the bottom line is we see that trend as being not a strong one at this point.
Thank you.
Thank you. Our next question comes from Blayne Curtis with Barclays. Your line is now open.
Hey, guys. Thanks for taking my question. I have two. I just want to follow Ross's question because maybe I missed what you said, Matt. I just kind of curious what is growing. You said ex Huawei would be growing. In the backdrop of enterprise being softer, have you seen any of that softness spill into your SMB switching business?
Hey, Ross. This is Jean. I'll add some color, right? Is when you look at it sequentially, we do see we have a diversified product lines under networking from security, switch, PHY. All those things are actually growing sequentially, which offset the Huawei impact. We're actually very pleased to have with all the networking product, the classical Marvell side, the design wins to continue to ramp up with different other customers across both major OEMs and abroad customers outside of China. That's really what's happening sequentially.
Got you. Thanks, Jean. I do look like Ross, but it's Blayne. I just maybe follow up on the new design win, Matt. Obviously, the Avera deal gets you access to a lot of these basic designs. Many of them are in the radio. You're talking about fusion there, is that temporarily, or is that doing some additional functionality and maybe there's more of a content story in the radio head? I just kind of curious to your perspective.
Yeah. Just to be super clear, the new opportunity we're speaking about is additional content. Okay. It's independent of the solutions that you mentioned. Now, what I would say is, you think about the long term, where if we can have a strong presence in the digital front end, then we can have the processing capability for massive MIMO, and then you can think about having all sorts of options to really leverage the technology platform and the company to optimize these designs over time. I think from a supplier point of view, we are going to be viewed as extremely compelling in having all these pieces. Yeah, we're excited to actually be able to, with Avera coming online, to be able to participate in that part of the market as well, which we had not previously at Marvell.
Thanks.
Thank you. Our next question comes from Kevin Cassidy with Stifel. Your line is now open.
Thanks. Yeah, I'll switch topics a little bit by asking about your Ethernet business. Can you give us an update of what's happened with the NIC card business and also your new Ethernet switch that was introduced of some type of design win traction you might have there?
Sure. Yeah. Kevin, I'll make a couple comments. I think on the Ethernet NIC side, that's a pretty small business for us. You may be familiar with it. It primarily sells into the enterprise. Our cloud position there is small. Think of that as being a smaller business tied to the enterprise cycle. For our new product, which is our 12.8 terabit switch, that's doing really well. We introduced it about a quarter ago. Design pipeline looks good. A lot of interest from a number of customers. I'm not really ready to give a detailed update, but I'd say that the traction is very strong for that product, and we've been very pleased by the reception.
I think as time goes on, we'll be happy to update the investment community about how our Ethernet story plays as we've now really entered a brand new segment that we weren't in before, addressing the higher end from 32 all the way to 12.8.
Right. Yeah, that's why I was wondering if you even could give us an estimate of when you'd expect to start to see revenue for that Ethernet switch.
I think it's still early days, Kevin. The design cycles, depending on the customer, tend to be a little bit longer here. I don't think I'm quite ready to commit to that. It's a bit early, we'll certainly be happy to do that as we get a little bit closer and we make some more progress.
Okay, great. Thank you.
Yeah, you're welcome.
Thank you. Our next question comes from John Pitzer with Credit Suisse. Your line is now open. John, please check your mute button.
Let's just move on to the next question, please.
Our next question comes from Mark Delaney with Goldman Sachs. Your line is now open.
Yeah, good afternoon. Thanks very much for taking the questions. The first question, I wanted to better understand how the company was trying to incorporate some of the broader implications from Huawei. Matt, I know you said he can incorporate the mid-single-digit direct exposure, but difficult to gauge some of the potential knock-on effects to other customers, for example, in storage, some of your drive customers have some exposure. Did you factor in any additional conservatism into your guidance in storage and networking to try and think about some of those potential factors? If there's any other color you can give us on how Marvell was thinking about that would be helpful.
Yeah, our current assumption is really just to take out this one particular Chinese customer's revenue going forward. Matt mentioned during his prepared remarks about the potential impact from our other customers, they get impacted, which will come to impact us. We are not going to be able to estimate at this point what it means. It's just something we're mindful, but it's not in our current assumption and forecast.
Yeah, I think, again, that's absolutely right. I think the assumption we're making is that our customers that we're talking to have comprehended this and their demand signals they're sending us, and I think we're mindful of that and certainly hoping that they're doing that. I think as Jean pointed out, it's really difficult for us to add a judgment on top of somebody else's judgment. I think the cleanest way was just take Huawei out. It's out of the numbers, and let's hope that the whole industry's kind of got the same methodology for accounting for this.
Okay. That's helpful. My follow-up is just on the strategic roadmap that the company's been underway with and doing the handful of acquisitions, and appreciated that all the commentary you provided along that front. Assuming all three deals close, you mentioned your cash balance would go up. Should we think about appetite for Marvell to do any additional M&A given the really strong balance sheet that would result? Or would you want to fully integrate Avera, Aquantia before thinking about any future M&A? Thank you.
Sure. Yeah, let me take that part of the question. First of all, yeah, I appreciate everybody listening to the backdrop because we felt it was really important so that part of the call was a little bit more explanatory to make sure that everybody understood the context, that these weren't just sort of three opportunistic things that came along, but rather we were really thinking about how to drive transformation in the company during this period. When you think about the priorities right now, the priorities are going to be to get these things closed and then get the integration done of Avera and Aquantia. That's the priority. Certainly, we'll be in a very good position when that's done. Jean, maybe you want to comment on the-
Sure.
I guess you already commented on the
Yeah
excess cash. It's certainly going to be a good place to be.
Yeah
Given the environment.
Yeah, as I mentioned earlier, over the next year, Matt mentioned that we're going to focus on integration of the three deals. From the cash side, we'll have a $500 million excess cash plus additional free cash flow generated by the combined business. I think if you think about it, our first priority is we think we have a tremendous financial flexibility to both buy back some shares and also pay down the debt. That will be our focus. Of course, in the longer term, our capital allocation policy has not changed.
Thank you. Our next question comes from Craig Ellis with B. Riley FBR. Your line is now open.
Thanks for taking the question, and congratulations on what's been a very active month of May. Matt, the first question I had is related to your opening comments and the transactions that the company's announced. While neither transaction individually is anywhere near as big as Cavium, in aggregate, they're a different kind of operational challenge. Can you spend a minute reflecting on what the company learned with Cavium that informs your view on how you will approach three individual transactions that all will be occurring about the same time to ensure that you've got good execution and are driving good financials through those transactions?
Sure. Let me address a couple points. I think the first is that you're right, although the sheer size of the three isn't the same as Cavium, I do think that in the long run, they have the potential to be as significant for the company. I think that's the first point, is that we view this as a very major step in our company's journey here. I would actually back up the clock a little bit, even go to pre-Cavium, when the team arrived here, about three years ago, by the way. You were early on in the story, Craig. We did a lot, okay? Obviously, we pivoted the company around a new strategy. We divested a number of businesses simultaneously in parallel, by the way. Sold buildings, consolidated design centers, a tremendous amount of activity.
What we learned through that process and what we developed was a very strong culture of execution and doing things on schedule or better, and doing them on budget or better. That bode well for when we did Cavium, and that integration, as Jean pointed out, very happy with our team. The fact that we were able to do the entire ERP integration in about nine months ahead of schedule. You can hear horror stories of ERPs gone wrong. Our team did a fantastic job from that point of view. From the operations side, what I'd say is we've built a very strong, capable, battle-tested team here that I have the utmost confidence in to execute.
When discussing these opportunities with my team, everybody enthusiastically agrees that we should go for it and was ready, and this goes from IT to business units to sales to legal to HR to finance, you name it, and obviously our operations team. We feel pretty good. We know we're going to be busy, but these are extremely important for us to take our next step. You think about phase 1 as being the restructuring and re-pivoting of the company, phase 2 as integrating and merging with Cavium, and then this next phase of growth leading into these new growth vectors.
We're pretty excited about what we've actually accomplished over the last three years, and I do want to just say thank you on the call to the entire Marvell team, who, quite frankly, without these people, we could never have embarked on such an ambitious journey. Long answer, but I think you hear the bottom line is I'm very confident in my team and our ability to execute these transactions.
Significant transition indeed. The follow-up question is just trying to get a better sense of what you're seeing out there in the marketplace with your customers. It sounds like with the broad-based networking growth in the quarter, absent the effect of that large China customer, that things are moving in the right direction. On the other hand, storage seems to be a little bit slower. Do you think you're seeing signs of an improvement, a bottom and then an improvement in the data center market? Or is storage really something that's driven by company-specific product performance, less so than a recovery in demand environment?
In two pieces, I'd say one is certainly it's positive that X, our China customer we do see some sequential growth. I think that's positive. On the storage side, it's really hard for us to call because if you think about that revenue on our controllers, it's all shipping into somebody who's then shipping into By the way, if you go through the whole supply chain, we're shipping into a drive company. They're shipping sometimes to a distributor who's shipping to a system integrator, who's shipping to an end customer somewhere. It's really hard for us to have the sensing at the end-to-end customer level of what's happening relative to our other businesses. We just can react to kind of what the demand signals we see based on where we are in the supply chain.
I think there are probably people downstream from us probably have a better point of view on that. Certainly, high-level characterization would be at least networking showing signs of life and some movement, and then storage still under shipping what we think is the end-to-end demand.
Thanks, Matt.
Yeah.
Thank you. Our next question comes from Srini Pajjuri with Macquarie. Your line is now open.
Thank you. Hi, Matt. Hi, Jean. A couple of clarifications, Matt. First of all, congrats on the Wi-Fi divestiture. I'm just curious if you see any other opportunities to prune the portfolio further. It doesn't look like it, but I just wanted to ask you that question. Then I have a follow-up.
Yeah, the answer is no. We've done a lot here, okay? These are some pretty big moves, including the decision to divest Wi-Fi. No other portfolio plans.
Got it. On the 5G design wins that you talked about, the two design wins, I think the first one is pretty clear. I'm just curious on the second one that you mentioned, I just want to understand the timing of that ramp. I think you said something like fourth quarter of this fiscal year. I just want to make sure that I got that right.
Yeah, you did. That's something that's come in that's newer to us, and we're obviously preparing for that. Yeah, it's actually going to be this year.
Just to clarify that, Matt, this is on top of the baseband ramp that we've been talking about at Samsung. Also, could you put some perspective in terms of, I know you mentioned $500 of additional content, but what's the TAM for this particular design win as you see it? Thank you.
Yeah. Okay. Just on the size, the TAM is going to be $hundreds of millions. I don't have an exact number for you. This is a very dynamic market. I think for everyone that's following us when we have these calls, even going back to our Analyst Day, I think every quarter, we've just seen the design activity and the intensity increase. As an example, this was something that the recent radio head opportunity was something that came up just within the last quarter. A lot of activity from that point of view.
Great. Thank you.
Thank you. Our next question comes from Rick Schafer with Oppenheimer. Your line is now open.
Hey, thanks. Matt, following on that 5G, I'm just trying to maybe understand it a little better, but you've spoken a lot in the past about how your 5G content is up roughly 4X versus 4G. I'm just curious how Avera, once it's in the fold, how does that potentially change that equation? Is that number, would that be more like a 5X or a 6X? Just kind of trying to get a sense above and beyond. Obviously, you've talked a lot about the $500 incremental content in your opening remarks and stuff, but I just was curious if there was a rule of thumb there post Avera close.
Yeah. I don't have an exact number for you, but I would say it's a multiple of the current SAM we have. Just what is it? We don't know, but certainly there's a number of sockets that are out there that have traditionally gone all ASIC. We certainly think with, obviously, the design team that they bring, plus leveraging our technology platform, which isn't just process technology, by the way, it's also Marvell's IPs that could be used and leveraged to help our customers differentiate in ways that they haven't been able to before, quite frankly. We think it's very compelling, I don't have all the exact TAM numbers yet.
I think the way I'd say it is I want to see how this year is playing out in terms of all the things that we're working on and then come back to you guys with a more comprehensive view, because it seems like every quarter we're finding new things I'd rather give a comprehensive update at a later date. It's big.
Got it. Thanks. Jean, I know you got a lot on your plate. Just on the Avera, I know you talked about it being a 50% or so gross margin business historically, you've talked about improving on that. Sort of how close do you think the corporate average Avera can eventually get? Sort of how do you get there? What are some of the bigger moving parts? Could this be a 60% or better gross margin revenue stream over, I don't know, over a certain timeline? Maybe identify what that timeline might be.
Yeah. It will take some time, right? The way to think about it is for any new design wins we're going to get, the gross margin is going to be very similar to Marvell's corporate average. When you start to mix the platforms, over time, it's going to migrate to our current gross margin. It will take time. Remember, all those things have very long cycle. Typically, they last to five years or beyond sometimes. We are very confident over time it's going to get there. Secondly, right, is operationally, we have a really strong operational team. We do think once we integrate Avera into Marvell, we're going to have the opportunity to improve cost of sales and to also help the margin improvement going forward. We'll provide you all detailed update when we close the transaction.
We do think we'll have the opportunity to migrate their gross margin to close to ours over time.
Yeah. What I'd say, Rick, too, I think one of the variables that I would add on top of what Jean said is that we have to first get this closed and get the team in and then really assess the opportunity pipeline, because in this business, like actually even our standard product business, the ability to command premium margins really comes with the value and the differentiation that you add. When we look at our pipeline, we're going to want to have some flexibility, right? Because we're going to look at, okay, how many opportunities we have that are just pure ASIC? How many are where we can add Marvell IP to help the customer differentiate? That's going to have a different margin structure.
Obviously we're a company that believes that gross margin equals innovation, and that's what we're driving in the company. That being said, we also have to assess the SAM, and that's going to be a part of how that journey goes, is what opportunities we decide to take or not, and what's the returns on those and the volume. In any case, the journey in that business will be up and to the right, both from an operational improvement point of view as well as on the new designs.
Got it. Thanks. That's great color.
Thank you. Our next question comes from Tim Arcuri with UBS. Your line is now open.
Yeah. Hey, this is John on calling in for Tim. Hey, adding my congratulations on the connectivity divestiture. Obviously you know our opinion over the past year on what you guys should do with that business. I'm just kind of curious about in your perspective, how long were you guys looking at this move?
Which move?
The Wi-Fi.
The Wi-Fi.
Oh. Well, let's be clear. We were approached on this business, right? We didn't put it up for sale. We were approached on this business, and we were approached by a number of parties, and we elected to have those discussions, and then it turned out to be a great outcome. That was really the catalyst, was just a number of inbounds that looked compelling, and we felt it was our obligation to take those seriously. On our own, we were driving that business, right? You know, that business three years ago
Was low to mid 30s% gross margins. It had been declining in revenue. It had all kinds of issues, and credit to the team here, really improved that business structurally, re-pivoted it, got their mojo back, and the business has really gotten to a very good place, and that's why you can look at the valuation we got for it. It's because there's a lot of value that's been created. I think, by the way, I think NXP will do a fabulous job with the asset. Yeah. You can see from what was paid for it's a good business, and we were fully prepared to drive it on our own as well.
Okay. All right. Fair enough. I appreciate the color. As my follow-up, in terms of your storage business, can you give a little bit more color in terms of SSD versus HDD dynamics and what you see for the coming quarter as well?
No, we don't provide that kind of details, right? We also have Fibre Channel in that business and some of the other product lines. The way we look at it is actually from end market perspective. We look at the client, we look at the enterprise data center, and periodically, we'll provide you with the details of how we are migrating to increasingly address the enterprise and the data center market. That's how we look at it going forward.
Okay, thank you.
Thank you. Our next question comes from Gary Mobley with Wells Fargo Securities. Your line is now open.
Hey, everyone. In the interest of time, I'll pose both my questions at the same time. In the just concluded April quarter, how much buy ahead was there from Huawei in anticipation of the shipment ban? Jean, you had mentioned in the past that you can bring the non-GAAP OpEx down to perhaps $280 million, and I think you laid out a timeframe of maybe the fourth quarter of fiscal year 2020, and you keep under-promising and over-delivering on that front. I'm curious, in light of the revenue headwind from Huawei and other factors as well, should we be thinking about maybe something better than $280 million by the end of this fiscal year?
First, on the Huawei question, right? The ban happened two weeks into our quarter, so we did not ship too much to them during the first two weeks of the quarter. If you look back into the last few quarters, it's very difficult for us to tell how much inventory they're building, but our assessment is we believe the run rate business of Huawei is around mid-single digit numbers of our revenue. That's how we think about it. Secondly, on the operating expense question, I think we continue to target exiting Q4 of fiscal 2020. We'll get to closer to $280 million operating expense. That's how we are targeting, and I think our team has done a great job to manage OpEx each quarter. We'll continue to be disciplined in managing the OpEx to get to our target level.
All right, thank you.
Thank you. Our final question comes from Christopher Rolland with Susquehanna International Group. Your line is now open.
Hey, guys. Two quick ones from me. I guess, first of all, given the Huawei ban, do you think this is going to help other OEMs, guys that you are more exposed to, and hence help you guys?
Sure. Chris. On that one, again, I think there's quite a bit of commentary on this that's out there now. I think Ericsson's been asked, Nokia's been asked, Samsung's been asked. You go through the list. You could sort of listen to their view. I think what they'll tell you is there's short-term positive, there's also potentially long-term negative. It's hard to call, and it's also hard to call when the situation resolves itself.
We don't have a particular point of view other than the customers that we are engaged with are doing well in the market, certainly on their tenders and their bids and their positioning for the deployments coming up. The design activity with those customers is very, very high. That's the commentary I would give you. It's hard for me to handicap the global base station market, what's in base right now.
Great. Lastly, have you guys in the industry heard anything about China withholding rare earth materials, and if that would have any effect on the hard disk drive market, or do you think that is a low risk, low probability situation?
Yeah. Don't know. Not the expert on that, although I'm reading the newspaper over the weekend kind of thing. I don't have a particular view on rare metals and then how it's going to trickle into the supply chain at this juncture.
Perfect. Thanks, guys.
Thanks, Chris.
Thank you. Ladies and gentlemen, this concludes our question and answer session for today's call. I would now like to turn the call back over to Ashish Saran for any further remarks.
Thank you, everyone, for joining us today, and we look forward to seeing you at upcoming conferences. Thanks and goodbye.
Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program, and you may all disconnect. Everyone, have a wonderful day.