Good day, ladies and gentlemen, and welcome to the Second Quarter 2019 Marvell Technology Group Limited Earnings Conference Call. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session and instructions will follow at that time. As a reminder, this conference is being recorded. Now, I'd like to turn the call over to Ashish Suren, VP of Investor Relations.
Sir, you may begin.
Thank you, and good afternoon, everyone. Welcome to Marvell's Q2 fiscal year 2019 earnings call. Joining me today are Marvell President and CEO, Matt Murphy and Marvell CFO, Jean Hu. Before I turn the call over to Matt, I want to remind everyone that certain comments today may include forward looking statements, which are subject to significant risks and uncertainties and which could cause our actual results to differ materially from management's current expectations. Please review the cost study statements and risk factors contained in our earnings press release, which we filed with the SEC today and posted on our site as well as our most recent 10 ks and 10 Q filings.
We do not intend to update our forward looking statements. During our call today, we will make 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. As you know, we closed the acquisition of Cavium on July 6, 2018, approximately 4 weeks before the end of our 2nd fiscal quarter. Therefore, the results we reported today for the Q2 of fiscal 2019 include the results from the Cavium businesses from July 6 to the end of the fiscal quarter.
To provide a direct comparison to the Q2 fiscal year business outlook we provided in our earnings call last quarter, we have provided a table which breaks out Marvell's standalone non GAAP results for the Q2 and excludes partial quarter results from the acquired Cavium business in our earnings press release. We are providing Marvell standalone non GAAP results on a one time basis only. As a reminder, there are no GAAP results for standalone Marvell. Matt and Gene's 2nd quarter commentary will primarily focus on the results from standalone Marvell business as it relates to the guidance we provided on our May call unless stated otherwise. Please note that the financial outlook for the Q3 of fiscal year 2019 includes expected results from the acquired Cavium businesses for the full quarter.
Prior to the acquisition of Cavium, we reported revenue for 3 core businesses, which were storage, networking and connectivity. We also reported revenue from a legacy set of businesses under the category of other. In order to incorporate Cavium's product lines, starting with the Q3 outlook and going forward, we will be changing the structure and composition for revenue reporting. We will categorize and report revenue by 2 core businesses, storage and networking. The new storage business will include Cavium's fiber channel products in addition to all the prior Marvell storage product lines.
The new networking business will include Cavium's embedded processor, security Marvell's Wi Fi connectivity business will also be reported within networking. We will still report revenue for the other businesses and the composition of that category remains unchanged. Please also note that starting next quarter, we will provide a revenue outlook range for the upcoming quarter only at the consolidated company level. Given changes which can take place within different businesses through the quarter, some of which can be offsetting, providing specific revenue outlooks for individual businesses may not yield the most accurate projections at the company level. This change directional commentary directional commentary on revenue expectations by business for the upcoming quarter.
With that, let me turn the call over to Marvell's President and CEO, Matt Murphy. Matt? Great. Thank you, Ashish, and welcome to
the Marvell team. It's great to have you on board. And good afternoon to all of you on the call, and thank you for joining us today. I'll start with a summary of our Q2 GAAP results for the combined company. Revenue for the combined company was $665,000,000 dollars GAAP gross margin was 56.7 percent and earnings per diluted share was 0 point 0 $1 I'm now going to review standalone Marvell non GAAP results excluding those of Cavium.
Gene will provide 3rd quarter projections for the combined company. Q2 was another strong quarter for Marvell. Once again, we delivered solid results driven by the strength of our core businesses and continued operational excellence. We also received regulatory clearance to close our merger with Cavium and began integrating the 2 businesses. Together, we are on our way to becoming an infrastructure solutions leader.
Arvel standalone revenue for the Q2 came in above the midpoint of our guidance at 624,000,000 dollars up 3% from a year ago, driven by strong growth in networking and continued growth in our storage business. We continue to improve our non GAAP gross margin reaching a record high of 63.5%. This reflects continued progress in improving operational efficiency as well as capturing more value from our world class engineering effort. Looking ahead, we will continue to focus on expanding our gross margin as we integrate Cavium. Marvell's standalone non GAAP operating margin for the Q2 was 30.1%, up 4.3 percentage points from a year ago.
I'm very pleased to report that we have achieved this target 6 quarters earlier than we originally projected at our last Investor Day in March of 2017. Non GAAP earnings per share on a standalone basis was $0.35 above the midpoint of our guidance and up 17% year over year. Moving to our core businesses. Our storage business met expectations with revenue of $320,000,000 growing 3% year over year. We continue to offset secular declines in client HDD through 2 efforts.
1st, we are growing our position in the near line segment of the HDD market, which is fueled by continued demand for data storage in the cloud. 2nd, we continue to increase Marvell's footprint in the SSD market, where we are also expanding our reach into the enterprise and data center segment. We believe that both of these efforts will continue to generate revenue tailwinds over the next few years. As we look forward, we see significant data growth continuing at cloud and data center customers for which they need more efficient storage management that we are addressing with our new innovative solutions. For example, I'm proud to share that at last month's Flash Memory Summit, we announced 3 new storage architecture solutions based on emerging NVMe over fabric interfaces and include both Cavium developed products for servers and Marvell developed products for SSD devices.
These architectures eliminate legacy bottlenecks in traditional server managed storage deployments, allowing customers to efficiently scale and share storage without adding additional servers. Cloud and data center customers will now be able to meet their growing demands for higher performance and higher capacity storage, while improving utilization and lowering their total cost of ownership. Moving on to networking. Our networking business delivered $170,000,000 in revenue and grew 16% year over year, significantly higher than our guidance of high single digit growth. This growth was driven by a robust IT spending environment as well as the continued ramp of our refreshed switch and PHY products for the enterprise.
We were also helped by the resumption of shipments to ZTE after the export ban was lifted partway through the quarter. In addition, we also continue to ramp Ethernet switch products into wireless base stations. Overall, Marvell's networking business continues to perform exceptionally well, driven by growth from our refreshed product portfolio. As a proof point within switching, the relative contribution of revenue from our refreshed switching products more than doubled from a year ago. The addition of Cavium's products further strengthens our networking portfolio.
Now moving on to connectivity. We continue to execute our strategy of shifting Marvell's connectivity business to higher performance opportunities away from older generation lower margin Wi Fi products. As a result and as expected, connectivity revenue of $88,000,000 declined 11% year over year in this quarter. Please note that we completed our transition away from the older gaming connectivity product during the Q2. In contrast, the rest of our connectivity portfolio grew year over year in the Q2 as we continue to pivot to higher performance, higher margin solutions.
Anticipating the evolving needs of our customers who are increasingly looking for broad platform solutions, we have recently announced our 802.11ax suite of solutions, which position Marvell to capitalize on the market shift to the next generation of Wi Fi. Overall, I'm very pleased with the performance of Marvell's core businesses and look forward to their continued growth, especially with the integration of Cavium's products and technologies. Now let me move on to the integration of Cavium. As I've mentioned on past calls, we started integration planning early and the Cavium team is already an integral part of the new Marvell. It's been great to welcome them to our combined team.
Given that we had completed a significant amount of planning before the acquisition closed, our integration is proceeding at a fast pace. As we integrate, we are applying important lessons from the last 2 plus years of Marvell's own transformation. All of this experience planning is now paying off with rapid and efficient integration occurring across our sales, engineering, operations and G and A teams. For example, in the 1st 2 months since closing the acquisition, we have already integrated the Xpliant and Armada roadmaps into their respective R and D teams. We also quickly realigned Cavium's business processes and infrastructure with Marvell's, including robust forecasting, budgeting, project reviews and establishing P and L accountability at the product line level to better optimize resource allocation.
Similarly, our combined business and engineering leaders also completed a strategic portfolio review of all key products and technologies across the entire combined company in order to optimize future R and D investments. 1 of the key changes we instituted on day 1 was applying Marvell's lower levels of inventory across the supply chain, higher customer lower levels of inventory across the supply chain, higher customer satisfaction and less pressure on the sales team to chase short term revenue. Our sales team is focused on attaining high quality design wins that drive long term revenue growth, and I'm confident that our disciplined approach will enable this across all of our new businesses. I'm very confident that our combined team will drive us towards our long term 6% to 8% annual revenue growth target. I'm also very happy with how well the Marvell and Cavium teams are collaborating.
Already, as we have begun working together, we've identified additional cost savings opportunities. These additional synergies combined with our rigorous and thorough approach to integration are allowing us to increase our synergy target from our prior $150,000,000 to $175,000,000 outlook to $200,000,000 by the end of fiscal 2020 on a run rate basis. As Gene will discuss later, our combined 3rd quarter outlook bakes in just over half of the long term OpEx synergy target on a run rate basis. This will be a significant accomplishment in our 1st full quarter as a combined company. As I mentioned earlier, we also completed our annual strategic portfolio review to prioritize R and D resource allocation to maximize future growth and profitability.
As a result, we have begun shifting resources to areas with higher return potential and deemphasizing investments in lower ROI products. For example, we completed the sale of Cavium's Monte Vista software product line and have quickly converged roadmaps in switching and embedded processors. Our future switch development will be based on Marvell's Prostera product line and we will be focusing our embedded processor efforts through Cavium's industry leading OCTEON products. We will of course continue to support to Gene, I'd like to thank the entire team for their continued contributions both this quarter and throughout the integration planning process. We've made amazing progress due in large part to the hard work and collaboration across the Marvell and Cavium teams and I am excited about what we can accomplish together.
Our combined company has significantly larger scale, more diverse products, a greater pool of engineering talent and a broader set of technologies that are very relevant to cloud and data center customers. I've been in a number of key customer meetings recently where the depth of architectural discussion and engagement with the most senior decision makers far exceeded what we had previously seen as independent companies and they are excited to work with us on their most ambitious projects. I look forward to sharing more about our business, technology and Marvell's trajectory at our upcoming Investor Day on October 16 in New York City. With that, let me turn the call over to our CFO, Jean Hu for more details on our Q2 financial performance and our outlook for the Q3.
Thanks, Matt, and good afternoon, everyone. I'll start with our GAAP results for the Q2 for the combined company. Please note our GAAP results include the impact of purchase price counting items, amortization of intangibles, acquisition and integration related non recurring expenses as well as stock based compensation. Revenue was $665,000,000 Gross margin was 56.7 percent. Operating expenses were $385,000,000 Operating loss was $8,000,000 and earnings per diluted share was 0 point 0 $1 Turning to our combined balance sheet.
I want to note that the inventory at the end of the second quarter was $473,000,000 which include the impact of stacking up KVM's inventory by $223,000,000 due to purchase price accounting. We amortized $23,000,000 of this step up into COGS in the second quarter and we anticipate amortizing the remaining balance by the end of the Q4 of fiscal 2019. Please note our non GAAP results exclude the amortization of inventory step up charges. We exited the quarter with $524,000,000 in cash and short term investments. Our long term debt was $1,900,000,000 and currently carry a blended interest rate of 4.3%.
Our gross debt to EBITDA ratio was 2 times and the net debt to EBITDA ratio was 1.4 times based on the combined pro form a EBITDA. We currently expect to start paying down the debt this quarter and anticipate stepping up the pay down rate to approximately $100,000,000 per quarter starting the fiscal 2020. As a result, we believe we can quickly get to our targeted ratio of 1.5 times gross debt to EBITDA. In the second quarter, we distributed $39,000,000 to shareholders in dividend. I will now move on to standalone Marvell non GAAP results for the Q2 for fiscal year 2019.
As Ashish had noted, we are providing standalone Marvell results on a one time basis on latest quarter, because our previously provided financial outlook for the Q2 exclude any impact of the Cavium acquisition. Reconciliation of our standalone and the combined performance as well as GAAP to non GAAP results are available in our press release. Standalone Marvell revenue in the 2nd quarter was $624,000,000 powered high end of the outlook provided in May. Our core business of storage, networking and connectivity accounted for 93% of revenue and grew 4% year over year. Storage accounted for 51% of revenue and grew 3% year over year in line with our expectations.
Networking accounted for 27% of revenue and grew 16% year over year, much stronger than expectations as we benefited from a strong end market and the resumption of a shipment to DTE partway through the quarter. I'm very pleased with this level of growth from networking, which is coming above what we think is sustainable in the long term. Connectivity accounted for 14% of revenue and as expected declined 11% year over year as we ramped down our older generation lower margin gaming product. Other product accounted for 7% of revenue and declined 5% year over year consistent with our expectations. Non GAAP gross margin was 63.5%, a record level for Marvell, an increase of 2.3 percentage points from last year.
Non GAAP operating expenses were $208,000,000 declined 3% year over year, while we'll simultaneously delever the year over year revenue growth. Non GAAP operating margin was 30.1%, up 4.3 percentage points from a year ago. Non GAAP earnings per diluted share was $0.35 exceeding the midpoint of our guidance range. Before I go to our Q3 outlook, I would like to spend a moment discussing Cavium's recent revenue run rate and also provide some guidance about our $200,000,000 cost synergy achievement plan. KVM's revenue run rate before we closed the acquisition and its contribution of $41,000,000 to our 2nd fiscal quarter during the 4 weeks after closing the acquisition was well below expectations.
The primary reason for this was the large inventory reduction at the Cavium's distributors and certain customers to bring their inventory down the levels more consistent with Marvell's business practices. At Marvell, our days of inventory have distributor inventory had been in the same range too. KVM's revenue was also impacted by softer demanding environment among some service providers as well as the decision to sell KVM's Monte Vista product line and roadmap consolidation for KVM's X PlantSwitch product. Also it's worth noting, KVM typically had fairly non linear revenue generation through their fiscal quarter with a relatively low level of revenue in the 1st month of their fiscal quarter, which was the last month of our fiscal quarter. The Marvell and the KVM teams have worked together to quickly integrate our forecasting supply chain and the demand fulfillment processes.
We believe KVM's revenue bottomed out due to inventory reduction and acquisition related impact during our fiscal Q2 and that we are forecasting a recovery in the Q3. We are currently projecting strong sequential growth from KVM in the 4th quarter, anticipating that inventory reduction will completely flushed out in the Q3. We believe from the combined company base in the Q4 for fiscal 2019, we can drive long term revenue growth to our target of 6% to 8% annually. Turning to our synergy achievement plan, which we have raised to $200,000,000 25% of these synergies will come from COGS, which typically take about 6 months to start to take effect. The balance $150,000,000 of synergy will benefit operating expenses.
Based on the combined pro form a operating expense run rate of $1,300,000,000 before the close of the transaction, The middle point of our Q3 outlook, based in realization of $90,000,000 of OpEx synergy on a run rate basis. As a reminder, our operating expenses have a certain amount of seasonality and tends to increase in the first half of our fiscal year, primarily driven by employee payroll tax matching and our annual merit process. Let me now move on to our current outlook for the Q3 of fiscal 2019, which include a full quarter of KVM contribution. We expect our total revenue to be in the range of $825,000,000 to 865,000,000 dollars At the middle point of this outlook, we expect approximately $210,000,000 of revenue contribution from ongoing KVM businesses. This expectation for KVM revenue assumes approximately $20,000,000 of excess customer and the distributor inventory to be consumed in the Q3.
We believe that exiting the 3rd Cavium's inventory level will be aligned with Marvell's practices. We expect our storage revenue at the middle point of our guidance to be approximately 48% of total revenue. As a reminder, the business now include KVM's cyber channel product in addition to all the prior Marvell storage product lines. We expect our networking revenue at the middle point of our guidance to be approximately 46% of total revenue. This business now includes KVM's embedded processors, security processor and the Ethernet connectivity products in addition to all the prior Marvell networking and the Wi Fi connectivity products.
We expect other revenue at the midpoint of our guidance to be approximately 6% of total revenue. Our expected GAAP gross margin will be in the range of 44% to 45% and the non GAAP gross margin will be in the range of 64% to 65%. We expect GAAP operating expenses to be approximately $390,000,000 to $400,000,000 and the non GAAP operating is to be in the range of $300,000,000 to $305,000,000 We expect our GAAP tax rate to be 4% in the rest of fiscal 2019. We'll update you on our fiscal 2020 tax rate once we make progress to integrate the 2 companies' international tax structure. We expect our interest expense to be around 20,000,000 dollars We expect a diluted share count of 670,000,000 shares.
As you know, our share count increased from the prior quarter due to the 153,000,000 share issued as equity consideration related to this acquisition. Please note that starting with this quarter, we'll be simplifying diluted share count projection to GAAP only as the difference to non GAAP has become immaterial with the increase in total share count. We anticipate GAAP loss per diluted share in the range of $0.04 to $0.08 and non GAAP income per diluted share in the range of $0.30 to $0.34 We're now ready for your questions. Operator, please open the line for questions.
Thank Our first question comes from Ross Seymore with Deutsche Bank. Your line is now open.
Thanks guys for letting me ask a question. And Gene, thanks for all the details about the ins and outs with Cavium. One follow-up question to that for either you or Matt is, it appears that the Cavium revenues, if you say they're clean in your January quarter and we just added back in that $25,000,000 for the $210,000,000 that you're guiding to in October, you'd still be down kind of high single digits year over year. So can you just talk about what you think that Cavium revenue growth rate can be off of that base and kind of the 2.35 ish range going forward? And why is it down that much year over year?
Sure. Hey, Ross, this is Matt. I'll take this one and let Jean add this, if she'd like to. So yes, the way to think of it is, we're guiding 210 for Q3. Then to the best of our knowledge and the analysis we've done, there's $20,000,000 that will still get consumed.
So you should assume a $230,000,000 run rate. To answer one part of your question, that's the baseline run rate that we believe we can grow the company off of based on the annual growth targets that we set when we announced the transaction. The year over year change primarily you can attribute to inventory. Obviously that we're now going back sort of a year in time. And so reconstructing that and infinite detail is challenging.
But what we do know is when we look through at the current set of customers now that we've got Cavium under the Marvell umbrella, we look at the channel inventory and customer inventory and demand patterns. We feel very confident that we'll exit Q3 with inventory overall normalized to the Marvell levels.
Great. And I guess for my follow-up, just switching gears to the storage side of your business and maybe just the classic Marvell side. Lots of debates these days on the NAND pricing market. I know that doesn't directly correlate to what your SSD business does one way or the other, but this is the Q1 in a while you hadn't highlighted what SSDs were as a percent of the business. Can you just give us an update on how that segment of your storage business is ramping?
Sure, Ross. No problem. And yes, I think we're adjusting here to having a much broader portfolio of products to talk about. And so with respect to SSD, that business continues to perform well. We've seen multi years now of pretty strong compounded annual growth in that business.
With respect to I won't comment specifically on pricing or we're not sort of the barometer on demand and pricing. But certainly, I think it's widely reported that supply continues to come free. And I think to that extent that's going to be good for certainly people that supply into this market including us. I'd also add that on top of all that our progress and effort to really grow our presence in the enterprise and data center segment of SSD continues to make very good progress. And so I think as you we head to Analyst Day plus future calls when we have sort of the Cavium ins and outs settled.
We can continue to give you more color there, but we still see strong business in SSD for the company.
Great. Thank you.
Thank you. And our next question comes from Vivek Arya with Bank of America. Your line is now open.
Thanks for
taking my question and good to see the Cavium results integrated in all the detail. First question, Matt, you mentioned strong sequential growth for Cavium in Q4. What does that imply? Does it get you back to the $230,000,000 baseline or can it be stronger than that? I'm just trying to see what a normal Cavium contribution quarter looks like.
Yes. I think I'll focus it to just to be specific what I said, which was and again, normally we wouldn't lean out kind of 2 quarters out. That's never been our practice. But given the circumstances, we felt we needed to give some color there. So yes, I think the way just to read it very simply is take the 210, assume that's the run rate at 20 back and so 210 going to 230 is a baseline to think about.
Obviously, we're not guiding that formally and we've got to see how the business does during that timeframe. But at this juncture, I think for everybody on the phone and the investors listening, I think that's the best view that we've got at this point. So that's really the growth we're talking about 210 to 230.
Got it. And for my follow-up, Matt, so good job on gross margins. You're kind of close to the 65 percent or so pro form a target. And I recall that when you gave that target, Marvell's organic margins were 61%, but now they are 63.5%. So is it possible that longer term you could perhaps do better than the pro form a targets you have outlined before?
Okay. Yes. Thanks, Vivek. I think, yes, if you go back to when we announced the transaction, you're right. We said 65 was our long term target.
And at that time, we were in that range. So we've been very pleased, right, with the performance of Coromarvel since we announced this. That business has strengthened on revenue, it strengthened on gross margin and operating income. And so that's been a nice tailwind heading into the closing of Cavium. We're certainly not we're not ready to update our targets at this point, although we have an Analyst Day coming up.
But you should assume that the one of the guiding principles I think that I've infused in the company over the last 2 years has been to really drive the gross margin as a reflection of the quality of the engineering in the company and the value we deliver. And we think it's a huge lever on our company's overall value. So we pay attention to it. We manage it and we're certainly happy in the Q1 out at the revenue level that we're guiding that we can already be in the 64% to 65% range. So look for us to keep driving that higher over time, but let's wait till analyst data to do a more extensive update on what we think we can do.
All right. Thank you.
Thank you. And our next question comes from John Pitzer with Credit Suisse. Your line is now open.
Yes, good afternoon guys. Thanks for letting me ask the questions. Congratulations Matt on the good start with Cavium. You did a good job kind of outlining the synergies from cost of COGS and OpEx. Wondering if you could talk a little bit more about kind of the icing on the cake, which is the revenue synergies.
How do you think or how do you see that playing out from sort of the lowest hanging fruit to some of the higher hanging fruit? And I guess as you answer the question, I'd love to kind of get sort of the customer reaction on the compute side of Cavium, ThunderX, ThunderX2, now that it's a part of your organization, a larger organization with perhaps more support?
Sure. So let me break that into 2 questions and I'll start with the revenue synergy, which really ties into the customer feedback since we've closed the transaction. And certainly, the fact that the customer base and the infrastructure market, right, whether that's cloud or hyperscale data center companies, the leaders in wireless base stations driving the 5 gs transition, our traditional strong enterprise customers, the feedback has been resoundingly positive. And I think what we're finding is a few examples where I mean, one I can give is one of our large networking customers where actually Cavium had more revenue and position than we did. We were chasing design wins there kind of for a few years, close the transaction, engage at the right level.
And I think on the basis of the hard work we put in, but also I think on the basis of the combined larger relationship, we were awarded sockets on products that we had never had before at that account. And so I think this and I think if you look at the switch products we have with our PHY technology plus the processor products from Cavium, we're seeing a lot of cross selling opportunities. So we're not quantifying the revenue synergies. I want to be clear on that. We've been sort of out the shoot saying, hey, any revenue synergy get would be on top of the growth targets that we've set.
But we certainly see strong leading indicators that this could definitely be 1 plus 1 equals more than 2 from that point of view. With respect to funder, probably helpful to comment on that as well. That's been an interesting evolution really even since we announced the acquisition from sort of us announcing supercomputing. If you remember last year in 2017, ThunderX2 had a very strong initial showing. Subsequently, if you look at it basically, the parts released to production, got strong customer traction.
We're shipping it now in production. And I think the customer base is looking to us and the ecosystem to really continue to support that effort because if you look at the leading benchmarking companies out there like a non tech and others, under X2 is performing extremely well on especially memory intensive applications versus Skylake. So that's an emerging business, but what I characterize it at right now is strong customer pull, parts out, release, it's a good product and we'll be happy to update you on that as we make progress there.
That's helpful, Matt. And maybe as my follow-up, just going back to the core Marvell storage business, clearly there's been some more mixed data points on the hard drive side of the market. I guess as you look out to your October guidance, is there any color you can give us as to how you're viewing hard drives versus SSDs? And can you remind us again kind of the mix benefit as more moves towards SSDs and or perhaps the ASP benefit as densities of platters go up within core HDDs?
Hi, John. Yes, when we look at our storage business, we're actually very pleased with the performance. Looking into Q3 when we guided, frankly, we continue to see our storage business to grow year over year, including both HDD and SSD business. SSD business definitely is growing double digit year over year. So overall, when we look at this, the momentum with our SSD business continues and we are pivoting more into the enterprise data center with both our SSD and HDD business.
So I think we're very pleased with our overall migration as a percentage of revenue, the enterprise data center become increasingly more. When we have our Investor Day, we'll definitely update you about the journey and the progress we have made during the last year and a half. So overall, we're pretty happy with Q3, how we look at the storage business. There's not much significant change from a momentum perspective.
And John, I'll just add, I think that was a great summary. Just to close on that, I think your part you mentioned around the HDD aerial density opportunity improvements that we could potentially help enable to drive help drive that market forward. We are very much pleased with our progress there. Our latest rechannel technology is, I think, going to help enable many new applications as HDDs in the cloud and data center for cold storage push up to higher and higher levels of capacity. And I think we're going to be at the leading at the forefront of enabling technologies like HAMR or MAMR or dual actuator.
Those are all opportunities for Marvell's differentiated IP and strength in the market to enable a very important part of what we think is going to be the for the cloud and hyperscale companies.
Thanks guys. Appreciate it.
Thank you. And our next question comes from Blayne Curtis with Barclays. Your line is now open.
Hey, thanks for taking my question.
Just going back to Cavium revenue, I think you've described it as multiple factors that caused the shortfall. You addressed the inventory portion.
I was curious if you
could just address some of the end market weakness like service provider as well as some of the new product forecasts versus actual revenue? And then kind of as you look forward here, can you just describe your level of confidence at this point in understanding all those moving pieces?
Sure, sure Blayne. So I'll give you my perspective on this and then Gene can add. So I'd say going back to the inventory question, the Cavium revenue. So if you think about it, the inventory that was built that was sort of you could you should imagine was running at a higher base of inventory than Marvell had run whether it was in the channel or in the end customer or quite frankly even in the factory. That was fairly broad based in nature because that's just how they ran their business.
So as we've now owned the company for 8 weeks and again trying to under our watch. I'd say the inventory now that's impacting the revenue is really around end market, which is primarily the service provider base station market, which is going through its own. It's lumpy to begin with. And then you layer on top this 5 gs transition, which from everything we're hearing is going to be meaningful next year and probably pull in certainly ahead of where people thought it would be a year ago. So I think that transition that's looming is causing some lumpiness.
And so the bulk of the remainder inventory to be consumed is really in that area that's primarily sitting in our OEM customers. But that's how I characterize if you start broad and you just sort of narrow it down to the $20,000,000 that's the way to think about it. And to the extent that we continue to be successful in service provider, there is going to be lumpiness in that business. I think everybody understands that. But
Yes. And also, we did say the X Blend and the Montelista, which we sold the business, those combined revenue impact, revenue run rate is probably about a little bit more than $20,000,000 a year. So that certainly is small, but it's some of the impact too.
Helpful. And then for Gene, just on
the OpEx, you're raising the range.
I think Cavium came in higher in the March quarter by about that much. I'm just kind of how do you think about the increased savings that you're getting? Is it just really the upside that CAGNY did? Or are you finding other areas? And then you had a higher range for a longer time period.
I'm just kind of curious if that still holds too off the 200?
Yes. I think our combined team, they did a great job to quickly integrate the R and D roadmap and also all the other different functions. So we the increase in the savings from more efficiency driving through the combination for the team to save more money on some of the investment areas and also on the SG and A support areas. So certainly, how we work through the process is we use the base run rate, the Cavium, as you mentioned, Q1 in 2018 and our last quarter run rate, that's the baseline, right? And then the team literally works through every line item, every work stream to drive the synergy achievement.
So $200,000,000 I would say across the board, the increase come from both R and D and SG and A areas.
Yes, but that's perfect. I just want to add one thing Blayne, which is, yes, Cavium OpEx ended up being higher in the March quarter as you mentioned. But when you go back and even when we go to our original models, right, we always had this $1,300,000,000 OpEx run rate that was going to be our target baseline, which is $325,000,000 a quarter. And as the year progressed, right, obviously Cavium's OpEx was higher, but then Marvell's as you can see even in our standalone results was 208. So while theirs came in high, ours came in actually lower.
We managed it pretty efficiently. So that $1,300,000,000 run rate actually is still the same. So we didn't said another way getting to $200,000,000 isn't because we were just resetting Cavium to whatever their level was. We looked at it as a combined run rate and that's for what it's worth hopefully that's helpful to help you think. That's helpful.
Thanks, Matt.
And our next question comes from Mark Delaney with Goldman Sachs. Your line is now open.
Yes. Thanks very much for taking the questions. First question is a follow-up on the synergies topic. Angie, thanks for all the clarity. But of the remaining OpEx synergies beyond this upcoming quarter, can you help us understand the linearity that you'd expect to achieve those?
Yes, that's a good question. So as all of you know, the system integration ERP integration typically takes 9 to 12 months. So there are a lot of synergy dollars that will be tied to 1 ERP, which typically will come off 4 quarters 3 or 4 quarters from now. So the way we're thinking about to help you model is the Q3 OpEx is going to be largely flattish at that level. Then the first half of fiscal 2020, you should see some step up because the payroll matching and the merit increase.
Then certainly, when ERP happens, you will see the step down to the run rate to what we talked about. Matt mentioned from 3.25 run rate before the close of the deal to in the end close to 2.90 run rate exiting Q4 2020.
Got it. That's helpful.
And then for a follow-up question on the HDD controller business, So one of your larger customers had announced a factory shutdown. And I know in the past, some of those factory shutdowns have led to some periods of inventory accumulation. And I don't know if that's anything that Marvell is seeing or able to quantify or something you think you might see in the upcoming quarters?
Yes. Mark, this is Matt. I'll take it. I think our perspective is the following. We've lived through many of these shutdowns in the 8 quarters I've been on the job here.
So this is nothing new in terms of managing through these transitions. Actually, I remember back at the Analyst Day we had in 2017, this had just gone on and the way that we managed it then and we're managing it now as you should think about that we have we're very plugged in with those companies in terms of understanding their inventory and their supply chains. And so we've comprehended any transitions that they have in their business and our forecast. I can't really comment more on what each of these companies is doing and the reasons for the details. But we're very aware of these things and we have a number of things that we do also to monitor inventory that's at the end customer level as well as their sell through.
And so we have a number of ways that we use we manage our forecasting environment sometimes when there's these transitions. So all I can say is we're aware of it, we've baked it in and it's part of our guide.
Thank you.
Thank you. Our next question comes from Joe Moore with Morgan Stanley. Your line is now open.
Great. Thank you. I wonder if you guys could talk about the China tariff situation. Do you see any impact that it's having on your customers either the first couple of waves or the waves that are coming? And I guess, do you see any risk of customers trying to accumulate inventory to sort of manage moving the geographic footprint around the world?
Thank you.
Sure. Joe, I'll take it. So yes, I'd say the first point just to make, I think you didn't ask it, but I'll just answer it, which is the tariffs themselves have really minimal to no impact on Marvell in terms of us manufacturing in China and then shipping parts here for consumption in the U. S. So the tariffs directly on us is not really an issue.
But as you point out, the bigger concern is what's the global impact of the tariffs on our customer base and does that drive different behavior. And certainly, we're concerned like everybody is about the global economic impact of the trade war escalating. I can't think of any specific issues related to customers that are telling us right now we're buying more inventory or we're taking less because of the tariffs, but we certainly know it's out there and it's going to to the extent that this becomes a larger global GDP issue, then certainly semiconductor companies will feel it. But I can't hold much more than that because I can't give you any direct commentary because we're not getting that when we do our demand pulses right now, but it may be out there.
Makes sense. Thank you very much.
Thank you. Our next question comes from Karl Ackerman with Cowen and Company. Your line is now open.
Good afternoon. Two questions, please. Matt and Jean, I wanted to go back to your comments on the synergy targets. Should we expect all of those cost savings to flow to the bottom line? Or are you looking to repurpose those monies into R and D within the core portfolio?
And I guess as a follow-up, as your portfolio has become more diverse, how do you prioritize R and D for your now very broad networking portfolio? Cavium's rule of thumb was half of sales growth. Is that still the right way to think about spending for your business? Thank you.
Okay. I'll take your question. Matt can add on the R and D resource allocation side. So as far as the synergy, our objective is we're targeting $200,000,000 run rate synergy and they're all going to flow through the bottom line. That part is clear.
There are certainly there's a timeline we just outlined how we're going to achieve that synergy, but our objective is to drive the earnings and the shareholder value there. As far as the R and D investment, frankly, Matt mentioned during his prepared remarks, we just went through our annual strategy and the portfolio review. That's the process that we look at all the different product lines to allocate the results among different product lines. So from investment dollar overall perspective, we feel we have the right investment. Matt probably can comment more on the process, how we look at the results allocation.
Sure, sure. I think happy to take that one. So I think the first comment I'd make is even if you go back to when as a standalone company, we went through our own transformation and we had our own plans there, which was $250,000,000 of OpEx reductions at that time. Actually, if you guys remember, we actually invested in key businesses during that time. So it was not just, hey, we're going to go take out cost and everybody suffers.
We use that opportunity as an example to increase our headcount and staffing in our SSD and networking areas. And I think we're seeing the benefit of that now paying off. And so the way we look at it is, Steve mentioned that's $200,000,000 obviously to the bottom line. But within that you should assume there's some add backs that are netted out meaning we're going to go deeper in some areas and we're going to add back in others. And we view this as one of the most important things we do in the company.
We have an annual review where and by the way, every company does this differently. As you mentioned, Cavium kind of had a high level way of doing it, take sales growth, cut it in half and higher to that. We have a I think a pretty rigorous approach to segmenting all of the investments we're making. So we actually have P and Ls now for all the Marvell businesses, all the Cavium businesses. We know what those businesses relative market shares are, their gross margins, their growth trajectories and ultimately what their operating margins are and their level of contribution to the company.
And then based on that, we make decisions about how we're going to fund those businesses, whether we need to reduce or transfer people or rehire in certain areas. And so even though we're going through our synergy achievement, we have a significant number of open recs in the company because we're hiring key talent in areas where we think we can grow. And we'll continue to do that and be good stewards of the R and D expense because we view that as the most critical resource we have. And so we deploy it in a very but we deploy it in a very thoughtful and data driven way that really should think of it as a combination of technical analysis on the products and their prospects as well as integrated with the financial analysis. And we've done we've actually empowered the engineering leaders in the company, the business unit leaders as well as my executive staff.
So we're looking at those as an integrated way to run the company. And so I know
it's a little bit of
a longer answer, but for those of you that might be new to the story that's been the playbook and we plan on continuing that on an ongoing basis.
Thank you very much.
Thank you. And our next question comes from Craig Ellis with B. Riley FBR. Your line is now open.
Thanks for taking the question and congratulations on the core Marvell performance in the quarter and appreciate all the financial information. The first question I had was on revenues, Matt, and it's really more of a long term question. As we look ahead to the fiscal Q4 when Cavium is back to a more normalized revenue level, if I understood you correctly, that's the base from which the company can proceed towards the 6% to 8% revenue growth target. So the question is, how long does it take to get there? And what are the 3 or 4 key things that need to happen for you to attain that goal on a sustained basis?
Great. Yes. So Craig, on the first part, you captured that correctly. At this time, that's our best assessment, which is take the Q4 revenue and then apply the growth rate to it and certainly having come off of our strategy review process where we just reviewed all these businesses. We reviewed their next 3 year outlook.
We reviewed how fast the market is growing and we'll give more details on Analyst Day. But from a market perspective, we see the end markets that we're targeting growing at least these kind of rates. And certainly, we think if we're being good managers, we should be able to do that or better. I think the high level I would just give you is you think about really we have 2 big businesses now that are really portfolios. There's a strong portfolio under each in storage.
I think the way to think about that one is, it's got 2 very strong cash flow businesses in there where we have significant market share and differentiation, but they're slower growing markets and those are flattish and those are HDD and fiber channel. And but if you layer in our SSD business and our flash business, which we really expanded from SSD controllers to really flash based solutions as seen in our FMS announcements, That business should continue to grow. So you can view your model thinking about it that way. And then within networking, if you just take a look at core Marvell networking is a pretty good proxy for what one can do in a networking business when you execute on R and D, you protect the right customers, you define the right products. We see that business continuing to grow, right, at double digits or greater.
And we also think about OCTEON and Fusion and the processor business from Cavium having a similar type of profile. And again, as I mentioned, some of those we're finding are more than we thought are actually in the same application. So I think the way to think about that is you've got those businesses, you've got our security business, which is making a transition to the cloud and there's been a number of announcements from large cloud providers on liquid security. So we see that as being a good growth business. And so the networking portion of the total should clearly grow faster than the storage.
But I think when you start running your own models and you'll have your own view based on end markets and what they're doing and based on our own kind of product line by product line view, we think that those targets we set are very achievable and we're going to drive the company hard to go do that.
Thanks for that. And then the follow-up question goes back to comments that you've made on prior calls. You've expressed strong interest in returning to cash return via share buyback. Gene outlined debt pay down of $100,000,000 per quarter beyond the current quarter. So in light of debt pay down, when do you expect you can return to share buyback?
And Gene, if I could sneak one in for you since every client will be asking it tomorrow. What's the timeline to quarterly earnings accretion on the former Cavium business? It doesn't look like we'd be getting that in the fiscal Q3, but can we expect that in the fiscal Q4? Thanks very much, team.
Hey, two questions, right? So the first one on the cash return, certainly we want to target 1.5 times gross debt to EBITDA ratio. So we do want to pay down the debt quickly. However, the combined company is going to generate a very significant amount of cash flow, right. So we do see we should be able to start to consider buyback once we get to 1.5 times the ratio, which should happen quickly.
Our overall view, we'll share more about the capital allocation during our Investor Day. But overall, the strong cash flow generation, we should be able to deploy capital in a way benefit the shareholder the most going forward, buyback certainly is well for the tools element we're going to focus on to. So that's your first question. 2nd question on accretion, certainly, right, I think if you look at the Q3, as we mentioned earlier, we are resetting in Cavium side of the revenue to make sure their process is aligned with our processes, so we can be more efficiently run the combined business going forward. We do expect the accretion in fiscal 2020.
And frankly, if we diligently manage our $200,000,000 synergy achieving plan and also really drive top line revenue growth, we do see double digit accretion when we get to exiting fiscal 'twenty. So we are very optimistic about our capability to run the business. As you know, we have the track record as a company to really drive the efficiency and also drive the top line revenue growth.
Thanks, Matt. Thanks, Jean.
Thank you. And our next question comes from Quinn Bolton with Needham and Company. Your line is now open.
Hi, Matt and Jean. Thank you for the all the detail on Cavium. Just wanted to come back with that you had sold the Monte Vista business, but can you say what have you done with the Xpliant business?
Sure. I can take that. So hi Quinn. Yes, so on client that product line and team and critical IP have been largely integrated into the Marvell switching team. So as you guys know, we have a large successful switching group inside of Marvell.
There was a lot of discussion and integration planning on R and D on how to take the roadmap forward. And I think based on it was joint decision between Cavium team and Marvell team that everybody agreed that the Prestera architecture, our ROS that we provide was the right way to go. And so we're going to drive that one forward. So that business has now been folded in. Clearly, there's some revenue headwind on the expliant piece as we mentioned, because once this was even once actually the acquisition was even announced, I mean, I think customers who were looking at both sort of were wondering and that definitely had a pause and that is resulting in some of those design wins probably ramping down faster than we thought and certainly not getting new ones during this time frame.
So, Gabion, as Gene mentioned, Monte Vista plus Explyant is about $20,000,000 a year run rate. Monte Vista is out and expliant will wind down, although we'll support it. Any customer that's designed it in or was in the process of designing it, we're going to support them with our larger engineering team. But that's how you should think about Xpliant. It's not a standalone business anymore.
It's just run as part of Marvell switching.
Great. And then a follow-up, at Analyst Day for the core more Vel storage business. I think you were targeting about a 3% growth rate for that business on a both combined HDD, STD. As you bring in the fiber channel business from Cavium, does that 3% CAGR change at all?
So we'll give you an update on our upcoming Analyst Day, but it should not change much, right? Matt just mentioned both HDD and the fiber channel, they're mature business. They generate a tremendous cash flow and we are going to drive the business to grow flattish with the market as both of those businesses. So we'll share more during our Investor Day about the prospect of storage business.
Yes, I think that's the right forum. If you go back to the last one, a lot changed from now to then, right? I think SSB has significantly outperformed sort of where we thought it would be back then as a market in our own business. And I think Marvell storage overall has actually done better than we thought. So I think that's the right forum.
We'll have more time under our belt and we can give you the full view of storage portfolio, but
Great. Thank you.
Thank you. This concludes today's Q and A session. I would now like to turn the call back over to Ashish Sharan for closing remarks.
Thank you everyone for joining us today and we look forward to talking to you all again next quarter. Thank you and goodbye.
Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program. You may all disconnect. Everyone have a great day.