Good day, ladies and gentlemen, welcome to the Second Quarter 2019 Marvell Technology Group Ltd. Earnings Conference Call. Now I'd like to turn the call over to Ashish Saran, VP of Investor Relations. Sir, you may begin.
Thank you. Good afternoon, everyone. Welcome to Marvell's second quarter 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 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 Form 10-K and Form 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 four weeks before the end of our second fiscal quarter. Therefore, the results we reported today for the second quarter 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 second quarter 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 second quarter 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 Jean's second quarter commentary will primarily focus on the results from the 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 third quarter 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 three 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 third quarter outlook and going forward, we will be changing the structure and composition for revenue reporting. We will categorize and report revenue by two core businesses: storage and networking.
The new storage business will include Cavium's Fibre Channel products in addition to all the prior Marvell storage product lines. The new networking business will include Cavium's embedded processor, security processor, and Ethernet connectivity products, in addition to all the prior Marvell networking products. 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 mirrors how the majority of our peers and customers already report as well.
We will of course, continue to report and comment on actual results by business and will also provide 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. Good afternoon to all of you on the call, and thank you for joining us today. I'll start with a summary of our second quarter GAAP results for the combined company. Revenue for the combined company was $665 million, GAAP gross margin was 56.7%, and earnings per diluted share was $0.01. I'm now gonna review standalone Marvell non-GAAP results, excluding those of Cavium. Jean will provide third 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 two businesses.
Together, we are on our way to becoming an infrastructure solutions leader. Marvell's standalone revenue for the second quarter came in above the midpoint of our guidance at $624 million, 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 second quarter was 30.1%, up 4.3 percentage points from a year-ago.
I'm very pleased to report that we have achieved this target six quarters earlier than we originally projected at our last Investor Day in March 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 million, growing 3% year-over-year. We continue to offset secular declines in client HDD through two efforts. First, we are growing our position in the nearline segment of the HDD market, which is fueled by continued demand for data storage in the cloud. Second, 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. 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 three new storage architecture solutions based on emerging NVMe over Fabrics 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 million 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. We also continued to ramp Ethernet switch products into wireless base stations. 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. 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 million declined 11% year-over-year in this quarter. Please note that we completed our transition away from the older gaming connectivity product during the second quarter. In contrast, the rest of our connectivity portfolio grew year-over-year in the second quarter 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 two-plus years of Marvell's own transformation. All of this experience and planning is now paying off with rapid and efficient integration occurring across our sales, engineering, operations, and G&A teams.
For example, in the first two months since closing the acquisition, we have already integrated the XPliant and ARMADA roadmaps into their respective R&D teams. We also quickly realigned Cavium's business processes and infrastructure with Marvell's, including robust forecasting, budgeting, project reviews, and establishing P&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&D investments. One of the key changes we instituted on day one was applying Marvell's disciplined revenue and sales processes to the Cavium businesses. We believe that these actions will provide significant long-term benefits, including a more predictable business, 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%-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 million to $175 million outlook to $200 million by the end of fiscal 2020 on a run rate basis.
As Jean will discuss later, our combined third 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 have also completed our annual strategic portfolio review to prioritize R&D resource allocation to maximize future growth and profitability. As a result, we have begun shifting resources to areas with higher return potential and de-emphasizing investments in lower ROI products. For example, we completed the sale of Cavium's MontaVista Software product line and have quickly converged roadmaps in switching and embedded processors. Our future switch development will be based on Marvell's Prestera product line, and we will be focusing our embedded processor efforts through Cavium's industry-leading OCTEON products.
We'll, of course, continue to support customers who are currently using Cavium's XPliant Switch products and Marvell's ARMADA embedded processors. Before I turn the call over to Jean, 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 16th in New York City. With that, let me turn the call over to our CFO, Jean Hu, for more details on our second quarter financial performance and our outlook for the third quarter.
Thanks, Matt, and good afternoon, everyone. I'll start with our GAAP results for the second quarter for the combined company. Please note our GAAP results include the impact of purchase price accounting items, amortization of intangibles, acquisition and integration related to non-recurring expenses, as well as the stock-based compensation. Revenue was $665 million. Gross margin was 56.7%. Operating expenses were $385 million. Operating loss was $8 million, and earning per diluted share was $0.01. Turning to our combined balance sheet. I want to note that the inventory at the end of second quarter was $473 million, which include the impact of stepping up Cavium's inventory by $223 million due to purchase price accounting.
We amortized $23 million of this step-up into COGS in the second quarter, and we anticipate amortizing the remaining balance by the end of the fourth quarter of fiscal 2019. Please note our non-GAAP results exclude the amortization of inventory step-up charges. We exit the quarter with $524 million in cash and short-term investment. Our long-term debt was $1.9 billion and currently carry a blended interest rate of 4.3%. Our gross debt to EBITDA ratio was 2x, and the net debt to EBITDA ratio was 1.4x based on a combined pro forma EBITDA. We currently expect to start paying down the debt this quarter and anticipate stepping up the paydown rate to approximately $100 million per quarter starting fiscal 2020.
As a result, we believe we can quickly get to our targeted ratio of 1.5x gross debt to EBITDA. In the second quarter, we distributed $39 million to shareholders in dividend. I will now move on to standalone Marvell non-GAAP results for the second quarter for fiscal year 2019. As Ashish had noted, we are providing standalone Marvell results on a one-time basis on this quarter because our previously provided financial outlook for the second quarter exclude any impact of the Cavium acquisition. Reconciliation of our standalone and combined performance as well as GAAP to non-GAAP results are available in our press release. Standalone Marvell revenue in the second quarter was $624 million, 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 a resumption of a shipment to ZTE pathway 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 it declined 5% year-over-year, consistent with our expectations.
Non-GAAP gross margin was 63.5%, a record level for Marvell, and increased over 2.3 percentage points from last year. Non-GAAP operating expenses were $208 million, declined 3% year-over-year, while we simultaneously delivered a 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 middle point of our guidance range. Before I go to our third quarter outlook, I would like to spend a moment discussing Cavium's recent revenue run rate and also provide some guidance about our $200 million cost synergy achievement plan. Cavium's revenue run rate before we closed the acquisition and its contribution of $41 million to our second fiscal quarter during the weeks after closing the acquisition was well below expectations.
The primary reason for this was a large inventory reduction at 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 typically been in the range of two to two and a half months, and our distributor inventory had been in the same range too. Cavium's revenue was also impacted by softer demanding environment among some service providers, as well as the decision to sell Cavium's MontaVista product line and the roadmap consolidation for Cavium's XPliant Switch product. Also, it's worth noting Cavium typically had fairly non-linear revenue generation through their fiscal quarter, with a relatively low level of revenue in the first month of their fiscal quarter, which was the last month of our fiscal quarter.
The Marvell and Cavium teams have worked together to quickly integrate our forecasting supply chain and the demand fulfillment processes. We believe Cavium's revenue bottomed out due to inventory reduction and acquisition-related impact during our fiscal second quarter, and we are forecasting a recovery in the third quarter. We're currently projecting strong sequential growth from Cavium in the fourth quarter, anticipating that the inventory reduction will completely flushed out in the third quarter. We believe from the combined company base in the fourth quarter for fiscal 2019, we can drive long-term revenue growth to our target of 6%-8% annually. Turning to our synergy achievement plan, which we have raised to $200 million. 25% of the synergies will come from COGS, which typically take about six months to start to take effect.
The balance, $150 million of synergy, will benefit operating expenses. Based on combined pro forma operating expense run rate of $1.3 billion before the close of the transaction, the middle point of our third quarter outlook bakes in realization of $90 million 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 third quarter of fiscal 2019, which include the full quarter of Cavium contribution. We expect our total revenue to be in the range of $825 million-$865 million.
At the middle point of this outlook, we expect approximately $210 million of revenue contribution from ongoing Cavium businesses. This expectation for Cavium revenue assumes approximately $20 million of excess customer and distributor inventory to be consumed in the third quarter. We believe that exiting the third quarter, 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 includes the Cavium's LiquidSecurity 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 the Cavium's embedded processors, security processor, and Ethernet connectivity products, in addition to all the prior Marvell networking and the Wi-Fi connectivity product.
We expect other revenue at the midpoint of our guidance to be approximately 6% of total revenue. Our expected GAAP growth margin will be in the range of 44%-45%, and the non-GAAP growth margin will be in the range of 64%-65%. We expect GAAP operating expenses to be approximately $390 million-$400 million, and the non-GAAP operating expenses to be in the range of $300 million-$305 million. 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 two companies' international tax structure. We expect our interest expense to be around $20 million. We expect a diluted share count of 670 million shares.
As you know, our share count increased from a prior quarter due to the 153 million 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 increasing total share count. We anticipate GAAP loss per diluted share in the range of $0.04-$0.08 and non-GAAP income per diluted share in the range of $0.13-$0.34. We're now ready for your questions. 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 1 key on your touch-tone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. Due to time constraints, we ask that you please limit yourself to one question and one follow-up. To prevent any background noise, we ask that you please place your line on mute once your question has been stated. Our first question comes from Ross Seymore with Deutsche Bank. Your line is now open.
Thanks, guys, for letting me ask a question. Jean, 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 million to the 210 that you're guiding to in October, you'd still be down kinda high single digits year-over-year. Can you just talk about what you think that Cavium revenue growth rate can be off of that base and kind of the 235-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 if she'd like to. Yeah, the way to think of it is, you know, we're guiding $210 for Q3. You know, to the best of our knowledge in the analysis we've done, you know, there's $20 million that'll still get consumed, you just should assume a $230 million 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, you know, primarily, you know, you can attribute to inventory.
You know, obviously that, you know, we're now going back sort of a year in time, reconstructing that in, you know, infinite detail is challenging. What we do know is when we look through at the current set of customers now that we've got Cavium, you know, under the Marvell umbrella, we look at the channel inventory and customer inventory and demand patterns, we feel very confident that, you know, we'll exit Q3 with inventory overall normalized to the Marvell levels.
Great. 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 first quarter in a while you hadn't highlighted what SSDs were as a % of the business. Can you just give us an update on how that segment of your storage business is ramping?
Sure. Sure, Ross. No problem. Yeah, I think, you know, we're adjusting here to having a much broader portfolio of products to talk about. With respect to SSD, you know, that business continues to perform well. You know, we've seen multi-years now of, you know, pretty strong compounded annual growth in that business. With respect to, you know, I won't comment specifically on pricing or, you know, we're not sort of the barometer on demand and pricing. Certainly, you know, I think it's widely reported that supply continues to come free, and I think to that extent, that's gonna be good for certainly people that supply into this market, including us.
I'd also add that, you know, on top of all that, you know, our progress and effort to really grow our presence in the enterprise and data center segment of SSD continues to make very good progress. I think as you know, we head to Analyst Day plus, you know, future calls when we have sort of the Cavium ins and outs settled, we can continue to give you more color there. We still see, you know, strong business in SSD for the company.
Great. Thank you.
Thank you. Our next question comes from Vivek Arya with Bank of America.
Thanks for taking my question, and good to see the Cavium results integrated and 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 million baseline, or can it be stronger than that? I'm just trying to see what a normal Cavium contribution quarter looks like.
Yeah, I think I'll focus it to, just to be specific what I said, which was, again, normally we wouldn't lean out, you know, kind of two quarters out. That's never been our practice, but given the circumstances, we felt we needed to give some color there. Yeah, I think the way just to read it very simply is take the $210, you know, assume that's the run rate, add $20 back, and $210 going to $230 is a baseline to think about. You know, obviously we're not guiding that formally, and we've got to see how the business does during that timeframe. 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.
That's really the growth we're talking about, you know, $210-$230.
Got it. For my follow-up, Matt, good job on gross margins. You know, you're kinda close to the 65% or so pro forma target. I recall that when you gave that target, Marvell's organic margins were 61%, but now they are 63.5%. Is it possible that longer term you could perhaps, you know, do better than the pro forma targets you had outlined before?
Yeah, thanks, Vivek. I think, if you go back to when we announced the transaction, you're right. We said 65 was our long-term target. At that time, you know, we were in that range. We've been very pleased, right, with the performance of core Marvell since we announced this. That business has strengthened on revenue, it's strengthened on gross margin and operating income. That's been a nice tailwind heading into the closing of Cavium. You know, we're certainly not ready to update our targets at this point, although we have an Analyst Day coming up.
You should assume that the, you know, one of the guiding principles I think that I've infused in the company over the last two 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, it's a huge lever on our company's overall value. We pay attention to it, we manage it, and we're certainly happy in the first quarter out, you know, at the revenue level that we're guiding, that we can already be in the 64%-65% range. Look for us to keep driving that higher, you know, over time. Let's, let's wait till Analyst Day to do a more extensive update on what we think we can do.
All right. Thank you.
Thank you. Our next question comes from John Pitzer with Credit Suisse.
Yeah, good afternoon, guys. Thanks for letting me ask some 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 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? I guess as you answer the question, I'd love to kinda 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. Let me break that into two questions, and I'll start with the revenue synergy, which really ties into the customer feedback since we've closed the transaction. Certainly, you know, the fact that, you know, the customer base and the infrastructure market, right? Whether that's cloud or hyperscale data center companies, you know, the leaders in wireless base stations driving the 5G transition, our traditional strong enterprise customers, the feedback has been resoundingly positive. I think what we're finding is a few examples where, you know, I mean, one I can give is, you know, one of our large networking customers, where actually Cavium had more revenue and position than we did. You know, we were chasing design wins there, you know, kinda for a few years.
Closed the transaction, engaged at the right level. I think on the basis of the hard work we put in, but also I think on the basis of the combined larger relationship, you know, we were awarded sockets on products that we had never had before at that account. 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. We're not quantifying the revenue synergies. I wanna be clear on that.
We've been sort of out the chute saying, "Hey, any revenue synergy you get would be on top of the growth targets that we've set." We certainly see strong leading indicators that, you know, this could definitely be, you know, one plus one equals more than two from that point of view. With respect to Thunder, probably helpful to comment on that as well. That's been an interesting, you know, you know, 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. You know, subsequently, if you look at it, basically the parts released to production, got strong customer traction. We're shipping it now in production.
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 AnandTech and others, ThunderX2 is performing extremely well on especially memory-intensive applications versus Skylake. That's a, you know, an emerging business, but what I'd characterize it at right now is strong customer pull, parts out, released. It's a good product. You know, we'll be happy to update you on that as we make progress there.
That's helpful, Matt. 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 if 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? Can you remind us again kind of the mixed benefit as more moves towards SSDs and/or perhaps the ASP benefit as densities of platters go up within core HDDs?
Hi, John. yeah, 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. You know, SSD business definitely is growing double-digit year-over-year. 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. I think, we're very pleased with our overall, like, migration as a percentage of revenue, the enterprise data center become increasingly more. You know, 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. Overall, we are pretty happy with Q3, how we look at the storage business. There's not much significant change from a, you know, momentum perspective.
John, I'll just add, I think that was a great summary. Just to close on that, I think the part you mentioned around the HDD, you know, aerial density opportunity improvements that we could potentially help enable to help drive that market forward. You know, we're very much pleased with our progress there. You know, our latest read channel technology is, I think gonna 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. I think we're gonna be at the leading, you know, 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 gonna be the for the cloud and hyperscale companies.
Thanks, guys. Appreciate it.
Thank you. Our next question comes from Blayne Curtis with Barclays.
Hey, thanks for taking my question. Just going back to the 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, you know, some of the new product forecasts versus, you know, actual revenue. Then kinda 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. I'll give you my perspective on this, and then Jean can add. I'd say, going back to the inventory question, the Cavium revenue, if you think about it, the inventory that was built, that was sort of, 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.
As we've now owned the company for eight weeks, trying to, you know, 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, you know, base station market, which is going through its own lumpy to begin with. Then, you know, you layer on top this 5G transition, which from everything we're hearing, is going to be meaningful next year and probably pull in, you know, certainly ahead of where people thought it would be a year ago. I think that transition that's looming is causing some lumpiness. The bulk of the remainder inventory to be consumed is really in that area, and that's primarily sitting in our OEM customers. That's how I characterize it.
If you start broad and you just sort of narrow it down to the $20 million, that's the way to think about it. 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.
Yeah. also, Blayne-
Thanks, Jean.
We did say, you know, the XPliant and MontaVista, which we sold the business, those combined revenue impact revenue run rate is probably about, you know, a little bit more than $20 million a year. That certainly is small, but it's some of the impact too.
Helpful. For Jean, just on the OpEx, you're raising the range. I think, you know, Cavium came in higher in the March quarter by about that much. I'm just kinda, how do you think about the increased savings that you're getting? Is it just really the upside that Cavium did, or are you finding other areas? You had a higher range for a longer time period. I'm just kinda curious if that still holds true off the $200.
Yeah. I think our combined team, they did a great job to quickly integrate the R&D roadmap and also all the other different functions. Certainly, we see the increase 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&A support areas. Certainly, how we work through the process is, you know, we use the base run rate, the Cavium, as you mentioned, Q1 in 2018, and our, you know, last quarter run rate. That's the baseline, right? The team literally work through every line item, every work stream to drive the synergy achievement. $200 million, I would say across the board, the increase come from both R&D and SG&A areas.
That's perfect. I just want to add one thing, Blayne, which is, yes, Cavium OpEx, you know, ended up being higher in the March quarter, as you mentioned. When you go back and even when we go to our original models, right, we always had this $1.3 billion OpEx run rate that was going to be our target baseline, which is $325 million a quarter. You know, as, you know, the year progressed, right, obviously Cavium's OpEx was higher. Marvell's, as you can see, even in our standalone results, you know, was $208 million. While theirs came in high, ours came in actually lower. We managed it pretty efficiently. That $1.3 billion run rate actually is still the same.
We didn't set another way. Getting to 200 isn't because we were just resetting Cavium to whatever their level was. We looked at it as a combined run rate. That's just for what it's worth, hopefully that's helpful to think, help you think about it.
That's helpful. Thanks, Matt.
Thank you. Our next question comes from Mark Delaney with Goldman Sachs. Your line is now open.
Yes, thanks so much for taking the questions. First question is a follow-up on the synergies topic. Jean Hu, thanks for all the clarity. Of the remaining OpEx synergies, beyond this upcoming quarter, can you help us understand the linearity that you'd expect to achieve those?
Yeah, that's a good question. As all of you know, the system integration, ERP integration typically takes nine to 12 months. There are a lot of synergy dollars that will be tied to one ERP, which typically will come off for, you know, four quarters, three or four quarters from now. The way we're thinking about or to help you model is, you know, the Q3 OpEx is going to be largely flattish at that level. The first half of fiscal 2020, you should see some step up because the payroll matching and the merger increase.
Certainly when ERP happens, you will see the step-down to the run rate, what we talk about is, you know, Matt mentioned from $325 run rate before the close of the deal to in the end close to $290 run rate, accessing Q4 2020.
Got it. That's helpful. Then, for a follow-up question on the HDD controller business, 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. I don't know if that's anything that Marvell is seeing or able to quantify or is something you think you might see in the upcoming quarters.
Yeah, no, Mark, this is Matt. I'll take it. I think, you know, our perspective is the following. You know, we've lived through many of these shutdowns in the eight 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. You know, the way that we managed it then and we're managing it now is you should think about that we're very plugged in with those companies in terms of understanding their inventory and their supply chains. We've comprehended any any transitions that they have in their business in our forecast.
I can't really comment more on what each of these companies is doing and the reasons for and the details, but we're very aware of these things. You know, 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. We have a number of ways that we use, you know, we manage our forecasting in environment sometimes when there's these transitions. 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. 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, you know, the first couple waves or the waves that are coming? I guess, you know, do you see any risk of customers trying to accumulate inventory to sort of manage, moving a geographic footprint around the world? Thank you.
Sure. Joe, I'll take it. Yeah, I'd say the first point just to make, I think you didn't ask it, but I'll just answer it, which is, you know, the tariffs themselves have really minimal to no impact on Marvell in terms of us, you know, manufacturing in China and then shipping parts here for consumption in the U.S. The tariffs directly on us is not really an issue. 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. Certainly, we're concerned like everybody is about the global economic impact of the trade, you know, 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. We certainly know it's out there, and to the extent that this becomes a larger, you know, global GDP issue, then certainly semiconductor companies will feel it. I can't help 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. 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, you know, 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? Are you looking to repurpose those monies into R&D within the core portfolio? I guess as a follow-up, you know, as your portfolio has become more diverse, how do you prioritize R&D for your now very broad networking portfolio? You know, 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&D resource allocation side. As far as the synergy, our objective is, we're targeting $200 million run rate synergy, and they are all going to flow through the bottom line. That part is clear. You know, there certainly there's a timeline. We just outlined how we're going to achieve that synergy, our objective is to drive the earnings, and the shareholder value there. As far as the R&D investment, frankly, you know, Matt mentioned during his prepared remark, we just went through our annual strategy and the portfolio review. That's the process. We look at all the different product lines to allocate the results among different product lines. 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 resource allocation.
Sure. I think, happy to take that one. I think the first comment I'd make is even if you go back to when, you know, as a standalone company, we went through our own transformation, and we had our own plans there, which was, you know, $250 million of OpEx reductions at that time. Actually, if you, if you guys remember, we actually invested in key businesses during that time. It was not just, "Hey, we're gonna go take out cost, and everybody suffers." We used that opportunity as an example to increase our headcount and staffing in our SSD and networking areas. I think we're seeing the benefit of that now paying off.
The way we look at it is, as Jean mentioned, that's $200 million obviously to the bottom line. Within that, you should assume there's some add backs that are netted out, meaning we're gonna go deeper in some areas, and we're gonna add backs back in others. We view this as one of the most important things we do in the company. We have an annual review where. By the way, you know, every company does this differently. As you mentioned, Cavium kind of had a high level way of doing it. You know, take sales growth, cut it in half and higher to that. You know, we have, I think a pretty rigorous approach to segmenting all of the investments we're making.
We actually have P&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. Based on that, you know, we make decisions about how we're gonna fund those businesses, whether we need to reduce or transfer people or rehire in certain areas. You know, even though we're going through our synergy achievement, you know, 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.
We'll continue to do that and be, you know, good stewards of the R&D expense 'cause we view that as the most critical resource we have. We deploy it in a very thoughtful and data-driven way that really you should think of it as a combination of technical analysis on the products and their prospects as well as integrated with the financial analysis. We've actually empowered, you know, the engineering leaders in the company, the business unit leaders, as well as my executive staff. We're looking at those as an integrated way to run the company.
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. Our next question comes from Craig Ellis with B. Riley FBR. Your line is now open.
Yeah, 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 fourth quarter when Cavium's back to a more normalized revenue level, if I understood you correctly, that's the base from which the company can proceed towards the 68% revenue growth target. The question is: How long does it take to get there, and what are the three or four key things that need to happen for you to attain that goal on a sustained basis?
Great. Yeah. Craig on the first part, you captured that correctly. You know at this time that's our best assessment which is take the Q4 revenue and then apply the growth rate to it. Certainly having come off of our strategy review process where we just reviewed all these businesses, we reviewed their next three-year outlook. We reviewed how fast the market is growing, and we'll give more details on Analyst Day. From a market perspective, you know, we see the end markets that we're targeting growing at at least these kind of rates. 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 we have two big businesses now that are portfolios. There's a strong portfolio under each. In storage, you know, I think the way to think about that one is it's got two very strong cash flow businesses in there where we have, you know, Significant market share and differentiation, but they're slower-growing markets, or flattish, and those are HDD and Fibre Channel. If you layer in our SSD business and our flash business, which we've really expanded from SSD controllers to really flash-based solutions, as seen in our FMS announcements, that business should continue to grow. You can do your model thinking about it that way.
Then within networking, if you just take a look at core Marvell networking as a pretty good proxy for what one can do in a networking business when you execute on R&D, you attack the right customers, you define the right products. We see that business continuing to grow, right, at double digits or greater. And, you know, 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.
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 LiquidSecurity. We see that as being a good growth business. The networking portion of the total should clearly grow faster than the storage. I think when you start running your own models and you'll have your own view, you know, based on end markets and what they're doing and based on our own kind of poor product line by product line view, we think that those targets we set are very achievable, and we're gonna drive the company hard to go do that.
Thanks for that. 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. Jean outlined debt paydown of $100 million per quarter beyond the current quarter. In light of debt paydown, when do you expect you can return to share buyback? Jean, 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 would be getting that in the fiscal third quarter, but can we expect that in the fiscal fourth quarter? Thanks very much, team.
Hey, two questions, right?
Yes, mm-hmm.
The first one on the cash return, certainly, you know, we want to target 1.5x growth as EBITDA ratio. 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? We do see, we should be able to start to consider buyback once we get to 1.5 x the ratio, which should happen quickly. Our overall view, we'll share more about the capital allocation during our Investor Day. Overall, the strong cash flow generation, we should be able to deploy capital in a way benefit shareholder the most going forward. Buyback is certainly one of the tools, element we're going to focus on too. That's your first question.
Second question on accretion, certainly, right, if you look at the Q3, as we mentioned earlier, you know, we are resetting Cavium side of the revenue to make sure, you know, 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. Frankly, you know, if we diligently manage our $200 million synergy achieving plan and also really drive top-line revenue growth, we do see double-digit accretion, you know, when we get to accessing fiscal 2020. We are very optimistic about our capability to run the business. As you know, we have the track record as the company to really drive the efficiency and also drive the top-line revenue growth.
Thanks, Matt. Thanks, Jean.
Thank you. Our next question comes from Quinn Bolton with Needham & Company. Your line is now open.
Hi, Matt and Jean. Thank you for all the detail on Cavium. That you had sold the MontaVista business, but can you say what have you done with the XPliant business?
Sure. I can take that. Hi, Quinn. Yeah, on XPliant, that product line and team and critical IP have been largely integrated into the Marvell switching team. As you guys know, we have a large, you know, successful switching group inside of Marvell. You know, there was a lot of discussion and integration planning on R&D on how to take the roadmap forward. I think based on, it was a joint decision between Cavium team and Marvell team that everybody agreed that the Prestera architecture, you know, our ROS that we provide was the right way to go. We're going to drive that one forward. That business has now been folded in.
Clearly, there's some revenue headwind on the XPliant piece, as we mentioned, because, you know, 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 timeframe. You know, Cavium, as Jean mentioned, MontaVista plus XPliant, you know, is about $20 million a year run rate. MontaVista is out and XPliant will wind down, although we'll support it. Any customer that's designed it in or is in the process of designing in, we're gonna support them with our larger engineering team.
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. A follow-up, at Analyst Day, for the core Marvell storage business, I think you were targeting about a 3% growth rate for that business on a both combined HDD, SSD. As you bring in the Fibre Channel business from Cavium, does that 3% CAGR change at all?
We'll give you an update on our upcoming Analyst Day. It should not change much, right? Matt just mentioned that, you know, both HDD and the Fibre Channel, they're mature business. You know, they generate a tremendous cash flow and we are going to drive the business, you know, to grow or flat-ish with the market as both of those businesses. We'll share more during our Investor Day about the prospect of our storage business.
Yeah, I think that's the right forum. You know, if you go back to the last one, a lot changed from now to then, right? I think SSD has significantly outperformed sort of where we thought it would be back then as a market and our own business. I think Marvell Storage overall has actually done better than we thought. I think that's the right forum. We'll have more time under our belt, and we can give you the full view of the storage portfolio.
Great. Thank you.
Thank you. This concludes today's Q&A session. I would now like to turn the call back over to Ashish Saran 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.