Ladies and gentlemen, thank you for standing by. Good morning, and welcome to the Marvell and Cavium Conference Call. Today's call is being recorded on November 20, 2017. After the speakers' prepared remarks, there will be a question and answer session. We ask that you please limit yourself to one question.
I would now like to turn the call over to Mr. Peter Andrew, Vice President of Treasury and Investor Relations for Marvell. Mr. Andrew, please go ahead.
Thank you very much. Before we start, I'd like to remind you that comments today regarding the benefits of the transaction, the anticipated timing of the transaction and the products and markets of each company are forward looking statements that we make pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements are made based on management's current knowledge and assumptions about future events, and they involve risks and uncertainties that could cause actual results to differ materially from our expectations. For additional information on the important factors that could affect these expectations, please see our most recent Form 10 Q and other filings made with the Securities and Exchange Commission. Please note that following communication is not an offer to sell or a solicitation of any offer to buy any securities or a solicitation of any votes for approval.
We urge investors to read the registration statement on Form S-four containing a prospectus and joint proxy statement and all other relevant documents filed with the SEC or sent to stockholders as they become available. Finally, there is a presentation available on our transaction website at marvelcavium. Transactionannouncement.com. A link is also available in the press release. So with that, let me now turn the call over to Marvell's President and CEO, Matt Murphy.
Great. Thank you, Peter, and good morning to
everybody, and thanks for joining the call today, especially for those of you who are on the West Coast, I know it's very early. Before we get to the primary reason for today's call, I want to share preliminary financial results for Marvell's 3rd fiscal quarter of 2018. We expect Q3 revenue to be between $610,000,000 $620,000,000 above the midpoint of the guidance we provided in August. Non GAAP earnings per share is expected to be in the range of $0.32 to $0.34 also above the midpoint of our guidance. Our strong performance in Q3 is a direct result of the continued growth in our core businesses and improved execution across the entire company.
We will share more details about these results on November 28 during our regularly scheduled Q3 earnings call. But now for today's big news, I'm excited to be here with the co founders of Cavium, Syed Ali and Rajiv Hussain. Marvell and Cavium today announced the signing of a definitive agreement unanimously approved by both companies' Boards of Directors under which Marvell will acquire all outstanding Cavium shares in a cash and stock transaction. Once fully integrated, the product portfolios and teams from the combined companies will create an infrastructure solutions powerhouse. This day has been a long time coming.
Ben and I first met 10 years ago. Over the years, we've kept in touch through various industry channels. Recently, after I joined Marvell, we began exploring the possibility of a collaboration between Marvell and Cavium on joint customer solutions. As we got to know each other and our strategies going forward, it quickly became clear that the potential of our 2 companies combined could far surpass what each of us could do individually. Syed, Will, would you like to add?
Thank you, Matt, and good morning, everyone. This is an incredibly exciting day for Cavium and also for me personally. Since founding Cavium, we have been focused on building a leading infrastructure semiconductor company by continually delivering innovative products and growing our footprint from networking to processing to storage. We have developed an incredible portfolio of products, IP and customer base across the entire infrastructure landscape that has helped drive strong growth over the years. I strongly believe the combination of Cavium's Marvell accelerates this vision and creates tremendous opportunities for Cavium shareholders, customers and employees.
For Cavium employees, the scale of the combined company will present new and exciting career opportunities and more chances to create industry leading products in technology. The combined product portfolio addresses the evolving needs of all the major infrastructure markets. In addition, the combined company will have the most comprehensive solutions for the high growth data center markets. The 2 companies have a very similar engineering driven culture that values and rewards innovation. We are looking forward to joining the talented team at Marvell, where we will design the next generation of networking, processing and storage solutions for data center, enterprise and service provider customers.
The implied value of the consideration represents a meaningful upfront premium to our recent undisturbed trading. In addition to the cash component at closing, Cavium shareholders will receive approximately half of their consideration in the stock of a combined company that is much better positioned to drive shareholder value than either company
been we look we took a deeper look at their business. We saw how it well aligned with the market and our products and it was clear that we could create something special together, which is why we're here today. For those of you following along on the website and the presentation, I'll start with Slide 3, strategic rationale. Combining Marvell and Cavium into one company makes sense for many reasons. 1st, we have complementary portfolios and together we have the scale to enable world class end to end solutions.
2nd, this transaction meaningfully diversifies our revenue base and end markets while doubling our SAM to greater than $16,000,000,000 With pro form a revenue of $3,400,000,000 we will have about 20% of that market today, which indicates significant opportunity for growth. When combined, we will create an R and D innovation engine with an exceptionally strong IP and patent portfolio and a very talented engineering team. In addition, we will have a best in class financial model with a compelling combination of revenue growth, gross margins and diversified end market opportunities leveraged to long lived infrastructure applications. Most other large semiconductor companies today come with trade offs between growth margin and diversification. Marvell and Capium deliver on all three.
Altogether, we are confident that this transaction will deliver significant long term value for our shareholders. So let me cover these points in more detail. Turning to Slide 4. First, our portfolios are very complementary. This is a chart showing 3 key end markets.
Enterprise is going through a revival with significant upgrades occurring due to multi gig Ethernet. Cloud data center presents a continued multiyear secular trend of growth and demand for high bandwidth networking, immense storage requirements and unique applications for heterogeneous processing. And with 5 gs trials beginning in 2019, the service provider market presents new growth driver for next generation modem and processor design. Across the 2 companies, our franchises are either market leaders or solid number twos. Marvell has a strong portfolio of SSD and HDD storage solutions, enterprise switches, PHYs and SoCs, as well as high performance wireless connectivity, which serve the enterprise cloud, data center and service provider markets.
Combined with Cavium's portfolio and multicore and data center processing, networking solutions including data center switches, storage and Ethernet connectivity and security solutions, our customers will gain a new strategic partner with the scope and scale to deliver comprehensive end to end platform solutions, something that very few companies in our industry today can provide. Move to Slide 5. Both companies bring portfolios that together make an infrastructure solutions powerhouse. As I mentioned, we have an extensive portfolio in storage, networking, particularly in the enterprise and wireless connectivity. Cavium has an established leadership position in compute with both multi core and data center processing, Ethernet and storage connectivity solutions and a strong family of security offerings.
Together, the combined company will have over 10,000 patents. In all industries, reputation is incredibly important to customers and we are proud of the brands that both companies have built. We absolutely plan to honor these reputations within the new company. But following today's announcement, we will work to create a new unified identity that captures and communicates the strength of our combination. We will share more details on our progress in the months ahead.
Our first priority is to complete detailed integration planning and focus on execution of the transaction. Naming, go to market and branding strategies will follow post close. So don't expect to see Carvel or Marvellium anytime soon. All right, Slide 6. Our combined addressable markets will exceed $16,000,000,000 with combined company revenue currently at approximately $3,400,000,000 we clearly see plenty of potential for future growth, and we expect our combined portfolio will be very well received by customers.
Syed, why don't you give your perspective on how you see the portfolio coming together, in particular in the cloud data center?
Sure, Matt. The data center market is a great example that showcases the power of our combined portfolio, and this is one of the reasons why I'm so enthusiastic about this combination. When you look inside the data center, racks of servers for processing data, network connectivity adapters and switches to move data and storage to save data. The combined company has an extensive product portfolio to fulfill the needs of every aspect of the data center infrastructure. ARM server processors, Ethernet controllers, top of the rack and spine switches, N5s, fiber channel connectivity to the storage area network and HDD and SSD controllers.
ARM servers are at a tipping point with our extremely competitive ThunderX2 processors and a robust ecosystem of partners and customers. In addition, we have a comprehensive portfolio of security solutions for the data center. This comprehensive solutions portfolio delivers performance, cost and power benefits to end customers.
Great. Thanks, Syed. And I agree the data center opportunity is tremendous for the combined company. We're very excited to have you and the team on board. It's notable when we close that our cloud data center business will immediately represent greater than 10% of our total revenue and is growing fast.
This is a fast growing market with plenty of upside, particularly for a company with our new portfolio breadth and scale, and we fully intend to capitalize on this opportunity. Let's turn to Slide 8. To continue with the benefits of this merger, our combination makes further sense because it enables us to achieve much greater traction across a number of key markets. Together, we will now have business with all major players in the cloud data center market. We expect the existing relationships will help us unlock new opportunities.
The same holds true in the enterprise and service provider markets. Longer term, there is also potential for further expansion in SMB, industrial and even automotive. We see automotive as a data center on wheels. Today, Marvell has a strong position in Wi Fi with the 1st Wi Fi enabled car in 2011 from Audi powered by Marvell. The wired in car network is going through a transformation from a myriad of legacy analog interfaces to a high speed network using Ethernet as the most ubiquitous and efficient packet based network today.
Think of it as if the connections within the car upgrading from dial up speeds to gigabit in order to handle the demands of GPUs, sensor inputs like LIDAR and radar, all key technologies to enable autonomous vehicles. We see automotive as one of the many edge computing applications where processing and filtering as close to the data as possible will be pervasive in the future. The combined portfolio of Marvell and Cavium positions us to be a huge winner as the computing paradigms moves from a centralized X86 based world to heterogeneous processing, networking and storage required to work seamlessly at the edge. Turning to Slide 9. From a financial perspective, this combination diversifies both companies' businesses.
At a high level, Marvell goes from roughly 25 exposure to networking to close to 40%. Storage remains our largest market, slightly below 50%. These 2 combined will be greater than 85% of company total. Drilling down one more level, we maintain the profitability and strong cash flow of our HDD business that reduced our disk drive exposure from approximately 35% to 25% of total revenue. Also, our notebook specific exposure will be reduced from approximately 15% of Marvell today to well under 10% of company total.
Our plans to expand in enterprise, nearline drives and preamps remain on track. This combination also reduces exposure for Cavium's fiber channel franchise. Both HDD and fiber channel franchises are number 1 in their markets, have very healthy businesses, but face some long term top line growth challenges. The effect of this transaction provides a meaningful improvement in concentration and should be welcomed by investors. As I mentioned earlier, much of our growth across our various product lines will be driven by the demand for increased network bandwidth, massive data storage and new computing paradigms.
Finally, our combination makes sense from the perspective of talent and culture, whose importance is absolutely critical to our company's success. The entire Cavium team has a reputation for excellence, collaboration and strong execution, which is very complementary to Marvell's culture. With this in mind, we are integrating the best of both companies. Syed is going to join the Marvell board and Raghav along with Anil Jain, Cavium's current Head of Engineering will join my senior leadership team. The infusion of talent at the highest levels of the new company will be tremendous.
An experienced leadership team from companies like Broadcom, Marvell, Maxim and now Cavium have set us up for our best days ahead. Together at all levels of the company, I am confident we are going to make an extraordinary team and are already working together to ensure a smooth transition.
Matt already made clear how the increased scale, breadth and depth of products and technologies of the combined company will deliver industry leading products and innovation for customers. I won't repeat what he said except to say that I strongly believe in the strategic rationale of the combination and the benefits of our combined scale. Personally, I have tremendous respect for Marvell and for Matt and his leadership team. I'm very excited to become a Board member and a strategic advisor of the new combined company. I would also like to take this opportunity to thank all our investors, employees, customers and partners for being an incredibly important part of our journey.
In short, I couldn't be more excited about what the future holds for the combination.
Great. Thanks for the kind words, Syed. Now I'm going to turn the call over to Marvell's CFO, Gene Hu, who is going to talk in more detail about the financial benefits. I will note that the plan we will present is solely based on Street outlook and targeted cost synergies. While we believe that significant revenue synergies exist and I hope all of you on the call do too based on the presentation you just heard, elected to be conservative and save the revenue synergies as upside for our investors.
For those of you who have followed Cavium closely, they have already demonstrated this ability in a very short period of time after acquiring QLogic.
Thank you, Matt, and good morning, everyone. From a financial perspective, as Matt stated, this combination will transform Marvell. It doubles our serviceable addressable market. It's immediately accretive to top line revenue growth, non GAAP growth and operating margin and earnings per share. For those following the IR deck, on slide 10, we highlight what the combined company would have looked like if we took out most recent quarters and annualized those results.
As you can see, this is a very compelling transaction financially. On a pro form a basis, it creates a RMB3.4 billion revenue company with the best in class financial profile, non GAAP gross margin of 63%, operating margin of 25% and EBITDA margin of 30%, all before any synergies. Move on to synergy. We expect to achieve synergies in the range of at least RMB150 1,000,000 to RMB 175 1,000,000 within 18 months after close of the transaction. Approximately 25% of the total synergy amount will come from cost of goods sold due to increased scale, volume and efficiency.
On the operating expense front, in addition to eliminating duplicated public company expenses and consolidating overlapping supporting functions, we believe there are many unique synergy opportunities we can unlock with this combination. We see significant operating expense reduction in consolidation of facilities as KVM and Marvell both have a major site in exactly the same location. We also see opportunities to rationalize the R and D spending as both companies have been investing in common areas such as leading edge process node and IP calls as well as combining product roadmaps. While we are not guiding to specific revenue synergy at this time, we also expect our broadened portfolio of solutions will enable us to capture additional opportunities with the customers. Given our expanded market opportunities from this combination, increased scale and expected synergies, we believe we can drive significant long term shareholder value.
Our new target long term model for the combined company is to grow revenue high single digit, expand the gross margin to approximately 65% and achieve operating margin of 35% and EBITDA margin of approximately 40%. Now move to Slide 11. As you read in the press release, Marvell will acquire all outstanding KVM shares for $40 per share in cash and 2.1757 Marvell shares for every KVM share. On Slide 12. From a financing perspective, this transaction will be funded through a combination of Marvell shares, RMB1.75 billion new debt and cash from our balance sheet.
As part of the transaction, we're also putting in place a RMB500 1,000,000 undrawn revolving credit facility. At closing, we expect the pro form a company to have approximately RMB1.75 RMB1.75 billion in gross debt and RMB1.15 billion of net debt with a gross leverage ratio of 1.7 times excluding synergy at close and 1.5 times including synergy. Our net leverage ratio will be approximately 1 times EBITDA including synergies. As such, Marvella will move from a net cash position to a net debt position and pivot toward a more efficient capital structure going forward. Given the consistent and growing cash flow profile of the combined company, we expect to delever quickly.
Our long term target of gross debt to EBITDA ratio is in the one time to 1.5 times range. This will provide for substantial business and financial flexibility, while also allowing us an opportunity to continue to return cash to shareholders through our ongoing dividend and share repurchase program. Our long term policy of returning at least 50% of free cash flow to shareholders through dividend and buyback over time remains unchanged. This transaction is subject to regulatory clearance and other customary closing conditions, and that we expect to close by the end of the first half of calendar twenty eighteen. With that, let me turn the call over to Peter to take your questions.
Okay. Thank you very much, Jean.
Can we please take the first question?
And our first question comes from the line of John Pitzer with Credit Suisse.
Congratulations Syed. Great transaction. I guess, Matt, just on the cost synergies that you've outlined in the PowerPoint, it's getting to about 6% to 7% of sort of the combined cost of both companies, which is a little bit higher than what we've seen announced on average by M and A transactions in the space. The caveat being that most of those announced synergies have had upside. But I'm just kind of curious just given where caveat is on some of the ramp phases of new products, why you're so confident that can get these cost synergies out?
Is there an argument to be made that you should actually start to invest at higher levels in the core Cavium portfolio to drive higher revenue synergies? And as a follow on, do any of the cost synergies include perhaps divesting of some core businesses in either company?
Hi, John. This is Jing. So you're right. When you look at the synergy at the middle point, the synergy is about 6 percent for combined company's cost of goods sold and plus operating expense. I think as earlier we said, it's quite unique.
We have a lot of unique opportunities to unlock value through the synergies. So if you look at synergy, there are really 2 buckets, right? The first bucket is the cost of goods sold. That's really driven by economic overscale. The combined company, the cost of goods sold is about $1,200,000,000 So just from economic scale and the efficiency and the volume, we'll be able to drive the synergy on the cost of sales side.
And then move to the operating expense side. As I said earlier, there are unusual opportunities. For instance, on the facility side, the consolidation side, we actually all the major side, we also have the location from both companies. Some locations, we have extra like space and other locations the Cavium have actual space. So the consolidation actually is very unusual.
And also on the R and D side, we both are investing actually heavily in the future technology, right, the next generation process node and also a lot of common IP utilized in the infrastructure solution market. So from that angle, really we do see a lot of opportunities to rationalize R and D roadmap and investment. Just remember, we are really looking at the combined company's overall spending. From that angle, right, we do see a lot of opportunity. And answer your second question, this does not include any divestiture or anything.
This is the pure net synergies we estimated so far. Matt?
Sure. Yes, let me add to that. I think that was well said, Gene. And John, just to add a little bit. So I think the first is, one of the VCs we've had since I got into the company was that the current scale of Marvell and the type of platform company that we are, we have believed would enable with the right partner unique synergies to be realized.
If you think about the cost structure of the company, our relationship, manufacturing relationship with large suppliers, global footprint, global brand, sales force. We felt that with the right partner, we would be able to uniquely realize synergies. And so what was interesting is Syed and I got to know each other and we started sharing information about our respective companies. We started finding all kinds of areas where we thought together we could, by merging the 2 operations, really unlock unique synergies from that point of view. As Gene mentioned, from a campus point of view, it was almost amazing that we literally have people in the same locations.
And to that point, in some cases, we can almost immediately have their folks move in or the other way around. So think of this as synergies that are captured across the combined company. I think that's one point to be clear. And even when those synergies are realized, the company will still have significant R and D investment as a percentage of sales. I think it will still be higher than any other peer.
And finally, I would just reiterate what Gene said, so it's clear for the investment community as well as the people on
the phone,
that are listening, including employees and customers. We have no plans to divest or change any of the Cavium plans today. And so I want to reassure people that this we're doing this because we really like the portfolio. We like the team. We think combining these is going to create a home run of the company.
And I guess I'll leave it at that.
Perfect. Thanks, Matt. Congratulations again. Yes.
Thanks, John.
Our next question comes from the line of Blayne Curtis with Barclays.
Thanks for taking my question and I'll relay the congrats as well.
Maybe you
could just talk about it
in the press release you talked about, Rob, given Anil joining the company. Maybe you can just talk about their roles and also, Syed, if you can maybe just talk about when you look taking stock as part of the consideration here, maybe you just talk about, your decision to do that versus maybe a cash purchase?
Sure. Yes, Blaine, I'll take the first one. Happy to talk about it. So as I mentioned, I had a chance to meet Syed sometime ago and we've obviously spent a lot of time together now as we really work for many, many months on trying to put this thing together. Through that process, I was able to really get to know the Raghib and Aneel.
And as I think everyone knows who's followed Cavium, these are extremely highly qualified individuals. They're visionaries, they're leaders in their field, and they're an incredible cultural match for me and the current team we've got at Marvell. We I see that their roles continuing in the combined company. We'll be defining all that as we go forward. But you should assume that both Raghav and Aneel will have significant roles on my team and in the combined company influencing direct operations as well as indirectly across the organization.
I'm really looking at this again as merging the 2 management teams together to really get best of breed. So I couldn't be more thrilled to have 2 of the highest quality people in the digital communication semiconductor space joining our company and joining my team. And Saeed, do you want to comment on the battery and maybe the cash stock?
Right. So one of the things, Blayne, is that when you take a look at the combined IP and product portfolio of the 2 companies, it's an incredible match. I mean, it's an unbelievable match, right? And looking forward, the combined company, there's significant amounts of improvements and additions that we can do to our product lines and really deliver kind of end to end solutions. So from Cavium side, the way we looked at it is very simple.
Approximately half of the consideration is in cash with a meaningful upfront premium and the other half approximately half is in stock. And we think that this combination really will be able to unlock shareholder value tremendously as a combination rather than as our 2 separate companies. So we really believe in the long term positioning of this combination, the long term growth of this and the long term relevance to the semiconductor infrastructure industry. Thanks guys.
Your next question comes from the line of Holland Sur with JPMorgan.
Good morning and congratulations Matt and Syed on bringing together the 2 companies. I think it's just a solid combination of technology and product leadership here. Given Cavium's leadership in security processors, security accelerator cores and expertise on systems that support very high levels of security such as SIP-one hundred and forty two. This is a very complementary offering to Marvell's strength in networking. But I guess how does the team think about the potential for CFIUS and regulatory related hurdles, just given that Marvell is a non U.
S.-based company?
Sure. Great. Thanks, Harlan, for the question. And we agree. We think that, that aspect of Cavium's product portfolio, we can use to enhance the entire Marvell portfolio.
As far as regulatory goes, we've looked very carefully at that and we do plan on filing across the globe in a manner that you would expect for a transaction of this size. Given that there's very, very little product overlap and from a revenue perspective, there's almost no overlap between the two companies. We don't anticipate any challenges with regulatory. But that being said, we still need to go through the normal process.
And we'll do that, as I mentioned, on
a global basis, both with CFIUS as well as around the world.
Great. Thank you. Congratulations.
Thanks a lot, Harlan.
Your next question comes from the line of Craig Ellis with
SVFR.
Matt and Syed, congratulations on a deal that's just got tremendous strategic logic. I wanted to ask a question regarding longer term revenue synergies. And I know that you don't want to provide any guidance, so I'm not looking for that. But I was hoping that you could elaborate a little bit further on Slide 8 and highlight where you think there are opportunities to do things together that wouldn't be possible as single companies? And then a follow-up clarification for Gene.
Gene, with respect to the $150,000,000 to $175,000,000 in synergies, what will be the determining factors that would argue for something at the lower end of the range versus the high end of the range? Thank you.
Greg, yes. Thanks, Greg. I'll take the first part and I may have Saiyad add as well. So yes, again, on the revenue synergy side, you I think the investment community has gotten to know us as a management team. We've always been very judicious in how we go out and present our company.
And in the case of justifying this transaction, we view the revenue synergies as very real and having upside, but we didn't want to come out on this deal from the get go and try to sell it to everybody as being highly dependent on revenue synergies to make it work. It works on its own. Revenue synergies are a bonus. Let me talk about where I see some of those. We've talked at Marvell about this growing opportunity for us, for our storage products in the data center.
And over the past year, year and a half, we've made good progress there. But I'd say we've made progress in a more targeted fashion at certain cloud and hyperscale companies, not necessarily as across the breadth as I would like. What's interesting when you look at Cavium's progress there, again, their position is much stronger than ours in the data center. And through many of their product lines, including the ThunderX and ThunderX2 families, which are their ARM CPUs, they've got traction across a number of accounts that we don't have traction at today. So we think when we map it out, we look at where we're strong and where we're engaged in storage as an example and where they're strong in Ethernet NICs, ARM CPUs, liquid IO, a number of other product lines.
We see a lot of synergy there from a revenue perspective to go in with a comprehensive solution. That's one that comes immediately to mind. Maybe Syed, you want to add to that?
Yes. I think when you take a look at the investor deck, you'll actually see who the main Cavium customers are and who the main Marvell customers are, right? So when you take a look at it, the overlap is reasonably small, which means there's a tremendous opportunity for being able to sell Marvell products into the Cavium customer base and vice versa. So especially like I said, both on the enterprise and data center side, we see tremendous opportunities for sales synergies.
Yes. So let me answer the question about the synergy. So during the whole process, we have been working with the the Rakiv and the whole KVM team to really just look at the different areas. We actually feel very comfortable about how the scale, how the consolidation of facility and also other overlapping functions, how we drive the synergy. I think one thing I would say is that was in the details.
So on the R and D side, when you try to combine roadmap, typically you really need a lot of people get involved. At this stage, we have not get into that kind of detailed discussion. So that's why we are looking at a range. I think once we start the integration activity, we'll definitely work harder to figure out what's the range of our synergies. And we'll give you update when we get to close to this transaction.
Just another comment to kind of end this is that when you take a look at advanced technology node development, let's say, the next nodes, 10 nanometer, 7 nanometer, especially the 7 nanometer node, each company individually would have to make a substantial investment to develop the design flows, the IP and all other aspects, the mixed signal service components, it would have been completely 2 different investments that now can basically be collapsed into 1. Secondly, Cavium has a very strong portfolio in CPU cores, caches, memory controllers, and a lot of those can now be used within Marvell products. So on the technology side, I really think there is a phenomenal amount of synergy there.
Thanks for all the color and good luck.
Thanks. Thanks.
Your next question comes from the line of Ross Seymore with Deutsche Bank.
Hi, guys. Congrats on the deal. The first question is sticking on that revenue synergy side. Your target is 6% to 8% growth. Matt, if memory serves, that's not tremendously different than the revenue growth targets you had for Marvell as a standalone.
So I guess my first question is with Cavium growing a little bit faster, is that number in that high single digits mainly due to conservatism?
Or is there some offset there?
And then two quick housekeeping follow ups, maybe for Dean. 1, what's the rate and the debt that you're trying to take out? And then the final one is, was this competitive bidding process for the Cavium asset? Thank you.
Just a quick one first, right? The model long term target model when we said 6% to 8% of growth rate, that does not include any revenue synergy.
Yes. And so just to clarify, so it's a great point. We came out at our Analyst Day, as many of you recall, and we said that we believe we could our core markets were growing at 6%. We believe we had some headwind because of some legacy business and our target was 5. Street, despite that and despite the fact that we've actually been achieving for the last many, many quarters growth in our core business at that rate or above.
Street still has us at a lower number for next year. So some of this is that effect of sort of Street expectations versus the management plan. But when we look at it and we roll it up, we feel very comfortable that this is a high single digit grower based on our prospects at Marvell as well as the proven track record of growth from Cavium. So it will remain to be seen, but we sort of see 6 as the low end and then we really think it's more of a high single digit grower. But we wanted to give a range at this juncture because we haven't completed all of our planning there.
But you're right, our prospects at Marvell are from a long term perspective are higher than Street today, which is why we put in the lower end of the range. And Ross, this is Peter. With regards to the debt, it's still early in the process for that. But on a blended basis, you should expect rates somewhere around 4%.
Great. Thank you.
Your next question comes from the line of Christopher Rolland with Susquehanna International.
Hey, Syed. Congrats on the transaction, really transformative here. So to flip a previously asked question, and this time for Matt and Gene. So the mix of stock and cash, and Gene, you probably talked about this a bit, leaving options open for a buyback. But why are you guys doing so much stock here?
It seems like if you guys did more like 75% cash versus 25% cash, we still would have had a leverage ratio that was pretty reasonable. So how did you guys actually come up with that? How did you and how did you view that leverage ratio and your cash position or your debt position in this case? Where did you guys kind of shake out on that?
Sure. Yes. No, it's a great question. I think it makes sense to answer it from both angles. So I'll give you my take and then I'll have Gene add.
I think a few things are on our mind. The first is kind of the global backdrop. We're 7, 8 years in now, doable market. And obviously, we hope that continues, but we wanted to be prudent in terms of the leverage on the company. As you point out, we clearly had the capacity to do more.
But when we looked at it, we really wanted to be again mindful of where we were in the cycle, mindful of coming out of this with business flexibility, right, in terms of continuing the buyback or doing other things. And finally, from our point of view, we thought it was very encouraging and we like the fact that both companies agreed to do this really in a fact just the combined company so that the upside opportunity is really shared by both sides. And that was really important to me and that's the 2 founders plus the core team of Cavium that's coming over has that same opportunity to participate in the upside versus, let's say, just a lot more cash and then it's done and then it doesn't really align sort of with where we're headed, which is build the next great digital platform for the next 10 years. And we wanted to make sure that everybody was on board with that, sharing the upside and sharing if there's any volatility in the market. And so when you look at where we come out, we have very reasonable levels of debt.
And I would say that, again, one final point would be, remember, we're coming from a position where we've got close to $1,000,000,000 of cash. We have no debt today. And we felt that going from that, as an example, all the way over swing to 3.5x, 4x leverage just wasn't prudent, didn't make sense, and we prefer to be more thoughtful about how we went through it. And so we think the combination of all of it's really a home run for everybody involved because the upside potential due to the unique synergies on both the cost side and then as we were talking about earlier, the revenue side.
Thanks guys and congrats again. Excited to see you guys grow.
Yes. Thanks Chris.
Your next question comes from the line of Quinn Bolton with Needham.
Hey, guys. Congratulations on the transaction, Matt and Syed. Chris just asked the leverage question that I was going to ask, but I just wanted to follow-up. Given that you're going to be a one time leverage ratio, how much of that decision was sort of forward looking to give you the flexibility to continue to do M and A versus just wanting to be conservative where we are in the business cycle? I mean, should we expect you to continue to look and be active on the M and A front given that low leverage ratio?
Yes. Thanks, Quinn, for the question. And again, as I said, I think we did want to have flexibility when we got through this. I think at this juncture to even speculate or talk about future M and A given how exhausted my entire team is and all of us going through the process we got to get here as well as the critical integration planning that we've got to do and then obviously executing on the synergies and getting the company integrated. That's really first priority, and that's what we're going to be focused on.
But you're right, we do have a longer term view of what this combination could provide, and we think it is a platform, and we do think that we would like to come out of this with enough flexibility that as we succeed in our plans to drive the integration successfully, we come out and then we'll continue to look for opportunities to grow the company, both organically as well as inorganically. And so again, I would just state that we felt like it was a nice balance of actually taking our balance sheet from being over capitalized and sort of not as efficient to a more reasonable efficient capital structure that gives us flexibility. One more comment here is when you take a look
at the top 20 fabless siliconenter companies now, and you take a look at you have the giants, obviously, then you have some analog companies and some RF companies. So when you take a look at the top 20 companies, the most rational combination, the most strategically important combination is the Marvell Cavium combination. It's actually a natural fit and it gives scale and it allows the combined company to be much more competitive. And regarding the cash and stock portion of it, this also helps align employees, investors to the joint success of the combination.
Okay, great. Congratulations again. Thank you.
Thanks.
Your next question comes from the line of Srini Fajjuri with Macquarie Securities.
Thank you. Good morning, guys. And let me also say congratulations on a great deal. Maybe a couple of questions. I guess, Matt, when you look at the 6% to 8 percent top line growth assumption, I'm just curious as to what you're assuming at a segment level?
And then for one for Gene. I mean, Gene, you guys have done a tremendous job in terms of cost cutting. So I think the synergy number that you're putting out there seems reasonable to me. But at the same time, you're assuming about an 18 month timeframe to achieve those synergies. I'm just curious as to what you consider to be some of the low hanging fruit and how long also maybe you can talk about the linearity of the synergies, how soon do you expect to achieve, let's say, half of the synergies and the remaining half?
Thank you.
Great. I'll take the first part and then we'll let Gene answer on the synergy realization. So yes, at this time, we're not prepared to go into the individual segment breakout. We have our views. Obviously, the 6% to 8% is sort of easy to get to if you just look at the Cavium growth rate that they've been achieving plus the Marvell growth rate, you'll get a blend.
We'll provide more detail as we go through integration planning on what the individual segments will look like in the outlook. Before I turn it over to Gene on the commentary on synergies, I'd just say that the management team at Marvell, to your point, has done a good job, in my opinion, of being able to deliver on what we say. And I'll let Jean comment further if she wants to on the synergies.
Yes. So on the synergy question, right, when you really think about it, there are 2 buckets of synergy. The cost of goods sold typically it would take around 6 months for that benefit to kick in. So I would say that's a bucket of synergy. You will expect starting 6 months after close, then the cost of sales synergy will kick in and it will be like ramping up during the following 12 months.
On the operating expense side, it's still early for us to talk about what's the shape of the synergy and how it's going to play out, because the integration activities will take some time for us to figure out. I promise that we'll give you update when we get closer to understand exactly what synergies we're driving and what integration activities will go on.
Yes. And I just ended by saying that because I
think there will be a lot
of questions questions on the subject. I think what we're really focused on, for everyone on the call, is doing this right, okay.
So that's why we gave a range,
because we wanted to be make
sure
we are being very thoughtful about how we did this and we also gave, because we wanted to be make sure we were being very thoughtful about how we did this and we also gave a timing range as well. So we'll come back to you at the appropriate time as we sharpen our pencils and we figure out what we want to do from that point of view. But that's all I'll say on that.
Great. Thank you, guys.
Thanks, Sreen.
Our next question comes from the line of Gary Mobley with Benchmark.
Everyone, I mean congratulations Stem and congratulations to both parties involved. Most of my questions have been asked and answered, but I wanted to ask if there are any debt covenants precluding Marvell for making any additional acquisitions? And Jean, could you discuss any tax consequences from the combination of the two companies? I know you're early days, but maybe any initial thoughts there would be helpful. Thanks.
Yes. The first question on the debt covenant, it's too early. We are literally just signing announced the deal and we're going to get the debt in place between the signing and the closing. So we'll be able to negotiate on the covenants and other things during the next phase of raising money for the transaction. So on the tax rate today, if you look at both companies, our non GAAP tax rate, both are approximately 4%.
So the integration for entity and tax structure are very complicated, but we believe we have a tax efficient way to combine both companies. So it should be in the same digit kind of tax rate going forward, but we'll give you an update when we close the transaction.
Crystal, can we have the next question?
Yes, sir. Your next question comes from the line of Mark Delaney with Goldman Sachs.
Yes. Congratulations on announcing the deal and thanks for taking the question. I had a question on the switching market. I realize some of the Marvell and Cavium switching products with some different feature sets, but maybe you can talk a little bit about how you expect that particular product line to evolve. And if you can envision the combined company having more opportunities in the hyperscale switching market?
Obviously, there's a very strong competitor there. And to the extent having the combined products and R and D effort can better position the company for that specific area? Thank
you. Yes, great, Mark. Thanks for the questions. And I'll give you my comments and I'll let Syed chime in as well if you'd like to. I think we're pretty excited about the combination of our 2 switching portfolios.
As you point out, Marvell has a very strong position today in the enterprise, campus, SMB and even carrier markets, which for us we see as standalone Marvell, we saw as a growth opportunity and we've been realizing that. What Cavium brings to the table is really, I think, great progress they've made in addressing the market you referenced, which is the hyperscale and high end data center switches. And I think putting those teams together and getting that combination of IP and technology really creates a much more formidable competitor in the market from a switching perspective that can address applications, quite frankly, that go all the way from Soho at the lower and SMB at the lower end of the market, all the way to the most advanced top of rack switch and spine applications. Maybe Syed, you want to give your perspective as well, but I think it builds a much stronger combined portfolio for switching.
Matt, I completely agree with you. I think the 2 product lines dovetail very nicely with each other. As Matt said, Marvell's switching portfolio is pretty comprehensive in enterprise service provider, SOHO SMB and Campus. And we have started to build our portfolio for the data center products. And one of the other benefits is, if you take a look at the larger OEMs, many of them have products ranging from kind of the low end to the high end, not only in terms of the switch OEMs, but also in terms of other embedded portions of the market.
Obviously, we didn't have the lower end of the product line and Marvell did not have the higher end. Now we'll be able to sell low end to the highest end solutions as a single vendor to multiple customers.
Your next question comes from the line of Atif Malik with Citigroup.
Hi. Thanks for taking my question and congratulations on the deal.
It does make a lot
of sense. Can you guys talk about the timing of the deal? Why now? And if it's a response to the a response to the ongoing industry consolidation where Broadcom is going after Qualcomm? And as a follow-up, if you can touch on how your big networking customers like Cisco will proceed this deal as your competitor is raising pricing on them?
Thank you.
Sure. I'll give a few thoughts and let Syed or Jean chime in. I'd say the first is that this transaction is many, many months in the making. And Syed and I have been talking for some time about how we could put this together. So this was not something that was done recently.
This started sometime back and we finally gotten here. It's interesting and sort of coincidental that when the leak occurred in the media about this potential combination, it was the same day that Broadcom and Qualcomm reports also surfaced. But just to make sure everyone's clear, this is a no reaction to any other consolidation. This was really our 2 companies figuring out that we had something unique we could do here and then really being thoughtful and planning out how to get to the finish line. So I'd say that clearly there's combinations that still exist out there.
I agree with what Sai had said earlier. I believe this is the best combination that's out there today, the 2 companies that could be put together in terms of forming a much larger semiconductor company. And it's unique in that it's unlike others that are in sort of the growth rates that we're talking about. This is an infrastructure company. 85% of the pro form a company is going to be leveraged to storage and networking.
And when you look at the other growers out there, it's really NVIDIA and then it's obviously the people that are levered to the mobile phone market, which has its own challenges from a concentration standpoint. So we really like the combination and where it heads and it was done with kind of independently of what may or may not happen in other parts of the market.
Our next question comes from the line of Vivek Arya with Bank of America.
Thank you for taking my question and congratulations to both the teams on this announcement. Just a quick clarification on this domicile question. I know it was asked before, but one of your competitors did need to redomicile to the U. S. As part of acquiring Fibro Channel assets.
So I was I just wanted to get an understanding of what is the government exposure from the Cavium QLogic side? And what would be the implications on tax rate if Marvell did need to redomicide?
I'll start taking the question and then hand it over to Jean. So one of the differences when you take a look at this particular combination versus the other combination is that we are a component vendor. We are not a system vendor. Generally, the bar for system vendors is significantly higher than it is for a component vendor because at the end of the day, a component is a component and is worthless without all the software and other things that a system integrator will put on it. So we think this is something that we look at obviously, but I'll hand it over to Jean to further elaborate.
Yes. So just independent of this transaction, right, Marvell as a company is incorporated in Bermuda very long time ago, 1995. So, parent company has been there for a long time. So, even independent of this transaction, as a company, we have been monitoring and we'll continue to monitor our own business model change as well as all the regulatory environment, the U. S.
Tax reform. So those are the things that we're just consistently evaluating, right, if our structure fits with our business model, fits with our overall environment. So I think even independent of this transaction that's what we have been doing. And frankly, we believe we have a tax efficient way. If our business model really dictate us to come back to U.
S, we should have a tax efficient way to do it, because in the end, it's all fitting to your business model, how you conduct your business.
Thank you. Our next question comes from the line of Matt Ramsay with Canaccord.
Thank you very much. Good morning and congratulations to both teams, particularly Syed and Raghiv founding a company like Cavium and monetizing it. Very big congratulations to you guys. Just a couple of questions from me on the processing side. Most of the revenue from the Cavium portfolio and processors is on the MIPS architecture.
And obviously, both companies have an ARM portfolio. Syed, maybe you could talk a little bit about your plans going forward with the MIPS line. Does this new scale give you the opportunity to support both architectures going forward and just how you plan the process or road map from here? Thank you very much.
Sure, Matt. So when you take a look at Carium's revenues, the single largest jump comes from CPUs and processors, right, whether they go into networking or wireless infrastructure or what have you. We have a very comprehensive mix line that today generates a very significantly large amount of the revenue. And we've put together a comprehensive line of ARM Processors, both for the embedded and data center markets that are starting to generate revenue. So we expect moving forward that we will do only ARM based processors, right?
We're going to just focus on the ARM based processors. However, having said that, every quarter even today, we received significant amount of design wins with our OCTEON 3 MIDS based architecture. Secondly, when you take a look at the life cycle of our infrastructure products, the average life cycle is somewhere in the 8 years to 9 years. So there's a long annuity tail for our product revenues, which is very unusual even for the infrastructure markets. So we have both products.
Moving forward, development is primarily going to be focused on ARM. But there's still a lot of design wins, a lot of revenue that we can still derive from our Mitspace product line. And we really see this as a continuum of products. A lot of our current MIPS generation products design in the next generation. There are a whole bunch of new customers out there that have chosen ARM.
So we will continue developing more and more ARM processes as we move forward.
Thank you. That does conclude our Q and A session for today. I would now like to turn the call back over to Mr. Murphy for closing remarks.
Thank you. And again, thanks everybody for joining the call today and the comments and great questions that were asked. We look forward to talking to our investors in much more detail over the coming days months as we work together with the Cavium team to do the integration planning and drive this transaction to a successful close. Thanks again, everyone.
Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.