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 20th, 2017. After the speakers' prepared remarks, there will be a question and answer session. We ask that you please limit yourself to one question. If you would like to ask a question during this time, simply press star, then the number one on your telephone keypad. If you would like to withdraw your question, press the pound key. 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 the 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-4, 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 marvellcavium.transactionannouncement.com. A link is also available in the press release. 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 our preliminary financial results for Marvell's third fiscal quarter of 2018. We expect third quarter revenue to be between $610 million-$620 million, 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-$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 28th during our regularly scheduled Q3 earnings call.
Now, for today's big news, I'm excited to be here with the co-founders of Cavium, Syed Ali and Raghav 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. Syed 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 two companies combined could far surpass what each of us could do individually. Syed, what 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 and 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 and 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 two 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 alone.
Great. Thanks, Syed. After also meeting Raghav Hussain, who I've really come to know and appreciate as a leader and a visionary in our industry, as well as other members of the team. We took a deeper look at their business. We saw how it well-aligned with the market and our products. 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 three, strategic rationale. Combining Marvell and Cavium into one company makes sense for many reasons. First, we have complementary portfolios. Together, we have the scale to enable world-class end-to-end solutions. Second, this transaction meaningfully diversifies our revenue base and end markets while doubling our SAM to greater than $16 billion.
With pro forma revenue of $3.4 billion, we will have about 20% of that market today, which indicates significant opportunity for growth. When combined, we will create an R&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 Cavium deliver on all three. Altogether, we are confident that this transaction will deliver significant long-term value for our shareholders. Let me cover these points in more detail. Turning to slide four. First, our portfolios are very complementary. This is a chart showing three key end markets.
Enterprise is going through a revival, with significant upgrades occurring due to multi-gig Ethernet. Cloud data center presents a continued multi-year secular trend of growth and demand for high-bandwidth networking, immense storage requirements, and unique applications for heterogeneous processing. With 5G trials beginning in 2019, the service provider market presents new growth driver for next-generation modem and processor design. Across the two 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 in multi-core 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 five. 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. We are proud of the brands that both companies have built.
We absolutely plan to honor these reputations within the new company. 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. Don't expect to see Carvell or Marvellium anytime soon. All right, slide six. Our combined addressable markets will exceed $16 billion. With combined company revenue currently at approximately $3.4 billion, 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 a 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, and PHYs, Fibre 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. 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 eight. 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. 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 the 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 first 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 are 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 nine. 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 two 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, but reduce 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 Fibre Channel franchise. Both HDD and Fibre Channel franchises are number one 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 Integrated, 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 CFO Jean 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, we 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 our most recent quarters and annualized those results. As you can see, this is a very compelling transaction financially. On a pro forma basis, it creates a $3.4 billion revenue company with the best-in-class financial profile, non-GAAP gross margin of 63%, operating margin of 25%, and the EBITDA margin of 30%, all before any synergy. Move on to synergy. We expect to achieve synergies in the range of at least $150 million-$175 million 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. Operating expense front. In addition to eliminating duplicate 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 Cavium and Marvell both have a major site in exactly the same location. We also see opportunities to rationalize the R&D spending as both companies have been investing in common areas such as leading-edge process node and IP cores, 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 increase the scale and the expected synergies, we believe we can drive significant long-term shareholder value. Our new targeted long-term model for the combined company is to grow revenue high single digits, expand gross margin to approximately 65%, and achieve an operating margin of 35% and an EBITDA margin of approximately 40%. Now move to slide 11. As you read in the press release, Marvell will acquire all outstanding Cavium shares for $40 per share in cash and 2.175 Marvell shares for every Cavium share. Now slide 12. From a financing perspective, this transaction will be funded through a combination of Marvell shares, $1.75 billion new debt, and the cash from our balance sheet. As part of the transaction, we'll also put in place a $500 million undrawn revolving credit facility.
At closing, we expect the pro forma company to have approximately $1.75 billion in gross debt and $1.15 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 time the EBITDA, including synergy. As such, Marvell 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 de-lever quickly. Our long-term target of gross debt to EBITDA ratio is in the 1 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 we expect to close by the end of the fourth quarter of calendar 2018. 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?
Again, if you would like to ask a question, simply press star, then the number 1 on your telephone keypad. We ask that you please limit yourself to one question. Our first question comes from the line of John Pitzer with Credit Suisse.
Congratulations, Syed. A great transaction. I guess, Matt, just on the cost synergies that you've outlined in the PowerPoint, it's getting to about 6%-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&A transactions in the space. The caveat being that most of those announced synergies have had upside. I'm just kind of curious, just given where Cavium is on some of the ramp phases of new products, why you're so confident that you 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? As a follow-on, do any of the cost synergies include perhaps divesting of some core businesses in either company?
Hi, John. This is Jean. You're right. When you look at the synergy at the middle point, the synergy is about 6% of our combined companies' 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. If you look at synergy, there are really two buckets, right? The first bucket is the cost of goods sold. That's really driven by economies of scale. The combined company, the cost of goods sold is about over $1.2 billion. Just from economies of scale and efficiency and the volume, we'll be able to drive the synergy on the cost of sales side. Then move to the operating expense side. As I said earlier, there are unusual opportunities.
For instance, on the facility side, the consolidation side, all the major sites, we also have the location from both companies. Some locations we have actual.
Space and other locations, Cavium have actual space. The consolidation actually is very unusual. Also on the R&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. From that angle, really, we do see a lot of opportunities to rationalize the R&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. To answer your second question, this does not include any divestiture, anything. This is the pure net synergies we estimated so far. Matt?
Sure. Yeah, let me add to that. I think that was well said, Jean, and John, just to add a little bit. I think the first is, one of the theses we've had since I got into the company was that the current scale of Marvell Technology 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. 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 two operations, really unlock unique synergies from that point of view. As Jean mentioned, from a campus point of view, it was almost amazing that we literally have people in the same locations. To that point, in some cases, we can almost immediately have their folks move in or the other way around. Think of this as synergies that are captured across the combined company. I think that's one point to be clear. Even when those synergies are realized, the company will still have significant R&D investment as a percentage of sales. I think it'll still be higher than any other peer.
Finally, I would just reiterate what Jean 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. I want to reassure people that 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 a company. I guess I'll leave it at that.
Perfect. Thanks, Matt. Congratulations again.
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 Raghav and Anil joining the company. Maybe you could just talk about their roles and, also Syed, if you can maybe just talk about when you looked at taking stock as part of the consideration here, maybe just talk about your decision to do that versus maybe a cash purchase.
Sure. Blayne, I'll take the first one. Happy to talk about it. As I mentioned, I had a chance to meet Syed some time ago, and we've obviously spent a lot of time together now as we really work for many months on trying to put this thing together. Through that process, I was able to really get to know Raghav and Anil, 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. 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 Anil 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 two management teams together to really get best of breed. I couldn't be more thrilled to have two of the highest quality people in the digital communication semiconductor space joining our company and joining my team. Maybe Syed, you want to comment on that and then maybe the cash stock?
Right. One of the things, Blayne, is that when you take a look at the combined IP and product portfolio of the two companies, it's an incredible match. I mean, it's an unbelievable match, right? 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. From Cavium's side, the way we look at it is very simple. Approximately half of the consideration is in cash with a meaningful upfront premium. The other half, approximately half, is in stock. We think that this combination really will be able to unlock shareholder value tremendously as a combination rather than as two separate companies. 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 Harlan Sur with JP Morgan.
Good morning. Congratulations, Matt and Syed, on bringing together the two 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 FIPS 140-2, this is a very complementary offering to Marvell's strength in networking. 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? Thank you.
Sure. Great. Thanks, Harlan, for the question. We agree. We think 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 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. With 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 FBR.
It's B. Riley FBR. Thanks so much for taking the question, 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. I know that you don't want to provide any guidance, and I'm not looking for that, but I was hoping that you could elaborate a little bit further on slide eight and highlight where you think there are opportunities to do things together that wouldn't be possible as single companies. Then a follow-up clarification for Jean. Jean, with respect to the $150 million-$175 million 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.
Great. Thanks, Craig. I'll take the first part, and I may ask Syed to add as well. Again, on the revenue synergy side, 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. 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.
Over the past year and a half, we've made good progress there. I'd say we've made progress in a more targeted fashion at certain cloud and hyperscale companies, not necessarily 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. 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. 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, LiquidIO, 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?
Yeah, 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? 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. Especially, like I said, both on the enterprise and data center side, we see tremendous opportunities for sales synergies.
Yeah. Let me answer the question about the synergy. During the whole process, we have been working with Syed, Raghav, and the whole Cavium team to really just look at the different areas. We actually feel very comfortable about how the skill, how the consolidation of facility, and also other overlapping functions, how we drive the synergy. I think one thing I would say is devil's in the details. On the R&D side, when you try to combine roadmaps, typically you really need a lot of people get involved. At this stage, we have not get into that kind of detailed discussion. 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 an update when we get close to the close of 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, seven nanometer, especially the seven 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, SerDes components. It would've been completely two different investments that now can basically be collapsed into one. 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. On the technology side, I really think there is a phenomenal amount of synergy there.
Thanks for all the color and good luck.
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%-8% growth. Matt, if memory serves, that's not tremendously different than the revenue growth targets you had for Marvell as a standalone. 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 Jean. One, what's the rate on the debt that you're planning to take out? And then the final one is, was this a competitive bidding process for the Cavium asset? Thank you.
Just a quick one first. The long-term target model, when we said is 6%-8% growth rate, that does not include any revenue synergy.
Just to clarify, it's a great point. We came out at our Analyst Day, as many of you recall, we said that we believed our core markets were growing at 6%. We believed 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 quarters, growth in our core business at that rate or above, Street still has us at a lower number for next year. Some of this is that effect of sort of Street expectations versus the management plan. 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.
It'll remain to be seen, we sort of see 6% as the low end, we really think it's more of a high single digit grower. We wanted to give a range at this juncture because we haven't completed all of our planning there. 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.
Ross, this is Peter. With regards to the debt, we're still early in the process for that, on a blended basis, you should expect a rate somewhere around 4%.
Great. Thank you.
Your next question comes from the line of Christopher Rolland with Susquehanna International Group.
Hey, Matt. Hey, Syed. Congrats on the transaction. Really transformative here. To flip a previously asked question, and this time for Matt and Jean. The mix of stock and cash, and Jean, you probably talked about this a bit, leaving options open for a buyback. Why are you guys doing so much stock here? Seems like if you guys did more like 75% cash versus 25% cash, we still would've had a leverage ratio that was pretty reasonable. How did you guys actually come up with that? 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. Yeah, no, it's a great question, and I think it makes sense to answer it from both angles. I'll give you my take, and then I'll have Jean add. I think a few things are on our mind. The first is kind of the global backdrop. We're seven, eight years in now into a bull 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. 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.
Finally, from our point of view, we thought it was very encouraging, we liked the fact that both companies agreed to do this really in fashion, just the combined company, so that the upside opportunity is really shared by both sides. That was really important to me, the two founders plus the core team of Cavium that's coming over, have 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. 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.
When you look at where we come out, we have very reasonable levels of debt, I would say that, again, one final point would be, remember, we're coming from a position where we've got close to $1 billion of cash. We have no debt today, we felt that going from that As an example, all the way over swing to 3.5, 4 times leverage just wasn't prudent, didn't make sense, we'd prefer to be more thoughtful about how we went through it. We think the combination of all of it's really a home run for everybody involved because of 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, congrats again. Excited to see you guys grow.
Yeah. 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. 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&A versus just wanting to be conservative, where we are in the business cycle? Should we expect you to continue to look and be active on the M&A front given that low leverage ratio?
Yeah. Thanks, Quinn, for the question. 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&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 real critical integration planning that we've got to do, then obviously executing on the synergies and getting the company integrated, that's really first priority. That's what we're going to be focused on.
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. 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 semiconductor companies now, and you take a look at, you have the giants, obviously, then you have some analog companies and some RF companies. 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. 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 Srinivas Pajjuri with Macquarie Securities.
Thank you. Good morning, guys. Let me also say congratulations on a great deal. Maybe a couple of questions. I guess, Matt, when you look at the 6%-8% top-line growth assumption, I'm just curious as to what you're assuming at a segment level. Then one for Jean. Jean, 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. 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. We'll let Jean answer on the synergy realization. At this time, we're not prepared to go into the individual segment breakout. We have our views. Obviously, the 6%-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 Jean 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. I'll let Jean comment further if she wants to on the synergies.
Yeah. On the synergy question, when you really think about it, there are two buckets of synergy. The cost of goods sold, typically, it would take around six months for that benefit to kick in. I would say that bucket of synergy, you will expect starting six months after close. The cost of sales synergy will kick in. It will be 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 we'll give you an update when we get closer to understand exactly what synergies we're driving and what integration activities will go on.
Yeah. I just end it by saying that, because I think there will be a lot of questions on this subject, I think what we're really focused on, for everyone on the call, is doing this right. Okay. That's why we gave a range, because we wanted to make sure we were being very thoughtful about how we did this. We also gave a timing range as well. 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. That's all I'll say on that.
Great. Thank you, guys.
Thanks, Srinivas.
Our next question comes from the line of Gary Mobley with Benchmark.
Everyone, congratulations. A sentiment of 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 from making any additional acquisitions? 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.
The first question on the debt covenant, it's too early. We are literally just announced the deal, and we're going to get the debt in place between the signing and the closing. We'll be able to negotiate on the covenants and other things during the next phase of raising money for the transaction. On the tax rate, today, if you look at both companies, our non-GAAP tax rate both are approximately 4%. The integration for entity and tax structure are very complicated, but we believe we have a tax-efficient way to combine both companies. It should be in the same digits for 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. Thanks for taking the question. I had a question on the switching market. I realize some of the Marvell and Cavium switching products have 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&D effort can better position the company for that specific area. Thank you.
Yeah. Great, Mark. Thanks for the questions. I'll give you my comments, and I'll ask Syed to chime in as well, if you'd like to. I think that we're pretty excited about the combination of our two 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.
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 end 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 two 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. 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? If it's a response to the ongoing industry consolidation, where Broadcom is going after Qualcomm. As a follow-up, if you can touch on how your big networking customers like Cisco will perceive 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 months in the making. Syed and I have been talking for some time about how we could put this together. This was not something that was done recently. This started sometime back, and we've 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. Just to make sure everyone's clear, this is in no reaction to any other consolidation. This was really our two 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.
I'd say that clearly there's combinations that still exist out there. I agree with what Syed said earlier. I believe this is the best combination that's out there today, the two companies that could be put together in terms of forming a much larger semiconductor company. 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 forma company is going to be leveraged to storage and networking. 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.
We really like the combination and where it heads, 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, one of your competitors did need to re-domicile to the U.S. as part of acquiring Fibre Channel assets. 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 re-domicile?
I'll start taking the question and then hand it over to Jean. 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. We think this is something that we look at, obviously, but I'll hand it over to Jean to further elaborate.
Yeah. Just independent of this transaction, Marvell, as a company, is incorporated in Bermuda very long time ago, 1995. Parent company has been there for a long time. 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. Those are the things that we're just consistently evaluating. If our structure fits with our business model, fits with our overall environment. I think even independent of this transaction, that's what we have been doing. 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 all fits into 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 Raghib 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 processor roadmap from here? Thank you very much.
Sure, Matt. When you take a look at Cavium's revenues, the single largest chunk comes from CPUs and processors. Whether they go into networking or wireless infrastructure or what have you. We have a very comprehensive MIPS 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. We expect moving forward that we will do only Arm-based processors. We're going to just focus on the Arm-based processors. However, having said that, every quarter, even today, we receive significant amount of design wins with our OCTEON III MIPS-based architecture. Secondly, when you take a look at the life cycle of our infrastructure products, the average life cycle is somewhere in the eight years to nine years.
There's a long annuity tail for our product revenues, which is very unusual even for the infrastructure markets. 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 MIPS-based product line. 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. We will continue developing more and more Arm processors as we move forward.
Thank you. That does conclude our Q&A session for today. I would now like to turn the call back over to Mr. Murphy for closing remarks.
Thank you. Again, thanks for 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 and 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.