Good day, ladies and gentlemen, welcome to the first quarter 2018 Marvell Technology Group Ltd. earnings conference call. All participants are in listen only mode. Later, we will conduct a question and answer session and instructions will be given at that time. If anyone should require assistance during the program, please press star then 0 on your touchtone telephone. As a reminder, today's program is being recorded. Now I'd like to introduce your host for today's program, Peter Andrew, Vice President of Investor Relations. Please go ahead.
Thank you very much, John. Good afternoon, everyone. Welcome to Marvell's first quarter of fiscal year 2018 earnings call. Joining me on the call today is Marvell's President and CEO, Matt Murphy, and CFO, Jean Hu. Before I turn the call over to Matt, I wanted to remind everyone that certain comments today will include forward-looking statements which are subject to significant risks and uncertainties, which could cause our actual results to differ materially from management's current expectations. Please review the cautionary statements and risk factors contained in our earnings release, which we filed with the SEC today and posted on our website, as well as our most recent 10-K and 10-Q filings. We do not intend to update the forward-looking statements. During our call today, we will make reference to certain non-GAAP financial measures.
A reconciliation between our GAAP and non-GAAP financial measures is available on our website in the investor relations section. With that, let me turn the call over to Marvell's President and CEO, Matt Murphy.
Thank you, Peter. Good afternoon to everyone on the call. As I've stated before, Marvell's goal is to deliver semiconductor solutions that move data faster and more reliably than anyone else. Last month, we took another big step towards achieving this goal with the hiring of Neil Kim as our new chief technology officer. Before I review our Q1 results, I want to share some of his background. Neil spent 16 years at Broadcom, where he led IP development, process node roadmaps, and engineering execution. He was instrumental to their success. He built their central engineering organization from the ground up. This was considered to be one of the key assets of Broadcom, giving them tremendous leverage in R&D as they scaled. Here at Marvell, we have an opportunity to improve our engineering efficiency and output, we are fortunate to have Neil on board.
Neil also brings extensive product development experience from his time at Western Digital, where he led the engineering organization. He hit the ground running and established himself as a catalytic force in our global engineering community. We expect his team will both improve execution and accelerate development of new technology. Let me turn to our Q1 results. The power of Marvell's new business model helped us generate strong results in what is typically our seasonally slow quarter. In Q1, revenue exceeded the midpoint of our guidance and represented a 12% year-over-year increase. Our core businesses of storage, networking, and connectivity grew 15% year-over-year and now account for 90% of our total sales. This is the third consecutive quarter in which our core businesses grew year-over-year. Our new business model also generated impressive gross margins.
In the first quarter, our non-GAAP gross margin rose above 60%, exceeding our 59% forecast and moving us up into the long-term range we outlined at our Investor Day. This is an important milestone for the company, a gross margin level Marvell has not achieved since fiscal 2011. Our improvement in gross margin is the result of a number of changes we've made throughout the company. Strong execution on cost reduction initiatives, yield improvements driven by product and test engineering, better discipline in selling the value of our solutions, exiting non-core, lower-margin businesses, improved mix within our segments, the ramp of new products with higher margins. We also significantly improved our non-GAAP operating margin to 21.8%, exceeding our guidance of 20%. This represents an important step towards our long-term goal of 30% operating margin.
Our revenue growth and operating performance translated into strong free cash flow of $117 million, or 20% of sales. I'm also pleased that we returned $196 million to shareholders, or roughly 170% of our free cash flow during the past quarter. I'm very pleased with Marvell's financial performance in Q1. Turning to our business performance. In Q1, our storage business performed much better than typical seasonality and grew 25% year-over-year. Our SSD revenue grew by double digits sequentially and by triple digits year-over-year. This growth reflects our increased market presence in both the SSD client and enterprise and data center markets. Our success in this market is a direct result of our technology leadership and strong partnerships with tier 1 customers.
We are well-positioned as this market continues to grow. We expect it to represent 25%-30% of our total storage revenue in the second half of fiscal year 2018. In HDD, we experienced very strong growth in the enterprise and data center markets, even as our client business declined sequentially. We have assembled the industry's broadest portfolio of SSD and HDD solutions and continue to shift our focus to higher growth segments of the storage market. An example of this shift can be seen in our total enterprise and data center revenue, which more than doubled from a year ago and grew 40% sequentially from the fourth quarter. We are pleased with the performance of our storage business and are well-positioned to capitalize on the opportunity in this large and growing market. Moving to networking. This business performed well in Q1.
Revenue was up 5% from a year ago, representing the fourth consecutive quarter of year-over-year growth. What is even more encouraging is that our switching PHY and SoC products grew double digits year over year. As you may remember from our investor day, we highlighted our refreshed product line and the 25 new products introduced in the last 18 months. I'm pleased to say that we are gaining great traction with our Switch and PHY products targeting the 2.5, and 10 Gigabit Ethernet markets. Marvell's success to date has been providing Switch PHY and SoC solutions for the enterprise campus and SMB markets. What is new this quarter is that we've been successful in extending design win momentum with our 10 Gig solutions into the carrier market for 5G base stations.
Our solutions are winning in this market because our products offer both greater port density and the latest software feature set. This enables our solutions to be more flexible and configurable within our customers' products. Our connectivity business performed better than expected in Q1, with revenue up 3% year-over-year and 16% sequentially. While seasonality and the specific timing of certain customer ramps make this business a bit uneven, revenue growth from Q4 to Q1 was driven by wins in gaming and home media streaming applications. Finally, on the end market adjacencies that we discussed at Investor Day, Marvell has secured multiple design wins in Q1 for our automotive Ethernet, and Wi-Fi products with U.S., European, and Asian car manufacturers. While these wins are not projected to deliver meaningful revenue until fiscal 2019 and beyond, they do represent an important milestone in Marvell's progress in the automotive market.
In summary, it was another solid quarter for Marvell, and I want to give credit where credit is due. Our success would not have been possible without the extraordinary efforts of Marvell's employees. I've been so impressed by their contributions and by the speed at which they have worked to get the company back on track. In virtually every company meeting, employee roundtable, and hallway conversation, I'm reminded we have some of the best talent in the industry, and I'm grateful to all of them for their hard work. With that, I'll turn the call over to our CFO, Jean Hu.
Thank you, Matt. I will discuss the highlights for our first quarter for fiscal 2018 and provide our current outlook for continuing operations in the second quarter for fiscal 2018. Our total revenue in the first quarter was $579 million. Our core business grew 15% year-over-year and was flat sequentially, much better than typical seasonality. In Q1, we had a small one-time benefit of $4.7 million in revenue from a reduction in revenue-related accruals. Storage accounted for 52% of our revenue and grew strongly on a year-over-year basis. As a reminder, we did have a weak Q1 2017 in storage revenue. On a sequential basis, it was much stronger than typical seasonality. This strength was driven by the significant ramp of overall SSD revenue and growth in the HDD enterprise and the data center market, as Matt mentioned earlier, offset by softer-than-expected HDD client revenue.
Networking accounted for 25% of our revenue and grew 5% year-over-year in line with our expectations. Connectivity accounted for 13% of our revenue and grew 3% year-over-year and 16% sequentially. Other products accounted for 10% of Q1 revenue and declined 16% year-over-year, less than we expected as we benefited from some last-time buy activity. Our GAAP gross margin for Q1 was 60.2%, and our non-GAAP gross margin was 60.4%, above our expectation of approximately 59%. This is an important milestone for Marvell as we are now within our target non-GAAP gross margin range as we set out at our Investor Day. Please note that our Q1 gross margin also slightly benefited from the accrual reduction noted above. However, excluding this benefit was still above 60% non-GAAP gross margin. GAAP and non-GAAP operating expenses were in line with our guidance range.
GAAP and non-GAAP operating margin was 17.1% and 21.8%, respectively, better than expected. We are pleased with the result and expect to continue to make progress toward our target of approximately 30% operating margin. Our first quarter GAAP earnings per diluted share was $0.19, and our non-GAAP earnings per diluted share was $0.24 compared to $0.03 per diluted share for the ffirst quarte r of fiscal 2017. This improvement demonstrated a strong financial leverage of our new business model. Please note that our Q1 fiscal 2018 GAAP and non-GAAP EPS also included approximately $0.01 per diluted share benefit from the accrual reduction noted above. Free cash flow in the quarter was $117 million and represented 20% of sales. We returned about 170% of our free cash flow to shareholders, which included $30 million in dividends and $166 million in stock repurchases.
Let's now turn to our balance sheet. At the end of the first quarter, our cash and marketable securities were $1.65 billion, or roughly $3.15 per non-GAAP diluted share. Before I provide our Q2 guidance, I am very pleased to report we closed the sale of our IoT LTE Thin-Modem product line for a purchase price of $45 million on May 17. This product line was classified as part of our other product category, with approximately $5 million in quarterly revenue and a gross margin below the corporate average. This divestiture was not included in our previously announced discontinued operation. Our original plan was to exit the LTE product line through restructuring action. In Q2, this product line will be classified and added to discontinued operation. Please note our revenue guidance for Q2 excludes revenue associated with the sale, which has been approximately $5 million per quarter.
Turning to Q2 fiscal 2018 guidance. We expect our total revenue from continuing operations to be in the range of $585 million-$615 million. At the middle point of our guidance, we expect our storage revenue to be flat sequentially and grow double digits year-over-year. We expect our networking revenue to be approximately flat sequentially. As we said last quarter, we will continue to see the headwinds from the decline of the legacy product line, but we do expect new product ramps to offset the legacy decline in the second half of this fiscal year, enabling networking to return to growth. We expect our connectivity revenue to grow more than 30% sequentially and double digits year-over-year, primarily due to seasonal customer demand in gaming and the growth of our high-performance connectivity solution.
At the middle point of our guidance, we expect our core business of storage, networking, and connectivity to grow approximately 5% sequentially and year-over-year. We expect our other product category to decline high single digits sequentially in the second quarter and represent approximately 8% of our total revenue. As we discussed during our Investor Day, other products do provide a slight headwind to our total revenue growth, but we do expect these products to have a long revenue tail and generate sustained cash flow for the company. We expect our GAAP and the non-GAAP gross margin to be approximately 61%. We expect our GAAP operating expenses to be in the range of $237 million and $247 million, and the non-GAAP operating expenses to be between $215 million and $220 million. Our restructuring plan remains on track.
At the middle point of our guidance, we expect to achieve 25% non-GAAP operating margin, making another positive step toward our long-term target business model. We anticipate GAAP income per diluted share in the range of $0.21 to $0.27 and the non-GAAP income per diluted share in the range of $0.26 to $0.30. With that, we'll now open the line to Q&A. Operator, we'll take the first question.
Certainly. Ladies and gentlemen, if you have a question at this time, please press star then one on your touchtone telephone. Our first question comes from the line of Timothy Arcuri from Cowen and Company. Your question please.
Thank you. I guess the first question, Matt, you talked about some new 10G wins in networking. Can you just talk a little more about that?
Sure. Yeah. Hey, Tim. What we really did in my prepared remarks was, one, reinforce the messages from Investor Day, which was really that we saw a market transition happening in the enterprise campus and SMB markets, starting now and over the next couple of years, transitioning to two and a half, five, and 10 gig deployments. What we said also, though, that was incremental was that the same solutions for 10 gig that we targeted and we've been successful in in the enterprise area, we're also now getting design wins across several customers and platforms in 5G base stations. That was encouraging, and I think it speaks to the quality of the product definitions and the engineering and also, I'd say, our improved sales effort here at Marvell to broaden the set of accounts and customers that we call on in promoting our solutions.
We just highlighted the 10 gig as an incremental opportunity for us in carrier, which we had not talked about at Investor Day.
Got it. Okay, thank you. Then, Jean, the gross margin is obviously very strong. Drop-through almost double the revenue year-over-year. Obviously, some of that's cost-cutting. Some of the things that I think Matt cited, and I think you talked about as well, some of those things seem to have long legs to them. It seems like with what you've already done, that there's more legs to gross margin and then there's more you can do. I guess my question is: Is that the right way to think about it? That some of the things do have longer legs here, and that is it reasonable to, I know maybe you don't want to commit to sort of 65. I know that we're sort of pushing you on this, but is that an unreasonable number over the longer term? Thank you.
Yeah. I'll give you some color, but Matt can add more about the longer-term thinking on gross margin, right? When you look at the gross margin improvement, Matt talked about all the different efforts that we have been making. When we look at the year-over-year gross margin improvement, really half of them are coming from cost reduction initiatives that Matt talked about. The other half largely comes from product mix change and just discipline in managing our business and the operation. We're very pleased with the margin we achieved because we thought during our analyst day, we'll get here sometime in the first half. We're really pleased we actually achieved it earlier. The guidance over 61% in Q2 largely reflects our thinking this is the run rate of gross margin. Of course, we're not going to stop here. Matt, anything you-
Sure. Maybe I'll add a few comments since I think this will be one of the bigger questions from investors and folks on the phone. Just to add to what Jean Hu said, as most of you, I think, recall when we started this journey, I, from the beginning, myself, as well as the rest of the management team, really adopted a mindset and a mentality here at Marvell that really put gross margin as one of the key performance indicators of the company. We have multiple reasons why we believe that's important. One of those is that we believe it's a reflection of the quality of the revenue and the quality of the engineering in the company. Quite frankly, I don't think any of us were satisfied at the levels of gross margin that Marvell was delivering in the past. We've made it a priority.
I've also said that there's really been no silver bullet on how we got here. There's been tremendous effort that's happened, as Jean Hu mentioned, on the operational side with working more closely with our suppliers, better negotiation practices. Certainly focusing on things like yield. Really, I think our product and test engineering team has done a great job. Also, I think the benefits of our portfolio management that we did and obviously driving better mix and then being fortunate in having new products ramp, the number of factors. It doesn't stop here. We're going to continue to put one foot in front of the other and do what we should be doing, which is good general management, blocking and tackling. Certainly, we've continued to make improvements against our internally set targets since we got here.
We're encouraged by what we see, including the guide that we gave in Q1, which you could also argue has a little bit of mix working against us, actually. We're not commenting beyond Q2, but it continues to be a priority, and I think it's really a reflection of the value that's actually inside Marvell that we've been fortunate to be part of actually unlocking that over the last nine to 10 months.
Thank you. Our next question comes from the line of John Pitzer from Credit Suisse. Your question, please.
good afternoon, guys. Thanks for letting me ask the questions, and congratulations on the solid results. Matt, I guess given that storage was so much stronger than seasonal in the April quarter, it's pretty impressive that you guys are sort of guiding sequentially flat. I was hoping, like you did for April, you might be able to give us a little bit color on the July guide as to how you think SSD versus HDD is doing in the quarter, and I guess even within HDD, client versus enterprise. I ask the question because there seems to be a lot of investor consternation that the HDD side of the business has been unusually strong kind of over the last two quarters, and that as that rolls off, it's going to be hard for you guys to continue to grow.
I'd just kind of like to get your comments on your SSD growth opportunities and your share growth within HDD in enterprise and data center.
Sure. Yeah. Thanks for the question, John, and a couple of comments. I'd say first, just at the highest level, we've been very encouraged by our progress in the overall storage market, I'd say agnostic to HDD or SSD, with respect to the solutions that we're delivering and now shipping into the end markets of enterprise and data center. I think that's a very positive mix shift for the company that's been ongoing since I got here. Between HDD and SSD, as we called out, we had very strong sequential growth into Q1 from Q4. Really what I'd say on Q2 is we see that momentum continuing across both SSD and HDD for our solutions that sell into the enterprise and data center. On the comment about HDDs running hotter, I think that's been almost the case since I got here.
It seems like every quarter it sort of keeps doing better from an industry point of view than people think. We clearly keep our eye on that with respect to what our customers are up to and inventory levels. We also react to, at the end of the day, we plan our business around what our customers need, and that's reflected in our guide. I guess what I just, again, reiterate overall is we're real positive on our storage business, both in HDD and SSD. I think the mix shift that we're seeing away from kind of traditional PC client type of applications to enterprise and data center is very positive for Marvell, whether it's SSD or HDD.
That's helpful. Then maybe as a follow-up, Jean, given just all the moving parts in the revenue model now, it might be helpful if you could spend just a few minutes Kind of trying to level set us is how we should think about seasonality sort of beyond the July quarter and kind of what are the puts and takes on that.
Yeah. John, thank you for the question. I think that's something we have been looking at inside the company. If you look at it in the past, our business has changed a lot. When we look at the seasonality, frankly, networking tends to be less seasonal. If you look at our guidance for the Q2, it's really flat sequentially. In the second half, I think our view is actually because the new product cycle we have with all those 25 new products, we do see those products start to ramp up, offset the legacy headwinds that we said. For networking, that's how we think about it for the rest of the year. For the storage, really, I think, again, the normal seasonality really we haven't seen it played out this year, it's difficult for us to call any normal seasonality going forward.
I think, as we guided for Q2, Q3, for the remaining of the year, the view we have is, again, like Matt said, is on the enterprise data center side, that we'll continue to see the expansion of our business for the rest of the year. We'll keep you posted about our progress there for sure.
Perfect. Thank you, guys.
Thank you. Our next question comes from the line of Stephen Chin from UBS. Your question, please.
Hi. Thanks for taking my questions. The first one I had was, hoping if you could give some more color on your SSD sales target for the back half of the fiscal year. I think Matt mentioned 25%-30% of storage sales target. Just given that math compared to where you are today, I think it would imply that this can roughly grow in the low to mid-20s, sort of a CAGR. Just relative to your end market for the broader SSD market, do you think you can grow faster than the end market, closer to the 30% range? What are some of the puts and takes for that?
Sure. I'll take a stab at that, and I'll let Jean add any color as appropriate. What I'd say is, I'd go back even to our November call when we decided to start giving more color around our SSD mix, which I believe was favorably received by everybody. We sort of had a nice progression from 20%, above 20, and then now we're guiding back half of the year in this 25%-30% range. You can run your own model across that spectrum to see the progress, and I think when you do that, certainly would indicate that Marvell is growing faster than this past quarter has been growing faster than the end market, and we believe in that the design win pipeline we have and the opportunities we have will get us to where we guided. I wouldn't argue with that.
I think that we're not going to give exact specific numbers or specific detailed percentile breakouts. Again, in the spirit of investor transparency, we're just trying to show progress, and you can backdrop that against your own model and infer growth rate, market share change, et cetera. My summary point would be, we just continue to feel very good about our position in that particular business, as evidenced by the results not only in Q1, but where we see this ending as we head towards the back half of the year.
Thank you. Our next question comes from the line of Craig Ellis from B. Riley. Your question, please.
Yeah, thanks for taking the question, and congratulations on the good execution. I wanted to focus on two longer-term questions. First, following up on some of the end market commentary. Within the connectivity business, Matt, you mentioned that there were some automotive Ethernet wins that would generate revenue in fiscal 2019. Can you quantify to the extent that you're getting those wins, either regionally or across customer sets, so we can get a sense of the market penetration you may be already achieving relative to some of the comments you made at Analyst Day?
Just for clarity, to back up one step, I think the way to think about the automotive opportunity and what I said in my prepared remarks was, we actually saw design wins and momentum continuing to build in both the connectivity side, which is Wi-Fi/Bluetooth combo chips for automotive, as well as automotive Ethernet, which includes PHYs, as well as our switches with integrated PHYs. Number of different products across two different technology sets that Marvell has considerable expertise and position in. The way to think about the traction, really, which is, I think, a very positive sign that I've seen, is that it's very broad-based in nature in terms of geography. In fact, we saw wins across all three major regions. It's across multiple customers and OEMs as well.
Having been involved with automotive for quite a bit of time, almost 10 years now, going back to 2007 when I got very involved with it at my old company. This concept of Ethernet in the vehicle was around even then. What we do see is that vision of actually upgrading that legacy bus in the car, connecting all the disparate ECUs on one packet-based network is starting to happen. We feel like we're in a good position as Ethernet becomes more prolific in vehicle. We're calling it out as an FY 2019 and beyond, so we're not quantifying any revenue yet or sizes. You could imagine we'll begin to talk more about that as we make progress towards these production ramps.
I think it's just a signal that we've got leverage from our existing R&D efforts that we can apply into adjacent markets that are growing very fast, where new SAM is actually being created, and we think automotive is one of those markets for us.
That's helpful. Thank you. The follow-up question relates to your commentary regarding Neil Kim's appointment as CTO, the question is this: Given his background at really creating significant extensibility to R&D capabilities and the efficiency implications thereto for Marvell, would you expect that to result in increased new product productivity for the team over time? Would it result in lower operating expense versus what we would have expected prior over time? Are there gross margin implications given what he'll be doing with the rest of the team? Thank you.
Sure. Happy to comment a little bit more on Neil. The first backdrop I would give is that we possess an incredibly talented engineering organization here at Marvell, credit continues to go to the founding team of Marvell and the quality of the people that were brought in over many years and established. We've got a phenomenal base of talent to work with. It's a very creative and innovative and unique engineering team, I think, in the industry. What I've observed since coming in is that there's some opportunity, I think, to put some more discipline and process and measurements and implement, I'd call them, more industry-leading best-known methods into our engineering organization. I think Neil is probably one of the best-equipped individuals in the industry to actually bring that in.
What that translates into for us right now is really getting more output, i.e., higher new product introduction, quantity run rate, faster time to market, fewer spins, all these other benefits. It's not necessarily a direct OPEX savings, although I think when you start doing all those things and you get more efficient, you obviously get benefit. We're really trying to get more and get the team we've got today to actually be even more productive. With respect to gross margin, I think the impact I would just see there is it's very clear in my history in this industry, it's probably the view of the investor base as well. There's a high correlation between the margins you can get on a product and the amount of time it takes to develop the product.
If you're first to market and you can have an advantage there, it has a tremendous lever on your gross margins and your profitability and your market position. I think as a side benefit, by actually improving our new product cycle times and reducing spins, getting things out faster and more efficiently with higher yields, I think it'll have all kinds of longer-term benefits as you indicate. I think he's one piece of the puzzle. There's a tremendous workforce here, but I think already his influence is being felt, and we're really happy to have him here.
Thank you. Ladies and gentlemen, we do have a full queue this evening, we ask that you please limit yourselves to one question each. You may get back into the queue as time allows. Our next question comes from the line of Harlan Sur from J.P. Morgan. Your question please.
Good afternoon, solid job on the execution and the continued margin expansion. In networking, obviously, I know the sweet spot for the team continues to be enterprise, campus, SMB. Good to see the traction with 10 Gig in carriers. For the cloud data center guys, it does seem like the transition to 25 Gig per port is starting to move at a pretty rapid pace. Just wanted to get an update from you guys on the traction with your 25 Gig switch solution, which I think you guys call Bobcat 3. I know you guys were showcasing that at OCP. Maybe an update on some of the PHY solutions that you have that helps your customers kind of leverage the existing 10 and 40 Gig infrastructure, but still ratchet up to 25 gigabits per channel.
Just wanted to understand if the team is already participating in this upgrade cycle. Thank you.
Sure, Harlan, this is Matt. I'll comment on that. I think I'd just say the update is first I'd confirm all of your statements are accurate. We do have the products you mentioned now introduced in sampling and in design win mode. We called them out at the Investor Day, which I think was news to some investors because I think people had always thought we were this enterprise-only, campus-only focus, and this was our first foray. We've been very pleased on both of those product sets you mentioned, both the traction we see on our 25 Gig switches, as well as the physical interface products on retimers and repeaters. That continues, I think, to track well.
It's still early days, you're absolutely right that traction in 25 Gig across some of our enterprise customers, by the way, also that are moving up into enterprise class data centers, as well as the data center guys are moving in that direction. We're pleased with the progress so far, clearly the company's goal is to participate in that continued data center build-out opportunity, which I think is a large SAM expansion for the entire industry over the next 5 years.
Thank you. Our next question comes from the line of Joseph Moore from Morgan Stanley. Your question please.
Great. Thank you. Progress in SSD, I wonder if you could talk about the mix of enterprise versus client. You see any differences between those two markets? Also if you could discuss any tightness of NAND supply, does that help you guys or hurt you guys from a share perspective and customer exposure perspective? Thank you.
Yeah. On the SSD side, what we have seen is our SSD business grows sequentially, and year-over-year very significantly. When we look at our enterprise, we're probably more indexed in SSD side to enterprise and the data center versus our HDD business. Our overall enterprise data center storage revenue have grown significantly during Q1. We're not going to break down into exactly how much of our SSD is enterprise or SSD. Over the remaining of the fiscal year, we definitely will tell you the business trend of enterprise, in data center business, both in HDD and SSD, how we're going to progress for the rest of the year. On the NAND shortage question, we have a strong relationship with our tier 1 OEM customers, so we're actually less impacted by the shortage.
We do see some of our tier 2 customers get impacted. Overall, if we look at our revenue, our top three, four customers, they're all tier 1 OEMs. We don't see the impact there.
Thank you. Our next question comes from the line of Christopher Rolland from Susquehanna. Your question please.
Hey, guys. Thanks, and congrats on the quarter. I can't remember the last time I saw a company with double-digit revenue growth and OPEX down 20% year-on-year. Nice job there. Also a nice sale on the LTE business as well. Perhaps I shouldn't be looking a gift horse in the mouth here, but, perhaps you could describe the level of interest you have for any other products outside of the G.hn and LTE businesses that you sold in that $100 million, that you could potentially sell. Lastly, since you guys are building your cash coffers here, perhaps your thoughts on M&A, particularly as semi stocks are up year-on-year so strongly.
Sure. Yeah. Nice to hear from you. I'll take that in two pieces. On the first one, which was the LTE sale, we were pleased to get that done. As Jean mentioned, that was not originally part of our discontinued ops because we thought the likelihood of selling it was low. We were pleased to accomplish that because I think, one, it's a good team, and they found a good home with a company that actually wants to invest in this area. We got $45 million for it. I think that was a positive. All I'd say is on the remaining discontinued ops, we're still very much tracking to our plan that we announced back in November in our restructuring when we called out the disc ops.
I have no updates on any details within that, you're right, G.hn was part of it, and there's some remaining work to be done there. Your second question was around M&A and our cash balance. Yeah, I think we're in a very good position. We have a lot of flexibility at this point, given the fact that we have $1.6 billion in cash, and now you've seen what kind of operating income we're generating and we believe we can generate on a go-forward basis. That's one where we continue to obviously look. We also understand where valuations are, that's always something that's going to be a balance. We're very committed, and I'll just proactively answer this one for future questions that may come in that we're going to remain very objective around this trade-off between holding enough for firepower versus returning to shareholders.
That's a discussion that we continue to have on capital returns. I would say that we're still early in our journey here at Marvell. We continue to make progress every quarter. The second is, I think from a capital return point of view, as Jean mentioned, we did return above kind of the run rate that we had committed back in November. We've done about $290 million out of the $500 million estimate that we had made for the year. Of course, with the dividend, you end up with a pretty sizable shareholder return last quarter. We're going to continue to monitor both. Just keep putting one foot in front of the other on running our business.
Thank you. Our next question comes from the line of Quinn Bolton from Needham & Company. Your question, please.
Hi, let me add my congratulations on the nice margin expansion. I wanted to start first on the SSD business. I believe you guys were working on a turnkey solution for the client and retail side of the business. Just wondering if you could give us an update on that. Then just a clarification, I believe you said that the client HDD business was weaker than what you had originally expected when you gave guidance 90 days ago. I'm just wondering if you could provide a little bit more color there. What surprised you in that segment of the market?
Yeah, I'll take the HDD question first, then Matt can answer the other SSD turnkey question. On HDD side, we did see the revenue on client, the HDD business was softer than we expected or than when we gave the guidance. Largely, it's toward the end of the quarter. It's probably, as many of you have seen, there's some inventory build. We suspect that's related to that. For us, we don't see the end customers, but certainly we see the demand is a little bit softer than what we expected. Overall, frankly, HDD market continues to be quite stable, I would say, I would add on that one. It's softer than we guided it, in Q4 when we had that earnings call a long time ago.
Yep, makes sense, Jean. Then I think on the SSD one, as we've mentioned, there's a comprehensive effort inside the company to align various firmware and software efforts to get to a common full turnkey software solution that can actually run across multiple Marvell controllers. Today, we do have solutions for retail, and we have code that ships with those controllers. We've made some progress there, but that code today is not necessarily scalable across the entire Marvell product set. I think that's still a work in progress in terms of having what I'd call a more comprehensive solution, but clearly in the areas where we've targeted and had some very focused turnkey offerings, we've made progress and that's also been part of some of the growth that we've had.
We are participating today, just to be clear, across the entire spectrum of SSD opportunities in retail, in client, which would be PC-oriented all the way up to, as we mentioned a few times, I think this exciting opportunity in the data center.
Thank you. Our next question comes from the line of Ross Seymore from Deutsche Bank. Your question, please.
Thanks for letting me ask a question. Wanted to focus on the OPEX and the operating margin, if I could, with my question. Jean, you guys are on a nice trajectory there in delivering on plan. Are you still committed to hitting that kind of $206 million or the $820 million-$830 million run rate in the October quarter? As we look past there to get to that 30% operating margin target that Matt, you, and Jean talked about, is that going to be achieved more on the revenue growth leveraging from that existing level of OPEX? Are there other absolute levels of OPEX or absolute changes in OPEX that would make that drop from a dollar perspective?
On the restructuring side, we're on track to get to the target we communicated during Investor Day, which is to get to around between $820 million-$830 million run rate in Q3 of fiscal 2018. We are on track to get to that target. Just as a reminder, our Q4 fiscal 2018, we actually will have 14 weeks. This is one of the four or five years that you end up catching up with 14 weeks quarter. If I look at the OPEX model after we achieve our target, but you have to add back that one additional week in Q4. Our operating expense, we are going to very disciplined managing our operating expense going forward. Going back to the long-term target model, we're very committed to our 30% operating margin model.
As we talked about during the Investor Day, we have multiple levers, top-line revenue growth, gross margin improvement, and operating expense efficiency. When you look at the three levers, we're going to manage through it. We definitely believe our top-line revenue will continue to grow as we communicated to everyone during the Investor Day. The growth margins, another lever, operating expense will be very disciplined.
Thank you. Our next question comes from the line of Gary Mobley from Benchmark. Your question, please.
Hi, Jean, Matt, and Peter. Thanks for taking my question. You mentioned in your prepared remarks some last-time buy or some benefit from last-time buy in the other product category. Is that having some influence on Q2, and can you talk to the magnitude of the revenue impact?
Yeah. Just a quick recap is under our other product category, it include a lot of things. It include our printer business, which actually is a large portion of that category, but it also include application processors, some of the legacy product lines that we had from the past. It's a collection of the product lines. Some of them we had last-time buys. It's probably below 10% of our Q1 fiscal 2018 revenue in that particular category, and it always has some last-time buy even in Q2. Overall, we're actually going to see once we get out to fiscal 2018, as I talked about during Investor Day, we're actually going to see this product, this other category, to be more stable, because then it's primarily going to be our printer business, which is not growing, but actually, it's a very stable and flat business.
Thank you. Our next question comes from the line of Srini Pajjuri from Macquarie. Your question please.
Thank you. I have a clarification on a question. Jean, I think you said networking business still has some legacy that's declining. I'm just curious as to if you could clarify how big that legacy business is. In terms of my question, the connectivity business, I guess you're guiding for 30% sequential, and I understand there is a seasonality. I'm just trying to figure out to what extent this is normal seasonality versus new design wins, and then how we should think about seasonality beyond Q2 in connectivity. Thank you.
Yeah. On your first question on the networking side, the legacy product lines, it's about between 15%-20% of the revenue of our networking business revenue. Those product lines actually have a long life. They last four or five years. During the fiscal 2018, as we talked about the last quarter, we see some drop for the last quarter and the next few quarters. After that, as I said, in the second half, our new product revenue ramp is going to offset that legacy product decline. Your second question is about wireless connectivity, right? On the wireless connectivity side, the more than 30% sequential increase is largely driven by the seasonal demand on the gaming side and some of the connected home solutions. We're also getting traction on the enterprise access point and some of the high-end performance connected home solutions.
I would say this is more seasonal than regular because we do see the gaming segment has been quite healthy. Typically, for the wireless connectivity business, you will see this quarter is the highest quarter, then it started to come down. Of course, after the holiday season build, you are going to see a seasonal significant decline of wireless connectivity because the typical seasonal cycle.
Thank you. Our next question comes from the line of Atif Malik from Citigroup. Your question please.
Hi. Thanks for taking my question. If I look at your segment sales, storage was about $5 million below street expectations. Mobile and networking were in line, and most of the upside came from the other line, and you're guiding to 4% decline year-over-year for revenues. How should we think about your revenue growth year-over-year basis in October and January, and what is going to make the revenue growth accelerate? Is it going to be the new products in the networking side or SSD share? Can you just talk about what's going to cause the year-over-year revenue decline to kind of revert its course?
Yeah. Maybe I just want to clarify, right? When you look at our Q2 guidance, at the middle point of our guidance, our storage and networking and connectivity business actually will grow 5% year-over-year. The other category of the products will decline more than 30% year-over-year. The overall company at the middle point of our guidance is actually flattish. Our core business is actually growing year-over-year. I think if you think about going forward, as we outlined during our Investor Day, is we do think our storage business, networking business are going to grow faster than market. Our performance in Q1 is a strong validation of that. Our wireless connectivity business is going to grow along the line of the market. That's how we're driving the overall business to grow.
The other category, we said in fiscal 2018, is going to decline 30% year-over-year. Beyond the fiscal 2018, it still have some slight headwind to our overall revenue growth, but we do believe we'll be able to grow our overall revenue above the market.
Thank you. Our next question comes from the line of Blayne Curtis from Barclays. Your question please.
Hey, Blayne?
You might have your phone on mute.
I guess, John, let's move to the next one.
Certainly. Our next question comes from the line of Mark Delaney from Goldman Sachs. Your question please.
Yes, good afternoon. Thanks very much for taking the question. The question is on the enterprise hard drive business. If I understood correctly, that part of the hard drive business was better than what had been expected when you gave guidance. Can you talk a little bit about what's driving the upside in the enterprise market? Do you think you're seeing acceleration with some of the share gains, or was that more end market strength? Maybe you can just help us understand just the breadth of programs that you're targeting for share gain within enterprise HDD controllers. Thank you.
Sure. Yeah. Hey, Mark. A couple things. One is the performance that we saw, we did indicate, when we guided and as well as at the investor day, that that particular segment we were pleased to see new ramps occurring in Q1, which were new programs that we had not participated in before. That occurred, which is good, and we continue to see progress there. We're not in the business really of doing a back and forth on a share gain discussion. The way we think of it is the HDD market overall is fairly established. There's two large players. There's a finite set of customers. Really, we're focused on, obviously, a segment of the market and making progress there, which is the capacity-oriented nearline drives and enterprise drives, and we'll continue to do that.
We're not in the business of trying to call out share gains other than we're saying that we've got some new programs that ramped, that were higher than last year, and we're pleased with that progress. That's all I'm going to say on the HDD enterprise side. I think it's a good opportunity for Marvell to participate going forward.
Thank you. Our next question comes from the line of Kevin Cassidy from Stifel. Your question, please.
Hi. Thanks for getting my question in. On your 25 Gig switch, can you say what customers you're getting traction with? Is it the tier 2, tier 1, white box, or any of the above?
Hey, Kevin, it's Matt. I'll take that one. I think what I'd say is we're not at liberty at this point to do any specific customer disclosures just because we don't have that permission. What I would say is that there's a lot of interest in the products, that the interest is across I'd say the range of those types of accounts. It's not something that is targeting at one or two customers. I think there's going to be, we're hoping, broad-based adoption for it. At this point, we're still pretty early, too, in securing those wins and really kind of running the gauntlet on some of the qualifications we need to do. I think we'll probably have to table that one for later as we make progress. When we can, we're certainly happy to provide more disclosure around that.
Thank you. Our next question comes from the line of Vivek Arya from Bank of America. Your question, please.
Thank you for taking my question. I just wanted to maybe go back to one of the prior questions. There have been some concerns about double ordering and component tightness in the supply chain. Matt, was just wondering what you have seen. Is there any abnormal behavior in terms of demand that could normalize, or do you really think that the demand environment stays quite strong and the supply environment is quite balanced with it? Thank you.
Yeah, sure. Happy to answer that question, Vivek. I think I'm certainly aware of the commentary that's been out there from a number of suppliers. I think a lot of that commentary has come more out of the component or catalog or mixed signal type of analog companies. We're not really in that business, so we tend to be fairly specific in the SoCs we sell. We sell a finite number of products to some very large customers. Distribution is a pretty small percentage of our sales. From our point of view, we see the lead time environment, the supply chain, all that's running very normally here at Marvell.
Certainly, I've been through enough of these cycles to know sometimes you don't know when you're in them, certainly having lived through those, it doesn't feel like at least we at Marvell are experiencing that kind of thing. I think we see in the supply chain pockets of tightness, depending on the particular supplier, the particular either process node or thing that we need to procure in order to make our products, but that's really isolated. I'd say for Marvell, we're probably not the canary in the coal mine on that one.
Thank you. Our next question comes from the line of Tom Sepenzis from Northland Securities. Your question, please.
Yeah. Hi, thanks for taking my question. I'll echo the congratulations on the execution. You've talked about networking and obviously the strong growth that you're seeing in the connectivity business. Can you talk a little bit about what your expectations are for storage as a whole in the second half of the year? Obviously, SSDs are doing well, but are HDDs causing a little bit of a headwind there? Should we expect growth in the second half?
Yeah. Hey, Tom. I think we'll limit our commentary today around our storage outlook really to the SSD one only. That was really given to, again, provide a little more transparency around the progress that we're making there. Also, I think that because that's a growing market and that pipeline, I think, is pretty well understood, we were comfortable giving those kind of ranges. I think with respect to calling HDD at this point in the second half, we're really in the business of guiding one quarter at a time. I don't really know what that's going to look like. We're clearly looking at the indicators, certainly as we get into the next quarter call and we have some more visibility, or when it's appropriate, we'd be happy to share our views.
We're not ready to really make a prediction on the second half at this particular juncture.
Thank you. This does conclude the question and answer session of today's program. I'd like to hand the program back to Matt Murphy for any further remarks.
Yeah. Thank you very much. Just a couple words here. In closing, I'd like to thank everyone for spending some time with us today to talk about Marvell's Q1 results. We're executing well on our plan to transform the company and deliver shareholder value. We look forward to updating you on our progress next quarter. Thank you all. Have a good evening.
Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.