Ladies and gentlemen, and welcome to the Marvell Technology Group Third Quarter Fiscal 2017 Earnings Conference Call. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session and instructions will follow at that time. As a reminder, this conference call is being recorded. I would now like to turn the conference call over to John Ahn, Head of Investor Relations.
Please go ahead, sir.
Thank you, Abigail, and good afternoon, everyone. Welcome to Marvell Technology Group's Q3 of fiscal 2017 earnings call. With me on the call today are Matt Murphy, Marvell's President and CEO and Jean Hu, Marvell's CFO, who will all be available during the Q and A portion of the call today. If you have not obtained a copy of our current press release, it can be found at our company website under the Investor Relations section atmarvel.com. We have also posted a slide deck summarizing our 3rd fiscal quarter 2017 results in the IR section of our website for investors.
Additionally, this call is being recorded and will be available for replay from our website until December 17. Please be reminded that today's discussion may contain forward looking statements. These statements are based on currently available information as of the date such statements are subject to risks and uncertainties that could cause our results to differ materially from management's current expectations. To fully understand the risks and uncertainties that may cause results to differ from our expectations and outlook, please refer to today's earnings release, our latest quarterly Form 10 Q and subsequent SEC filings for a detailed description of our business and associated risks. Please be reminded that all of our statements are made as of today, and Marvell undertakes no obligation to revise or update publicly any forward looking statements except as required under applicable law.
During our call today, we will make reference to certain non GAAP financial measures, which exclude the effect of stock based compensation, amortization of acquired intangible assets, acquisition related costs, restructuring costs, litigation settlements and certain expenses and benefits that are driven primarily by discrete events that management does not consider to be directly related to our core operating performance. Pursuant to Regulation G, we have provided reconciliations of the non GAAP financial measures to the most directly comparable GAAP measures in our 3rd fiscal quarter 2017 earnings press release, which has been furnished to the SEC on Form 8 ks and is available on our website in the Investor Relations section. Please note that Marvell Technology Group announced a significant restructuring action on November 2, our 4th fiscal quarter. During the prepared remarks section of this call, Matt and Gene will be providing details of our Q3 results before our restructuring actions. Then Gene will provide comments on our restructuring actions and provide our Q4 fiscal 2017 guidance for continued operations.
With that, I would now like to turn the call over to Matt Murphy, Marvell's President and CEO. Great.
Thank you, John. Good afternoon, everyone, and thank you for joining us. Before I review Marvell's results from our fiscal Q3, I want to provide you with some insight into our recent announcements and strategy going forward. As I mentioned on our last call, we completed a comprehensive evaluation of how our R and D resources are allocated across our product development efforts. This included a thorough review of product lines, discussions with customers and feedback from key stakeholders throughout the company.
Our assessment confirmed that Marvell's core strengths are in the high speed movement of data, particularly in the storage, network infrastructure and wireless connectivity markets. As a result of this review, we are focusing Marvell on these strengths and have developed clear strategies to grow in each of these markets. Let me share the details on our strategy for each market starting with storage. Data storage is in Marvell's DNA and we hold leadership positions in both hard disk drive SoCs and solid straight drive controllers. For our HDD business, our strategy is to maintain our leading position in client drives and continue expanding into cloud and enterprise storage with our higher performance solutions and strong OEM relationships.
The strategy is already yielding design win momentum and we are gaining traction in the high end of this market. In SSD, our strategy is to extend our leadership in this fast growing market by leveraging the breadth of our portfolio and continuing to expand our solution offerings. We continue to set the industry standard across a range of interfaces from SaaS and SATA to our leading PCIe based solutions. Our portfolio includes cost effective DRAMless solutions, custom ASICs, mainstream client products with firmware that provides full turnkey solutions and new generations of ASSPs for the rapidly growing cloud and data center markets. We are the 1st merchant controller provider to offer products built on advanced process nodes and along with our proven error correction technology enables higher performance, lower power and smaller footprint, all capabilities that our customers desire.
Innovation is equally important and we are also leading in the deployment of emerging standards such as NVMe, which is enabling a new generation of high performance computing systems. Altogether, we are very excited about the profitability and growth potential of our storage business. Network infrastructure is another area of historical strength for the company. We are one of the pioneers in low power, low cost CMOS based Ethernet transceivers. Today, we have reenergized this business and our 2.5 and 10 gig Ethernet 5 switches and versatile multi core RMSOCs are gaining traction in the marketplace.
Expect this to continue as our recently announced 25 gig solutions for the data center and private cloud markets are also showing promise. We are continuing to invest in this business and moving up the value chain to grow in this market, particularly in products that target the cloud and enterprise data center. Wireless connectivity is a core strength and one that we've grown organically as we've established Marvell as a market leader. Our strategy is to refocus on WiFi technology and invest in high performance areas. For example, our innovative 802.11ac integrated wireless solutions deliver industry leading performance with a reduced footprint at a lower cost.
As a performance leader, we are shifting from the low end towards markets that value high performance such as enterprise access points, automotive, the connected home and gaming. Overall Marvell's core strength align with the broader trends emerging in the marketplace. Literally billions of connected devices not just appliances but also cars, cities and entire industries are moving to the cloud. Virtual reality, artificial intelligence, autonomous cars, smart cities depend on high bandwidth video and data multiplied by social sharing. This is creating an explosion of digital traffic.
Data needs to be moved and stored not just to the cloud but also to the edge for greater accessibility at ever increasing speeds. Enterprise infrastructure and cloud providers are being forced to innovate at an unprecedented rate just to keep up. By building on our core strengths in storage, wired infrastructure and wireless connectivity and providing differentiated solutions, Marvell is well positioned to transform how data is moved and stored across a range of markets from the consumer to the cloud. Now as part of our R and D review, we looked at our total portfolio from a product by product and holistic perspective. We examined where we had differentiated technology and a path to market leadership that would produce profitable growth.
We also identified areas where we could improve the return on our current technology investments and which markets don't make sense for us to participate in. Based on this analysis, we announced on November 2 that we will exit or divest non core businesses, consolidate R and D sites and eliminate approximately 900 positions worldwide. These difficult but necessary actions focus Marvell in areas where we can win and deliver a higher return on our R and D investments. This restructuring is the first phase in our efforts to improve Marvell's performance. Our next phase includes the continued improvement in gross margins and operational efficiency.
We've had a number of initiatives in place to increase our supply chain efficiency, including consolidating purchasing and other functions to leverage our scale. We are raising the bar on our R and D investments so that new products have clear differentiation and yield a higher return on investment. Our goal is to achieve 58% to 60% gross margin within the second half of our fiscal twenty eighteen. With a renewed focus on our core product portfolio and on markets in which we are a leading technology provider, we are confident that with discipline and execution, we will deliver profitable growth. As we achieve greater cash flow and profitability, we are also committed to returning cash to shareholders.
With this in mind, I am pleased to announce that our Board of Directors has authorized a $1,000,000,000 stock repurchase plan. As part of this, we intend to return $500,000,000 to shareholders through share repurchases over the next 12 months, while also maintaining our current dividend plan. In summary, we have made significant progress over the 4 months that I've been with Marvell and I want to thank the entire team for their efforts. We've assembled a strong management team, refocused our R and D on the company's core strengths, developed strategies that will put Marvell on a path to faster and more profitable growth and implemented changes to make more effective use of our capital. Altogether, I am very confident that these actions will improve our execution as a company, accelerate innovation and yield greater returns for our shareholders.
Now I'd like to review the results of our Q3. We delivered strong financial performance for the 3rd fiscal quarter of 2017. Our revenue came in above the high end of our guidance, growing 4% sequentially to $654,000,000 This was driven by stronger demand from our storage and networking businesses as well as from our mobile and wireless sales, which came in as expected. We achieved non GAAP gross margin of 56.7 percent, which is a significant improvement from 45.9% 1 year ago. We also generated non GAAP operating income of $115,000,000 and delivered $0.20 in earnings per diluted share beating the high end of our range.
In terms of business highlights, storage revenue came in stronger than expected driven by growth in both HDD and SSD SSD solutions. Our HDD revenue grew as customers saw continued stabilization in demand for client drives. In SSD, Q3 was a record quarter with revenue increasing significantly both quarter over quarter and year over year. SSD controller sales now represent approximately 20% of our total storage revenue. In the networking market, Q3 sales of Marvell solutions were better than anticipated.
They grew 20% compared to the Q3 of last year, driven mainly by continued traction of our solutions for the campus and enterprise markets. In the wireless connectivity market, our 3rd quarter revenues came in as expected. This was mainly due to anticipated declines in wireless connectivity solutions related to mobile handset and low margin modules. Now I'd like to turn it over to our Chief Financial Officer, Jean Hu to provide more details for Q3 and our outlook for Q4. Go ahead, Jean.
Thank you, Matt, and good afternoon, everyone. First, I will review our Q3 financial results. Then I will discuss our restructuring actions and provide our Q4 fiscal year 2017 guidance for continued operations. As a reminder, our Q3 results do not include any impact of our restructuring actions, which we announced on November 2nd in our Q4 of fiscal 2017. Our revenue in the 3rd quarter was $654,000,000 which represent a 4% increase from 2nd quarter revenue of $626,000,000 Our Q3 revenue included $16,000,000 of storage shipment deferred from Q2.
Normalizing the $60,000,000 deferred revenue between Q3 and Q2, our storage revenue in Q3 would represent an 8% sequential increase and a 21% increase year over year, driven by higher HDD and SSD demand. Networking revenue in the Q3 of fiscal 2017 decreased 16% sequentially, but grew 20% year over year. Mobile and wireless revenue declined 11% sequentially as expected. Mobile handset related revenue was $4,000,000 Our GAAP gross margin for the 3rd quarter was 56.3%. Non GAAP gross margin was 56.7 percent above the high end of our guidance range provided in our Q2 2017 earnings release.
This increase was primarily driven by product mix and the improvement of operational efficiency. Our GAAP operating expenses for the Q3 were $285,000,000 Non GAAP operating expenses were $256,000,000 lower than our guidance, primarily due to better operating expense management. Non GAAP R and D expenses in the Q3 were $202,000,000 and the non GAAP SG and A expenses in the 3rd quarter were $54,000,000 Non GAAP operating income increased to $115,000,000 from $27,000,000 a year ago. This represented an operating margin of 17.6% versus a 4% operating margin a year ago. Our net other income was $5,500,000 Tax provision was $16,000,000 GAAP net income was $73,000,000 for the 3rd quarter and the non GAAP net income was $105,000,000 3rd quarter GAAP earnings per diluted share was $0.14 and our non GAAP earnings per diluted share was $0.20 versus $0.06 a year ago.
We have made significant progress to improve our financial performance. Turning now to our balance sheet. Our cash and marketable security were $1,650,000,000 or over $3 per diluted share at the end of the Q3. Net cash provided from operations in the 3rd quarter was $121,000,000 During the quarter, we resumed our stock buyback and our original plan. We returned $87,000,000 cash to shareholders, which included $30,700,000 in dividends and $56,500,000 in stock repurchases.
As noted in our press release, our Board of Directors approved $1,000,000,000 share buyback program. This newly authorized program replaced in its entirety the prior $3,250,000,000 stock purchase program, which had approximately $115,000,000 of repurchase authority remaining. Now I'd like to recap the restructuring actions we announced on November 2, which included the 2 initiatives. First, we are discontinuing specific R and D programs, streamlining engineering process and consolidating R and D side for great efficiency. These actions will result in eliminating approximately 900 positions worldwide, which is about 17% of our total headcount.
We estimate the revenue associated with these R and D programs was about 7% of our Q3 fiscal 2017 revenue. This revenue is primarily under our mobile and the wireless as well as other end markets. We do expect this revenue to decline over the next several years, but do have a very long tail. We will classify this revenue under other market in Q4, so we can provide more transparency of our core business in storage, networking and wireless connectivity. We also expect a significant reduction in legal and accounting costs.
Altogether, these actions are expected to reduce the annual operating expenses by $180,000,000 to $200,000,000 In addition, we are divesting non strategic businesses with approximately $60,000,000 in operating expense and $100,000,000 in revenue based on first half twenty seventeen annualized run rate. These businesses have a gross margins of approximately 40% and will be classified as asset held for sale and reported as discontinued operations in Q4. Our guidance for Q4 excluded estimated results of this business, which will primarily affect our other end market revenue category. Now I'd like to move on to our guidance of Q4 fiscal 2017 for continued operations. We expect our Q4 net revenue to be approximately $565,000,000 plus or minus 2%.
Excluding the impact of the $60,000,000 deferred revenue in storage, we expect our storage revenue to be down slightly in Q4 compared to Q3, but will grow year over year. Net working revenue is expected to be flat sequentially, but show double digit growth year over year. Our wireless connectivity revenue is expected to decline sequentially due to normal seasonality. Our GAAP and non GAAP gross margins are expected to be approximately between 57% to 58%. Our GAAP operating expenses are expected to be in the range of $322,000,000 to $332,000,000 and the non GAAP operating expenses are expected to be in the range of $225,000,000 to $235,000,000 GAAP and non GAAP net other income is expected to be approximately $3,000,000 and the GAAP non GAAP tax benefit is expected to be approximately $1,000,000 GAAP and the non GAAP diluted share count are expected to be approximately 524,000,000 and 532,000,000 shares, respectively.
This will result in GAAP income per diluted share in the range of negative 0 point 0 $1 to positive 0 point 0 $3 and non GAAP income per diluted share in the range of $0.17 to 0 point 21 dollars Looking ahead, we will detail our strategy for profitable growth, including our long term target financial model and the capital allocation strategy at an upcoming Analyst Day in early 2017. We will send out more specifics on this event soon and look forward to seeing many of you in person. With that, I'd like to turn the call back over to John to open up for Q and A.
Thank you, Jane. We will now open the call up to your questions. Operator, we'll take the first question, please.
Thank Our first question comes from Craig Ellis, B. Riley. Your line is open.
Thanks for taking the question. The first question is on gross margins. So one, congratulations on the significant progress you're making there in other parts of the business. As we transition from the improvements in gross margins to 56 0.7% and then 57.5%,
can you talk about
what changes in the business to drive it towards 58% to 60% over the next 3 to 4 quarters? And should we think about that 58% to 60% being a peak margin level for the business? Or is that just an intermediate level with potentially higher margins down the road?
Great. Hi, Craig. This is Matt. So yes, I'll go Hey, there. So, yes, so we're clearly pleased with the progress the company has made in short order to really address the cost side with respect to the product margin.
Additionally, we're benefiting from improved mix with higher sales of our networking and storage. So that's helpful and helping in the near term. As we look out into the longer term model we're communicating for the second half of twenty eighteen, we see further mix improvements and additional benefit that we anticipate in really addressing cost of goods in a very strategic and meaningful way. As far as anything above $60,000,000 we're not going there yet. It's a tough crowd.
I think we're pretty happy after this period of time to come out and be comfortable guiding in that range. But we do feel confident that the quality of the business that we're winning and that we're delivering is very good and that the roadmap of new products that we're going to be introducing also has a gross margin profile that supports that type of guidance. So overall, we're pleased with the progress on gross margin.
That's helpful. And then the follow-up question is more of an operational question. It was helpful to get the summary of which businesses you think are growth businesses and which are more maintenance businesses. As the company brings down its operating is in R and D significantly in the near term, when do you think you'll have the R and D allocated to your satisfaction in growth your areas versus maintenance areas? And when do you think we'll start to see sustainable revenue growth out of the business as you've gotten the R and D teams in place and as you make whatever tuning adjustments necessary with field engineering and the marketing program?
Sure. So let me break it into 2 pieces. So the first part of your question was around when do you think we'll have the R and D movements allocated appropriately to the areas where we believe we can grow. And what I'd say on that is and Gene gave some numbers on it. What we've really done is edit and address the areas of the company where we had R and D applied that we didn't see acceptable returns and meaningful growth prospects.
So in the core businesses of storage, networking and wireless, we're pretty comfortable with the R and D allocation there. There's some moving pieces within each of those businesses. But overall, we've been investing in those businesses. So there's some fine tuning going on. But actually I'm quite comfortable with the road map, the team and the execution we're seeing out of those three businesses.
That being said, there are minor tweaks we're making. So really what we're doing is addressing the part of the portfolio that is not part of the long term roadmap. Thanks. Good luck.
Yes. Just to add to Matt, really if you look at the restructuring action we are taking largely to focus on those non core areas, which have very large R and D, but very small revenue and the return on investment. And I think we articulated over the next 4 quarters that we'll reduce those R and D programs to the point, which has a run rate of comfortably at quarterly $210,000,000 So that's the objective of exiting Q4, twenty eighteen. I think then the question is we're investing all those core areas, Mike talked about, which we're very comfortable and we do believe the revenue growth will come from those market we're focusing on.
Thank you.
Thank you. Our next question comes from John Pitzer with Credit Suisse. Your line is open.
Yes. Good afternoon, guys. Thanks for letting me ask the question. Congratulations on strong results. Matt and Jean, I guess even if I adjust for the divestitures and look at an apples to apples sequential compare, you're guiding gross margins for the quarter in a flattish sequential despite the fact that storage is going to be down.
And so Matt, I guess help me understand a little bit better as you drive forward to this new model on the gross margin line. Do you think all of your products, the best majority of your product portfolio will sit inside of that gross margin range such that the gross margin variability is not going to be as dependent as historically has been on the storage business? Or how should I think about that? And I guess, how are you achieving sort of flat gross margins sequentially despite a mix that seems to be moving against you a little bit in the quarter?
Yes. Thank you, John. So on the gross margin question, if you look at our portfolio overall, some of the portfolio we are investing going forward above our corporate average. There are a few areas we're investing and we do think there's a great potential in the future, but the gross margin actually they are below our corporate average. So we do have the product mix will continue to be one of the drivers of our gross margin going forward.
As Matt talked earlier, right, we're going to focus on the differentiation of our product going forward. So over longer term, we're certainly trying to get our gross margin higher. And the second question is on the guidance for Q4. You're right, the mix is changing in Q4, but we are making effort to really improve cost of sales, the operation efficiency. So we do get benefit from operation efficiency.
But on the other side, the revenue compared to Q3 is lower. We do have the overhead absorption and all those headwinds. So in balance, that's what we're guiding. And of course, we'll continue to be disciplined and try to do better.
No, that's helpful. Guys, as my follow-up, Matt, one of the things that was holding you back from reinstating the buyback was just trying to decide what kind of M and A strategy you might follow. I'm wondering if you could just update us on your M and A philosophy now that you've reinstated the buyback and should we read anything into that philosophy with the reinstatement of the buyback?
Yes. No, thanks for asking about the buyback. So yes, we're pleased to put a sizable authorization out there, which I think signals our confidence in the company and the business. We and we felt it was important to get that communicated and authorized and announced at this call and get moving on it. In the context of the buyback, clearly we've looked at our capacity and our capital structure today and also comprehended the reality that M and A is real in the semiconductor industry today.
And we have to think about that and we do have some thoughts around it. We're not ready to communicate those, but clearly that's a reality that we have to deal with. So I'd say in the context of an industry that's going through the transformation it's going through, it's on our minds. But 1st and foremost, we're focused on driving Marvell's organic improvements. That's 1st and foremost.
We think we have a good opportunity with the products that we have. And second, we felt it was important to put out an authorization and the commitment to return a significant portion of our capital to shareholders while still maintaining dry powder.
Perfect. Thanks guys and congratulations again.
Thank you.
Thank you. Our next question comes from Harsh Kumar with Stephens. Your line is open.
Yes. Hey, guys. Congratulations as well. Stellar results. I wanted to follow-up on the first question asked.
If I heard it correctly, it was 58% to 60% gross margin in second half fiscal twenty eighteen. What are some of the levers that still need to happen in a big way for you to get there? And then I had a follow-up as well.
Harsh, thank you. That's yes, to get to 58% to 60% in the second half of fiscal twenty 18. There are 2 major drivers. The first is we'll continue to refine our product strategy just based on the portfolio Matt articulated we're investing in storage and networking and the wireless. We're going to look at the areas where we really can get the return back in the investments in those areas.
Secondly, I think within the next several quarters, most importantly is we are focusing on supply chain efficiency, not only just your typical operational streamlining, improvement of full cost, but also like testing, consolidating tests, labs, all those things, we do think we have a lot of work we can accomplish. Some of them, as you can imagine, will take some time when you want to consolidate the testing facilities across all the global locations of Marvell. So those are the very important drivers, the product mix and cost reduction effort.
And Harsh, this is Matt. Let me just add to that. I think what we've found is on the COGS side as we brought in a very seasoned and experienced operations management team, we've come to a few conclusions. And one is, as Gene mentioned, there's really tremendous opportunity to rationalize our supply chain in the back end by consolidating some of our spend with key partners. If you think of the drivers of our cost, it's obviously in wafers, it's obviously in the packaging and it's in the back end.
Some of that back end is done inside Marvell, but most of it's done with partners. So those levers are being pulled, negotiating with and partnering with the right people to drive our cost structure in a much more positive way. There's also programs we're implementing that are very structured around leveraging our strong product engineering and test engineering teams to drive yield improvement. That's another big lever we can pull. And then finally is fact of the matter is Marvell has always been very, very strong in small die size and optimized design techniques.
So some of the new products we have also have that advantage as well. So I'd say it's a real it's a very much a comprehensive approach we're taking from design to supply chain on the cost side, which has some short term benefits, which you're even seeing today in our current results. And we think that those efforts are going to continue to yield gross margin leverage over the next 4 quarters.
Hey, thanks. And for my follow-up, I think one of the key things that has to happen for Marvell to grow is the wins and for example, enterprise and cloud both had networking and storage. And I think I heard you guys say that you're starting to get some of those. I was wondering how should we as investors measure that success? Could you would you have some metrics like number of design wins this year versus last year?
Anything else you can give us to buy into that data?
Yes. I think what you can expect going forward as we get into a rhythm of these earnings calls is now that we've gotten restructuring announced buyback, we've gotten through the strategy, We'll begin to give more color on our business, things like design wins, pipeline and where we see the opportunities in a lot more detail. I'm seeing them firsthand. I'm visiting customers and I'm very encouraged. But as far as the data points, I think those are things that we'd like to call we'd like to cover as we make progress as a company and start highlighting some of those things and then ultimately call them out as we see them in our business results.
Yes. And that's also another good topic for our Analyst Day that's coming up, right? So we'll have you'll have the opportunity to meet with a lot of our business unit heads, especially the networking. So you'll get a lot more details about what you're looking for. I think that's the best one for it.
Fair enough. Congratulations again, guys.
Thank you.
Thank you. Our next question comes from Chris Rolland with Susquehanna Group. Your line is open.
Hey, guys. I echo my congrats as well. Perhaps you guys can drill down a little more on the non strategic businesses with $100,000,000 in revs. In mobile and wireless, what exactly was this? Was it a kind of a stub that remained in kind of cellular investments or was it something else?
And then what are we talking about in the other bucket as well? And then lastly, how should we think about the potential drag on gross margins from these businesses as well?
Yes. Thank you, first. So I'll answer your first question on the discontinued business side. Those businesses are currently under the category of other end markets. That's the most I can tell you because we're running a sale process.
As you can imagine, it's at this stage, we will not be able to disclose which business we're trying to run the sales process. And on the your second question about the other category, so when I look at all the revenue that get impacted by those R and D programs, we discontinued investment. They are largely under either mobile and wireless or under our other markets. Some of them ones probably obviously is under mobile and wireless. We do have the mobile computing like application processors, those kind of business mobile has long time.
So for instance, the application processor, they tend to have a very long life. So we're going to stop investing for the future generation of product, but we do expect the revenue to last for several years and declining. From margin perspective, of course, we're going to try to optimize the gross margin of those products when we don't have any investment in R and D anymore. And so we do think from the Q margin dollar perspective, those business will continue to contribute to the operating margin line.
Okay, great. Thank you. That was helpful. And then pacing on the $1,000,000,000 of buybacks. So you guys said $500,000,000 over the next 12 months.
I guess my first question is, should we just kind of expect that to be somewhat linear? Do you guys have a different strategy around that? And then secondly, should we just assume another $500,000,000 the next year? Or is this kind of a multiyear plan in your eyes?
I think we'll try to do the buyback in the most efficient way we can. And so frankly, when we guided our Q4, we did not I think we're really focused on the Force500 right now. I think we're really focused on the Force 500,000,000 right now, about the authorized $1,000,000,000 which is multiyear plan. And right now, we're really focused on the $400,000,000
Okay, great. Thank you.
Thank you. Our next question comes from Quinn Bolton with Needham and Company. Your line is open.
Hi, all. Congratulations on the nice margin results. Gene, just wanted to make sure I heard you right. When you talked about the discontinued ops, you said it's about $100,000,000 of annual revenue and I think $60,000,000 of annualized expenses. Did you also say it was running roughly a 40% gross margin?
Yes. Yes. Yes. That's exactly what we said. This business is about $100,000,000 revenue, about 40% gross margin and $60,000,000 operating expense roughly.
So as that business gets categorized as discontinued ops in the January quarter, you clearly get a little bit of a positive gross margin effect since you take that 40% gross margin revenue stream out of the continuing operations. Is that right?
Yes, absolutely. You're right.
Got it. Great. And then sort of the second question, it sounds like most of the products that you're walking away from on the mobile side or looking to categorize as discontinued ops are in the other category. Just within what's left then within mobile, it sounds like most of the wireless LAN will be focused on segments where you expect to continue to invest. I just want to make sure that I know you're stopping the investments in Wi Fi for mobile handsets, but is there anywhere else that you're stopping the investment in the wireless LAN?
Or are you looking to kind of continue that investment in sort of higher performance Wi Fi across the remaining segments of that wireless business?
Yes. Hey Quinn, this is Matt. I'll take this one. So, yes, the way to think about it is we have this category mobile and wireless and then within that is our Wi Fi business is a piece of it, it's the largest piece today. And we are investing there.
When we've looked at that business, the handset portion now is pretty de minimis. It's almost down to nothing. When we look at the WiFi market non mobile, when you break it into a few categories like enterprise access points, we actually have a leading position there. When you look at automotive, we've got a leadership position there as well, connected home, high end gaming. So these non mobile higher performance, more robust Wi Fi enabled applications is a place where Marvell has got a market position.
It's got traction. It's got design wins. And we're going to try to build off of that. So that's how we're thinking about the investment portion of the mobile and wireless category.
And Matt correct me if I'm wrong, but it sounds like most of those Wi Fi designs will be more access point solutions perhaps with integrated CPUs rather than lower end sort of client devices. Is that right?
That's the way to think about it. Yes.
Great. Thank you.
Thank you. Our next question comes from Timothy Arcuri with Cowen and Company. Your line is open.
Margins, your
line is open.
Hello. We did not hear your question.
Hello?
Hey, Tim, are you there?
Hello, can you hear me?
We can hear you, Tim.
Hi, okay, great. My question is, first one on margins within storage and really how much higher SSD gross margins are than HDD gross margins?
Sorry, we don't disclose that information. And I think the only comment I would say is that our overall storage margin is higher than our corporate average.
Okay, great. And then I guess a question really for Matt. There's some concern that if you did a M and A deal right now that it could interfere with your ability to basically take costs out of the current businesses. But you obviously have about $2,000,000,000 worth of liquidity between your real estate and your cash and what you could borrow against. So the question is, would you be willing to do a deal while you're still rightsizing the cost of the existing business?
Thanks.
Sure. Thanks, Tim. And what I'd say is you're absolutely right. The key focus of the company right now is to execute. Execute on the plan that we laid out to the investment community, laid out the plan that we've discussed internally and really drive that.
And if we do that, we think we can unlock a lot of value in the company. We have comprehended what you mentioned with respect to our buyback thoughts. But at this point, again, we're laser focused on the internal development and we've got all hands on deck on executing.
Okay. So I guess the right way just to think about that would be that you want to take the cost out of the existing business before you go out and
do a deal, to be clear, right? Yes. I think all I'd say is this, that's clearly the priority. We have to keep our eyes open. We're not unaware of what's happening in the industry.
And we do think that over time as we execute our plan, Marvell is a phenomenal company. It's a phenomenal platform. We've got a great brand, great infrastructure, great engineering talent and great scale. And so over time we think we can grow this company organically and inorganically. But first things first.
Okay, awesome. Thank you, Matt.
Yes, you're welcome, Tim.
Thank you. Our next question comes from Joseph Moore with Morgan Stanley. Your line is open.
Hi. This is Vinay calling in for Joe. Thanks for taking my question. I wanted to follow-up on your SSD business. Can you just talk about the growth you're seeing there, your share position as well as the pricing and the competitive profile of that market?
Sure. Yes, happy to take the question. So we're very pleased with our performance of our SSD business. As I mentioned in my prepared remarks, it's now becoming a meaningful portion of our overall storage revenue. It's growing much faster than our overall storage revenue.
And it's in a market that's growing quite fast. We have a wide range of technology that we offer there. We participate primarily at the higher end of the market. And we're also seeing traction especially in the last year or so even in the lower end of the market where really having not only the hardware, but the software and the firmware and a full turnkey solution is required. So I couldn't point to any one individual specific growth driver, meaning all the areas that we're investing in SSD, all the different submarkets are actually all performing quite well.
And we're encouraged by the traction we see especially as large OEMs who are transitioning from hard drive based systems to SSD based systems start thinking about tailoring their storage requirements around their own special needs. And when they do that, they can think about using Marvell technology and controllers in conjunction with sourcing their own NAND and coming up with their own solutions for their tailored applications. So we really participate, again in a broad range from all the way from ASICs at the high end for high end applications down to broad based solutions for the retail market.
Got
it. That's helpful. For a follow-up, can you touch upon what traction you're seeing for final level cash and Moshi? That's something you guys were pretty vocal about last year. Like any comments on customer traction there?
Sure. So the way we look at those two technologies is they're both technologies that are continue to be in the Marvell roadmap. With respect to Mochi, we're in production today with devices that are based on the Mochi architecture. But I'd say more broadly the company really took that vision of Mochi as an interface and as a design standard and actually has embraced modular design and modular technology
in a
number of different ways outside of just the Mochi specific interface. So we see modular design is important for Marvell, especially as processor cores want to migrate down to advanced node, but IO really still can be efficiently designed and leveraged at legacy nodes. So that's a technique we are taking advantage of today. FLC is a little farther out and that's leveraged primarily from our storage group. So both of them are in our new product design pipeline.
Mochi is farther along. And we are going to continue to leverage those technologies that have been incubated inside Marvell for our own product benefit.
Very helpful. Thank you.
Thank you. Our next question comes from Ian Ng with MKM Partners. Your line is open.
Yes, thank you. First question for Matt, I mean Marvell largely a OEM business, but in your past you also have extensive experience with distribution representatives and other types of channels. So do you foresee perhaps adding other types of channels to help sell Marvell product? I know IoT and connectivity some competitors use
a channel distribution channel. Thanks.
Yes. Hey, Ann. Yes, great question. And it's not something we've talked a lot about, but I'll just spend a little time here on it. So you are correct.
Marvell historically has been a very much an OEM direct account, R and D to R and D partnership type of company and that's great. I mean, companies actually I'm very impressed with the level of relationships that have been developed over the years in Marvell up to very, very senior levels at our customers. So that's an asset we have and that's great. We do have business that goes through distribution and you're right, some of it's in connectivity. Actually, a lot of it is in our networking business, in PHYs that sell into the broad market as well as some of our switches.
So that revenue today isn't terribly large as a percentage of Marvell. So it hasn't gotten looked at in a lot of detail. But in an aggregate dollar amount, it's actually not insignificant. And when I look at our distributor network that we have in place today, it really hasn't been actively managed in my opinion. It's not been a priority.
So think of it this way, we sell a lot through distribution to a lot of customers. And our view here is and this is in the next sort of phase of Marvell now that we've gotten all of the strategy in place and the restructuring and the things I mentioned, our attention is now turning to how do we take the technology we have in Marvell and sell it much more efficiently and much more broadly. And distribution can be a great mechanism to do that. And I think there's a lot of low hanging fruit in distribution today to really leverage that revenue we've already got with those partners, maybe think about how to focus within distribution on some key partners and actually motivate them and enable them to sell Marvell products much more competitively. So that's something I think you'll be hearing more from us on.
I think it's an opportunity for the company to get incremental sales with technology we've already developed.
Thanks, Matt. And for my follow-up, now that the strategic review is done, do you think there's any opportunities in terms of the process of green lighting new products investments, perhaps revisiting the hurdle rates or ROI and investment requirements?
Yes. You've got my playbook figured out. So that process in the company, I mean, again, it's a very, very innovative company. And that innovation and that level of creativity in Marvell has created a lot of technology that's very, very valuable as a company. So that's something that I'm very focused on making sure we maintain as we go forward.
But that being said, the rigor in the company around having a very robust process to evaluate all the new investments that we're going to make in R and D, all the new projects, What's the true realistic derisk return on investment for those? Does it meet the hurdle rate that we need to grow the company over time? Is it differentiated? What's the development cycle time? What's the cost?
That whole process in the company is something that I think can really be improved upon a lot. It's something that I have a lot of passion around. And myself and the whole management team as we think about Marvell going forward are going to be spending a lot of time with our engineering groups and really making sure that what we're putting into the pipeline on this very precious R and D budget that we have is being spent wisely. And again, I think that's just like you said on the other question with distribution, it's just another opportunity to optimize what's already working in the company and do a much better job at it. And I think we should start seeing dividends paid on that next year and the year after.
But to really manage a company of scale for the long term, we've got to have a very efficient capital allocation process and R and D budgeting process and we're putting that in place. Thank you, guys.
Thank you. Our next question comes from Kevin Cassidy with Stifel. Your line is open.
Thank you. Maybe my question is along the same lines. You had mentioned revitalizing your networking, especially Ethernet networking. I wonder if you could talk a little more details about that of, say, you mentioned the 25 gig PHY. What are you going to be bringing to the market that isn't there already?
Sure. So you're right. We I think many of you know the history of the company. Marvell really one of the ways it made its mark in the industry was that at 1 gigabit Ethernet, the company really took the market by storm and gained a leading position. And along with the pioneering in the rechannel area in HDD as well as in Wi Fi, these are kind of the core businesses that grew Marvell to what it was what it is today, excuse me.
Company did get behind for a number of reasons. And starting in early 2015, there was a leadership change and within the company, within the networking business and a real refocusing in that area. We do see strong demand and opportunity for us both to do some refreshing on the existing portfolio. And we've now started to get products out that are leading products and what we call NBASE T, which would be things like 2.5 gigabit Ethernet, 5 gigabit Ethernet that are addressing new segments of the Ethernet market as well as 10 gig, which even though that standard has been around for some time actually does not represent a material portion of the Ethernet shipments today. We have our 10 gigabit solutions as well and we think we can participate there, especially because of our strong position in switches.
And selling our switches and PHYs together as a solution to our customers is a very powerful prospect and one that one of our largest competitors has done really well for many years. So we think there's plenty of market to participate in. Marvell is very well recognized in this area. And we have a suite of products from 1 gig, 2.5, 5, 10, gearboxes and other interface ICs at 25 and beyond. And again coupled with our switches and our ARM based SoCs by the way, it's a very nice solution for a wide range of our customers.
So we are investing there and we're seeing traction.
Yes. Just to add to Matt's side, right, if you look at our networking revenue for the past 4 quarters, we had experienced the year over year growth consistently. So we do see strong momentum from that business, not only during the past several quarters, but going forward.
Okay. Thank you. And Matt, you mentioned my follow-up question was around adding the ARMADA or the ARM based processors to the strategy too. Maybe if you can expand on that a little more.
Sure. So I think that was a very good decision that was made. That was done before me. And the that product line has actually if you look at our networking revenue and as Gene mentioned, it's been growing pretty nicely. Actually the fastest growing piece of it has been the Armada family.
It's getting traction across a range of applications and range of geographies. It's doing well in products for campus, SMB, even small cell base stations and things like that. And we also see that there are some legacy architectures out there like PowerPC or MIPS that ultimately customers want to see a migration path to ARM, the ARM architecture, which is really, as everyone knows, become the industry standard. And so as that transition happens and people move to ARM, Marvell has got a pretty competitive offering there. So we do see some positive trends in the SoC area.
It's still relatively early days, but we are getting revenue growth. And as I mentioned, it's growing faster than our overall networking business. So we're encouraged.
Great. Thank you. Congratulations.
Okay. Thank you. Thank
you. Our next question comes from Mike Burton with Brien Capital. Your line is
open. Hi, and thanks for taking my questions and congrats on the results. I'd like to follow-up on the SSD comments you just gave and congrats on the record quarter there. Did I interpret you correctly that the majority of the revenues currently are for enterprise SSDs? And when you look at those newer opportunities on the low end, Matt, are you looking more at client PC as the low hanging fruit?
Or are you looking in mobile flash controllers?
So maybe I'll take the question. So it's a combination of up to date's revenue between enterprise and the client side. And I think when we look at continue to grow this business, we're certainly like Matt said, we're going to focus on the high end. We're doing ASIC for a lot of customers. Those are great foundation business.
We'll expand it to the client side, not mobile handset. We're more focused on the PC, the things we can add more value.
Okay, understood. And then I know it's early, but with the changing mix of businesses, can you give us a sense of what seasonality looks like in your segments and any initial thoughts relative to market trends as we contemplate the April quarter in our models? Thanks.
That's a good question. As you can imagine, the business, if you look at the last year also, it has changed very significantly, right? We used to have a very large portion of our revenue from the mobile side. So the seasonality has been all over the place frankly. I would say going forward, if you look at the Q4 when we guided Q4, on the storage side, typically Q4, the seasonality, you have a 2% to 4% decline sequentially.
We actually excluding the 16,000,000 dollars deferred revenue shipment, our guidance actually is better than normal seasonality. And the networking side, I think Q4 typically is flattish sequentially. I think right now we can see networking and storage are quite consistent. The wireless connectivity side Q4, it's a very significantly sequentially declined quarter. As you can imagine, a lot of the consumer, mobile, gaming, those are the really seasonally down quarter.
And going forward, I think since our investment are going to focus on storage and networking and the wireless connectivity And over time, those three businesses' seasonality will dictate overall company's seasonality. We'll give you more color next quarter when we have a clear cut of 3 segments, so we can provide more insight.
Fair enough. Congrats again.
Thank you. Thanks Mike.
Thank you. That does conclude today's question and answer session. I'd now like to turn the call back to John comments.
Okay, great. Thank you, Abigail. I would like to thank everyone for their time today and your continued interest in Marvell. Please note that we'll be presenting at the Credit Suisse TMT Conference in Scottsdale, Arizona a couple of weeks from now, Wednesday, November 30. So we look forward to speaking with you either there or again very soon.
Thank you very much.
Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Everyone have a great day.