Good day, ladies and gentlemen. Welcome to the Marvell Technology Group first quarter 2017 earnings conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Instructions will follow at that time. If anyone should require assistance during the conference, you may press star then zero on your touch-tone telephone. As a reminder, this conference call is being recorded. I would now like to turn the conference over to John Ahn, Head of Investor Relations. You may begin.
Thank you, Latoya. Good afternoon, everyone. Welcome to Marvell Technology Group's first quarter of fiscal year 2017 earnings call. With me on the call today are Rick Hill, Marvell's Chairman; Matt Murphy, Marvell's President and CEO; and David Eichler, Marvell's Interim CFO. We will all be available during the Q&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 at marvell.com. We have also posted a slide deck summarizing our first quarter fiscal 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 August 27th. Please be reminded that today's discussion may contain forward-looking statements as defined in the Private Securities Litigation Reform Act.
These statements are based on currently available information as of the date of such statements and 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 forward-looking expectations and outlook, please refer to today's earnings release, our latest quarterly report on Form 10-Q and Form 10-K, 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. Marvell undertakes no obligation to revise or update publicly any forward-looking statements except as required under applicable law.
During the 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 settlement, 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 first fiscal quarter 2017 earnings press release, which has been furnished to the SEC on Form 8-K and is available on our website in the Investor Relations section. With that, I would now like to turn the call over to David Eichler.
Thanks, John, and good afternoon. Before I get started, let me say that we anticipate filing our Form 10-Q for the first quarter of 2017 in the near future. With that, we will be current with our required SEC filings and be compliant with listing requirements of Nasdaq. Let me spend a few minutes highlighting Marvell's financial results for the first quarter of 2017 before turning the call over to Rick Hill, our chairman. For the first quarter of fiscal 2017, we reported revenues of $541 million, which represented a decrease of 12% from the fourth quarter revenues of $616 million and a 25% decline from $724 million in the first quarter of fiscal 2016.
The revenue decline in the first quarter of fiscal 2017 relative to the fourth and first quarters of fiscal 2016 was primarily driven by decreased industry demand for HDD products as well as the anticipated decline in revenue resulting from Marvell's exit from the mobile handset business that we announced in September of 2015. Our first quarter is typically a weaker quarter where we see revenues decline sequentially. The first quarter of fiscal 2017 was no exception. Our storage revenues declined 16% sequentially, mainly due to the continued weakness in the HDD industry TAM. This was partially offset by growth in SSD driven by increased demand. Our networking business increased 5% sequentially due to improved demand for our networking products, while our mobile and wireless sales declined 29% sequentially due to the continued ramp-down of our mobile handset platform business.
Please note that the mobile handset revenues in the first quarter of 2017 were $22 million, down from $69 million in the fourth quarter of fiscal 2016 and $65 million in the first quarter of 2016. Our gross margin percentage for the first quarter of fiscal 2017 increased by 120 basis points from 50.9% of net revenues in Q4 of fiscal 2016 to 52.1% in Q1 of 2017, also compares favorably to 51.5% for the first quarter of fiscal year 2016. Improvement gross margin was primarily due to the lower percentage of mobile handset revenues. Operating expenses on a GAAP basis for the first quarter of 2017 were $311 million, flat with the fourth quarter of fiscal 2016 and 14% lower compared to $360 million in the first quarter of 2016.
Please note that R&D expenses in Q1 fiscal 2017 were $241 million or 45% of revenues, compared to $240 million or 39% of net revenues in Q4 and $280 million or 39% of net revenues in Q1 fiscal 2016. The $39 million decrease in R&D spending in Q1 2017 compared to Q1 2016 was largely due to the restructuring of the mobile handset business, which we announced in September that has now been completed. I'll talk more about the restructuring in a few minutes. Please note the small increase in R&D spending in Q1 2017 relative to Q4, was largely due to the increased payroll costs related to merit increases effective April 1st, increased payroll taxes starting a new calendar year, as well as savings from the holiday shutdown in December, which didn't occur in our first quarter of fiscal 2017.
SG&A expenses, on the other hand, were $69 million, or 13% of net revenues in Q1 2017, compared to $72 million or 12% of net revenues in Q4 2016, and $80 million or 11% of net revenues in Q1 2016. Please note that operating expenses on a GAAP as well as a non-GAAP basis for the first quarter of fiscal 2017 and the fourth quarter of fiscal 2016 include $17 million and $11 million, respectively, of accounting and legal fees related to the audit committee investigation and the related shareholder litigation, investigation by the SEC and the United States Attorney's Office, as well as other professional fees.
In summary, in Q1 2017, we reported a GAAP net loss of $23 million, or $0.04 per diluted share, compared to GAAP net income of $4 million or $0.01 per share diluted for the fourth quarter of fiscal 2016, and a GAAP net income of $14 million or $0.03 per share diluted for the first quarter of fiscal 2016. We were essentially break even on a GAAP basis in Q1 if you exclude the $4 million restructuring charge coupled with the $17 million of increased legal and accounting fees mentioned earlier. Let me spend a few minutes reviewing our financial performance on a non-GAAP basis.
On a non-GAAP basis, net income for the first quarter of fiscal 2017 was $7 million or $0.01 per share diluted, which includes adjustments of approximately $29 million, $25 million of which is related to stock-based compensation and $4 million related to restructuring, $1 million of which was related to the mobile handset business, which was completed in Q1 of fiscal 2017. Let me comment for a few minutes on the mobile handset platform restructuring, which we announced in September last year. We ended up eliminating 950 positions in the mobile handset business unit, which is 150 less than was expected, as we decided to retain more employees and equipment to support the remaining business than was anticipated.
The end result of the restructuring is that we estimate the annual cost savings of approximately $130 million, including employee-related facilities and equipment costs, which you are now seeing realized in our Q1 R&D spending levels. This compares to the original estimated annual savings on the low end of the range of $165 million or $25 million less. As I mentioned earlier, our total R&D spending in Q1 of fiscal 2017 was $39 million less than in Q1 2016, which was largely due to the restructuring of our mobile handset business. Please note more work is needed in the near term in bringing our operating expense levels in line with our revenues and long-term strategy.
Our non-GAAP gross margin for the first quarter of 2017 improved slightly to 52.5% from 51.9% in the fourth quarter, largely due to favorable product mix relating to higher networking sales and lower volume of mobile handset products. Non-GAAP operating expenses in Q1 2017 came in at $280 million, compared to $267 million in the fourth quarter, a 5% increase, and $307 million in the first quarter of fiscal 2016, a 9% decline. As I mentioned previously, our GAAP as well as our non-GAAP operating expenses for the first and fourth quarters of fiscal 2017 and 2016 include $17 million and $11 million, respectively, of increased legal and accounting fees, which are included in G&A.
In Q4, we had the benefit of a holiday shutdown, resulted in lower employee costs relative to Q1, which was offset by increased personnel costs with the annual merit increase effective April 1st and higher payroll taxes in the new calendar year. The overall decrease in Q1 2017 spending compared to Q1 2016 is primarily due to lower R&D spending as a result of the shutdown of the mobile platform business. The end result is that in Q1 fiscal 2017, we reported non-GAAP net income of $7 million or $0.01 per diluted share, compared to $0.11 in Q4 2016 and $0.13 per diluted share in Q1 fiscal 2016.
Please note if you exclude the impact of the added legal accounting fees, which are included in our non-GAAP operating expenses of $17 million in Q1 2017, $11 million in Q4 2016, our adjusted non-GAAP EPS would have been $0.05 per share in Q1 2017 versus $0.01 per share as reported, compared to $0.13 as adjusted in Q4 2016 versus $0.11 as reported, and $0.13 per share in Q1 fiscal 2016. Net cash provided from operations for the first quarter was -$610 million, which reflects the $750 million payment related to the Carnegie Mellon University litigation settlement, or a +$140 million on adjusted basis, compared to $53 million in the fourth quarter of fiscal 2016 and $59 million in the first quarter of fiscal 2016.
With that, I would like to turn the call over to Chairman Rick Hill to provide additional color on Q1 operating results and our Q2 outlook.
Thank you, Dave, and good afternoon, everyone, and thank you for joining our call today. We are happy to report our first quarter fiscal 2017 earnings today. We are also happy to report that we will be fully caught up on our filings after we file next week our Form 10-Q for this quarter. The first quarter is a seasonally weaker quarter for Marvell, with revenues typically declining sequentially, and the first quarter of fiscal year 2017 has been no exception. We saw our revenue decline by 12% sequentially, mainly due to normal seasonal weaknesses, compounded by a declining HDD market and the previously anticipated drop-off in our mobile and wireless sales as a result of the company's decision to exit the mobile business. Despite the previously mentioned declines, sales of our network and SSD products increased during the quarter and partially offset these weaknesses in other areas.
In the storage market, our HDD SoC revenues were negatively affected by continued pressure on overall HDD industry builds, which is correlated with a persistently weak PC demand environment. The HDD decline was partially offset by growth in SSD controller sales, which was driven by improved demand for SSDs. The company continues to invest in comprehensive solutions that build upon our leading positions in the storage market for both HDD and SSD. In the networking market, sales of our networking solutions grew sequentially in the first quarter of fiscal year 2017 due to increasing demand in the enterprise and data center applications. During fiscal 2016, we refocused our engineering and marketing efforts to our core networking technologies for Ethernet switches, PHYs, and embedded networking processors.
These efforts helped us to address growth opportunities in cloud data center, enterprise, and carrier migration towards infrastructure with higher bandwidth and speed, as well as opportunities arising from investment in the 5G network products. These efforts are starting to manifest in a number of new designs that will enable growth of our networking revenues and improve our market share. In the wireless connectivity market, our wireless connectivity revenues declined in the first quarter of fiscal year 2016, given sales of handset-oriented wireless connectivity combo chips were unfavorably affected by our decision to restructure the mobile platform business announced in 2015. The decline in mobile handsets-related business was partially offset by increased demand from gaming and multimedia applications. We continue to see greater demand and growth opportunities in enterprise access points, gaming, and set-top box streaming devices with our new generation of Wi-Fi solutions.
We believe the increase in performance of our new solutions with advanced signal processing and location capabilities will enable a significant upgrade cycle in enterprise, service provider, and connected home applications. In the mobile market, sales of our mobile solutions, which include our integrated applications processors, baseband modem solutions, declined due to anticipated drop-off resulting from our restructuring of our mobile handset platform business. We are entering the final phases of our restructuring of this business and anticipate the ramp down in revenues to continue through fiscal year 2017, providing somewhat of a negative drag on revenues. Let me turn to our outlook. As our financial results mentioned in the press release, we expected revenues to grow to $625 million-$635 million or a sequential growth of 16% at the midpoint.
Given that our first quarter results came in weaker than normal, this expected growth for the second quarter will bring us back in line with a first half typical expectation. However, it is important to note that the demand environment remains challenging for the semiconductor industry as a whole due to continued global macroeconomic uncertainty. Additionally, the shutdown of our mobile handset business, combined with the de-emphasis of other low-performing and low-margin products last year, is anticipated to create revenue headwinds in the near term, but should provide improved financial performance in the long term. Consequently, we remain cautious about revenue and margin as we enter the second half of the year. With a new management team in place at Marvell, we're doing all we can to ensure that our costs and expenses are in line with our cautious view on the top line.
Matt and his team are working diligently on a long-range plan, we will have more to share with you over the coming months. Now I'd like to review our profit and loss guidance for Q2. As we said, revenues for the second quarter ending July 31, 2016, which is fiscal year 2017, are expected to be in the range of $625 million-$635 million, with gross margins on a GAAP and non-GAAP basis expected to be between 52% and 54% of net revenues. GAAP operating expenses are expected to be in the range of $307 million-$317 million, with non-GAAP operating expenses expected to be in the range of $270 million-$280 million, with the difference between the GAAP and the non-GAAP due to stock-based compensation expense.
The anticipated growth Q2 revenues compared to Q1 is expected to come from all end market areas led by storage. Our estimated non-GAAP operating expense for Q2 is further broken down as follows: R&D spending is expected to be approximately $210 million-$215 million, SG&A expenses between $60 million and $65 million, including $15 million in additional legal and accounting fees related to the audit committee investigation and related shareholder litigation. The SEC investigation and other professional fees, which seem to have a long tail on them. Interest net and tax expense are expected to be $3 million positive and -$4 million negatively, respectively. The weighted average diluted share count for Q2 on a non-GAAP basis is estimated to be 527 million shares.
In summary, our Q2 GAAP EPS are estimated to be in the range of $0.03-$0.05 per diluted share, while our non-GAAP EPS is in the range of $0.10-$0.12 per share. With that, I'd like to turn it over to Matt Murphy to share some thoughts on his first couple of weeks at the helm. Matt?
Great. Thank you, Rick. Good afternoon, everyone, and thank you for joining our call today. As you're probably aware, we successfully filed the Form 10-Qs for Q2 and Q3 fiscal 2016 and Form 10-K for fiscal 2016 last week. This is obviously a huge milestone for Marvell, and I would like to thank the entire Marvell team as well as our advisors for the months of hard work that they put in to make our recent filings possible. We look forward to finally catching up with all of our filings upon the completion of the Form 10-Q for the period that we just reported. Looking ahead, as Rick just alluded to, I've been working closely with my direct staff, employees, and customers to get a detailed assessment of our business and operations in order to help formulate a comprehensive plan for Marvell moving forward.
The demand environment remains challenging. We recognize that we need to align our structure to this reality. As I articulated last week in our conference call, I believe the strength of Marvell lies in the talented employees and the innovative technologies that we have here. We must utilize this strength in a targeted and efficient manner. This means focusing our efforts on growing and profitable businesses while tightly managing expenses. That has been foremost in our minds as we perform detailed reviews of all of our businesses. I'm sure many of you have questions on this topic that you would like answered today, but we want to make sure that we take a thorough and rigorous approach to our analysis, which will take some time.
Therefore, I would like to ask you to hold off on such questions until we are ready to roll out our strategy in the coming months. With that, I'd like to turn the call back over to John to open it up for the Q&A portion.
Okay. Thank you, Matt. We will now open the call up for your questions. Please be sure to keep your questions within the scope of the first quarter results and second quarter outlook. Please note that we are not yet in a position to provide long-term guidance or strategies. Latoya, we'll take our first question, please.
Thank you. Ladies and gentlemen, if you do have a question at this time, please press the star then one key on your touch tone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. We do ask that you limit yourself to one question and one follow-up. The first question is from Craig Ellis of B. Riley. Your line is open.
Thanks for taking the question and thanks for all of the details in the releases. The first question is just on the revenue guidance. I know that you said that revenue growth would be led by HDDs or storage, I'm hoping that you can provide some further color on the growth of the other businesses within that overall 16% guidance.
Well, the growth is from $541 to between $625 and $635. The growth in storage is up roughly probably in the order of 20%, a little bit less than 20%, of course, there'll be growth in the networking market of near 10%. That's largely what's driving the growth.
Thanks, Rick. The second question is on gross margins. At the midpoint, it would imply about a 50-basis-point improvement, I know the guidance for the baseband business is to mix that down over the course of the year. At the midpoint, would the improvement be that smartphone mix out, or are there other dynamics that are at play?
There's other dynamics as we're continually looking at our cost structure, and we're making changes with our new Chief Operations Guy. We're really attacking the cost of goods sold. So I'm optimistic that we can meet those numbers and hopefully do better.
Thanks, guys. I'll get back in the queue.
Thank you. The next question is from Timothy Arcuri of Cowen and Company. Your line is open.
Thank you very much. I had two. I guess, Rick, this is more of, and also Matt, this is sort of more of a big-picture question. The thing that everybody always says is, well, storage is not that great of a business. They say that the drive business is not really growing, and SSD is still much, much smaller for you than the drive business is. Can you just address sort of how you see the mix of HDD being flat to down over time and SSD growing? Today, I think your HDD business is significantly larger than your SSD business. Thanks.
You're absolutely correct on that, Tim. As you've seen in some of the announcements, there has been somewhat of a rebound in the PC demand business that we're seeing in the short term, okay, with a steady growth in the SSD area. There'll be ups and downs in this particular business, but basically, our second quarter, which shouldn't be all that hard to project since it ends on Saturday, we see it somewhat up. I'll let Matt comment what he sees on it as well.
Sure. No, I'd just add to that. I think Rick's right. Clearly the HDD portion of our business is larger. SSD is smaller, but it's growing. All I'd say is in my preliminary reviews with the team, there's plans in place to address what would be a secular decline in sales of hard drives with some alternative strategies, and obviously SSD is a very important part of our future as well. We'll get back to you with more details as we roll out our strategy, but those are clearly some challenges we have, but there's plans in place to address it.
Clearly, Tim, as you know, in a market where there's secular decline, let's make no mistake about it, hard drives aren't going away anytime soon. They're shifting clearly more to the enterprise area. That offers more value, more complexity, and more opportunity for us in winning share in those areas as well. I think it's a combination of those things that allow us to be modestly optimistic that we can do better in the storage business. All right?
Got it. Thanks. Just follow up on that, can you just talk a little about capital return, Rick? I know maybe this is sort of a discussion point for down the road, but just generally, you guys have $1.6 billion in cash, no debt. You came through this really terrible drive period and still generated cash, and you're actually GAAP break even before you take out these one-time costs. What's the minimum cash? You've run many businesses, as you look at this, what's the minimum cash that you all think that is needed to run this business? Thanks.
As I quoted a long time ago at Novellus, you can never be too cash rich in the high-tech business, or too thin, and I gave up on being too thin, so I'm only working on the cash piece. With all seriousness, the one thing I hope you would want us to do is take a very measured look. With this industry, we want to make the right moves, and we want to have the ability to be able to make the right moves. We've just brought in a new management team, and I can assure you, it's on the top of our list to discuss with the board what our capital allocation strategy is, and it isn't going to be that you're going to have to wait forever. We will disclose it in a subsequent call here.
At this point, I'm going to deflect your question because I don't want to get us committed into something that I wouldn't be set to execute. Hopefully, that's helpful and honest.
Got it, Rick. Thank you so much.
All right.
Thank you. The next question is from Christian Schwab of Craig-Hallum Capital. Your line is open.
Great. Thanks for taking my question. When you guys look at the business on a go-forward business, if we just kind of take away some of the low gross margin products that you began to exit in the last few quarters, and we take away all of the mobility business that we're no longer going to be servicing and making, is the remaining business, should we be thinking about as kind of a $2.2 billion business ±$100 million? Or how would you look at that?
Well, I'm hoping that on an annualized basis, we can achieve numbers that are closer to a $2.4 billion range, ±$100 million, and grow from there. That would be my hope, and based on everything I've seen so far, I think it's achievable. Do we have it in the bag yet? Not in the bag, but we're making progress very rapidly.
Okay, wonderful. Just a follow-up to the previous conference call one week ago when you talked about a margin structure in line or better than industry peers on an operating margin structure. I think we all kind of think about that as 20%+ or 25%+. Is that a fair thought by analyst investors?
We talked last week, I believe, regarding gross margin. I got boxed into having a six handle on my gross margin, which got a lot of activity. As you can see, we're inching our way there even with this quarter. We haven't even begun to see some of the savings that we are starting to get in the supply chain. Relative to the operating expenses, obviously, there's tremendous room to change where we are today. Clearly, R&D with a three operating handle is not sustainable for long periods of time. We've got to be able to see growth in the top line or reduction in the R&D expense.
Our SG&A, if you were to take out this, what I would call, anvil around our neck with legal and auditing expenses, our SG&A expenses are not out of line from an industry perspective, although we can always get better in all of these areas. Rather than just put a number on it and throw it out on the table, I think things you should be thinking about is that clearly on an R&D basis, we're going to be more focused. It's one of the things Matt and his team are really doing right now is taking a look at where the real opportunities are and focusing our R&D efforts to get the most bang for the buck. In the operations area, we're really driving the supply chain and the efficiency of our organization to drive up gross margins.
We believe there's a lot of room to gain there. Some will come in the short term and more will come in the long term. I hope that's helpful, Christian.
That's excellent. One last question, if I may. I was surprised to see some enterprise, solid state drives released by Seagate, who continued to use your controllers instead of the controller that they bought from LSI/Avago a few years ago. Can you give us an update on your thoughts on your strength and positioning competitively on the enterprise side of the solid state drive world?
Well, I think from a standpoint of Marvell's overall performance is we have this ability to get better technical performance in a smaller area than any of our competitors. As a result, it gives our customers a performance advantage that they can monetize, and it allows us to even compete with people's internals capabilities. We think that is one of the great strengths of Marvell, and we hope to continue to enhance that uniqueness.
Great. No other questions. Thank you.
Thank you. The next question is from Quinn Bolton of Needham. Your line is open.
Hi, guys. Nice job on the margins. Just was curious, looking at the guidance for storage, doing up 20%. If I look at the HDD TAM now that Seagate and Western Digital both pre-announced June quarter results, looked like the TAM was actually down in June. So I guess I'm just wondering, as you look at the storage business for the July quarter, do you think that this reflects some of the customers building ahead for sort of the typical second half seasonality, or could there be some share shifts in various platforms where you guys may be actually gaining share that helps account for that strength? Then I've got a quick follow-up on the mobile business. Thanks.
Yeah. Since we don't have anything called a pull-in anymore, that's building ahead. Obviously, this time of year is an important build time for the upcoming season. It's still a little bit early, but I think as I highlighted, there's somewhat of a rebound that has occurred in the PC business. In addition to that, while the total addressable market has gone down somewhat, there are market share wins that we've had within that downward trend market. With those market share wins, we're able to grow this particular quarter, but make no mistake about it wasn't a very pretty quarter as far as we're concerned for quarter one.
Can you give us maybe an update on where you think your HDD controller market share is? Is mid-60s kind of a good estimate for your current share?
I don't know that we disclose that routinely, what our market share is overall. I'd have to ask somebody who's been here longer. John, have we ever disclosed that? I don't think so.
In the past, what we've said was we've always been at around 60-plus % share, right? It's been kind of ebbing and flowing from there. We haven't really given a specific number lately.
We're going to be at the Citi conference in September. These are all good questions to ask. We'll go evaluate whether or not, from a company standpoint, it's in our best interest to release those kinds of numbers. To the extent we can release them and discuss them more, we'll be prepared to do it at that time. Thanks for the input. Okay?
Great. Just a quick mobile platform. Does that include the combo chips, the $22 million in the first quarter, would that include any combo chips, or is that just purely the apps processors and baseband?
No, it would include combo chips.
Okay. Thanks for the clarification.
All right.
Thank you. The next question is from Ian Ing of MKM Partners. Your line is open.
Yes. I think you said smartphones, $22 million in the first quarter. Obviously, that winds down in future quarters. Just want to clarify, is there a policy of when there's last-time buys in place? Perhaps, there could be some end of the period buys.
Yeah. Hey, Ian, this is John. I think when we announced the restructuring, we had placed a one-year last-time buy, right? We announced that back in September, so by the fall of this year will be our last-time buys.
Your question is, do we expect any large surges? That's not in our forecast.
Okay. That's helpful. In terms of the extra accounting costs and those fall away in coming quarters, I assume the auditing and legal?
I'm pushing them out the door as fast as I can get them, but they're like their claws stick into the concrete of the walls.
Okay.
We're pushing it.
You're suggesting perhaps a gradual wind down in this current fiscal year then?
I'm hoping it's not gradual.
Okay.
I can't say anything yet.
Okay. No guarantees.
Not until I can slam the door on their fingers.
Understand. Okay. That's all I had for now. Thank you.
Thanks.
Thank you. The next question is from John Pitzer of Credit Suisse. Your line is open.
Good afternoon, guys. Thanks for letting me ask the question. Rick, just going back to the mobile platform. I'm kind of curious, when that $22 million of revenue is no longer in the P&L, what kind of gross margin uplift should we expect? If we were to kind of look at current results, X that mobile platform, how do we think about gross margins?
Well, at this juncture, at $22 million, it's not that big a deal.
It's just basically, it's gone now.
Yeah, it's pretty much gone out of there. We're getting gross margin improvement because we're operating better, okay? We're just getting more efficient.
That's helpful.
We have a long way to go on that, believe me.
Rick, for my second question, I was glad to see networking grow sequentially in the quarter, and you're guiding it to grow again. You kind of talked about three buckets inside of networking, Ethernet, PHY, and embedded processors. I'm just kind of curious if you could give us a little bit of color of your positioning there, because everyone knows your history in the HDD controller market. You had a strong position in networking. You kind of missed a product cycle. Why confidence now that you guys have a good product cycle set up here for continued growth?
I got confidence in the people, I've been here long enough to know who the people are and who are delivering and their ability to deliver, I'm pretty bullish.
Is it across the board, Ethernet, PHY, and embedded processing, or are there areas that you're more constructive on?
Well, Ethernet, certainly, I'm very constructive on. PHYs I'm getting more constructive on.
Helpful. Thank you.
All right.
Thank you. The next question is from Steven Chen of UBS. Your line is open.
Hi, thanks for taking my questions. I want to start off with the networking business as well. Could you also provide some more color on what's been driving the growth? Is it purely because of new products that are currently ramping that's driving the growth, or is there pent-up demand, or is the macro actually improving enough for some of your enterprise customers such that you're seeing budgets improving right now, or?
Well, it's largely due to some new product introductions by us, some wins, recover lost market share wins that we've had, and we're digging ourselves out of a hole we created by taking our eye off the ball, and the team now has their eye on the ball and are executing. It's that simple.
Okay. As my follow-up, I also had a question on the mobile business. If I recall correctly, when you guys announced back last September that you're moving away from the smartphone business, I believe that there was still some R&D being maintained on the cellular modem side. Just kind of curious how the products that you were still focusing on over the last several quarters, how that's coming along and whether or not the IoT product strategy, if that's still moving along and generating the expected returns for the original plan.
As I said last time, our major focus at this juncture is back to the core, which is the storage business first and making sure we're optimizing that. Second is networking, which we've realigned our strategy, and we're starting to get results with there. Finally, our big opportunity from a standpoint of wireless and gaming and multimedia, that really exploits our high-tech capability and our ability to differentiate ourselves, and so that's the primary focus at this juncture. Everything else relative to smartphones and that type of stuff is sort of the Internet of Things. Don't get me wrong, I love the term Internet of Things, I just can't get my hands around which one of those things is going to lead us to the promised land yet. Until we do, it's pretty hard to just allocate willy-nilly R&D dollars to products.
I think that's where we are, and I know that's where Matt is.
Okay. Appreciate the call, Rick. Thanks.
Thank you. The next question is from Gary Mobley of Benchmark. Your line is open.
Hi, guys. Thanks for taking my question. If I back out the $22 million from mobile handsets from the mobile wireless revenue, you generated roughly $90 million in revenue in the first quarter. Is that steady state business? Is that how we should think about it? Is most of what's remaining there related to gaming? Considering that, what sort of seasonality should we see off that $90 million base?
I do think it's an area that then is going to be more focused on gaming. It will have seasonality as you can expect due to the Christmas season. If you're in a hot product, you take off like a rocket ship, and if you're not in a hot product, you don't. I think in the short term, we think we're in hot products, and so there's upside, but we're not planning huge upside with that. Dave, you want to comment on it?
I'm not sure there's anything I can add-
Okay
to what he's already said.
Okay. If I look at estimates from those who assess the hard disk drive market and the solid-state drive market, it looks like the market in the March quarter for hard disk drive units declined about 20%, and for solid-state drives, the market increased about 30%. Contrasting that with maybe a one-month offset and looking at your April quarter results, you're down about 30% year-over-year. Is most of that disconnect explained by inventory depletion, not only for hard disk drives in the channel, but your hard disk drive customers depleting component inventory?
No. I articulated this a week ago, that I felt that we had lost some market share in the HDD arena, and recently we've won some market share back.
Okay. All right, that's it for me. Thanks, guys.
Thank you. As a reminder, if you do have a question, please press the star then one key on your touch tone telephone. The next question is from Mark Delaney of Goldman Sachs. Your line is open.
Yes, good afternoon. Thanks very much for taking the questions. First question is on the hard drive business. I think historically, ASPs for controllers have been in the $4 range. Rick, I think you said last week you're hoping to see better trends there going forward from preamps, and you guys have talked about your pricing strategy and potentially being able to optimize pricing going forward. Maybe you can help us think about, as you think about those different factors, what kind of price per hard drive opportunity you could see going forward.
Well, obviously in the hard drive business, it's the typical semiconductor business of do more and more for less and less till you do everything for nothing. There's constant price pressure there. Now, our strategy clearly is that we've got to take that pressure on the price. We've got to make sure that the complete supply chain shares in what's needed in order to continue to get the drive market to grow. The real big key is in our design capability and our ability to design uniqueness in that benefits our customer, namely speed and power consumption primarily, along with reliability, which are just sort of entry ante into the marketplace of itself, and we think we have a strong core competency there. We believe that we can always have an advantage to our competitor from a pricing standpoint because of the performance that we're selling.
That's strategically what we're trying to do. If you're asking the question, is there pressure on the $4 price? There's some pressure on it, from the standpoint of our products that are differentiated, we're able to maintain those kinds of prices.
That's helpful.
Hopefully that answers your question.
That is helpful. For follow-up on the SSD strength that the company's been seeing in the last couple of quarters, and you talked about guiding SSDs, I think, up for next quarter as well. Is that regaining market share, or is that driven by end market growth or some combination of the two?
It's a combination of the two.
Thank you.
Thank you. The next question is from Rick Schafer of Oppenheimer. Your line is open.
Hi, this is Corey Grady on for Rick. In your storage segment, what's your current PC and notebook exposure versus enterprise?
I don't have that number handy.
I don't.
We don't have it handy. John, I'll get it to you after the call.
Yeah, we'll take that offline.
Okay. Do you have your current split between HDD and SSD, and can you tell us how that compares to your backlog?
Yeah. Hey, we never break that out, as you know.
Okay
For competitive reasons. We're not ready to break that out at this point.
Okay, thanks.
Thank you. There are no further questions in the queue at this time. I'll turn the call back over for closing remarks.
Okay, great. Thank you, Latoya. I'd like to thank everyone for their time today and your continued interest in Marvell. I think Rick mentioned earlier that we are planning on attending the Citi Global Technology Conference in New York on September 6th of this year. We look forward to meeting many of you there. Otherwise, we look forward to speaking with you again soon. Goodbye.
Thank you. Ladies and gentlemen, this concludes today's conference. You may now disconnect. Good day.