Good day, ladies and gentlemen, and welcome to the Marvell Technology Group fourth quarter and fiscal year 2016 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. If anyone should require assistance during the conference, please press star then zero on your touchtone telephone. As a reminder, this conference is being recorded. I would now like to introduce your host for today's conference, Mr. John Ahn, Head of Investor Relations. Mr. Ahn, you may begin.
Thank you, Andrea, and good afternoon, everyone. Welcome to Marvell Technology Group's fourth fiscal quarter and fiscal year 2016 earnings call. With me on the call today are Rick Hill, Marvell's Chairman, Matt Murphy, Marvell's President and CEO, and Dave 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 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 fiscal 2016 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 19th.
Please note that since we are still in our quiet period and will continue to be so until we are fully up to date on our financial filings, our commentary today regarding Marvell's business trends and finances will be largely limited to past periods, specifically to fiscal Q2, Q3, and Q4, and full year fiscal 2016. We will not be providing any specific financial guidance for future periods on today's call. Please keep this in mind when posing questions during the Q&A portion of the call. We thank you in advance for your understanding. Please note that we anticipate releasing the results of our first quarter of our fiscal 2017 results during the week of July 25th, and we will hold a conference call to discuss those results. We will announce the exact timing of the Q1 release and call via press release several days before the event.
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 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 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, and Marvell takes 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 results, restructuring costs, litigation settlement, and certain one-time 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 second, third, and fourth fiscal quarters and fiscal year 2016 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 like now to turn the call over to Dave Eichler.
Thank you, John, and good afternoon. I would like to thank everyone in our investor and analyst community for your patience over the past nine months as we have worked through a number of issues, including the completion of the independent audit committee investigation, the hiring of Deloitte & Touche as our independent public accounting firm, and the completion of the audit of fiscal year 2016. We anticipate filing our annual report Form 10-K, as well as our second and third quarter 10-Qs within the next week, followed shortly thereafter by our 10-Q for Q1 fiscal 2017. We will then be current with our required SEC filings and compliant with listing requirements of Nasdaq. Let me spend a few minutes highlighting our financial results for fiscal 2016 and the fourth quarter before turning the call over to Rick Hill, our chairman.
In fiscal 2016, we reported total net revenues of $2.7 billion, a decline of 26% from fiscal 2015 revenues of $3.7 billion. On a GAAP basis, our gross margin in fiscal 2016 was 45.2% compared to 50.3% in 2015, while our operating expenses were $2 billion compared to $1.4 billion in 2015. Please note that operating expenses in fiscal 2016 included $655 million related to the CMU settlement, and I want to point out that the total CMU settlement amount of $750 million contained multiple elements, which we are required to allocate under the accounting rules, with $655 million allocated to operating expenses as the settlement and covenant not to sue component. $79 million was allocated to cost of goods sold as the fair value of the license related to prior periods, leaving $16 million to be amortized in future periods.
R&D spending in fiscal 2016 was $1.1 billion, or 40% of net revenues, compared to $1.2 billion in fiscal 2015 and 30% of net revenues. SG&A expenses were $292 million, or approximately 11% of revenues, excluding the $655 million related to CMU settlement, which I talked about previously, compared to $290 million or 8% of net revenues in 2015. Please note that our fiscal 2016 GAAP results included restructuring charges of $63 million, which was primarily related to our decision to exit the mobile handset business, compared to restructuring charges of $10 million in fiscal 2015. The end result is that for fiscal 2016, we reported a GAAP net loss of $811 million, or $1.59 per share, which was largely the result of the CMU settlement and restructuring. This compares to GAAP net income of $435 million or $0.84 per share in fiscal 2015.
Shifting to non-GAAP results for fiscal 2016. Our non-GAAP numbers for fiscal 2016 exclude the impact of $134 million of stock-based compensation, $63 million related to restructuring, $751 million of litigation matters, including CMU, the amortization of acquired intangibles of $13 million and $43 million of other items, all of which are detailed in our GAAP non-GAAP reconciliation contained in these financial tables. Our non-GAAP gross margin fiscal 2016 was approximately 49% compared to 50.5% in fiscal 2015, and our non-GAAP operating expenses were $1.2 billion, a decline of 10% over the prior year. Please note that the non-GAAP operating expenses exclude the impact of the $750 million Carnegie Mellon University litigation settlement, again, of which $655 million was allocated to operating expenses, as I mentioned previously.
Our non-GAAP R&D expenses for fiscal 2016 were $945 million, or 35% of net revenues, compared to $1.1 billion in fiscal 2015, or 29% of net revenues. SG&A expenses, on the other hand, were $213 million or 8% of net revenues, ignoring the impact of the CMU settlement, compared to $223 million and 6% of net revenues in fiscal 2015. Please note that non-GAAP SG&A expenses for the third and fourth quarters of fiscal 2016 include $6 million and $11 million, respectively, of legal and accounting fees related to the audit committee investigation and government inquiries by the SEC and the U.S. Attorney's Office. On a non-GAAP basis, our fiscal year earnings per share in fiscal 2016 were $0.37, down 68% from $1.15 per share in fiscal year 2015. Shifting to Q4 2016 for a minute.
For the fourth quarter of fiscal 2016, we reported revenues of $616 million, which was a decrease of 9% sequentially, mainly driven by the anticipated decline in revenue resulting from Marvell's exit of the mobile handset business. The decline in mobile and wireless was partially offset by growth in our storage and networking products. Our GAAP gross margin percentage for the fourth quarter of fiscal 2016 was 50.9%, compared to 43.8% for the third quarter and 51.4% for the fourth quarter of 2015. Operating expenses on a GAAP basis for the fourth quarter were $311 million, or 12% lower compared to $355 million in the third quarter, and 14% lower compared to $360 million in the fourth quarter of fiscal 2015.
R&D expenses in Q4 were $239 million, or 38.9% of net revenues, compared to $284 million or 42% of net revenues in Q3, and $260 million or 33% of net revenues in Q4 2015. SG&A expenses were $69 million or 11% of net revenues in Q4, compared to 10% in Q3 and 8% in Q4 2015. Operating expenses in the third and fourth quarter of fiscal year 2016 include $6 million and $11 million, respectively, of legal and accounting fees related to the audit committee investigation and related shareholder litigation inquiries by the SEC and the U.S. Attorney's Office.
In summary, in Q4, we generated GAAP net income of $4 million or $0.01 per share compared to a GAAP net loss of $58 million or $0.11 loss per share in Q3 of fiscal 2016, and a GAAP net income of $82 million or $0.16 per share for the fourth quarter of 2015. The difference between our GAAP and non-GAAP results during the fourth quarter were mainly due to stock-based compensation expense of $32 million, $4 million of restructuring expense, $4 million related to litigation matters, and $11 million related to the amortization and write-off of intangible assets and other expenses. Focusing on our non-GAAP Q4 numbers for a minute. Our non-GAAP gross margin for the fourth quarter was approximately 52% compared to 46% for the third quarter, with the improvement due to more favorable product mix due to lower volume of mobile handset products.
Non-GAAP operating expenses came in at $267 million, a 6% decrease from the third quarter and a 15% decline compared to the fourth quarter of 2015. This resulted in a non-GAAP operating margin of 9% for the fourth quarter, compared to 4% for Q3 and 15% in Q4 2015. Non-GAAP R&D spending in Q4 was $209 million, or 34% of revenue, compared to $229 million or 34% in Q3, and $260 million or 30% of revenue in Q4. Non-GAAP SG&A expenses were $58 million or 9% of revenue in Q4, compared to $54 million in Q3 or 8% of revenue, and $55 million or 6% of revenue in Q4 2015. Again, please note that the non-GAAP SG&A expenses for the third and fourth quarters of 2016 include $6 million and $11 million, respectively, of legal and accounting fees, as I mentioned previously.
The end result is in Q4 2016, we reported non-GAAP net income of $55 million, or $0.11 per diluted share, compared to $0.06 per share in Q3 and $0.25 per diluted share in Q4. If you exclude the impact of the added legal and accounting fees, our non-GAAP EPS in Q4 would've been $0.12 per share versus $0.11, as I mentioned a minute ago, and $0.08 per share in Q3 versus $0.06 as I commented on. The shares used to compute diluted non-GAAP EPS during the fourth quarter was $519 million. Cash flow from operations for the fourth quarter were $53 million, and free cash flow of $47 million, or approximately 8% of revenue. Moving on to details of our various end markets. For the full fiscal year 2016, our storage revenue decreased 31% and represented approximately 44% of total sales.
The revenue decline was mainly due to soft PC demand environment that affected hard disk drive or HDD bills. In Q4, storage revenues grew 12% sequentially, reflecting improved demand from HDD customers, but was partially offset by slightly lower SSD controller sales. Storage revenue represented 47% of total Q4 sales. In networking for fiscal 2016, our revenue declined 18% and represented approximately 20% of total sales. In Q4, our networking revenues grew 8% sequentially and represented 22% of Q4 sales as we started to benefit from our increased focus on our core technologies into new enterprise and data center applications. For our mobile and wireless business, revenue for fiscal 2016 decreased 27% and represented 29% of overall sales. In Q4, our mobile and wireless business declined 34% sequentially and represented 26% of revenues.
The drop in revenues in Q4 and fiscal 2016 was mainly attributable to our exit of the mobile handset platform business. Turning briefly to the balance sheet. Our balance sheet included $2.3 billion in cash and short-term investments at the end of fiscal 2016 and no debt. As noted in the press release, we paid the $750 million settlement to CMU in the first quarter of fiscal 2017. No share buyback occurred in the fourth quarter with the blackout due to the delayed filing of our financial statements, and currently we have $180 million remaining in our authorized share repurchase plan. We also paid dividends of $30 million fourth quarter, or equivalent to $0.06 per share, and have subsequently declared and paid dividends in Q1 and Q2 of fiscal 2017 at the same level.
With that, I'd like to turn the call now over to Chairman Rick Hill, to provide additional color on our fiscal year 2016 revenues and introduce our new CEO, Matt Murphy.
Thank you, Dave. Good afternoon, ladies and gentlemen. This is Rick Hill. I'd like to thank all of you for joining the call today. I know it's been a very long time since the company has had an opportunity to communicate with you. We have decided to break this up into separate calls for finishing fiscal year 2016, the first quarter of fiscal year 2017, which we will hold on the 27th, which is a week from now. A week and a day from now, just so you're aware. Today, we're going to focus on fiscal year 2016 and the three quarters where we have been in the dark. Before I start, I want to make a few opening comments to refresh everyone's memory on how we have gotten to where we are today.
In August of 2015, before we announced Q2 of fiscal year 2016, we started an investigation of [polers]. The board and the audit committee launched an investigation to determine the facts of the situation. As a result of the investigation, the audit committee and their legal representation determined that there were no fraudulent activities that they could find in the organization, nor were there any material misstatements within the fiscal year 2016, which would have needed to be restated. The financials, for 2016, there were no material changes to any of those numbers, therefore, no restatement was necessary. We filed an 8-K to this effect, I think on March 1st of this year, the findings of the audit committee. All right.
A team of people that included the board, our outside counsel of Gibson Dunn, as well as Sheppard Mullin, KPMG, EY, several other auditing firms, were all poring over, working tirelessly in order to help the company be able to come to the determination that there were no material misstatements or fraudulent activity with the finances. As a result, we've been able to file the fiscal year, or will be filing the fiscal year 2016 financial results in the next week. The audit committee, along with the entire board, have addressed many of the issues relative to controls. While there were no fraudulent activities identified or material misstatements, it was identified by the company that we did have control issues, which, if not properly corrected, could lead to misstatements in the future. We have been busily fixing those situations.
Personally, having been here only since the 1st of May, I've received nothing but total unwavering support by the entire board of directors, including both founders, who have recognized the need to enhance internal controls and take Marvell to the next level of performance. Both Sehat and Weili have been instrumental in helping bring me up to speed on technology and the customers of Marvell. They've also supported and been involved with the selection and recruiting of Matt Murphy, our new CEO, who started on July 11, 2016. They were also instrumental in supporting the settlement with Starboard Value LP that added Peter Feld, Oleg Khaykin, and Rick Hill to the board, as well as bringing on Bob Switz and Mike Strachan, two individuals steeped in valuable financial acumen.
Over the last 10 weeks, we have made tremendous progress assembling a team of individuals, establishing an organization structure of checks and balances in order to execute the business strategy. We've hired the following. First, a young, capable CEO with knowledge and a vision for our business, Matt Murphy, who will be speaking in a few minutes. We hired a chief legal counsel to help craft our internal controls and monitor compliance, Mitchell Gaynor. We've added a VP of marketing and sales who can coalesce the organization around a single strategy, Chris Koopmans. We've hired a Chief Operating Officer, Andy McCullough, who can streamline our operation and improve our cost structure globally. We also hired a new VP of finance, Willem Meintjes, who has a strong controls background and accounting technical expertise as we build a robust finance organization.
We still are conducting a search and expect to complete shortly a search for a CFO and a Chief Accounting Officer. The reason that I feel it's important to talk about these changes is it shows the commitment of the founders and the board to win back the confidence of our investors who are vital to our success. We thank you for staying with us. As Dave Eichler has brought you up to date on the finances through quarter four of fiscal year 2016, I'd like to make some observations. We dropped about $1 billion in revenue from fiscal year 2015 to fiscal year 2016. That's pretty obvious. We exited Q4 with revenue of $616 million. As you all know, Q1 is normally seasonally down from Q4 of the prior year. Market expectations for the first quarter are $612 million.
Our expectation is lower due to seasonality and restructuring of the mobile business. I'd like to point out, it's clear our operating profit at 7.1% is way too low. R&D expenses as a % of revenue are way too high. Our gross margins have stabilized but need to continue to improve. Both Matt and I agree there is no reason Marvell, with its existing structure today, can't perform at the level of all of our peers or better. During the last 10 weeks, we introduced Strategy 1.0.
Over the next month and a half, Matt Murphy will take us to the next level of Strategy 2.0 as he evaluates the first changes we've made to focus the business on the storage business, where we are dedicated to making sure that we decline less than a market that is in secular decline, grow within that market the shift to solid-state drives, where we have a leadership position. In addition to that, we want to grow networking and wireless by refocusing our efforts on cloud and enterprise and drive down our cost structure in these areas. With that, I'd like to turn it over to Matt Murphy to say a few words before we open it up for Q&A.
Great. Thank you, Rick, and good afternoon, everyone, and thank you for joining our call. It's truly a pleasure to meet all of our investors and analysts today, and I look forward to speaking with many of you personally over the coming months. Today, I'd like to talk a little about my background, why I joined Marvell, some initial thoughts on the company, and what I plan to work on in the near term as I formulate a strategy to take Marvell to the next level. In terms of my experience, I spent the last 22 years at Maxim Integrated, and in that capacity, I took on a number of different roles and responsibilities. Most recently, I was running all of the business units, sales and marketing, product development, field applications, and central engineering.
Prior to that, I led the communications and automotive solutions group, and I also, during my career at Maxim, spent five years as the head of worldwide sales and marketing. I'm thrilled to have this unique opportunity to join Marvell during, in my opinion, a very exciting time for the company. Marvell has always been well-respected in the semiconductor industry as a leader in engineering and innovation. It's really an iconic global brand. It's filled with talented people and cutting-edge technology. I feel that very few semiconductor companies today offer true systems and platform solutions that encompass silicon, software, firmware, and support. Marvell is one of those few companies. I give a lot of credit to the founders of the company, Sehat and Weili , for having the vision to create and grow this special company into what it is today.
I have tremendous respect for them. I'd like to thank them for all of their contributions. I realize that Marvell has had some challenges lately, but I believe that this is the best time to join a company to help lead it to the next level. Today is officially my seventh day at Marvell. In that time, I've had a chance to meet with our board, management team, employees, and customers. My initial impressions of the company are overwhelmingly positive. It's filled with phenomenally talented people and that these people are the foundation of our company. We have many solid businesses where we have a leadership position and many innovative technologies that form the core of our company. As I mentioned, I've also had a chance to meet several customers already in order to understand their needs and how Marvell can help solve their problems.
What I've found is that Marvell has a long track record of closely partnering with its customers. As a result, we have a long list of very loyal customers. Over the coming weeks and months, I will be delving deeper into our product portfolio, financial structure, and organization in order to formulate a long-term vision for the new Marvell. I see tremendous potential for the company to participate in growing markets and to increase its profitability. I'm also committed to investor outreach. I look forward to updating our investor community on a go-forward strategy and providing regular reports on our progress. With that, I would like to turn the call back to John to open it up for Q&A.
Okay. Thank you, Matt. We will now open the call up to your questions. As I indicated initially in my opening remarks, we will not be providing any guidance into future periods on this call. Please keep that in mind when you're posing your question. With that, Andrea, we'll take the first question, please.
Thank you. Ladies and gentlemen, if you have a question at this time, please press the star then the number 1 key on your touch-tone telephone. In the interest of time, we ask that you please limit yourself to 1 question and 1 follow-up question. Our first question comes from the line of Craig Ellis with B. Riley. Your line is open.
Thanks for taking the question, Matt, congratulations on the move. The first question I had was following up on a comment that you made, Rick. I think you said that you wanted the business to have a margin structure that was at peers. Can you be a bit more specific on what you would expect there, even if broadly speaking, from a gross margin and operating margin standpoint?
Well, I don't want to put Matt into a box at this particular point in time, so I've been hesitant to give you a range of numbers. Needless to say, there has to be always a minimum of a five handle and then ideally a six handle on the number from a gross margin standpoint.
The follow-up is for Matt. Matt, I know you've been there just seven days, and maybe it will require some input from Rick on this too, but as you look at the product portfolio and as you look at the operating parameters of the business, what do you think the greatest opportunities are for growing the revenue profile of the company, and what are the greatest opportunities for improving its margin structure?
Sure. I'll take that, Craig. Thanks. Again, as you mentioned, this is with seven days of data, I've been digging in quite a bit. Here's what I'd say. I think there are many businesses in Marvell where we have a strong leadership position and a strong base of profitability. Actually in some of those businesses, even where we have a strong position, we have the ability to grow those. I think there's also a lot of other businesses in the company that potentially are smaller in scale. Maybe they're not the largest player. Really portfolio management and the decisions around where we're going to invest and not going to invest is going to be the biggest portion of the time I spend over the coming weeks as we develop the new strategy.
Craig, I want to add something on this. If you look at Marvell, one of the things I've been most impressed with over the last 10 weeks is the quality of the design capability that we have within the company. In particular, when you look at the storage market, we have a core competency in storage, whereby there's a huge opportunity focusing on growing segments
Within the storage business that we need to take better advantage of, particularly in the enterprise and the cloud space. We have the knowledge, skills, and ability to do that. Also, we've lived with the luxury of being more efficient at our designs, and as a consequence, have maybe slipped a little bit on really focusing at driving our supply chain costs down. So we see a huge area in storage with an opportunity to do that. In the area of networking, it's another area where we have a strong core competency. Frankly, we took our eye off the ball as we tried to really focus on the Internet of Things, which is often difficult to get your arms around. We sort of got away from our knitting.
Again, we have this core competency and an ability to do a lot of data manipulation and data crunching, which are essential in this arena. By refocusing again on the cloud and the enterprise infrastructure, we believe, and we've already begun to see our ability to win incremental sockets that lead to long-term growth in this business. So again, if you look at what's going to limit the world going forward, it's the pipe, and it's the area where Marvell has the greatest expertise. Finally, from a growth standpoint, clearly virtual reality and augmented reality are two new emerging opportunities where, again, Marvell's core competency will come into play, and I think you'll see, during the Christmas season this year, strong growth in this area, and Marvell is going to be part of it, and a big part of it. I hope that helps.
Thanks for the color, guys. Good luck.
You're welcome.
Thanks.
Thank you. Our next question comes from the line of Timothy Arcuri with Cowen and Company. Your line is now open.
Thank you very much. First of all, Rick, let me say that having known you for many years, the company's in very good hands. There's not a better person that could be leading the ship. That's great, first of all.
Thanks, Tim.
I guess I had a question for both you, Rick, and also Matt. The first step seems to be the costs. OpEx is more than 40% of revenue in fiscal 2016. Semis average is more like 20%, it seems like you could pretty easily take out, I don't know, $250 million-$300 million out of OpEx, and that would still leave you higher than most of your peers. Can you just talk generally about OpEx and sort of how you think about what you could cut and what you can't? Thanks.
We're going to talk more about that after Matt's been on the ground a little while, but I can tell you one thing. Matt was mentored by a friend of mine who was probably the toughest guy in cost on the planet, and that was Jack Gifford over at Maxim. I have no doubt in my mind that nothing on the income statement has escaped Matt's eye in the last seven days. I'll toss it over to him as a softball, but go for it.
Thanks for setting it up for me there, Rick. I was fortunate to have worked for Jack Gifford for many years. Yeah, I think we have to dig in, and clearly, it's well understood by me and the company where the peer group sits and where large semiconductor companies of this size run from an OpEx point of view. I think my focus is really starting with the strategy and which product areas we want to focus on. Then from the strategy, obviously, that will derive what kind of spending we need to support those businesses and win and be wildly successful. Then also, we'll have to pick the businesses that we don't want to participate in. I think that will really be the framework which shapes our operating expenses going forward.
Got it. Thank you for that. I guess just a quick follow-up. It's more of a logistical question, once you get current on the filings, which it sounds like is going to be next week or maybe shortly thereafter once you get the filings out, would you be able to theoretically begin to buy back your stock at that point?
Well, first of all, Tim, just so you know, we'll report Q1 next Wednesday. I believe that's the 27th.
27th.
Right?
Right.
It takes us a little while to get all the paperwork filed. It'll be whenever we get the Q filed. That's what we have to do with Q1. It's just forthcoming, hopefully. Relative to capital allocation, I think that's something we need to take a hard look at, and we don't want to ad lib it on the call, it's a very, very good question, and it's something that we've certainly started to look at. Job one is going to be get the cost structure in line, as well as making sure we've got a long-term growth strategy in a business that really is attacking markets where there is clearly growth, and there aren't a lot of businesses you can say that about. There's many, many commodity businesses, but Marvell is more than a commodity semiconductor company.
It is a company that is steeped in system-on-a-chip design capability, and it's something essentially needed for where the industry is going with the Internet of Things that's going to be attached to it. Make no mistake, we'll get on to capital allocation, but it isn't going to be in the next month or two months, but it'll probably be within, before the end of the year. Hopefully that's helpful Tim.
Okay. Thank you, Rick. Appreciate it.
Thank you. Our next question comes from the line of Christian Schwab with Craig-Hallum. Your line is now open.
Congratulations to the team for being very close to wrapping up the accounting. Can you give us an update at the end of fiscal year 2016, where your market share was in disk drive controllers, in your viewpoint, as well as your market share in solid-state drive controllers, non-captive?
Well, unfortunately, I don't have that information right in front of us, but I can give you a generalization from the standpoint of our decline in the storage business, I have looked at it quite extensively, is a combination of things that occurred. All right? In the solid-state drive arena, okay, there was one major customer that we lost, and there were some competitive losses that we had. Overall, that business is continuing to grow very positively even during the year after we lost the one major customer. That's on a very bright note. The HDD business declined by 28% overall, which was worse than the industry. Okay? The reason behind that was our focus largely on the mobile business or the PC business, okay, which the industry came down.
Also, we're heavily weighted where we're very strong at Toshiba, and they declined more, declining 24.4%, which was greater than the industry at 16%. Aside from that, we were weak on a mix between the enterprise systems and the PCs. The enterprise HDD was actually flat while the PCs were down 19%, and we were more biased to the PC business. There was some loss of market share. We have refocused that. We've also broadened our product offering and are offering system solutions to the equation now, and we believe that we can basically outperform the market going forward. Hopefully that helps, Craig.
Yeah, that's great. My second question is what amount of the discontinued mobile business as far as either a percentage or a revenue amount, was in Q4?
Do you know that, Dave?
In Q4? No. I know the difference between fiscal 2015 and fiscal 2016.
That's good.
In fiscal 2015, our mobile handset business was $505 million. In 2016, that dropped to $281 million, and we still have a residual amount in fiscal 2017. Very small.
Okay. That's helpful. Then a follow-up, if I may, on that question. When you decided to exit the mobile business in September of 2015, you talked about reducing annual expense, which did include stock-based comp at $170 million-$220 million. At the end of fiscal year 2016, is that complete?
No. You mean as far as the restructuring?
Yeah. Are we done restructuring?
Well, as it relates.
Of the targeted range of $170 million-$220 million, how much of that has been accomplished at the end of the fiscal year 2016?
Initially, there was an estimate that was put out that the restructuring would be between $100 million and $130 million. The restructuring that we've recorded in fiscal year 2016 was about $60-some million. There's a small piece that's left. Initially, we were looking to reduce headcount by 1,100 employees, and the initial cut is we had terminated 825, with additional 100 some people we decided to stay on as we relate to the mobile product business. We had some people that were basically on temporarily as we winded down some of these products. To answer your question, we didn't achieve what we'd hoped to achieve. Some of this equipment we thought we would basically get rid of, we decided to repurpose. There's alternative uses in the company.
To answer your question, instead of reducing headcount by 1,100, we're going to wind up reducing headcount as it relates to the mobile business by, I think about 950 employees.
Great. Thanks. I guess that's my two questions. Congratulations on being almost done with this accounting.
It's been painful
Thank you. Our next question comes from the line of Harlan Sur with J.P. Morgan. Your line is now open.
Good afternoon. Thanks for taking my question, and Matt, congratulations on your new role. Questions for both Rick and Matt. I know you haven't been on board that long, but just given all of the disruption over the past nine months, what's been the feedback by your customers? Has there been any loss of design engagements? Has employee retention been an issue in the ability to keep the workforce focused on critical programs?
Harlan, I'm going to answer that because I've been around the employees. In fact, Weili Dai made the joke that even though I've been here eight weeks, it seems like eight years. It must have been that painful for everybody. The bottom line is, I cannot tell you how impressed I am with the talent that, given the disruptions that we've had, that we have within the company. I have no question in my mind that we've retained, and attracted additional extremely good talent to the business. It's a credit to the culture of the company of really recognizing knowledge, skills, and ability, and the ability to really get into complex design opportunities for people.
Now, relative to customers, when I first joined, one of my first actions were to visit customers to reassure them that, in fact, the company is going to continue to invest in the semiconductor business, we're not having a going-out-of-business sale. I think we've been successful in convincing our customers that we are here for the long term. I even made a trip to Asia, which I hadn't done in over four years, as much as I love Asia, I don't like the trips over there. It was very fruitful, I met with a key customer in China and a key customer in Japan, I think they believe we're here for the long term as well.
I think Matt will have no problem at all demonstrating the ability to convince the customers that not only are we stable, but we're back in a growth mode. That's my feeling, Harlan.
All right. Good to hear. The data center and cloud networking segment, primarily switching in PHYs, that's a double-digit growth segment going forward. I know, Rick, you talked about focusing on this area. When should we expect the Marvell team to start launching products targeting this segment?
I think you should see it imminently.
All right. Thank you.
Thank you. Our next question comes from the line of Quinn Bolton with Needham & Company. Your line is now open.
Hi. Let me just add my welcome to both Rick and Matt. Maybe a question for both of you just to start off, to follow up on the last question. As you look at the product focus, obviously the core storage or HDD market is in decline, which you talked about. Matt, as you refine the product strategy, focus on which markets you want to target, do you think that takes a year or two before you can sort of turn the ship, or has there been product development underway, especially cloud and the like, to be able to get those new products and to start to see some revenue growth in a shorter period than, say, a year or two?
Yeah, sure. Great question, Quinn. I'll give you my initial observations. We spent a lot of time on the FY 2016 look back. You can see the implications of the performance of the company relative to some of the markets it served. As you can see, a lot of the emphasis on things like the cloud and data center, both in storage as well as in the networking business, that was not apparent in FY 2016. However, as I've dug in with the team so far, it's very clear that in the key markets that both Dave and Rick talked about, storage, networking, and wireless, the teams have already underway pivoted their businesses to more B2B-oriented segments. You could talk about the shift away from PCs and storage to things like cloud computing and data center. Same in the networking business.
Harlan indicated segment growth very high in some of those opportunities. That's already underway. The same in the wireless business. I don't think we're starting from scratch at all. I think the instincts of the team were right. The pivots have been made in R&D. The question is execution and getting the products out. I think there's a good head start, and I'm optimistic in these core areas where Marvell already has a leading position, that there's been some really good work done.
Great. Look forward, obviously, some of those new product launches. The second question I have is, what started the audit committee investigation seemed to be the pull-ins on the storage side of the business. Obviously, as you pulled revenue into current periods, that means that at some point, the future periods were affected. As you exited fiscal 2016, do you sort of feel that the business was back to shipments matching consumption in that market, or is there still, as we're coming to the first quarter, still some overhang from previously pulling in shipments into fiscal 2016?
There are no pull-ins going on within the company whatsoever. I believe that quarter one seasonally is always down. We don't expect it to be any different. Relative to going forward, we're optimistic that things will continue to improve.
You don't feel that there's inventory of your controllers at the customer level that still needs to be burned through as a result of that pull-in activity? I guess that was sort of what I was driving at.
No, we do not.
Great. Thank you very much.
Go ahead, Dave.
I was going to say, we essentially stopped the pull-in practice in the third fiscal quarter of 2016, and we've officially ended it in the first quarter of fiscal 2017. We're no longer doing that. There may have been a little bit of a catch-up in the third fiscal quarter, but certainly by now the inventory's been bled.
Great. Thank you.
Thank you. Our next question comes from the line of Ian Ing with MKM Partners. Your line is now open.
Yes. Congratulations on all the milestones and getting close to the finish line here. My first question is on gross margins here for the fiscal fourth quarter, rebounded nicely sequentially on the mobile exit. Still gross margin's about 30 basis points higher than the first fiscal quarter when you had a full mobile business. I'm just trying to understand why it's not a little bit higher. Is it residual smartphone business still in that mix or some pricing pressure? Thanks.
I think that's a good question to ask next Wednesday when we talk. Let me defer that for a week. Okay? You got a follow-up?
Yeah, sure. You had some interesting comments about doing some R&D pivots already to B2B applications. Should we think there's going to be some reset in terms of the new product pipeline? In the past calls, it was talked about things like final level cache and modular chips and search engines and things like that. Should we consider those are going to get reassessed?
Well, I think from the standpoint of those particular FLC and also MoChi, which I think is what you're articulating, we see those as key building blocks for the challenges that face people who want to use integrated circuit technology, complex integrated circuit technology going forward. As everyone knows in this industry, the cost of a design is escalating exponentially. Marvell has a vision that in order to continue to optimize the use of integrated circuits over a larger volume of people, okay, we've got to be able to not have to do a custom design for every single application. As a result, MoChi is a very interesting design alternative in order to address a broader set of the market who needs complex IC design to solve their challenges.
They'll be a vital part of our portfolio, but they in of themselves are not products that will be introduced to the marketplace, at least not over the next couple of quarters. Matt, you might want to comment.
I just add to that, Ian, I think what I'd say is within the, again, limited discussions I've had already with the various teams on their roadmaps, both FLC and MoChi have a lot of enthusiasm around them in the company. They are both part, depending on the product line and the technology, they are part of the Marvell product roadmap.
Thanks. That's helpful.
Ian, this is John. You mentioned the search engine, I think you're talking about a TCAM that we had talked about for a brief period. That pertains to our networking business. We have really moved to refocus the networking business on our core technologies. I think we've talked about this before. Our core technologies are Ethernet switches and PHYs and our embedded networking processors, okay? The search engine that you're talking about is no longer a focus for the company. In the past, we've also talked about switch fabric products. That is no longer a focus as well. Those three things that I just mentioned, Ethernet switches and PHYs and embedded networking processors is what we're going to be promoting a lot more.
Thanks. That's helpful. Sounds like the founders are still busy with the product development.
Thank you.
I don't know what that means, but thanks.
Our next question comes from the line of Joseph Moore with Morgan Stanley. Your line is now open.
Great. Thank you. I wanted to ask, you guys had, at one point, been facing an inquiry from the SEC and the U.S. Attorney's Office. Is any update on that, and can we safely conclude that that's behind us, or is there still uncertainty around that?
Yeah, Joe. That's a voice from the past. I haven't talked to you in years.
Hi, Rick. How are you?
Good. The inquiry continues to go on. We're hopeful that the extensive communications with them, along with the thorough investigation we've done, we hope we can end that at some time in the future, at this time, we have no update on it whatsoever.
Okay. Thank you for that. Then I think you'd mentioned gross margins could have a six handle. I thought that was a curious comment. I don't want to try to pin you down on any specifics on that, as you think about that, with the current product portfolio, does that require you to exit businesses? I was a little surprised. That number seems pretty healthy.
There's two ways to go there, right? One way is to improve your cost structure, which is really optimize your supply chain management and make sure you're not overpaying in areas where you may have been in the past. The second thing is, I've always looked at gross margin in a systems business as a function of the quality of engineering, because it allows us to value price. One of my observations about this company is when you look at the heart of IC design, it's basically your ability to efficiently use silicon. I've been extremely impressed on the design capabilities of the people at Marvell and their efficient use of silicon. That's why I firmly believe that the company can attain margins others can't, and it remains to be seen.
As I said, I don't want to box Matt in, but I know how good he is, and I know he knows how to get at the cost line. I also know he knows how to identify markets where we can add value. I'm optimistic, and I wouldn't throw that number out the door.
Great. Thanks very much. Congratulations on.
All right.
getting the financing.
Thank you.
Okay. I think, at this time, we'll probably have time for two more questions. Two short questions, please.
Thank you. Our next question comes from the line of Ross Seymore with Deutsche Bank. Your line is now open.
Hi, guys. Thanks for sneaking me in. Matt, congratulations. I'll just make it one question to keep it timely. You talked about the OpEx and how I think everybody realizes there's opportunity to unlock value by trimming that. In that trimming process, do you think the revenues have to be trimmed as well? That's, I guess, a third way to get the gross margin up per your last question, Rick. Do you have to get smaller to get stronger and before you start growing, or is this a base off of which you think you can start to grow?
Well, from my standpoint, I don't think we need to get much smaller. We have the residual decline that Dave talked about from the standpoint of the handset business that we have to get through, we have this overwhelming downward trend in the storage business that's been going on for a while. We've got to make sure we can get into the parts of the segment of the business that have growth opportunity, particularly in enterprise and cloud. I think those are the headwinds we have to a growth model. I believe, quarter over quarter, we ought to start seeing growth beyond the first quarter. If that's helpful.
Great. Thank you.
Thank you. Our last question comes from the line of John Pitzer with Credit Suisse. Your line is now open.
Good afternoon, Rick and Matt. Matt, congratulations. I'll follow Ross's lead and just have one question. I guess, guys, can you help me understand a little bit, given that the SSD controller market's going to be kind of a focused area in storage, how big is that market relative to your storage business? How did it fare in the fiscal year? You said in your prepared comments it was flat to down a little bit sequentially in the fiscal fourth quarter. I'm just trying to kind of circle the square with some tipping point within SSDs right now and some other controller companies showing pretty good growth. What happened in your fiscal fourth quarter, and I guess, why are you confident that you've got sort of the secret sauce you need there to be successful?
Well, I think the major reason is the refocus on how we're attacking the SSD market and the HDD market from a standpoint of not only providing hardware but also software. Again, when you're dominant in a business like the PC business that suddenly takes a sort of a precipitous decline, it takes you a couple of quarters to refocus. We believe that we do have the design capability. We also have an opportunity to enhance our position due to pre-amps that we'll take advantage of. We believe those are the biggest things that we can change in the short term. I think a majority of the heavy growth in the storage has come on the SSD side, and it's come from smaller companies with a healthy growth, and we think we'll get a larger share of that going forward.
Rick, that's helpful. Can you give us a sense of how big the SSD business is inside of storage today?
We don't disclose that, so I can't pull that out right now. I don't want to start announcing that every quarter, especially since Matt's only been here seven days. John, you haven't changed. That would've been the same question you would've asked me in the systems business. Jeez.
If nothing else.
We try. Thank you, John.
Appreciate it, guys.
Thank you. This concludes our Q&A session for today. I would now like to turn the call back over to John Ahn for any closing remarks.
Okay, great. I would like to thank everybody for their time today and your continued interest in Marvell. We look forward to speaking with you again next week. Thank you and goodbye.
Ladies and gentlemen, thank you for participating in the conference today. This does conclude the program, and you may all disconnect. Everyone, have a great day.