Day, ladies and gentlemen, and welcome to the First Quarter 2016 Marvell Technology Group Earnings Conference Call. My name is Derek, and I'll be your operator for today. At this time, all participants are in a listen only mode. We shall facilitate a question and answer session towards the end of the conference. As a reminder, this conference is being recorded for replay purposes.
I would now like to turn the conference over to Mr. John Ahn, Director of Investor Relations. You may proceed.
Great. Thank you, Derek, and good afternoon, everyone. Welcome to Marvell Technology Group's Q1 of fiscal year 2016 earnings call. With me on the call today are Suhat Sperja, Marvell's Chairman and CEO Weili Dai, Marvell's President and Suki Nagesh, Marvell's Interim CFO. We 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 atmarbell.com. We have also posted a slide deck summarizing our Q1 fiscal year 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. Please be reminded that today's discussion will include forward looking statements that involve risks and uncertainties that could cause our results to differ materially from management's current expectations. The risks and uncertainties include our expectations about our overall business, our R and D investment, product and market strategy, statements about design wins and market acceptance of our products, statements about general trends in end markets we serve including future growth opportunities, statements about market share and statements regarding our financial outlook for the Q2 of fiscal 2016.
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 annual report on Form 10 ks 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 Marvellis undertakes no obligation to revise or update publicly any forward looking statements. During our call today, we will make to certain non GAAP financial measures, which exclude the effects of stock based compensation, amortization of acquired intangible assets, acquisition related costs, 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 Q1 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. With that, I would now like to turn the call over to Zaha.
Thanks, John, and good afternoon, everyone. I'd like to start today's call by thanking Mike Raskin, who is retiring as our CFO. Through his leadership, Mike has been extremely instrumental in improving financial discipline in the company. All of us at Marvell would like to thank Mike for his many years of service and dedication to the company and wish him a wonderful retirement. The Board has also appointed our VP of Finance and Investor Relations, Suki Nagesh as Interim CFO.
Many of you already know Suki quite well and we expect this to be a smooth transition. Now moving on to the financial results for the Q1 of fiscal 2016. We reported Q1 revenue of $724,000,000 a sequential decline of 16%, which is which was in line with our revised guidance. The sequential decline was mainly due to softer than expected demand from the storage end market as well as from the emerging markets. Our non GAAP gross margin of approximately 52% was better than our original guidance and we continue to effectively control our operating expenses, which also came in better than our original guidance.
As a result, our non GAAP EPS came in at $0.13 per share. We believe the weaker demand in Q1 was due to near term macroeconomic conditions as many of our customers and semiconductor peers experience similar trends. We expect this slower demand environment to persist in Q2, but expect growth to resume in the second half of the year. Despite the near term headwinds, we will continue to invest in the new in new and innovative technologies as we believe this will allow Marvell to emerge stronger when economic situations improves. Now I would like to provide a brief update on each of our end markets.
1st, on storage, revenue declined 20% sequentially due to weaker than expected HDD sales and seasonally soft SSD demand. In HDDs, our revenue declined on weaker than expected HDTAM during the quarter. Despite the weakness in HDDs, we believe we maintain our market share. Next, in SSDs, Q1 is a seasonally soft quarter and revenue declined sequentially as expected. We continue to maintain our technology leadership and focus on developing industry leading solutions such as DRAM less NVMe SSD products, which we expect to do well in the market.
For Q2, we expect our storage end market to decline sequentially on continued end market weakness. At this point, I would like to take a moment and discuss breakthrough technology that we believe will significantly benefit the storage industry. This technology is related to the FLC technology that you have heard me talking about in the last few months. For those of you who have not heard about it, FLC stands for final level cash, a technology that developed to solve the main memory problem in computer systems. It is a big data caching technology and today I want to talk to you about the adoption of FLC into storage devices.
More specifically using FLC we will now be able to make an HDD perform like an SSD. Why is it why is this important? The HDD industry is at a critical stage where it is dealing with the competitive forces at play from SSDs, especially at the mid and high end of the market. The HDD industry knows that the best way to deal with the competitive threat of SSDs is to adopt hybrid drive technology. Unfortunately, 1st generation hybrid drives do not adequately address the SoC challenge head on and as a result market acceptance has been lukewarm.
More specifically, the performance of these early hybrids is closer to HDDs rather than to SSDs. This is because the SSD caching algorithm that is used on the early generations on the 1st generation hybrid has a hit rate of only approximately 50%. In other words, these early hybrid devices behave like more like an SSD more like half behave like an SSD half of the time and behave like an HDD the other half of the time. The problem is in mobile applications, the user expects the storage device to be asleep when not in use. This unfortunately creates sluggishness whenever the drive needs to be awakened during that 50% of the time.
This latency time is clearly noticeable to the user and therefore user experience is poor. We have now solved this problem by using the breakthrough FLC technology. Using FLC, every hybrid drive will soon be able to behave like an SSD apart 99.9% of the time, basically practically for practical purposes 100% of the time. So as far as the user is concerned, the hybrid is now practically an SSD. Using this technology, we can now build a 1 terabyte consumer hybrid drive with FLC cash for only $40 of build material compared to a 1 terabyte SSD, which would otherwise cost $300 on build material.
Similarly, a 4 terabyte enterprise hybrid drive with 128 gigabyte FLC cash could certainly build with approximately $200 of bill of material versus a pure 4 byte or terabyte enterprise SSDs, which today would easily cost upward 20 times more. So as you can see, it is not a matter of if, but a matter of when the HDD industry adopts our FLC technology to power all of their hard drives. We have engineering samples now and we are actively promoting our FLC based hybrid technology to our customers. We expect first production to our customers early next year. Now next for our mobile and wireless end market.
Q1 is typically a slower period. Specifically in Q1, we saw weaker than normal demand last quarter due to the overall slowdown in China smartphone build. As a result, our mobile and wireless revenue declined 13% sequentially. In mobile, China Unicom recently launched the world's first 399 RMB LTE smartphone using our 64 bit quad core 190 8 mobile platform, the same mobile platform used by China Mobile for their TD LTE devices. The same 64 bit LTE platform has also started shipping into global markets with Tier 1 customers such as Samsung.
Additionally, our turnkey program is on track to launch at the end of Q2. This will expedite our partners adoption of our chipset and allow them to go to market sooner. Moving to connectivity. Revenue was slightly below expectations, primarily due to weaker mobile shipments in China and seasonality in gaming consoles. For connectivity, early this year, we announced the industry's highest performance 4x4, 11ac Wave 2 product and have seen broad market interest in adopting Wave 2 products this year.
Wave 2 provides multiple simultaneous data links over Wi Fi and increases network capacity for densely populated environment, thus expanding wireless capabilities to a variety of new use cases such as real time video streaming to multiple devices. Wave 2 is the future of WiFi and is the next growth driver in wireless connectivity. We will be announcing additional Wave 2 products over the coming months as we refresh our key connectivity products to support the Wave 2 ecosystem to address all tiers of the market. In the meantime, our existing mainstream 11ac products continue to gain adoption at multiple customers. For example, recently Linksys announced another flagship 2x2 AC router.
Now moving to the mobile computing space, we are shipping our industry leading 2x2 AC combo into mobile applications running Windows as well as Chrome OS. We expect to see more mobile computing products on the shelf using our Wi Fi solutions later this year. Moving next to IoT, we continue to gain design wins for our connectivity and microcontroller solutions for IoT platforms and multiple Tier 1 OEMs. For example, Xiaomi has recently already announced a series of smartphone smart home products powered by Marvell's wireless microcontroller IoT platforms. Over the next decade, it is estimated that billions of IoT products will be used by consumers and businesses.
For this to happen, we believe there will be a fundamental change in how these products are engineered to allow them to realize the full potential of being always connected. Historically, the vast majority of embedded devices have used simple 4 bit and at most 8 bit microcontrollers running rudimentary software and open with no operating system at all. In order to for these products to fully participate in the Internet, products will need to incorporate much more sophisticated software, which will require more powerful 32 bit microprocessors. The end user expectations of connected products creates a requirement for significantly more sophisticated software, which calls for building embedded software in a new way. We are addressing the software challenge with Kinoma JS, an application framework uniquely designed to address the application software needs for the IoT by providing embedded programmers with a modern high level scripting language JavaScript to power their products.
Today, JavaScript powers already powers the web pages, mobile applications and web servers. As one of the most popular and productive computer languages, we believe it is poised to power embedded products, thereby accelerating the growth of the IoT. We recently released our Kinoma JS software under an open source license to encourage customer adoption. Using Kinoma JS, Marvell's customers can create high performance products across a wide variety of hardware platforms using common code across multiple chipsets, thus removing the barrier to adoptions and increasing scalability of their designs. Moving next to our multimedia business.
In Q1, we launched our next generation multimedia SoCs, the Armada 1500 Ultra, which features a quad core ARM CPU, 8 core GPUs, carrier class security and state of the art power management. This product is designed to enable pay TV operators and set top box manufacturers to cost effectively migrate all of their customers to 4 ks video capability. As you know, 4 ks is the future of video. For Q2, we expect our mobile and wireless end market to be flat to up slightly. Turning next to networking, demand came in weaker than expected and revenues declined 7% sequentially, mainly driven by muted enterprise networking demand.
However, we continue to make progress in design wins with our networking SoCs in areas such as network storage interconnect applications we're gaining share at telecommunications and access infrastructure customers. In addition, we have secured more customers for our 10 giga 10 giga DASE, which is our 10 gigabit Ethernet copper pipe solution. Last year 10 giga DASE T deployment doubled compared to the year earlier to a total of 3,300,000 ports. Over 8,000,000 ports are predicted for this year by some analysts. Every major switch OEM has introduced a 10 gs base T interface option and we are leading we are a leading supplier are the leading supplier for this for the 10 gs base T solution.
For Q2, we are expecting our networking business to be flat sequentially on continued muted enterprise spending. In summary, despite the near term market uncertainty, we continue to focus on execution and believe we are well positioned to return to growth in the second half of the year. In addition, we believe this year will be an exciting transition period for Marvell as we incorporate FLC technology in many areas, including storage as I mentioned earlier. On top of this major drive of implementing FLC, we are also implementing Mochi, our new modular chip technology into all of our products and solutions. Once our mochi technology is fully deployed, we will be able to drastically lower product development costs and improve time to market.
More importantly, mochi will allow our customers to develop new products that we haven't even anticipated yet since they will be able to create virtual system on chips to their liking using any combinations of our Mochi devices. I will speak about our progress in Mochi and FLC in the months to come. So stay tuned. With that, I would like to call to turn the call over to Suki to go over our first quarter results and our Q2 outlook.
Thank you, Sahat, and good afternoon, everyone. I'd also like to add my thanks to Mike and congratulate him on his retirement. Mike has been a great mentor to me and I hope to offer it with the same level of integrity and principles in my new role going forward. Moving to our financials. As Sahid mentioned, our Q1 financial results reflected a muted demand environment, which is consistent with many of our customers and semiconductor peers.
While revenues were in line with our revised guidance, gross margin was slightly better than our original expectation mainly due to mix. We reported revenues of $724,000,000 for the Q1, which was a decline of 16% driven by softer demand trends across most end markets. As Sahad said earlier, we believe the demand weakness is temporary and we expect to return to growth in the second half of this year. Moving to the details on our various end markets. Our storage revenue in the Q1 declined 20% sequentially and represented 48 percent of total revenue.
HDD sales were lower due to the well documented weakness in the PC value chain, while SSDs declined in line with seasonality. Our mobile and wireless revenue declined 13% from Q4 and represented 25% of total revenue. Weaker LTE smartphone demand in China was partially by initial shipments into a Korean OEM's global smartphone platform. Connectivity sales were also weaker due to lower mobile and gaming seasonality. In networking, our Q1 revenue was softer, declining 7% sequentially and making up 21% of total revenues.
This was mainly due to muted demand from enterprise customers. Moving next to margins and expenses. Our non GAAP gross margin for the Q1 was approximately 52% or roughly flat from Q4, but better than anticipated due to favorable mix. Non GAAP operating expenses came in at 307,000,000 better than expected due to continued operating discipline across all of our businesses. This resulted in non GAAP operating margin of 9% for the Net interest and other income was about $5,000,000 and we recognized a non GAAP tax expense of $1,200,000 in the quarter.
This resulted in non GAAP net income for the Q1 of $71,000,000 or $0.13 per diluted share. The shares used to compute diluted non GAAP EPS during the Q1 were $535,000,000 Cash flow from operations for the Q1 was $59,000,000 and free cash flow was $44,000,000 or approximately 6% of sales. Now summarizing Q1 results on a GAAP we generated GAAP net revenue income of $14,000,000 or $0.03 per diluted share. The difference between GAAP and non GAAP results during the Q1 was mainly due to stock based compensation expense of $33,000,000 and approximately $24,000,000 related to amortization and write offs of intangible assets, legal, restructuring and a one time cash compensation payment. Now turning to the balance sheet.
Cash, cash equivalents and short term investments as the end of the Q1 was approximately $22,500,000,000 a decrease of about $30,000,000 from the previous quarter. We used $22,000,000 to buy roughly 1,400,000 shares of stock during the quarter. We currently still have $420,000,000 remaining in our authorized repurchase program and we will continue to be opportunistic in our buyback. We also paid dividends of $31,000,000 in the quarter or $0.06 per share. Net inventory at the end of the Q1 was approximately $340,000,000 an increase of $30,000,000 from the previous quarter anticipation of new customer programs that are launching over the next few quarters.
Moving next to our outlook for the Q2 of fiscal 2016. We currently project revenues to be in the range of $710,000,000 to 740,000,000 dollars At the midpoint, this would equate to roughly flat to Q1. We expect storage business to decline sequentially, our mobile and wireless business to be flat to up slightly and our network business to be flat to Q1. We currently predict non GAAP gross margin of 50 percent plus or minus 100 basis points and anticipate non GAAP operating expenses to be approximately 305,000,000 dollars plus or minus $10,000,000 We anticipate R and D expenses of approximately $253,000,000 and SG and A expenses of approximately $52,000,000 At the midpoint of our projected guidance, this should translate to a non GAAP operating margin of about 8%, plus or minus 100 basis points. The combination of interest and other income should net out to approximately $2,000,000 and we expect tax expense to be approximately $2,000,000 We currently expect diluted share count to be approximately 539,000,000 shares.
In total, we currently project non GAAP EPS to be $0.11 per diluted share plus or minus a penny. On the balance sheet, we currently expect to generate about $75,000,000 in free cash flow during the quarter. We anticipate our cash balance to be about $2,600,000,000 excluding any M and A activity, share buyback or other one time items. We currently expect our GAAP EPS to be lower than our non GAAP EPS by about $0.09 per share. With that, I would like to turn the call over to the operator to begin the Q and A portion of our call.
And our first question will come from the line of Harlan Sur, JPMorgan.
Hi, good afternoon. Thanks for taking my question. HDD industry shipment TAM was down about 10%, 11% sequentially in Q1. I think your HDD controller business was probably down more like 25% sequentially in the Q1. Here in Q2, I think HDD industry TAM is looking to be down about kind of 3% to 5%.
And now you're guiding your HDD segment probably down in about that range as well. So the Marvell team is essentially undershipping consumption by 20% to 25% for 2 quarters in a row. It seems like your customers are planning for some positive seasonality in Q3. If that plays out, should we anticipate a return to growth in your HDD business that is greater than the TAM growth? And just given how much you're undershipping consumption here these past 2 quarters?
Harm, this is Suki. You bring up good point, but I think in our storage business overall, you've never broken down the mix between hard drive and SSDs. And all we can say is our SSD business was down more than HDD business in the quarter for a multitude of different reasons, I think, which is pretty well aware. People know about that in the market. But in terms of the hard drive business for us versus the TAM, we have some customers who are actually seeing a pullback in their business and we're just we believe that our TAM over a multiple quarter period tracks that of the overall TAM.
Our business tracks that of the overall TAM. It's very hard for us to synchronize exactly every quarter. But I think over a couple of quarter periods, we are pretty similar to what the TAM is.
Right. Okay. But you do you did brought up a good point that our hard drive I mean the PC industries, people in the PC industries value chains, okay, are expecting to see the deployments of finger 10s over the second half of this year. So as a result of that, it is widely known that by this time, it's widely known that, okay, there's a slowdown in the PC space due to that anticipation. So we'll see.
I think okay, we do expect okay, when window tint is launched and have good reception, we're all going to benefit from that uptick.
So, Mohan, if there is an uptick in the drive industry for Q2 or Q3, maybe we will see that benefit. But at this point, it's probably too early for us to comment on that.
Okay. That's a fair point. And then question for Sahat. So last call when I asked, you said you'd clearly be doing what's right for shareholders in terms of strategic options for mobile. It seems like the pricing environment hasn't been getting any better.
The competitive environment continues to be fierce. If you exit and so and if you exit mobile, I think you're left with a business that can grow kind of low mid single digit top line and sort of being throwing off sort of low mid-twenty percent operating margins and free cash flow margins. So given that your mobile business was down in Q1 and that's the 4th consecutive quarter, are you any closer or is the team any closer to making any sort of strategic decision with mobile?
Well, that's a good question. But as you know, especially with the deployments of FLCs and Mochi's technology into all our product lines, we will be even more competitive in the mobile space. So we as a company, we have to focus on developing the best technology to differentiate ourselves. So mobile is no different. However, as we say okay, as I said earlier, as okay, we have to be responsible also for the shareholders' inputs.
So we will we'll continue to be open to any strategic opportunities that comes in front of us. In the meantime, we will continue to build even better, even more advanced technology to make it even more attractive for our customers to use our products.
Thanks, Tahad.
Thank you, Harlan.
Your next question will come from the line of Tim Arcuri, Cowen and Company.
Thank you very much. I guess my first question is, Suki, maybe you can talk about the CFO transition. Why did this happen now? And maybe from a top level Sahat, maybe you can sort of address whether or not the CFO transition might change how you think about any of the possible strategic decisions you might make with the mobile and wireless business? Thanks.
So I'll answer the second part. It's none at all, not even a bit.
Yes. There was no linkage to that at all, Tim. And as far as the transition now, Mike's been with the company for 16 years. He's been a fantastic leader for all of us and a great colleague for many people here who've been here. And it was a personal decision for him to retire and so there's nothing more to that than that.
Okay. And I guess
for me, I'm just wondering how you might handicap if I look at your SSD business. It looks like it's down more than I would expect, unless there was a decision by 1 of the large notebook manufacturers to maybe begin to use their own controller. They recently did by a controller company several years ago. And it looks like they might be doing that in their flagship notebook now using their own part. So my question is, how does that impact your business?
And how do you handicap the likelihood that that customer or any other customer might use their own control over the years? Thanks.
Sue, you want to answer that? Sure. Yes.
So Tim, I think you're probably on the right track in some of your assessment there. But we also have a very strong portfolio of products in SSDs. Sahat mentioned about NVMe, DRAM less NVMe SSD products. The PCI based product especially is going to be very critical for this market moving forward. And we are engaged with multiple other customers for this e type of product as well.
So we do believe that SSC market is growing and even if there are certain near term product transitions at a certain customer, we should be able to move beyond that fairly quickly.
Yes. I want to add on to that. Okay. And then there's always going to be a customer may want to use their own solution, especially a customer that is critical mass. However, the vast majority of the customers do not have such critical mass and they will still use 3rd party suppliers like from us.
And as far as from the SSDs discussion, it also in terms of our differentiation, how do we get to differentiate ourselves in the long run compared against the competition? The answer will be similar to the HDD space. As I said earlier, okay, we are now deploying hybrid technology into our HDD portfolios. So to make our HDD solution to be very, very powerful just like as powerful as SSD solution, they will help increase the adoptions of HDDs into the market to reverse the trend of converting the HDD to SSDs. Now at the same time, using the same technology, we can also build an enterprise SSD, there is okay, they have the cost of more like an HDD.
So this technology is applicable for HDD as well as for SSDs. So we believe that we believe that in when the dust settles, we will have the majority of the market shares in this area. Okay, Sahad. Thank you.
Thank you, Tim.
Your next question will be from the line of Quinn Bolton, Needham and Company.
Hi, Todd
and Siggi. Just wanted to follow-up on Harlan's question. Obviously, you guys under shipping the TAM here in the near term. Can you make any comments as to whether you're seeing your HDD customers holding lower inventory levels? And if so, do you think that's a permanent reflection of just greater supply chain efficiencies or to the extent that demand conditions come back as Harlan suggested maybe allows for a snapback in the second half of the year?
Good question, Quinn. And that's entirely possible. We do know that some customers do very tightly manage their inventory and did manage their inventory in Q1 and their supply and their production towards the end of Q1. How long that continues or if they're going to switch it back on? We don't have entire visibility into that at this point of time.
But if they do start to switch that back on, we may see a positive benefit.
Okay. And then just a follow on question on the FLC technology. Obviously, it sounds like it probably adds some kind of price premium over a standard HDD controller. But can you give us any sense as FLC starts to ship next year, what you think the penetration might be? And how to extent that that technology is accepted, how much faster on a revenue basis could you grow rather than the overall HDD TAM?
Yes. So FLC, the cost adder the silicon cost adder of deploying FLC into the chip is actually quite insignificant, especially if we're talking about the storage market. This technology is okay, okay, I've been developing this technology of like close to more than 3 years. And okay, over the years, okay, we have improved the we have actually mastered the implementation of this technology to the point where this is becoming very low cost. So we do believe because of the delta difference between a hybrid solution is so small, okay, basically just a practically just an addition of a single device flash chip to the hard drive.
The once this thing is proven into the field, the adoption rate will be very rapid. There will be nobody in the world that wants to buy a standard hard drive once they see the significant improvement in the IOPS and response times of the these FLC based hybrid drive. Okay. So as I said earlier, it's not a matter of if, it is just when and that time is just really is just the schedule of the time to port the software into this new device, the certification, validations and certification of device and showing to the customers, to their customers. And that's typically to the order of about 9 months or so, 9 months, maybe at most 12 months.
So that will be the timing that we anticipate. And after that, I think everybody will want to demand FSC hybrid technology.
Yes. In addition
to what's asked that FLC technology benefit storage, we're seeing in the last few months it's really across different markets. For example, mobile. There's huge hurdle. Everybody knows the battery, the power is a big issue. FLC absolutely is going to solving this issue as well as the cost with the memory cost for the platform.
So we believe our SFC technology is going to help company and differentiate in multiple markets. So therefore, we'll gain more business and new design wins.
Sorry, Steve, you still look at to say something? When you have a follow-up?
I just had a quick follow-up with FLC versus the 1st generation hybrid drives. Does it use the same size flash chip or do you need a significantly larger flash chip to implement the FLC?
Very good question. For the same size of flash chips, the improvement in the hit rate from 50% to 99.9 percent. Actually during benchmark it's actually 100%. We're saying 99.9% because it's hard to believe that we could achieve 100% hit rate. So just to give an idea that there will be certain there will be once in a while occasion where the algorithm will miss and we will have to access the HDD.
But that event is so rare. So with our FLC technology versus the traditional caching algorithm about 50%, sometimes less, sometimes slightly less, sometimes slightly better. Okay, it hits the SSDs, but the other 50% of time it hits the HDD. So but during that time, typically the hard drive is sleeping. So then during that 50% of time, it has to go to the HDD.
Driver has to spin up first. That takes about one second and the data will be accessed. Then you have to put it down to sleep again. And then the next excess if the next excess happens to be in SSD, you're fine, okay. But if the excess goes to HDD again, then you're going to have to wake the HDD again.
In our case, we 99.9% of the time is SSDs. So highly unlikely that the HDDs, if we turn on the HDD, takes one second, then anybody will notice it because that's just a very rare event.
It's the same silicon footprint.
For the same flash size, so if it's 8 gigabyte, no problem. We can still use 8 gigabytes. If 4 gigabytes, no problem. We can still use 4 gigabytes. Now of course, nobody is building 4 gigabytes and 8 gigabytes flash chip any longer.
So the smallest flash chips that we can buy is 16 gigabytes. But we have run a lot of benchmarks, a lot of simulations that whether it's 8 gigabytes or 16 gigabytes, the performance is exactly the same. Well, 16 gigabytes is slightly better, but for practical purposes, this is the same performance.
Great. Thanks for that clarification.
Thank you, Quinn.
Your next question will be from the line of Sanjay Chirajah, Nomura.
Hey, Sahath. Another question on FLC. There are multiple reason SSD is being adopted in computing platforms. A couple of things better power consumption by 3 to 4 times, lower weight by 10 times and SSDs enabling thinner form factors such as ultra SIM notebooks. So even if FLC allows you to bridge the gap in the performance versus SSDs, how much of the competitive dynamics you think you could change that could slow the decline in hard disk drives?
Well, the if you look at the in the laptops, the laptop market, the difference between the laptops with the hard drive versus a flash, the difference in the weight is quite insignificant. So the biggest challenge of HDD in mobile laptop applications, especially at the high end where people are willing to pay $1,000 or more for their laptops that It's really it is instant on this practically this microsecond or millisecond latency that people expect from the SSDs. Without FLCs, there is no way HDD could be put into sleep mode and be able to wake up in time for people to not to notice it. So the market acceptance we expect the market acceptance of the hybrid drives to be very, very good. Now in terms of the weight of the HDD, today, it's okay, the thinnest hard drives in the world are 5 millimeters.
Well, the vast majority that people are selling right now is actually 7 millimeter hard drives. We are okay, we have been working, okay, also okay, on okay, with our partners to develop 4 millimeter extremely thin, thinner than the battery like extremely thin hard drive, which is going to be for full hybrid hybrid drive. And if you look at it, okay, if you see the sample of the prototypes that we have on hand, it is I mean, if it's so beautiful, it's so light, so you will not have to notice any difference by the time
you get into the laptop. Okay. This is very helpful. Another question on mobile. Last quarter, you indicated that your turnkey solution will be available by end of Q1.
And I believe if I heard correctly, you said Q2 this time. Just wondering what was the delay and if you could provide some progress in that area? And a Part B in that question is, do you see your mobile and wireless growing year on year in fiscal 2016?
Yes. So if you look at the mobile responding to the first question, the Turkey. So Turkey has been progressing. There's a lot of actually a lot of work maybe to be done, okay, building the prototypes. When I look at the prototypes, I could understand why it is a little bit longer.
It's very complicated. And then and you have to build it nicer. So if it doesn't look nice, okay, nobody wants it, right? So you need to get all the software running, validated, certified. So a lot of certification work, okay, has been going on with the carrier especially with China Mobile.
We have to buy new equipments okay, test equipment okay, to a lot more test equipment to get the finished certification process going on with China Mobile. So those things being progressing quite well. So this is the delay is okay. It's just minor compared to the amount of where they have to be done. Now in terms of the second question, the volumes, we do expect, okay, the volumes will continue to grow.
Okay. So in the second half of this year, we will be introducing our FLC based cell phones smartphone chip. That will be probably the one that will be like will be like will be like huge hit because for the very first time in the history of mankind, there will be anybody will be able to build a phone with such a small amount of main memory while behaving like a very high end phone. So we can be able to compete with flagship phones that have 4 gigabytes of main memory with fractions of the main memory. So that is going to be the defining time of our success into this business.
Yes. In addition to what Sahab said the China Mobile effort as you guys know that the China Unicom Marvell also is the leading providers and driving mass market LTE phones. So there's a lot of effort there. And we have multiple OEMs coming out with their phones in the next few quarters as well.
Right. More specifically there Sanjay, I think for we think Q1 was probably the bottom for our mobile and we should probably start to see an improvement from unit and revenue going forward. This particular quarter itself, I think we should see a double digit growth in unit volume and for IoT business across both in China as in Korea. Okay. Thank you.
Thanks, everybody.
Your next question will be from the line of Chris Caso, Susquehanna.
Hi, thank you. With respect to your revenue, it looks like the first half is running on the order of about down 25% year on year. Could you characterize how much of that you'd consider to be more due to what I'd say are persistent factors things like pricing and market share as compared to transient factors, with just the industry conditions and perhaps what's happening with inventory. And I guess your answer to that probably gives some insight into your level of conviction for growth in the second half.
Hi, Will. Okay. As we said earlier, there are 2 factors that you just mentioned that the one that really the biggest factors, The sanctions, okay, there are people waiting for the Windows 10 in production. So people are not buying the replacement for PCs. I mean, whatnot the reduction people buying, but I mean, there will be more people waiting for the retail test.
And the other part was the slowdown in the smartphone shipments in China, and which was apparently, okay, was already been quite well known in the last few months, okay. As you see that the pricing of mobile DRAMs has dropped quite a bit over the last few months. So only just to give like the last few days that people have been talking about that, okay, sometimes next month or so, it is expected that the DRAM price the DRAM pricings will go back up, okay, to be above $3 per 4 gigabits for the mobile DRAMs for the smartphone. And because of cable, we expect that the smartphone shipments to pick up again in the second half. So we do believe with the market will pick up again as well as our continued traction in the customer space in the customer side on our mobile solution.
We do expect, okay, we will get bigger shipments. Now our customers also, we're getting some new customers even with today's solution while they're waiting for our FLC based technology because as soon as they see the base the significant advantage they're going to have from our future MSP based smartphones, they actually immediately can jump in and make decision to, okay, for people that haven't used our solution. Quickly, actually, they start working on our current solution because they know that once they are familiar significantly lower cost, lower power, much lower power and much longer battery standby time. So okay, so we are very bullish on this.
Okay. Well, my follow-up question is regarding the FLC technology as well and a lot's been said on that already. But would you also potentially see licensing opportunities there in either businesses adjacent to what you do or perhaps totally different? Is that something you guys would anticipate?
Yes. I published the FLC technology, okay, because I know this will benefit mankind. So I okay, I'm open to licensing the technology to anybody in the world. It's good for the world. It's good for us as well.
Great. Thank you.
That's something we definitely will be considering, Chris. Thank you.
Your next question will be from the line of Hans Mosesman, Raymond James.
Thank you. So just another one on SLC. So you're basically incorporating a DRAM and a low cost SSD.
The DRAM, who provides that? Are all vendors
or suppliers capable of supplying that?
Yes. For the very first generation, we're using standard off the shelf DRAM. However, the true benefits of FLC will come whenever DRAM the future DRAMs are built differently. More specifically, future DRAMs should be built again, if you look at my presentation at the ISFCC, future DRAMs should be built for performance, latency, lower power in mind than for increased capacity. So those things are in okay, those things are actually okay, are being if you look at the JEDEC in JEDEC JEDEC is the industry wide organizations for memory.
If you look at JEDEC, okay, a lot of proposals in the new memory architecture that have been shown in the last few months, those exactly follow our proposal care for modifying DRAM to be truly, truly, truly optimized for together to gain the maximum benefits of FLC. But for now, we use standard DRAMs. Okay.
And then as a follow-up, what is the incremental dollars to Marvell from a conventional approach or hybrid today to going to the 1st generation FLC? Is it 10%, 50% of your existing silicon content? We're not going to
talk about that. It's too early to talk about that. It's too early. Way too early to talk about that. It's more important, okay, that's okay, our customers at this point.
Our customer actually never even asked their questions. So because they know that the benefits will way outweigh the whatever the cost has to be they have to incur to use this technology. The benefit is not just the money they will save from, okay, the less DRAM they have to buy, the money, okay, the saving also less battery, smaller battery, lighter, lighter phones, lighter mobile devices or they can use the same battery and have much longer battery life. As I mentioned in my speech at the ISSSEC, we can now build okay, down the road using this technology, we can build a smartwatch with weeks of standby time. So that's beyond how much money we save, okay, to build this device.
It's like even you want to spend all the money in the world, you cannot do it anyway today, okay, because your battery life is so bad. So the other benefits there is not that's hard to measure from the from dollar point of view.
Okay. Thank you.
Your next question will be from the line of Craig Ellis, B. Riley.
Thanks for taking the question and congrats Suki. I'll just follow-up with the recent line of inquiry on FLC. Sahat, you already have a very strong share position in your core storage market, but you said FLC would be much more broadly applicable. Where do you think that technology would be most meaningful in terms of helping Marvell gain share? Which
other applications? The answer is across the board. The benefits in the mobile, okay, laptops application is clear, okay. If just makes things like really, really low power. So the drive is slipping 99.9% of the time is purely slipping consuming 0 power.
So the benefit is very obvious. But the non obvious one would be the enterprise. Imagine if you have if we have a, let's say, a petabyte of hard drive with a terabyte of FLC cash. A terabyte of FLC cash caching, well maybe in fact not all, but terabyte like 10 or 20 or 40 terabytes of hard drive. The performance of their such solutions will be incredible.
They will be you will notice 0 difference between, okay, a 10 terabyte of SSD, pure SSD versus our 10 terabyte hard drive that has a 1 terabyte of SSD. In fact, you will notice the difference in power because now the power dissipations of the SSD will be oneten compared to the a few 10 terabytes of SSD. So while costing basically a 10th of the cost. So the benefit is depending on the benefit, okay, the optimization, the target optimization, the benefit is the same. So for the high end, we just have to have higher capacity FLC cash.
For the individual users like the consumers, we could afford we could actually live with smaller cash and everybody will see the same benefits.
Got it. Thank you. And then the follow-up is for you Suki and more towards the middle of the income statement. In the revenue outlook, not much change, pretty flattish, but there is a much more meaningful change in gross margin. Is that just inter segment mix?
And with OpEx now at the $305,000,000 level, is that a level that's sustainable? Or as the business grows, as the company is signaling later this year, is that going to move back up?
Good question, Craig. So on the gross margin front, it is a function of mix obviously. So I think if you look at the end market guidance across the 3 different areas that should give you a fairly good explanation of why our guidance for gross margin is where it is for Q2. As far as the OpEx, even at 305, we are constantly looking at ways of improving ourselves reducing our spending, being more efficient. And the answer really the answer is no, you shouldn't see our OpEx going back up in the second half of this year.
Thanks guys.
And we have time for one final question. That question will be from the line of Ian Ng, MKM Partners.
Yes, thanks. Clarification on mobile and wireless, looks like guiding flat to up slightly double digit growth in unit volume. Does that mean the ASP declines are more benign than in recent quarters? And then how would you say Opticore pricing is based on some DecaCore announcements recently from competitors? Thanks.
Yes. So Ian as you know in the mobile space pricing is always competitive. And we want to ensure what pricing is going to do at any given quarter. We do have a connectivity business as well as a mobile business. So we do expect to see growth in our mobile business in this quarter from multiple customers and maybe on the connectivity side maybe less growth if you will or flattish outlook.
So it's probably not appropriate for us to comment on pricing per se. And we did notice what some of our competitors are talking about 2nd core. We're not entirely sure what the how the market will adapt to DecaCore?
Well, pricing is always an issue if we're all in this 3 building similar stuff. So the beauty about FLC is that once it's deployed, pricings will be a lot less than the mid June because it's not going to be about the cost of the chip any longer. It's the cost of the system that matters all of a
sudden. Okay. We'll look for FLC. And then just a quick follow-up over to Mochi, this modular development of silicon. Are you going to implement this as build to order parts for customers?
Or could you incorporate this into your standard ASSP products? It seems that you connect up some smaller silicon die, you can get a cheaper solution than a big monolithic die.
Right. So I guess as I mentioned in my planner speaking as well as today's earnings calls of his statements. We were building basically anything that's reasonably practical, anything that we build, I mean, almost anything that makes sense, anything almost anything that makes sense to be built using Mochi interfaces. So meaning like practically almost every application processors will have MOCI interfaces. So we're also building MOCI, the Southbridge devices, many different kinds.
So we are our engineers are busy building different types of this South Beach device functions in, so that our customers, once we are done with this, our customers do not have to specify what chips need to be built. All they have to buy basically is like a la carte menu. They will pick different 8 application processors, different sound bridge functions, different modem and they can build whatever they want. Okay? And they can decide how much money they want to spend, how much functionality they want to have.
It is all under their control. They don't need certain functions. They can save money automatically by not buying those functionalities. So this is going to be this is going to be so helpful for us. It will improve our decision making process.
We will improve time to market. We will get things done sooner because chips can be a lot simpler from now on.
Thank you, Sahad.
All right. I think that's it.
I'd like to thank everyone for their time today and the continued interest in Marvell. We look forward to speaking with you in the coming months. Thank you and goodbye.
Thank you. Thank you.
All right. Thank you.
Ladies and gentlemen, that concludes today's conference. We thank you for your participation. You may now disconnect. Have a great day.