Good day, ladies and gentlemen, welcome to the Q1 2015 Marvell Technology Group Ltd. earnings conference call. My name is Whitley, and I will be your operator for today. At this time, all participants are in listen-only mode. Later, we will conduct a question and answer session. If at any time you require operator assistance, please press star followed by zero, and we will be happy to assist you. As a reminder, this call is being recorded for replay purposes. I would now like to turn the conference over to your host for today, Mr. Sukhi Nagesh, VP of Finance. Please proceed, sir.
Thank you, Whitley, and good afternoon, everyone. Welcome to Marvell Technology Group's first quarter fiscal 2015 earnings call. With me on the call today are Sehat Sutardja, Marvell's Chairman and CEO, and Mike Rashkin, Marvell's CFO. We will all be available during the Q&A portion of the call today. If you have not obtained a copy of our current press release, it can be found at our company website under the investor relations section at marvell.com. We have also posted a slide deck summarizing our quarterly 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&D investment, product and market strategy, statements about design wins, and market acceptance of our products, statements about general trends in the end markets we serve, including future growth opportunities, statements about market share, and statements regarding our financial outlook for the second quarter of fiscal 2015. To fully understand the risks and uncertainties that may cause results to differ from our expectations and outlook, please refer to today's earnings press release, our latest quarterly report on Form 10-Q and subsequent SEC filing for a detailed description of our business and associated risks. Please be reminded that all of our statements are made as of today, and Marvell undertakes no obligation to revise or update publicly any forward-looking statements.
During our call today, we will make reference to certain non-GAAP financial measures, which exclude the effect of stock-based compensation, amortization of acquired intangible assets, acquisition-related costs, restructuring costs, and certain one-time benefits and expenses that are driven primarily by discrete events that management does not consider to be directly related to our core operating performance. Pursuant to Regulation G, we have provided reconciliations of the non-GAAP financial measures to the most directly comparable GAAP measures in our first quarter earnings press release, which has been furnished to the SEC on Form 8-K and is available on our website in the investor relations section. With that, I would now like to turn the call over to Sehat.
Thanks, Sukhi, Good afternoon, everyone. Today, we reported first-quarter revenue of approximately $958 million, an increase of 3% from the prior quarter and above the high end of our guidance range. Upside for the quarter was driven by better-than-expected demand from our mobile and wireless customers. We delivered the following non-GAAP results for Q1: gross margin of approximately 49%, operating margin of 14%, and earnings per share of $0.27. We also paid approximately $30 million in dividends during the quarter. I'd like to provide a brief update on each of our end markets. In storage, we continued to execute well for Q1. Revenue from our storage end market was slightly better than initially expected and declined 6% sequentially. Starting with HDDs, our business declined in the quarter due to typical seasonality.
On a year-over-year basis, our HDD revenue grew modestly despite a decline in the overall TAM as we continued to gain share. In the enterprise space, we continued to see share gains at a top North America-based HDD customer. Overall, for HDDs, we are accelerating our investment in the next-generation technologies. We believe this will allow us to further increase our share and solidify our leadership position in the market over the next few years. In SSDs, with better-than-expected results and another record quarter. Our units and revenue increased double digits sequentially. During the quarter, we saw multiple new product announcements by multiple customers from our client and enterprise as SATA and SAS products. In addition, we sampled our fifth generation's LDPC technology, which addresses next-generation flash.
We believe this technology will be a key enabler for volume adoptions of 15-nanometer 2D NAND, and in the future, for 3D NAND as well. We expect mass production of these products starting in 2015. We also sampled new PCIe-based products during the quarter. Our SSD business remains on track to grow strongly into fiscal 2015. For Q2, we expect our storage end market to be flat due to typical seasonality and in line with the market. Turning next to networking. Q1 results were as expected and flat compared to the prior quarter. During the quarter, most of our product lines performed in line with our expectations. We saw strong double-digit sequential growth for our accelerated NPU product family, driven primarily by LTE build-outs, particularly in China. We continue to gain momentum in closing design wins and driving new opportunities with our latest family of NPU devices.
Our Arm SoC product lines continue to gain momentum as well. The ARMADA family of SoC devices is garnering design wins across a spectrum of platforms from NAS to wireless access points to ethernet routers. In Q1, our ethernet business benefited due to new devices in the Prestera switching, Alaska PHYs, and LinkStreet SOHO families. In summary, for networking, we continue to garner design wins of new technologies across multiple market segments. For Q2, we expect our networking end market to be approximately flat from the prior quarter. Moving to mobile and wireless. Our revenue in this end market grew strongly and increased 30% sequentially. For our mobile business in Q1, we saw strong growth both on a sequential and year-over-year basis.
The sequential increase in mobile was primarily due to LTE ramp in China, where multiple tier 1 OEMs have launched their LTE smartphones based on our solutions. Our shipments during the quarter exceeded expectations. On the top best-selling LTE smartphone models in China, nearly half of them are based on our platform solution. We continue to focus on this fast-growing LTE market in China and are seeing more OEM partners start new LTE smartphone design and tablet as well mobile broadband device projects with Marvell chipsets. We are on track to powering more multi-mode LTE devices from leading OEMs for deployment later this year. We are also expanding into multiple geographies. Following our modem certification at AT&T, we achieved another important milestone with having completed LTE certification at Verizon. Next, in wireless connectivity, Q1 sequential performance was in line with our expectations.
On a year-over-year basis, our connectivity business grew over 50%. This growth has been due to strong demand for new game consoles and our high attach rates for connectivity across all our 3G and 4G mobile platforms. Due in large part on the high level of Arm integrations and low power features, we are seeing increased momentum for both our 1x1 and our 2x2 11ac combo solutions in mobile computing and dongles. In addition, our Cortex-M-based Wi-Fi and Zigbee devices are seeing adoption in new IoT-type devices. We expect volume ramps of these devices later this year. We're also witnessing increased traction from customers for our high-performance 4x4 11ac products, which are the de facto standards for the enterprise and video distribution devices.
To summarize, we have very strong quarter for our mobile and wireless business, and we continue to be focused on improving our execution in this market. For Q2, we expect our mobile and wireless end market to be relatively flat. We expect continued growth in 4G and seasonal growth in connectivity to be offset by a decline in 3G business. Moving next to our video business. Our revenue declined seasonally in the quarter. On a year-over-year basis, our video business has grown over 2 times. This growth has been driven by devices such as the Google Chromecast, which has been launched internationally. Additionally, a number of service providers have selected our award-winning ARMADA 1500 family of video SoCs for their IPTV and over-the-top hybrid set-top boxes. In summary, Q1 was a better than expected quarter.
Although Q2 is expected to be flat, we are well positioned to deliver solid growth for fiscal 2015. We continue to make strong progress in mobile at multiple customers for smartphones and tablets. We are seeing new opportunities for our connectivity solutions across multiple market segments, and we continue to do better than the market in both HDDs and SSDs. Our networking business also remains stable. With that, I would like now to turn the call over to Mike to go over our first quarter financial results and second quarter outlook.
Thank you, Sehat, and good afternoon, everyone. Moving to our financials, as Sehat mentioned, we reported revenues of $958 million for the first quarter, which was a near record for the company and an increase of 3% from the prior quarter. Our better-than-expected revenue was due to upside in our mobile and wireless business. In storage, our overall revenue declined 6% sequentially and represented approximately 44% of total sales. Our HDD business declined seasonally as expected. However, our SSD business performed better than expected and grew double digits sequentially. In networking, our revenue was flat and represented approximately 18% of total sales. Market softness in areas such as controllers and switches was offset by growth in categories such as MPUs, PHYs, and SOCs. We also saw better-than-expected demand for our PON business this quarter.
Our mobile and wireless end market grew strongly in the quarter, increasing approximately 30% sequentially and represented 33% of overall sales. During the quarter, we saw strong growth in China from multiple customers for our 4G LTE products. In addition, our connectivity business also performed better than anticipated, with only a slight decline in the quarter. Strong mobile platform sales and demand from game consoles were key drivers in the quarter. Moving next to margins and expenses, our non-GAAP gross margin for the first quarter was approximately 49%, which was slightly below our guidance range. The main reason for this was mix. Non-GAAP operating expenses came in as expected at $330 million. This resulted in a non-GAAP operating margin of 14% for the quarter, which was better than our expectations.
Net interest and other income was about $2 million, and we incurred a tax benefit of approximately $5 million in the quarter. The tax benefit in the quarter was due primarily to an adjustment to deferred tax assets and liabilities, resulting from a tax rate change in a foreign jurisdiction. This resulted in non-GAAP net income for the first quarter of $144 million, or $0.27 per diluted share. This was approximately $0.05 higher than the midpoint of our guidance. The shares used to compute diluted non-GAAP EPS during the first quarter were 530 million. Cash flow from operations for the first quarter was $237 million, and free cash flow for the first quarter was $211 million, or approximately 20% of revenue. Now, summarizing Q1 results on a GAAP basis, we generated GAAP net income of $99 million or $0.19 per diluted share.
The difference between our GAAP and non-GAAP results during the first quarter was due mainly to stock-based compensation of $30 million, $7 million related to amortization and write-off of intangible assets, and $7 million was due to restructuring and legal settlement costs. Now turning to the balance sheet. Cash, cash equivalents, and short-term investments as of the end of the first quarter was approximately $2.1 billion, an increase of 9% from the previous quarter. We also paid dividends of $30 million in the quarter, or equivalent to $0.06 per share. Net inventory at the end of the fourth quarter was approximately $351 million, roughly flat from the prior quarter. Days of inventory declined approximately six days to 64. Now turning to our outlook for the second quarter of fiscal 2015. We currently project revenues to be in the range of $940 million-$980 million.
At the midpoint, this would be roughly flat to the prior quarter. We expect all of our end markets to be relatively flat to the prior quarter. Within our mobile and wireless business, we expect continued growth in 4G and seasonal growth in game consoles to be offset by a decline in 3G. We currently project non-GAAP gross margin of 50% ± 100 basis points, and currently anticipate non-GAAP operating expenses to be in the range of $330 million ± $10 million. We anticipate R&D expenses of approximately $270 million and SG&A expenses of approximately $60 million. At the midpoint of our projected guidance, this should translate to a non-GAAP operating margin of approximately 15.5% ± 100 basis points. The combination of interest and other income should net out to approximately $1 million, and we expect tax expense to be approximately $1 million.
We currently expect the diluted share count to be approximately 537 million shares. In total, we currently project non-GAAP EPS to be $0.28 per diluted share, ± a couple of pennies. On the balance sheet, we currently expect to generate approximately $150 million in free cash flow during the quarter. We anticipate our cash balance to be about $2.2 billion, excluding any M&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 $0.07 per share. With that, I would like to turn the call over to the operator to begin the Q&A portion of our call. Operator?
Ladies and gentlemen, if you'd like to ask a question, please press star followed by one on your phone. Our first question comes from the line of Quinn Bolton with Needham. Please proceed.
Hey, guys. Congratulations on the nice results and outlook, especially on the mobile and wireless side. Just obviously it sounds like you're seeing a good initial ramp in China on the LTE side. I'm wondering what visibility you have into the channel and if you have any data on sell-through of the devices based on your LTE solutions.
Well, Quinn, this is Sukhi. The uptake of our devices by customers in China has been very solid. We've noticed that even subscriber strength in China Mobile for LTE has been subpar so far. The expectation from what we hear from a lot of our customers is for that to pick up as we go throughout the rest of this year. We're watching that closely, and we'll see how that plays out.
Great. Just a follow-up on the 3G business. Looks like you're expecting a decline in 3G. Is that mostly on the TD-SCDMA side as the LTE ramps, or are you also seeing sort of less traction on the WCDMA side as well?
I think the market in China is transitioning to LTE. I think you'll probably see a lot more subsidies come to the market.
Starting in the second half of this year. As a result of which, I think a lot of our customers are probably going to see a transition over to 4G LTE at a much faster clip. I think you've heard other participants in the ecosystem say the same thing as well. This will be for both WCDMA as well as for TD-SCDMA, we believe.
Okay, great. Thank you.
Thank you, Quinn.
Our next question comes from the line of Doug Freedman with RBC Capital Markets. Please proceed.
Hey, guys. I'm calling in for Doug Freedman. Thanks for taking my question. I guess, getting back to the mobile and wireless, what do you view in terms of overall LTE shipments in that market for this year?
I think it's a lot of questions in this area, especially when China Mobile say that this year volume is going to be 100 million units. We, on the other hand, do believe that the more realistic number probably start with somewhere between 50 million units, and the 100 million units is the extreme end of our projection. I think it's appropriate to be a little bit more conservative during the first year of the ramp. Closer to the lower range is more realistic, is what I think.
Well, I mean, if you give some color on that, Earl, I think if you look at the TD-SCDMA market, they have about 230 or 240 subscribers so far, and that's been around for what, about four years now? Three to four years. To expect maybe potentially 100 million units in the first year of TD-LTE may be stretching it a little bit. Right. Our view has been it's probably going to be somewhere between 50 to 100 million units this year.
Great. Thank you.
Anywhere between there. It's a bit of difference.
Okay. Just as a follow-up, I guess, given the higher revenue run rate you guys have, are you still maintaining your OpEx guidance for the year of roughly flat, kind of the 330 level? I guess, if so, what are you guys doing to manage that through a higher revenue growth period? Thanks.
Absolutely. We committed early on that it's going to be flat. When we look at the amount of resources that we have across the company, it's clear that we have plenty of resources to take care of the important projects that we need to do to be successful. Nothing changed. We are on track to deliver that flat OpEx this year.
Thank you, Earl. Can we go to the next question, please?
Our next question comes from the line of Harlan Sur with J.P. Morgan. Please proceed.
Hi, good afternoon. Congratulations on the great quarter and outlook. It's good to see the traction you have in 4G with China Mobile really starting to play out here in Q1 and Q2. I think the big concern by investors is that, when your competitor MediaTek enters the market late Q3, early Q4 of this year, that your market share will decline substantially. I guess the question is, given the design cycle times by your customers, I would think that Marvell has already some visibility on handset design wins that will ramp in Q4 and into the first part of next year. Are you seeing the number of handsets that you're winning during this period of time falling off in a big way as MediaTek comes into the market?
Are you maintaining a steady stream of wins at least through the first part of next year where you should have some design win visibility?
Yeah. As you correctly stated that it takes times for our customers to develop handsets using a new silicon. We've been introducing our silicon for quite a while now. We don't expect any newcomers to be able to gain any much traction this year, especially if you're talking about Q3 or Q4. My expectation is probably closer to sometimes next year when before they can have reasonable traction in this area. Having said that, we're not sitting still. We have our first generation product in production, and we are also developing the higher-end devices. We already introduced the high-end chips with the 64-bit, even the 64-bit processors, whether they need it or not, it doesn't matter. This time around, we can just build it, let the market decide whether they need it or not.
We're also working on the lower end, lower cost solutions for market where they don't have advanced solutions, but they want to have lower cost. This time around, we are coming out with multiple products to serve the different market segments to make sure that we defend our territory in much better than historically when we only have one product. We should be in a much better position this year. Next year, as we build even better products We should be in a much better position again.
You have a follow-up, Harlan?
Yeah, I do. Thanks for that, Sehat. Nice to see Marvell's HDD controller show up on the recent Seagate six terabyte enterprise drives. Question is, how far are you into the share ramp into enterprise? Is that going to continue to be a bit of a tailwind for your HDD business throughout this entire year? If HDD TAM does start to improve in the second half, in addition to that, your SSD controller business should continue to grow. Should we see margins that are more sustainable in kind of the 50%+ range, even with the growth in your mobile and wireless business as we think about the second half of the year?
Yeah. Regarding the questions on the enterprise hard drive. The enterprise hard drive is really a very unique business where the design cycle is extremely long design cycles. Part of it is, the customers are very conservative in selecting the chips. On top of that, even when they're done with the products, their end customers are even more conservative. They spend like one year to two years sometimes in qualifying new hard drives for the enterprise storage systems. What we're saying is the ramp-up is going to be continued to steady. Our percent market share will continue to steadily increase over the next couple of years in the enterprise space. Nobody should expect to jump to 100% instantaneously.
This is good for us because, another reason why it's good, it's also the life cycle of these products also now lengthening, so getting longer and longer due to the maturity of this business, where it's getting much harder to build the next generation capacity. That's the reason why we continue to, in our call, I mentioned about we are trying to accelerate our investment in the hard drive because we're seeing that our customers are needing even more advanced technology so they can introduce the next generation capacity node earlier. Most of this help will have to come now in our algorithms and system solutions. That means that we as a supplier in this business, we have to invest to help them. What was the next one?
Was that a part of your question, Harlan?
Yeah. The second part of my question is, given the tailwind that you have on enterprise, if HDD TAM does start to improve in the second half, which it does seem like it is, in addition to your SSD controller business continuing to grow, combine that with growth in mobile and wireless. Should we see a margin that is more sustainable now, kind of in that 50%+ range because you've got the higher gross margin storage products growing at the same time that you have your slightly lower gross margin mobile and wireless products growing?
Yeah. Okay. Our expectation is still trying to get the 50%+ gross margin. At least in the near term. If we look at further down the road, in a much longer term, as the high volume consumer products like the handsets becomes a bigger part of our business, the gross margin could go slightly down, but on the other, we should look at the business as often a scale business, where the most important metric in that area is to have reasonable operating margins of at least 20% in that segment. If we look at the overall picture, this is going to be good for us because as we improve our executions in those areas, our net operating margin can only go up even though when the gross margin stays at 50% or even if it goes down slightly below the 50%.
Great. Thank you.
Your next question comes from the line of Craig Ellis with Caris. Please proceed.
Yeah. Thanks for taking the question. Nice job on the revenues in the quarter and the outlook. The first question is just a clarification. It's on the sequential change in gross margin in the July quarter. Given that the major segments are all guided flat, is that really just that the mix within the baseband business that you talked about where 3G will decline as a % of mix, or are there other intra-segment dynamics that are at play and lifting gross margins 120 basis points quarter-on-quarter?
Well, there's intra-segment play there as well, Craig. Obviously, if you look at even within networking, we have products that have varying margin structures. You know margins are different even within our storage business for HDD and SSDs. Across the different business lines, within those businesses, we'll have some of that positively impact our gross margin for Q2.
Okay. Then the question, I might as well keep the string going since everybody's getting in an LTE baseband question. As you look at the LTE baseband business. Can you give us a split between the China versus outside China mix in the first quarter? I would expect it was mostly China. How would you expect that mix to change in the back half of your fiscal year? Said differently, what other countries will you be shipping material, LTE baseband volumes to beyond China?
Yeah. In the first half, it's clearly mostly China. In the second half, I think we've mentioned, we did get certified on AT&T. We are certified on Verizon, and I think we've mentioned in the past as well that the first initial devices and geographies outside of China will be for mobile computing devices. We still expect that to be true.
Okay. Thank you, and good luck.
Our next question comes from the line of Chris Caso with Susquehanna Financial Group. Please proceed.
Thank you. Given the big quarter that you guys saw in wireless, if you could help us to how we should think about seasonality in the mobile and wireless business as we go into the October quarter. I guess that's a function of 3G versus 4G versus the connectivity ramp. I'm sure you don't want to give absolute guidance, but just how we should think about that, should we be seeing normal seasonal trends in that business in October off of these levels?
Yeah. This is very hard for us to be able to predict that, what is the seasonality and something that just we need to reuse it to the market. One thing that, I'm talking about the LTE here in China. One thing that we can make projection is that, if our customer overbuild the LTE, what we're going to find out is we're going to be caught up with a surprise. There's going to be over-inventory toward the end of the year. That's why when investor asking us questions and when we talk to our customers, we always like to temper down the expectations of the ramp of LTE for this year.
We said earlier that even though we all hear that 100 million is the possible number for the year, we always say that, more likely the number is going to be closer to the 50 than closer to the 100 million units. Okay. We do not want, I do not want our customer to overbuild, and toward the second half of the year say, "Oh, sorry. There's a seasonality." Seasonality usually only happens in a market where things are more mature. LTE, the deployment in China is not a mature technology. It's just in the early stage. We just want our customers not to make that mistake, to overbuild.
Okay.
Does that answer your question? Well, for us, October, Chris, you know seasonally at least our Q2 and Q3 are good quarters for us. Obviously, this time around, we are getting to a flat quarter for Q2. Typically, both Q2 and Q3 are good quarters for us.
Right. Okay. As a follow-up, could you address return of capital? I know the repurchases have paused here for a while. Now that there's at least some visibility on the CMU trial, is that an avenue to allow some repurchases to continue?
Yeah. We haven't changed our policy with regard to purchases, but over the course of the last few years, we have returned a lot of money to shareholders, greater than our competitors. We tend to look at the repurchases as an opportunistic activity. Taking into account various activities we have planned, we'll be making a decision over the next quarter.
Chris, we have not changed our views on that capital allocation. We will be opportunistic on our buyback.
Okay. Thank you.
Your next question comes from the line of Blayne Curtis with Barclays. Please proceed.
Thanks very much for taking the question. This is Chris on for Blayne. Congrats on a good quarter, guys. First of all, on the CMU front, since you brought it up, just any update you can provide there on. I know you guys are aggressively pursuing an appeal, just anything on timing, on status, general update would be helpful.
Yes. As you know, the judge has filed the order for the judgment, that has allowed us to file an appeal. We have bonded the amount of the judgment, the appeal we expect is going to take somewhere between 12 and 18 months. That's basically the status at this point.
Very helpful. Thanks much. Turning back to the ever popular topic of LTE. Things seem to be going very well now. The builds are obviously strong, there's not a lot of competition. The 3G market, though, pricing certainly deteriorated rather rapidly as competition intensified. Are you still, last time, last quarter you'd said you expected LTE to hold up a little better than 3G did. Just any update on your expectations there why you think pricing and profitability may remain better in the LTE market than it did in the 3G market?
LTE is a relatively new market. When everybody build LTE devices, including us and our competition, they all trying to build LTE devices. They have a good performance, not throwaway phones types of performance. In terms of the pricing expectations, as a result, we always be on the higher side. The reason you're seeing that in the 3G side, the pricing is very competitive is because many of the 3G products that people are building are targeting for throwaway types of phones. Those are the ones that are pushing the pressure on the 3G margin.
We don't expect that to happen in LTE for at least several years, meaning only after the LTE become mature, then when these throwaway phones will be built using LTE to address the third world, because many parts of the world where even the 3G side, they are just barely switching to the 3G. On our side, our focus is to build in LTE, to build devices. They will address the mainstream market and a little bit toward the higher ends and a little bit toward the lower ends. The middle 50%, 60% of the market opportunities for the people there going to buy smartphones. Those are the area that people still care about performance and quality.
Thanks very much. It's helpful.
Our next question comes from the line of Ambrish Srivastava of BMO. Please proceed.
Hi, this is Gabriel calling in for Ambrish. Thanks for taking my question, and congratulations on your great quarter. Want to switch gear to the networking business. I think the first quarter came in flat, and you're guiding flat. Can you give us an update on what's your view on the second half? You're still confident that you can grow your networking business?
Well, Gabriel, the networking business, I think is generally a pretty lumpy business for most people, as you know. We are seeing strength in certain pockets, and I think we mentioned that on the prepared remarks where we are seeing strength in the NPU side, for example, coming out of the LTE builds in China. At the same time, we haven't really seen a meaningful pickup in enterprise spending yet. There are certain pockets within enterprise spending we're seeing some pickup, while there's others that we're not. It's a mixed bag there. I think for us, I think we mentioned our networking business is more geared towards the enterprise today. 70%-80% of the business today we have is more geared towards enterprise. It will likely follow the trend of how the enterprise networking market goes for the rest of this year.
Yeah. I think we want to add a little bit. Some of the things that probably we're seeing is that some of the low end of the enterprise markets, we're probably seeing softness because there are alternatives to these wired networking. Specifically, when I talk about these 4x4 11ac for wireless networking. A lot of companies, especially the smaller companies, startups, they just deploy wireless networking for the workforce, instead of using some of these low-end wired networking. Even though in our business, we split the enterprises, even though some of this wireless actually goes to the enterprise, but we call it within the wireless networking business.
You have a follow-up, Gabe?
Yes, just a quick one. Switching to the SSD controller market, I think one of the customer has said they're planning to introduce their 3 bit per cell SSD later this year. Do you also see this as an opportunity to gain maybe more share, further share on this control market?
Did you say three bit?
Yeah, three bit.
Three bit.
Yeah, the three bits per cell of the TLC.
Yeah. Talking about flash solid state, as you know, a lot of companies are trying to push down, try to squeeze the density of the 2D NAND, and the latest is the 15 nanometer nodes. At this node, people are starting to realize, coming to a realization that in order to achieve the reliability that is expected in this market for the enterprise types of class of storage solutions, the LDPC technology is very important.
This is the reason why we introduced our latest generations of LDPC specifically to address, to improve the reliability of these devices that increasingly become so small that there's only very few charge that could be stored in the floating cells. If you talk about triple-bit per cell, it's even worse, because basically for the same number of charge that is stored in a cell, you have to be able to distinguish 8 levels of information. Without this powerful LDPC, it will be impossible to build SSDs for the enterprise class of market. The short answer is, we are actually in the good position in this area, because we're the only one that have this technology, right?
Gabriel, I think we, in the prepared remarks as well, we mentioned, right, we are shipping or sampling our fifth generation LDPC technology right now, and that'll be applicable to both current generation 15 nanometer 2D NAND, and that includes both MLC and TLC, and that will also be addressed for the 3D NAND that a lot of our customers will start to introduce next year.
Thank you. That's helpful.
Your next question comes from the line of John Pitzer with Credit Suisse. Please proceed.
Yeah, good afternoon, guys. Thanks for letting me ask the question. Mike, I guess my first question, I understand, I think, some of the positive dynamics going on at the gross margin level for the July quarter. I guess I'm just trying to figure out a little bit, why not more leverage in the April quarter? I get it, mobile and wireless was up a lot sequentially, but if you look at the overall mix in your April quarter, it wasn't all that different than it was last October, except you had better LTE growth in this April quarter. Why not a better margin profile in April? What else was going on or what am I missing?
Well, John, I think we did have. If you look at even in Q1, if you look at our business in Q1, our mix was more skewed towards 3G, even though our LTE business did really well. Right? Overall, I think we had a significantly higher mix towards 3G, obviously because of that mix, the overall margin for us actually came in slightly below our guidance for the quarter.
That's helpful. Thanks, Sukhi. Guys, you talked a little bit earlier in either answer to a question or your prepared comments, sort of the importance of scale in the baseband business, even if gross margins are flat to down, op margin can still expand. I'm wondering if you can help me out a little bit. Some of your peers have actually broken out profitability by division, and we can see how much money they're investing in LTE, i.e. losing. How close are you guys to break even? What kind of market share should we think about in the LTE business that provides scale that allows you to break even or make a reasonable profit in that business longer term?
We're not providing any breakouts. It's not appropriate for us to give out the breakout at this point due to competitive situations. In terms of scale that will give us the ability to be very profitable on the net operating basis, I would say somewhere within around 15%-20% of market share in this space. I do believe that as we continue to invest some of the technology that we've been building, in building advanced microprocessor, for example, will allow us, in the future, to build truly differentiating products that will be able to show the benefits of our solutions against our competition. I expect, when we introduce those new technology, we should be able to increase our market share accordingly. As a result, we'll soon be able to be very profitable in that business down the road.
All right. Thanks, guys. Appreciate it.
Our next question comes from the line of Hans Mosesmann with Raymond James. Please proceed.
Thank you. Congratulations on the quarter. Can you give us, please, the attach rate of your connectivity solutions to your LTE modem?
100%.
It's 100%, Hans.
Okay, that's consistent, you expect that to be the case throughout the year?
At this point, it's not just us. Every LTE suppliers in this business will have 100% attachment rates with their own products. There's no business that you could expect us to support other suppliers, not because we don't want to support them, because they don't want us to support them, and vice versa.
I think we are engaged with so many multiple customers right now, Hans, on the LTE side, and there's not a single customer who's looking for a discrete connectivity solution.
They want basically one guy to choke. If anything's wrong with the handset, they just want one supplier to choke. Okay. It doesn't matter whether it's the LTE problem, the power management problem, the RF receivers problem, the audio problem, the video problem, the graphics problem, doesn't matter. They want only just one person to choke. As a result, you should expect that in this business, it is a business where we have to provide complete solution to the customer. Not 90% of the solution. It's 100% of the solution.
Okay. Very helpful. Thank you.
Our next question comes from the line of Srini Pajjuri with CLSA Research. Please proceed.
Thank you for taking my question. Sukhi, I think to follow up to the previous question, you said, one of the reasons why the gross margins were a little weaker was 3G was stronger, obviously you're guiding 3G to decline next quarter, and that seems to be helping the gross margins. Just wondering how big is 3G, if we kind of compare that with 4G. Then do you expect 3G to continue to decline over the next few quarters, and should we expect further improvement in your gross margin?
That's a good question, Srini. We don't typically break out 3G versus 4G. Like I said, 3G was a bigger part in Q1. It's hard for us to say exactly how that's going to end up, by the end of this year or in the second half of this year, mainly because we are sometimes still engaged with certain key customers for some of their 3G product line. This is strategically, in strategic engagements in some of these cases. We'll engage strategically with some of these customers because we know there's follow-on business to be had either later this year or next year, for some of their LTE business. It's a little harder for us to quantify that at this point.
Yeah. I want to follow up on that. If it's up to us, okay, I would like to accelerate our ultra-low-cost LTE business so that down the road, like a year from now, okay, we want to see no 3G business. Right. Having said that, we may have no choice but still have to build some of the 3Gs because of the customer requirements. Again, if I have a choice, I would like to have everything moved to LTE.
Yeah. Just to follow up and just clarify on that, Srini, it's a little hard for us to really give you a good description of whether 3G is going to really continue to decline in the back half of this year. We don't have.
Okay. Fair enough. Fair enough. Just a clarification, did you have any 10% customers? Thank you.
I believe we did. It was probably in the storage space.
Okay, great. Thank you.
Your next question comes from the line of Sanjay Chaurasia with Nomura. Please proceed.
Hey, guys. A question on SSD. You guys have been mentioning that your SSD business is increasing in double digits for several quarters now. Could you talk about how is it as a percentage of the storage business? Within SSD, what is your split between OEM and merchant solution? I have a quick follow-up.
Sanjay, we don't break out our SSD business with our HDD business. We will refrain from doing that. The majority of our SSD business today is client, targeted to client. When you refer to OEM, we're not sure what that really means, but if you look at our solutions on the SSD side, for both the SATA and the PCI Express side, most of our customers use them for client devices.
I guess maybe to help you, maybe we need to reiterate again what we said for the last maybe several quarters or the last several years. When we build our SSD controllers, we're building our SSD controllers to address the people that care about quality and performance. The customers that we have are the people that have invested $ billions to build fabs, factories, to build their flash capacity. The customers there, the OEMs that we are buying, maybe the OEMs that are buying our products, are the people that have their own factories to build these flash chips. Yeah. Of course, the other customers, there's a few, less than a handful customer that would be able to buy excess capacity of those flash from these companies, and we support them as well. Those are the minority.
The majority would be the people that have their own fabs.
That's helpful. As a follow-up, are you guys expecting any changes in the SSD controller landscape? Because there's some chatter that one of your competitors may be looking to exit this SSD controller space. Could you talk about that and any changes in the landscape that you may see here?
Yeah. I think it's pretty well-known that that particular story that you mentioned there, that the chatter is very well-known, that it's not in dispute because they're the one that's saying it themselves. It's not even a rumor. We don't consider that as to be a positive neither here or there. We've been working in this area for six years now. We have all the different classes of SSD solutions from the high-end to the mainframes to the low-cost segments. Our focus is just to mind our own business, to build products that will be able to serve all the different markets and make our customers to be successful.
I think it's next, probably what they're saying is they don't have the scale that we have, and if they decided to get out of this business, it's not going to change our market share one way or the other. We already capture today the vast majority of the market anyway.
Yeah. We're over 50% of the market, merchant silicon market right now, as you know, that continues to do well. Our focus on the SSD front is really to come up with really strong solutions that we can continue the momentum for the next few years and beyond, right? Move into other areas within SSDs as well.
Great. Thank you so much.
Our next question comes from the line of Mike Burton with Brean Capital. Please proceed.
Hey, thanks for taking my question, and congratulations on the good results and guidance. Can you help us understand what % of your shipments and design wins are for five-mode devices versus three-mode, and what's the view of five-mode versus the three-mode opportunity out of that $50 million-$100 million that you mentioned? Where do you think Marvell will be more heavily weighted?
Actually, it's the same device. For customers, they're building five modes and three modes. The only difference is just the number of the RF power amplifiers and duplexers in the system. There's no change whatsoever in the delivery from our side. Some customers, they're on the higher end, so they're mainly building the five modes. For the lower cost, obviously, they're building the three modes only. The mix, we don't really control the mix. It's up to them.
The customer.
Up to the customers. Yeah.
You're already seeing, you already designed into and shipping into the five-mode devices already in the market.
Oh, yeah. Our delivery, it's all five modes. It's up to the customer to remove. They want to remove a few components on the RF side. It's their responsibility. I mean, it's their right. Even some customers, even when we deliver five modes, they even want to remove to make it four modes because certain areas they don't even need TD-SCDMA. They say, okay, they don't want to pay for some of the extra components that are needed in that space. Or even it doesn't cost, they don't carry five mode either. Some customers will say, "Hey, I want to do four mode because I don't want to promote TD-SCDMA in the network." It's really up to the customer. Now, zero difference.
Our LTE is we support every mode possible that we can think of. We don't argue what's the best solution from us. We want only one solution.
You have a follow-up, Mike?
Yeah. Just another on the mobile. Could you help us out with the linearity of the quarter, since most of the other suppliers into China saw a really large pickup in March and April. Is there a May holiday reset for you guys, and then we build off of that, or is it generally a more front-end loaded quarter?
No, I think for Q1 was more back-end loaded for sure. May I think has been so far similar to what our expectations were. We're not seeing it being front-end loaded in May, for sure. All right, Whitley, we'll take one last question, please.
Final question comes from the line of Ian Ing with MKM Partners. Please proceed.
Ian, are you there? He may have dropped off. You want to just move to the next caller, Whitley?
Yes, sir. Our next question comes from the line of Joe Moore with Morgan Stanley. Please proceed.
Thank you. I wonder, can you talk about the TD-LTE market one more time? If you look to 2015 and you think about MediaTek having products and other people having products, can you talk about how your product is positioned? Should we think of you participating in every price band? Should we think of you as being at a premium to MediaTek? How do you see it positioning a year from now when there are more vendors in the market?
A year from now, we will have a lot more product portfolios from all the different price points. There will be higher-end devices, there will be lower-end devices. We believe that as LTE becomes successful in China, a lot of parts of the world will take notice that the performance of LTE and the cost of deploying LTEs will be actually lower than deploying the 3G on a per user basis. When that happens, a lot of parts of the world will demand, want to have lower cost solution to take care of the price points that they normally expected.
On the other hand, this also means that it will create a huge opportunity for us to finally be a serious player in the smartphone business as we are now considered to be early, as we are early in the game. We are busy right now building all the different parts, different flavors. Joe.
Within China specifically, to the extent that if in areas where MediaTek has comparable technology to you, people talk about the number of people they have on the ground kind of supporting the smaller handset vendors. What are the competitive dynamics in those kinds of channel customers?
I understand that. At the same time, okay, the vast majority eventually, just like we stated, okay, last quarter, to build a handset, eventually the one that controls the DRAM capacity, the flash capacities, the LCD capacities, those are the ones going to be more successful in this business. It is important that for companies, okay, like for us to focus on who's going to be eventually going to be the winner, the big players in this business. In our opinion, it won't be this 1,000 or 100 small companies that are going to be shipping fake phones. The other part is we don't want to be related to people, customers that are building fake phones, because that's going to only ruin our reputation in the tier 1 customers.
We need to pick and choose the battle. Our choice is we want to be at the side of the big customers that care about their reputation and the quality and the performance. Then, okay, if we have to let go some of these clone or fake telephones.
The white box market.
White box, okay. Let the telecom competition take over that business. We don't have to worry about it.
Great. Thank you very much.
There are no further questions in queue at this time. I would now like to turn the call back over to Mr. Nagesh for final remarks.
Thank you, Ashley. I would 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.
All right, thank you.
Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect. Have a great day.