Good day, ladies and gentlemen, and welcome to the Q1 2015 Marvell Technology Group Ltd. Earnings Conference Call. My name is Whitley, and I'll be your operator for today. At this time, all participants are in listen only mode. Later, we will conduct a question and answer session.
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. Suji Nagesh, VP of Finance. Please proceed, sir.
Thank you, Vitale, and good afternoon, everyone. Welcome to Marvell Technology Group's Q1 fiscal 2015 earnings call. With me on the call today are Sarath Sattaja, Marvell's Chairman and CEO and Mike Rachin, Marvell's CFO.
They 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 atmarvell.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 and 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 Q2 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 filings for a detailed description of our business and associated risks. Please be reminded that all of our statements are made as of today and Marvell undertakes no obligation to revise or update publicly any forward looking statements. 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 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 Sahil.
Thanks, Ruki, and good afternoon, everyone. Today, we reported 1st quarter revenue of approximately $958,000,000 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 up approximately 40 percent, operating margin up 14% and earnings per share of $0.27 We also paid approximately $30,000,000 in dividends during the quarter. Now I'd like to provide a brief update on each of our end markets.
In storage, we continue 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. However, 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 continue 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. Next, in SSDs, have 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 SaaS products.
In addition, we sampled our 5th generation's LDPC technology, which addresses next generation flash. We believe this technology will be a key enabler for volume adoptions of 15 nanometer 2 d NAND and in the future for 3 d NAND as well. We expect mass productions 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 in the fiscal 2015.
For Q2, we expect our storage end market to be flat due to typical seasonality and in line with the market. Now turning next to networking. Q1 results were best 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 MPU 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. Also in Q1, our Ethernet business benefited due to new devices in the Presterra switching Alaska PHYs and LinkStreet SOHO families. In summary, for networking, we continue to garner design wins on new technologies across multiple market segments.
For Q2, we expect our networking end market to be approximately flat from the prior quarter. Next, moving to wireless 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 tablet as well as 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 and 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 from for new game consoles and our high attach rates for connectivity across all our 3 gs and 4 gs mobile platforms. Due in large part on the high level of RBOM integrations and low power features, we are seeing increased momentum for both our 1 by 1 and our 2 by 2 11 AC combo solutions in mobile computing and dongles.
In addition, our Cortex M based WiFi 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 fractions 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 had 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 4 gs and seasonal growth in connectivity to be offset by a decline in 3 gs 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 Comcast, which has been launched internationally.
Additionally, a number of service providers have selected our award winning Amada 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 and 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 1st quarter financial results and second quarter outlook.
Thank you, Sahat, and good afternoon, everyone. Moving to our financials, as Sahat mentioned, we reported revenues of $958,000,000 for the Q1, which was a near record for the company, 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 4 gs 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 Q1 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 $330,000,000 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 $2,000,000 and we incurred a tax benefit of approximately $5,000,000 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 Q1 of $144,000,000 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 Q1 were $530,000,000 Cash flow from operations for the Q1 was 237,000,000 dollars and free cash flow for the Q1 was $211,000,000 or approximately 20% of revenue. Now summarizing Q1 results on a GAAP basis, we generated GAAP net income of $99,000,000 or $0.19 per diluted share. The difference between our GAAP and non GAAP results during the Q1 was due mainly to stock based compensation of 30,000,000 dollars 7,000,000 related to amortization and write off of intangible assets and $7,000,000 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 $2,100,000,000 an increase of 9% from the previous quarter. We also paid dividends of 30 $1,000,000 in the quarter or equivalent to $0.06 per share. Net inventory at the end of the 4th quarter was approximately 3 $51,000,000 roughly flat from the prior quarter. Days of inventory declined approximately 6 days to 64. Now turning to our outlook for the Q2 of fiscal 2015.
We currently project revenues to be in the range of $940,000,000 to $980,000,000 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 4 gs and seasonal growth in game consoles to be offset by a decline in 3 gs. We currently project non GAAP gross margin of 50%, plus or minus 100 basis points and currently anticipate non GAAP operating expenses to be in the range of $330,000,000 plus or minus 10,000,000 dollars We anticipate R and D expenses of approximately $270,000,000 and SG and A expenses of approximately $60,000,000 At the midpoint of our projected guidance, this should translate to a non GAAP operating margin of approximately 15.5 percent plus or minus 100 basis points. The combination of interest and other income should net out to approximately 1,000,000 dollars and we expect tax expense to be approximately $1,000,000 We currently expect the diluted share count to be approximately 537,000,000 shares.
In total, we currently project non GAAP EPS to be $0.28 per diluted share, plus or minus a couple of pennies. On the balance sheet, we currently expect to generate approximately $150,000,000 in free cash flow during the quarter. We anticipate our cash balance to be about $2,200,000,000 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 $0.07 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.
Operator?
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. I was hoping to start there and 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?
Quinn, this is Suki. So far the uptake of our devices by customers in China has been very solid. We've noticed that the subscriber strength in China Mobile for LTE has been maybe less as it's subpar so far. But 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. So we're watching that closely and we'll see how that plays
out. Great. And then just a follow-up on the 3 gs business. It looks like you're expecting a decline in 3 gs. Is that mostly on the TDS, CDMA side as the LTE ramps?
Or are you also seeing sort of less traction on the wideband CDMA side as well?
I think the market in China is transitioning to LTE. So 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 4 gs LTE at a much faster clip. I think you've heard other participants in the ecosystem say the same thing as well. And this will be for both wideband as well as for TDSCDMA, we believe.
Okay, great. Thank you.
Thank you, Quinn.
Our next question comes from the line of Earl Heghey with RBC Capital Markets. Please proceed.
Hey, guys. I'm calling in for Doug Friedman. Thanks for taking my question. I guess, getting back to the mobile and wireless, what do you view in terms of overall shipments, LTE shipments in that market for
this year? Yes. So I think it's a lot of questions in these areas that volume is going to be 100,000,000 units. We, on the other hand, Safir, do believe that the numbers the more realistic numbers probably start with somewhere between 50,000,000 units. And the Harned Unit is the extreme end of our projection.
So, I think it's appropriate to be a little bit more conservative during the 1st year of the ramp. So 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 TSAMA market, it's probably about they have about 230 or 2 40 subscribers so far and that's been around for what about 4 years now, 3 to 4 years. So they expect maybe potentially 100,000,000 units in the 1st year of TDLTE maybe T, maybe stretching it a
little bit,
right. So somewhere so our view has been it's probably be somewhere between 50,000,000 to 100,000,000 units this year.
Great. And
you're right between that. And as Just put the difference. Okay. And just as a
follow-up, I guess, given the higher revenue run rate you guys have, are you still maintaining your OpEx guidance that you're roughly flat, kind of the 3 $30,000,000 level? And I guess, if so, what are you guys doing to kind of manage that through higher revenue growth periods? Thanks.
Absolutely. We committed early on that it's going to be flat. It looks like 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 take to do to be successful. So nothing changed. We are on track to deliver that flat OpEx this year.
Thank you,
Our next question comes from the line of Harlan Sur with JPMorgan.
It's good to see the traction you have in 4 gs with China Mobile really starting to kind of play out
here in Q1 and Q2. I think the
big concern by investors is that when your competitor MediaTek enters the market kind of late Q3, early Q4 of this year that your market share will decline substantially. Now, 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 1st part of next year. So 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? Or are you maintaining a steady stream of wins at least through the 1st part of next year where you do or you should have some design win visibility?
Yes. As you correctly stated that it takes time to for our customers to develop handsets using new silicon. And we've been introducing our silicon for quite a while now. And we don't expect any newcomers to be able to gain any much traction this year. And question, if you're talking about Q3 or Q4, Okay, my expectation is probably closer to sometimes next year before they can have reasonable tractions in this area.
Now having said that, we're not sitting still. So, we have our 1st generation product in productions and we are also developing the high end devices. So 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 a lot, we need to just build it, let the market decide whether they need it or not.
We're also working on the lower end of the lower cost solutions for market where they don't have advanced solutions, but they want to have lower cost. So, 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 a much better than historically when we only have one product. So, we should be in the better much better position this year. And next year, as we build even better products, we should be in a much better position again. Do you have a follow-up, Harm?
Yes, I do. Thanks for that, Sahat. Nice to see Marvell's HDD controller show up on the recent Seagate 6 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?
And 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%, 50% plus range even with the growth in your mobile and wireless business as we think about the second half of the year?
Yes. Regarding the questions on the enterprise hard drive, the enterprise hard drive is very unique business where the design cycle is extremely long design cycles. Part of it is, okay, the customers are very, very conservative in selecting the chips, okay? And then on top of that, even when you're done with the products, the end customer their end customers even look on derivatives, they spend like a year to years sometimes in qualifying new hard drives for their enterprise storage systems. So what we're saying is the ramp up is going to be continued to steady that our market 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. So this is good for us because another reason why it's good is also the lifecycle of this product is also now lengthening, so getting longer and longer due to the maturity of this business, where it's getting much, much harder to build the next generation capacity. And that's the reason why we continue to in our call, I mentioned about we are trying to accelerate our investment in the hard drives because we're seeing that our customers are needing even more advanced technology so they can introduce the next generation capacity node earlier. And most of this help, I think, will have to come now in our algorithms and system solutions. And that means that we, as a supplier in this business, we have to invest to help them.
So what was the next one? Was that
a part of your question, Harlan?
Yes. The second part of my question is, given the tailwind that you have on enterprise and 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%, 50% plus 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?
Yes. Okay. Our expectation is still trying to get the 50% plus gross margin. So at least in the near term. Now if we look at further down the road in a much longer term, as the high volume consumer products like the handsets becomes bigger it's a bigger part of our business, okay, the gross margin could go slightly down.
On the other hand, we should look at that business as a scale business where the most important metric in that area is to have reasonable operating margins of at least 20% in that segment. So if we look at the overall picture, okay, this is going to be good for us because as we improve our execution 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 up slightly below the 50%. Great. Thank you.
Your next question comes from the line of Craig Ellis with Keyuris. Please proceed.
Yes, thanks for taking the question and nice job on the revenues in the quarter and the outlook. The first question is just a clarification and 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 the mix within the baseband business that you talked about where 3 gs will decline as a percent 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. And obviously, if you look at even within networking, we have products that have varying margin structures and margins are different even within our storage business for HDD and SSDs. So across the different business lines, we'll have within those businesses, we'll have some of that impact or positively impact our gross margin for Q2.
Okay. And then the question and I might as well keep the string going since everybody is getting an LTE baseband question. As you look at the LTE baseband business, can you give us a split between China versus outside China mix in the Q1? I would expect it was mostly China. And 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 LPD baseband volumes to beyond China?
Yes. In the first half, it's clearly mostly China. In the second half, I think we've mentioned, right, we did get certified on AT and T. We are certified in 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 and 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. And I guess that's a function of 3 gs versus 4 gs 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?
This is very hard for us to be able to predict that, okay, what is the seasonality and something that's just been introduced into the market. But one thing that okay, I'm talking about the LTE here, so in China. But one thing that we can projection is that if our customer overbuild the LTE, What we need to find out is we need to be kind of with a surprise statement to be over inventory towards the end of the year. That's why when investors are asking us questions and when our customer when we talk to our customer, we always like to tamper down the expectations of the ramp of the LTE for this year. So we said earlier that even though we heard we all hear that $1,000,000 is the possible number for the year, we always say that it's more likely the number is going to be closer to the 50 than closer to the 100,000,000 units.
We do not want I do not want our customer to overbuild and over the second half of the year say, oh, sorry, we're there, but seasonality. Seasonality usually only happens in a market where things are mature. LTE, the deployment in China is not a mature technology. It's just at the early stage. Just don't just please we just want our customers not to make that mistake to overbuild.
Okay. Did Does that answer your question? For us, October, Chris, seasonally at least our Q2 and Q3 are good quarters for us. I mean, obviously this time around we are guiding to a flat quarter for Q2, but typically both Q2 and Q3 are growth drivers for us growth quarters for us.
Okay. As a follow-up, could you address return of capital? And 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?
Yes. 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. And we tend to look at the repurchases as an opportunistic activity. And taking into account various activities we have planned, we'll be making a decision over the next quarter.
So, 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.
This is Chris on for Blayne. Congrats on the good quarter guys. I guess, 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, but just anything on timing on kind of status general update would be helpful.
Yes. Well, as you know, the judge has filed the order for the judgment and that has allowed us to file an appeal. We have bonded the amount of the judgment and the appeal we expect is going to take somewhere between 12 18 months. And so that's basically the status at this point.
Very helpful. Thanks much. And then I guess turning back to the ever popular topic of LTE. It's things seem to be going very well now. The builds are obviously strong and there's not a lot of competition.
The 3 gs market though pricing certainly deteriorated rather rapidly as competition intensified. Are you still I think last time last quarter you'd said you expected LTE to hold up a little better than 3 gs did. Just any update on your expectations there and why you think pricing and profitability may remain better in the LTE market than it did in the 3 gs market?
Well, LTE is a relatively new market. So when everybody build LTE devices, including us in our competition, They are all trying to build LTE devices. They have a good performance, not throw away phones types of performance. So in terms of the pricing expectations, as a result, we'll always be on the higher side. The reason you're seeing that in the 3 gs side, the pricing is very, very competitive is because many of the 3 gs products that people are building are targeting for throwaway phones.
Those are the ones that are pushing the pressure on the 3 gs margin. We don't expect that to happen in LTE for at least several years, meaning like only after the LTE become mature then, okay, when these throwaway phones will be built using LTE to address the 3rd wall because many parts of the world where the 3 gs sides of the area just barely switching to the 3 gs. So on our side, our focus is to build LTE to build devices. They will be they will address the mainstream market and a little bit toward the higher end end and a little bit toward the lower end. So, the middle 60%, 50%, 60% of the market opportunities for the people there going to buy smartphones.
So those are the areas that people still care about performance and quality.
Our next question comes from the line of Ambrish Srivastava of BMO. Please proceed.
Hi, this is Gabriel Hong calling in for Birenz. Thanks for taking my question and congratulations on your great quarter. Just want to switch gear to the networking business. And still confident that you can grow your networking business?
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 business in China. But 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. So it's a mixed bag there.
But I think for us, I think we mentioned our networking business is more geared towards enterprise today. It is 70%, 80% of the business today we have is more geared towards enterprise. And so it will likely follow the trend of how the enterprise networking market goes for the rest of this year. Yes.
I think we want to add a little bit. Some of the things that probably we start seeing is that some of the low end of the enterprise markets, we're seeing probably seeing softness because there are alternatives to this wired networking, specifically Monadon, but this 4x4 11EC wireless networking, a lot of companies that especially the smaller companies that start ups, they just deploy wireless networking for their workforce instead of using some of these low end wired networking. So even though the growth in our business, we split the enterprises even though some of these wireless actually goes to the enterprise, but we call it within the wireless networking business. Do 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 the 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 3 bps?
Yes, the 3 bits per cell of the TLC.
Yes. So talking about the flash solid state, as you know, a lot of companies are trying to push down, okay, so they try to squeeze the density of the 2 d flash. And the most the latest is the 15 nanometer nodes. And 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 clouds of storage solutions. The LDPC technology is very, 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 they could be stored in the floating cells. So I and if you talk about tripletial to cell, it's even worse because basically for the same number of charge they have to store in the cell, you have to be able to distinguish 8 levels of information. So, without this powerful LDPC, it will be impossible to build SSDs for the enterprise class of market. So the short answer is, this is we are actually in the good position in this area because we're the only one that have this technology, right?
So Gabriel, in the prepared remarks as well we mentioned, right, we are shipping or sampling our 5th generation LTPC technology right now and that will be applicable to both current generation 15 nanometer, 15 nanometer 2 d NAND and that includes both MLC and TLC and that will also be addressed for the 3 d NAND that we expect 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.
Yes, 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. And 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. So why not a better margin profile in April? What else is going on or what am I missing?
Well, John, I think we did have a big if you look at even in Q1, if you look at our business in Q1, our mix was more skewed towards 3 gs, even though our LTE business did really well, right? I mean, so overall, I think it was we had a significantly higher mix towards 3 gs and obviously that because of that mix, the overall margin for us actually came in slightly below our guidance for the quarter.
That's helpful. Thanks, Suki. And then guys, Sahat, 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 and 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 breakeven? What kind of market share should we think about in the LTE business that provides scale that allows you to breakeven or make a reasonable profit in that business longer term?
Yes. So we're not providing any breakouts. It is not appropriate for us to give us the breakout at this point due to competitive negotiations. And 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% to 20% of market share in this space.
And I do believe that as we continue to invest some of the technology that we've been building and building advanced microprocessor, for example, will allow us in the future to build truly differentiating products that be able to show the benefits of our solutions against our competition. And I expect, okay, when we introduce those new technology, we should be able to increase our market share accordingly. And as a result, okay, we should be able to be profitable and very profitable in that business down the road.
Thanks guys. Appreciate it.
Our next question comes from the line of Hans Mosesmann with Raymond James. Please proceed.
Thank you and congratulations on quarter. Can you give us please the, if you can, the attach rate of your connectivity solutions to your LTE modem?
100%. It's 100%. Okay.
And that's consistent, you expect that to
be the case throughout the year?
At this point, okay, every it's not just us, every LTE suppliers in this business will have 100 percent attachment rates with their own products. There is no business where we could 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. Yes.
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 wrong with the handset, they just want one supplier to choke, okay. So it doesn't matter whether it's the LTE problems, the power management problem, the RF transceivers problems, the audio problems, the video problems, the graphics problems, it doesn't matter. They want only just 1 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.
So, 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.
Suki, I think a follow-up to the previous question. You said, one of the reasons why the gross margins were a little weaker was 3 gs was stronger. And obviously, you're guiding 3 gs to decline next quarter and that seems to be helping the gross margins. Just wondering how big is 3 gs if you kind of compare that with 4 gs? And then do you expect 3 gs 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 3 gs versus 4 gs. But like I said, 3 gs 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 3 gs product line. And this is strategically strategic engagements in some of these cases.
And we'll take 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. So, it's a little harder for us to quantify that at this point.
Yes. 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, we want to see no 3 gs business. But having said that, we may have no choice but still have to build some of the 3 gs because of the customer requirements. But again, if I have a choice, I would like
to have everything moved to LTE. Yes. So just to follow-up and just clarify on that, Shruti. It's a little hard for us to really give you a good description of whether 3 gs is going to really continue to decline in the back half of this year. We don't have
Okay, fair enough. Fair enough. And then just a clarification, did you have any 10% customers? Thank you.
I believe that it was probably in the storage space.
Okay, great. Thank you.
Your next question comes from the line of Sanjay Sureshwarja with Nomura. Please proceed.
Hey guys, question on SSD. You guys have been mentioning that your SSD business is increasing in double digit for several quarters now. Could you talk about how is it as a percentage of the storage business? And then within SSD, what is your split between OEM and Merchant Solutions? And then I
have a quick follow-up.
Yes. So Sanjay, we don't break out our SSD business with our XGB business. We will refrain from doing that. The majority of our SSD business today is client targeted to client. So 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
reiterate this again what we said over the last reiterate this here what we said for the last several quarters over the last several years. When we build our SSD controllers, we are building our SSD controllers to address the people that care about quality and performance. So, the kind of clients that we customers that we have are the people that have invested 1,000,000,000 of dollars to build fab factories to build the flash capacity. And so, 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. Yes, of course, the other customers that 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.
But those are the minority. The majority will be the people that have their own valves.
Okay, that's helpful. And as a follow-up, are you guys expecting any changes in the SSD controller landscape? Because there is some chatter that one of your competitors may be looking to exit this SSD controller space. Could you talk about that? And anything any changes in the landscape that you
mentioned that the charter is very well known, okay, that particular story that you've mentioned that the charter is very well known. It's not in dispute because they're the one that's saying it themselves. So it's not even a rumor. So we don't consider that as to be a positive neither here or there. We've been working in this area for 6 years now.
So we have all the different classes of SIT solutions from the high end to the mainstream to the low cost segment. So our focus is just to mine our own business, to build products there 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 that they don't have the scale that we have and they decided to get out 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.
Yes.
We're over 50% of the market, merchant silicon market right now, as you know, and that continues to do well. So, our focus on the SSD front is really to come up with really strong solutions that we can continue that momentum for the next few years and beyond, right? And then move into other areas within SSDs as well.
Great. Thank you so much.
Our next question comes from the line of Mike Burton with Beren Capital. Please proceed.
Hey, thanks for taking my question and congratulations on
the good results and guidance. Can you help us understand what percent of your shipments and design wins are for 5 mode devices versus 3 mode and what's the view of 5 mode versus the 3 mode opportunity out of that $50,000,000 to $100,000,000 that you mentioned? And where do you think Marvell will be more heavily weighted?
Actually, it's the same device For customers, they're building 5 modes and 3 modes. The only difference is just the number of the RF amplifiers and duplexers in the system. So there's no change whatsoever in the delivery from our side. So some customers on the higher ends of their billing, mainly billing the 5 nodes. And for the lower cost, obviously, they're building the 3 nodes only.
So the mix, we don't really control the mix. It's up to the customers. Up to the customers, yes.
Right. But you're already seeing
you're already designed into and shipping into 5 mode devices already in market?
Yes, yes. Okay. Our delivery, okay, it's all 5 modes. It's up to the customer to remove, They want to remove a few components on the other side. It's their responsibility.
I mean, they're right. Even some customers, even with even 5 modes, they even want to remove the 4 modes because of an area they don't even need PDS to give me. So they say, okay, they don't want to pay for some of the extra components that needed in that space. Or even it doesn't cost, they don't want to call it they don't want to clarify more details on some customers that say, hey, I want to reform because I don't want to promote TDA, CDMA in the network. So it's really up to the customer.
No, 0 difference. Our LTE is we support every mode possible that we're shipping off. So if it's so they don't have to I mean, so we don't argue what's okay, what's the best solution from us. We want only one solution.
Do you have a follow-up, Mike?
Yes, yes. 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 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. And May, I think has been so far similar to what our expectations were. So we're not seeing it being front end loaded in May for sure. All right. We'll take one more with me, we'll take one more question one last question, please.
Final question comes from the line of Ian Ng with MKM Partners. Please proceed.
Ian, are you there? You may have dropped off. Well, you want to just move to the next caller, Ridley?
Yes, sir. Our next question comes from the line of Joe Moore with Morgan Stanley. Please proceed.
Yes. Thank you. I wonder can you talk about the TV LTE market one more time? If you look to 2015 and you think about MediaTek having products and other people having 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 MediaTekt? Just how do you see a positioning a year from now when there are more vendors in the market?
Yes. A year from now is we will have a lot more products portfolios from all the different points. So there will be higher end devices. There will be lower end devices. So we believe that as LTE becomes successful in China, a lot of parts of the world will take notice that the performance of LTE is going to be and the cost of deploying LTE will be actually lower than deploying the 3 gs on the per user basis.
So when it happens, a lot of parts of the world will demand want to have lower cost solution to take care of the price points, okay, they normally expected. I mean, the pay will be more very fine, but okay, they are but on the other hand, okay, this also means, okay, 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. And so we are busy right now building all the different parts, different flavors.
Yes. And 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?
Yes, I understand that. But at the same time, the vast amount of volumes eventually, just like we stated last quarter, to build a handset eventually the one that control the DRAM capacity, the flash capacities, the LCD capacity, those are the ones going to be more successful in this business. So it is important that for companies, okay, they want, okay, like for us to be to focus on what eventually going to be who's going to be eventually going to be the winner in this the big players in this business. So and in our opinion, it won't be this 1,000 or 100 small companies that are going to be shipping fake phones. And the other part is, we don't want to be related to people, customers they are building pay phones because that can only win our reputation in the Tier 1 customers.
So, we need to be we need to pick and choose the battle. And our choice is we don't have to we only be at the site of the big customers that care about their reputation and the quality and the performance. And then, okay, if we have to let go some of this clone, okay, or fake telephone, okay. Lightbox money. Lightbox money.
Lightbox money, 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'd now like to turn the call back over to Mr. Nagesh for final remarks.
Thank you, Whitley. I would like to thank everyone for the 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