Peter Andrew - VP, IR Matt Murphy - President and CEO Jean Hu - CFO.

John Pitzer - Credit Suisse Karl Ackerman - Cowen and Company Craig Ellis - B. Riley Sidney Ho - Deutsche Bank Chris Rolland - Susquehanna Joe Moore - Morgan Stanley Mark Delaney - Goldman Sachs Kevin Cassidy - Stifel Harsh Kumar - Stephens.

Good day, ladies and gentlemen, and thank you for your patience. You’ve joined the Q2 2018 Marvell Technology Group Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time.

[Operator Instruction] As a reminder, this conference may be recorded. I’d now like to turn the call over to your host Vice President of Investor Relations, Mr. Peter Andrew. Sir, you may begin..

Thank you and good afternoon everyone. Welcome to Marvell’s second quarter of fiscal year 2018 earnings call. Joining me on the call today is Matt Murphy, Marvell’s President and CEO; and CFO, Jean Hu.

Before I turn the call over to Matt, I wanted to remind everyone that certain comments today will include forward-looking statements, which are subject to significant risks and uncertainties which could cause our actual results to differ materially from management’s current expectations.

Please review the cautionary statements and risk factors contained in our earnings release which we filed with the SEC today and posted on our website, as well as our most recent 10-K and 10-Q filings. We do not intend to update our forward-looking statements. During our call today, we will make reference to certain non-GAAP financial measures.

A reconciliation between our GAAP and non-GAAP financial measures is available on our website in the Investor Relations section. With that, let me turn the call over to Marvell’s President and CEO, Matt Murphy..

Great. Thank you, Peter, and good afternoon to everyone on the call. Today, I’m pleased to report that our second quarter results demonstrate Marvell’s continued progress as a company including growth in our core businesses, improved execution and increased profitability.

In our second fiscal quarter of 2018, Marvell achieved revenue of $605 million, above the midpoint of our guidance, led by our growth in our core businesses of storage, networking and connectivity. Together, these businesses grew 6% year-over-year.

Our non-GAAP gross margin also showed continued improvement, increasing the 61.2%, up over 0.5 percentage point from last quarter and 6 percentage points from a year ago. We’re already operating above the target we established at our investor day in March.

As we continue to improve the mix of our business by ramping new products with differentiated features and reducing costs through efficiency, we believe we will continue to drive gross margin improvement going forward.

Our non-GAAP operating margin improved from 14.5% a year ago to 25.8% this past quarter, marking significant progress towards our long-term goal of 30%. During the second quarter, we also announced the definitive agreement to sell our multimedia product line to Synaptics with the transaction scheduled to close later this quarter.

When completed, it will mark the successful divesture of all operations we identified for sale during last November’s restructuring announcement. We remain committed to returning capital to our shareholders. During Q2, we returned $251 million including $221 million in buybacks and $30 million in dividends.

We have now repurchased over $500 million of Marvell stock under the $1 billion repurchase plan we announced last November, well ahead of schedule. In total, including buybacks and dividends, we have returned more than $690 million to shareholders since the third quarter of fiscal 2017, which equates to almost 170% of free cash flow.

Now, turning to our business performance. I’m pleased to report that in Q2, our storage business performed above expectations, growing 13% year-over-year, despite headwinds in the HDD market. We achieved this upside by stronger than expected growth of our SSD products for the enterprise and datacenter market.

Our SSD business grew sequentially and now accounts for more than 25% of our storage revenue. We achieved this growth despite supply constraints in the NAND market.

Customers continue to choose Marvell because we offer one of the industry’s broadest family of client to cloud controllers spanning all key protocols including SATA, SAS and NVMe as well as best-in-class power and performance.

Our solutions, which feature Marvell’s unique NANDEdge error correction technology are also helping enable new generations of 3D and QLC NAND memory. This demonstrates that Marvell is well-positioned to benefit as the overall storage market continues to shift from hard disk drives to solid-state drives.

We’ve also been making significant progress diversifying Marvell’s HDD business. We’re expanding in key growth segments such as the cloud and datacenter as well as into growing consumer markets. In addition, as our mix shifts to higher capacity HDD products, we have the opportunity to capture more content.

As a result of these diversification efforts, we estimate that our exposure to the HDD notebook segment represents less than 15% of total Company revenue. I want to pause here and make an important point. We continue to believe that the storage market transition from HDD to SSD will be positive for Marvell.

As an example, we estimate that our total storage sales into notebooks will grow in fiscal 2018 versus fiscal 2017 with growth in SSD sales more than offsetting the decline in HDD sales. Overall, we are pleased with the performance of our storage business, and our Q2 business validates the growth strategy we outlined at our March investor day.

Let’s move on to networking. Networking was up 2% sequentially, slightly above our expectations. During the quarter, we started to see our customers announce significant upgrades to their existing switching platforms for the campus and enterprise markets.

These upgrades will utilize multi-gigabit Ethernet to increase speed and also feature enhanced security, traffic analytics and greater support for mobility. Marvell is well-positioned in this upgrade cycle with our refreshed portfolio of switches PHYs and SoCs, offering unique features such as Layer 3 Fiber to the Edge.

We are also seeing continued design win traction with our gigabit and multi-gigabit Ethernet switches at the enterprise access layer and with our 10-gig switches for access and aggregation.

These design wins are moving towards production and we are very pleased that one of our major customers has already announced their first products, based on our new 10-gigabit switch family.

Finally, our connectivity business enjoyed a seasonally strong broad based strength in the enterprise access point, gaming, streaming, voice assist, and automotive markets. New products we introduced in the quarter included a family of Wi-Fi combo solutions that enable advance infotainment, telematics and Wi-Fi gateways for the connected car.

These solutions compliment our Ethernet PHY and switch products and put us in a strong position in the growing automotive market. In summary, I’m very pleased with our performance in Q2. And I want to thank Marvell’s employees for making this success possible. Our progress is the direct result of their efforts and I’m proud to be part of this team.

And with that, I will turn the call to our CFO, Jean Hu..

Thanks, Matt, and good afternoon, everyone. I’ll discuss the highlights for our second quarter for fiscal 2018 and provide our current outlook for continuing operations in the third quarter for fiscal 2018.

As a reminder, we have reclassified the LTE thin-modem product line we sold in Q2 as part of the discontinued operations and the recast of our financials can be found on our website. Our discussion today will be focused on continuing operations only. Revenue in second quarter was $605 million.

Our core business of storage, networking and connectivity grew 6% year-over-year, above the middle point of our guidance range and accounted for 92% of total revenue.

Storage accounted for 52% of revenue and grew 13% year-over-year, driven by the rapid revenue ramp of SSD products and our increased market presence in enterprise and the data center market with our broad HDD and SSD product portfolio.

Networking accounted for 24% of revenue and decline about 6% year-over-year, primarily due to the decline of our legacy network of processor product line. Connectivity accounted for 16% of our revenue and grew 6% year-over-year. Finally, other products accounted for 8% of revenue and declined 35% year-over-year, consistent with our expectations.

GAAP gross margin for second quarter was 60.4% and non-GAAP gross margin was 61.2%, an increase of 6 percentage points from Q2 last year. Gross margin improvement initiatives and strong execution enabled us to continue to expand the gross margin in the midst of our revenue mix headwind in the second quarter.

GAAP operating expenses were $241 million and non-GAAP operating expense was $214 million. Non-GAAP operating expense was below the guidance range we provided. We’re on track to achieve our $250 million annualized run rate cost reduction we announced last November.

GAAP operating margin was 20.6% and non-GAAP operating margin was 25.8% versus 14.5% a year ago, highlighting the strength of our financial model and continued progress toward our target operating margin. GAAP and non-GAAP earnings per diluted share were $0.26 and $0.30, respectively.

Our non-GAAP earnings per share were up 58% from year ago due to improved sales and significant expansion of both growth and operating margin. Let’s now turn to our balance sheet. At the end of the second quarter, our cash and marketable securities were $1.6 billion or roughly $3 per non-GAAP diluted share.

We are very pleased with our second quarter results and how we are positioned heading into the second half of the year. In addition, as Matt mentioned earlier, we have successfully divested both of the product lines classified and the discontinued operations in addition to the LTE thin-modem business.

In total, after we close the sale of multimedia business, we will have generated over $170 million in cash from the sale of this product line.

As a result of additional cash proceeds from asset sales and confidence in our long-term business prospects, we accelerated share purchase activity during the quarter and returned $221 million cash through share repurchases, bringing the total amount of repurchases over $500 million under our $1 billion program announced last November.

We are committed to return cash to shareholders, and we expect to continue to repurchase our shares under the current plan. Now, turning to our fiscal third quarter of 2018 guidance. We expect our total revenue from continuing operations to be in the range of $595 million to $625 million.

At the midpoint of our guidance, we expect our storage revenue to be approximately flat sequentially, reflecting our cautious view of HDD demand in the near-term.

We expect our networking revenue to return to year-over-year growth of low-single-digit in the third quarter, which is consistent with what we said last quarter that our new product rams are expect to offset legacy decline in the second half of fiscal 2018.

We expect our connectivity revenue to decline slightly sequentially and other products category to be approximately flat sequentially and decline more than 20% year-over-year. We expect our GAAP and the non-GAAP gross margin to be in the range of 61% to 62%.

We expect our GAAP operating expense to be between $230 million and $240 million and the non-GAAP operating expenses to be between $205 million and $210 million, successfully reaching our targeted non-GAAP operating expense level we announced last November, ahead of the schedule.

At the midpoint of our guidance, we expect to achieve 27% non-GAAP operating margin, making another positive step toward our long-term target. We anticipate GAAP income per diluted share in the range of $0.25 to $0.31 and non-GAAP income for diluted share in the range of $0.30 to $0.34. With that, we’ll now open the call for questions.

Operator, we’ll take the first question, please..

Thank you. [Operator Instructions] Our first question comes from the line of John Pitzer of Credit Suisse. Your line is open..

Yes. Good afternoon, guys.

Can you hear me okay?.

Yes. .

Hey. Matt, I’m just kind of curious. I know that Jean in her prepared comments said embedded in the October quarter guidance is a view that storage is flat. I’m just kind curious if you can give us a little bit more granularity as to what you’re embedding in HDD side of the business versus the SSD side of the business.

And as you answer that question, in your prepared comments, did mention that supply constraints in NAND. I am wondering, that was an industry comment or that was specific to your business.

If it was the latter, kind of what was the revenue that you missed because you couldn’t get enough NAND and does that start to alleviate itself in the back half of the year, calendar year? Thank you..

Great. Okay, thanks for the questions, John. So, I will lead off and I’ll let Jean add to it. But on the storage side, our primary caution, if you will, is really on the HDD portion.

And that’s specifically related to the inventory challenges that are pretty well understood and I think have been well-understood since -- even the beginning of calendar 2017. So, with that portion of our business, we’re being very cautious. We still do see strength.

And to your second question, in our SSD business, the NAND comment in industry, the situation there is really an industry comment.

We’ve been fortunate that the customers we supply to and the technology that they are using from Marvell has given them an advantage in the market and as such, those solutions with Marvell inside, if you will, are selling well and you’ve seen that in our sales growth. So, we don’t -- well, that’s an industry comment I would say.

We faired pretty well from that point of view.

Jean, did you want to add anything?.

No, I think in Q2, right, as Matt mentioned that we did see some softness in HDD side. So, we did guide conservatively. And certainly, if you look at our Q2 result, our storage actually performed better than our guidance..

Thank you. Our next question comes from Karl Ackerman of Cowen and Company.

Your question, please?.

I guess, maybe first, as a follow-up to John’s question. One of your primary competitors on the SSD controller has been struggling with the ability to fully procure NAND. So, I was just hoping you could talk about the opportunity to gain share in the low-end SSD SoC market, and made some of this market dislocation going into the back half of the year.

And I have a follow-up, please..

Sure, I’ll comment on that. So, again, we’ve performed very well as a company in SSD, and we have gained substantial market share, if you look and integrate back over the last year or so. So, that business continues to be on a very positive trajectory.

We do view ourselves as being a very -- the broadest supplier of IP and solutions from clients, all the way to the cloud and the enterprise and the data center. As you mentioned, there is competition as some of those competitors are focused in very specific segments, some in the lower end. That’s a segment that we’re not ignoring.

We have purpose-built solutions for that market and we plan to be competitive, certainly in that segment, whether its Marvell or our competitor or just in general in the market, the bulk of the NAND is not being allocated there. So, that’s just an industry issue.

But we certainly intend to benefit when the overall industry re-bounce, we intend to be competitive across the span of our portfolio..

Understood. I just have a question on OpEx. Now that you’ve completed the restructuring and divestiture actions you laid out last November, your guidance for October puts you squarely at your $820 million, $830 million annual run rate on OpEx.

How sustainable do you think that is on a go-forward basis, beyond the January quarter? I know it’s an extra week. But, as you look out over the next few quarters, if you take the core business to advance at least mid singles on a year-over-year business, again, how sustainable do you think that run rate level is? Thank you. .

Thank you for the question. So, as we said, we reduced $250 million run rate cost during the last nine months and achieved our target. Our view is this target is the right investment level for the Company. And just as a reminder, Q4, we do have 14 weeks.

So, you will have that 14 weeks OpEx pickup in Q4 and that will cause Q1 next year, you will have payroll tax. But those are just normal either the seasonality or next year some of the merit increase. For us, this is the right level of investment. And we feel quite comfortable with OpEx level. .

Yes. And Karl, I would just add as even a broader comment. When you look at our business model and what we’re trying to achieve here from a company perspective and a financial perspective.

When we drive towards what we view as goal to get us really in a leading position from a financial performance perspective on operating margins, which is to drive to this 30% level, we have multiple levers that we’re pulling, and we said this back at Investor Day as well.

And sort of in order of priority, clearly, we’re trying to grow this Company, and we’re putting substantial time and energy in retooling the entire organization to go do that. So that’s one lever that’s being pulled. And I think so far, if you look at our progress in our core business as we’ve been very pleased with that, but we want that to continue.

The second is on gross margins. And we put out 61.2% this past quarter; you saw us guide with fairly modest revenue growth 61 to 62. And we believe even beyond this quarter, we anticipate that to continue to expand. So, we’ve got leverage on the gross margin side. And then, it flows down to OpEx. And I agree with Jean.

We sized the organization to compete effectively to grow the Company. And with the new products coming, we think we have some gross margin leverage. At the same time, we’re not stopping on driving efficiency. There are a number of programs inside the Company to get Marvell to be more nimble, more effective in our R&D execution.

And so, to the extent we’re getting benefit from those efficiency savings, we’re reinvesting those back into the Company for growth, but we always have that flexibility in our model to make adjustments. So, I think we’re in a very good position right now as a company. We’re in markets that are growing.

And we’ve got really leverage and flexibility on all aspects of our -- of the financial model to drive towards our goals that we committed to get to..

Thank you. Our next question comes from Craig Ellis of B. Riley. Your line is open. .

Yes. Thanks for taking the question and congratulations on the nice execution in the quarter. Matt, I wanted to go back to the networking business and just see if you could give us some more color on some of the underlying dynamics that are going on in the portfolio.

At analyst day, I think you and the team talked about a business that had different dynamics, very strong share and a strong market position in China.

What’s happening with networking geographically right now? And as you go from an enterprise position potentially, a data center position, following some product announcements, like last year, how should investors think about the ramp-up of that business, as we look ahead over the next four to six quarters? Thank you..

Sure, yes. Craig, thanks for the question. So, few points on networking.

We had indicated everybody earlier this year that we had a challenge, which did manifest itself which was we have legacy networking business rolling off, albeit gradually, offset by new product ramps in our core areas of switch, PHY and SoC, and as you mentioned primarily targeting today the campus and enterprise markets.

I think we are pleased to have seen that play out. Our Q3 guide returns us to growth in networking and it’s really on the heels of again strong new product ramps in our core businesses that are now offsetting, this sort of headwind that we had for a quarter or two.

We said, I think on the last call, that we did anticipate a strong second half to the fiscal year for networking and we continue to believe that that’s tracking nicely.

So, I think -- and again, it relates to some of our prepared comments around that the multi-gigabit products or 10 gig solutions and even some of our refreshed gigabit switches, PHYs are all I think seeing design wins. From a geographic standpoint, China continues to be a focus area for us.

We think that that particular segment of customers will continue to do well globally, and we are very well-positioned there with the new design wins we’ve gotten. But even traditional customers in the U.S. have also done their own refreshes.

So, I think it’s a combination of the multitude of things where there are customer successes that are happening but also there is a larger upgrade that’s going on that we think will drive some nice growth in the campus and enterprise segment..

Thank you. Our next question comes from Ross Seymore of Deutsche Bank. Your line is open..

Hi. This is Sidney Ho for Ross Seymore. Just a quick question. You mentioned earlier that you are being more cautious on hard disk drive for Q3.

Is that more related to the PC market versus more related to the enterprise data center market that has been the source of strength for you? And what kind of inventory are you looking at the channel at this point?.

So, what we said is we’re cautious because of the HHD market and largely because of the supply chain side. It’s very well published in the news that not only there are some inventories used with our customers and also they are some factory transitions with the two of the three major customers. So, that’s really what we are talking about.

Of course, as a component supplier, we actually don’t see the channel inventory or customer inventory level. We are cautious about our customers and published data basically. So, it’s primarily supply chain related inventory..

Yes. Just to add to it, I would say, it’s clearly not market share related, it’s not -- in some cases, we’re not even making specific commentary about one sub segment. As Jean mentioned, there has been multiple factory transitions, shutdowns, closures and other things within the HDD supply chain upstream from us that are happening.

And we see those things being worked through. And demand, I think that those numbers are pretty well-understood. So, we’re hopeful to see this inventory correction complete quickly and move on to a more normal situation. But, we’re going to monitor it, as we obviously progress through the quarter..

Thank you. Our next question comes from Chris Rolland of Susquehanna.

Your question, please?.

Hey, guys. Congrats on outpunching a pretty tough storage environment. So, you guys are definitely right. I think the bridge inventories at Seagate and Western Digital are pretty well known.

But do you guys have any idea, how long it might take to kind of work out all of that bridge inventory or perhaps the magnitude overall? Is there any other details you can give us in terms of your view?.

Yes. I’d give you my take here, Chris; Jean can add too. I mean, having been through large number of these issues over my career and trying to project exactly when inventory actually draws down and when you rebound is really tough. Given that we’ve got a pretty good visibility of why it’s happening, we don’t think it’s going to be protracted.

But, we really -- unless, Jean, you’ve got a different view, it’s really hard for us to predict, hey, X many weeks and then in Y many weeks, it’s going to be at a certain level. But, all I can say is we’re going to watch. And that’s why we guided the way we did. We tried to be judicious about this and kind of prepare for all scenarios.

But, I think given that it’s really bridge inventory, if you will, that’s a much better bucket to sort of put it in and manage around versus, if there is wild things happening in the end market demand, which become harder to modulate.

So, I’m not -- I can’t be real crisp on that one, but we don’t think it’s going to be a long and protracted issue, assuming that the customers’ factory transitions happened per their plans..

Okay, agreed. And on the wireless side, you guys previously said, 2Q is going mark the top for game consoles. Now, you guys are saying that the whole segment is just the slight decline there.

Should we interpret that as perhaps a bit stronger than expected, particularly [ph] on the game console side? And then, maybe if you can talk about the content opportunity outside the consoles. I think it’s mostly like enterprise access points and stuff like that.

How is that contributing, and what kind of opportunity do you see there?.

This is Jean. So, on the wireless business, the seasonality typically, the way we look at it, the first half and the second half. Typically first half, you have a really strong season and then second half, the overall revenue would drop. So, if it is Q3 or Q4, sometimes it varies.

So, the view we have is, right now, it looks like Q3 is slightly down and the Q4 probably would down a little bit more, more like [ph] 20% to 30%. But in general, second half is much weaker than the first half; it’s just the wireless seasonality.

And on the wireless, the focus is that certainly as Matt talked about, the enterprise access, automotive, there are a lot of new opportunities for us. .

Thank you. Our next question comes from Joe Moore of Morgan Stanley. Your line is open. .

Thank you. I wonder, you talked continued potential to improve gross margin. Obviously, you did pretty well in a quarter where mix went pretty strongly against you.

Can you give us any kind of qualitative indication of how much upside there still is, and how much is there -- is it mixed related, is there also opportunity for you to sort of structurally improve the gross margin from some of the other initiatives that have been underway?.

Sure. Yes, great. Thanks, Joe. Yes. So, I think, first, high level statement I’d make is we -- I’ll give you some more commentary than I have given maybe in the past on this. But, just to frame it, we’re not in a position to set a new gross margin target range, just yet.

But clearly, it’s been performing well, and I think it’s been performing better than a lot of people thought it could. I think the answer to your question, I think there is multiple opportunities.

I think one is and we’re seeing it, and you can even see it if you look at our guide, where -- you’re right, our mix really worked against us in Q2, based on the way that we guided for Q3 with fairly modest revenue growth and not a whole lot changing on mix. You can see that there is still leverage in gross margin.

And it is due to a multiple factors, one of them is structural.

I mean, we’ve fundamentally -- I think, our operations team has done an outstanding job of really getting our cost structure very competitive, working very closely with a handful of suppliers and doing a consolidation there, and just quite frankly managing the overall supply chain and manufacturing operations much more efficiently than we have.

So, I think that -- and they haven’t stopped, just because we had [indiscernible] they didn’t decide to go take a break. They’re still head down and we’re still driving that very hard. So that’s one sort of companywide structural advantage instead of improvements that we’re driving.

But I think the other factors of richer mix coming in even within our segments, so the new products, particularly in storage and networking that are ramping, are accretive to gross margin, they’re higher than the Company average; that’s helpful.

And certainly, as you kind of get out of Q2 and Q3, even if you get into quarters where revenue is seasonally lower, then you start getting -- as you get the benefit of mix and new products within the mix, that’s why I made the comment I made that we think it’s going to keep going up.

Where it’s going to land exactly, we’re not giving that range yet, but you should expect that we understand -- we understand that that’s an investor question out there as where do we sort of see this it’s headed, and we’re just not ready to give a limit there yet. But, we’ve been very pleased as a company.

And I’d say, fundamentally, it reflects the belief I had when I got in here over a year ago, which was the quality of the engineering in this Company and the quality of the end markets that we’re in, really we believe commanded a premium gross margin for what we’re offering or what we’re delivering in.

I almost feel like now it’s been a matter of just unlocking that potential of Marvell and letting us actually grow our way into what we think can be hopefully industry-leading kind of gross margins. That’s how we think about it at this juncture..

Thank you. Our next question comes from Mark Delaney of Goldman Sachs. Your line is open..

Two-part question on storage. First, specifically around HDDs. Matt, you talked about seeing some success with some of the growth to your areas in enterprise hard drives, some of the opportunity and preamps that you talked about.

Can you just give a sense any of the relative, rough sizing of some of those newer products as a percentage of your total hard drives and what sort of cadence we should have in mind for those to grow? And then second on storage overall.

You made the point in your prepared comments about how you think your notebook storage business holistically can grow this year. And any more detail you can give us on how you arrived at that assumption would be helpful. Thanks very much..

Sure. So, I’ll take a stab at both of these. So, let’s start with the first one, which is how is the diversification going into newer areas. So, I’ll take the preamp one first. That’s still in the early stages. We did start shipping for revenue couple of quarters ago; that is more of a fiscal 2019 event but that’s a product line that we’re investing in.

We’ve got an outstanding team there. We think there is a great match between the SoCs that we’re selling and obviously the preamps as a combined solution.

In particular, if you go into the nearline and enterprise class drives where you are driving aerial density and actually the fundamental system performance is really important, so having that pairing we think is going to be a strategic advantage. Our sort of non-client HDD business has been performing well.

And so, we are not breaking that out in detail just yet. But, overall, we started to see I think two quarters ago ramps in enterprise and nearline drives which has helped us in the first half of the year, we see that continuing. And then, your second question was….

On the PC, HDD PC, 15%..

Yes. So that was one, I think, Mark, you are one of many analysts asking this question and being concerned. And we’ve actually done a lot of work here to go through and really unpack in a very detailed level our HDD business. And not only is it sort of client or enterprise or nearline, but where do we think that those particular drives are going.

And it’s taken us some time to get there. But I know, one of the big concerns is out there has been, hey, Marvel has got a very high percentage of its business in HDDs, there is an investor concern always that big portion of that was -- an outsized portion was in notebooks in particular.

And if that was too bigger portion of Marvell that caused concerns for some investors, so we called it out as being less than 15% because we wanted to give people a sense that that number has certainly come down from where it was a year or two or three years ago.

And not only that but that we called out the SSD example just to show that while our share obviously is quite high in the notebook HDD space because of the value we bring in SSD, our share in that particular segment and client that we’re actually managing that transition quite well as a company.

And so, there is notion that HDD going into notebooks is a real risk factor for Marvell.

Our attempt in our commentary today was just to start providing some more color around that, so investors could get more comfortable that not only is it not a bigger portion of our Company as people maybe thought but that we’re mitigating some of those declines that are happening because we’ve got good share in the SoC side for notebooks..

Thank you. Our next question comes from Kevin Cassidy of Stifel.

Your question, please?.

There is an effort for a standard of open channel SSDs.

Can you say how that would affect Marvell?.

I don’t think -- I think, we have a really broad portfolio and we’re positioned to address all different markets and different solutions. So, we feel pretty good about where we’re positioned with our SSD portfolio..

Okay. Well, maybe, I can move over to the automotive market.

Can you say -- the traction you’re getting in automotive and when do you think that would be a significant portion of revenue?.

Sure. Kevin, I will take that one. So, we -- today, I have really two technologies that we sell in the automotive today. The one that’s got legacy and that’s been around for while is Wi-Fi and Wi-Fi Bluetooth combo. And that business continues to do well for us. It’s been growing, it’s going to continue to grow.

We just announced our newest chipset, which is an 802.11p compliant radio for vehicle to vehicle communications in the U.S. We’re putting R&D there and we hope and intend that that business becomes a bigger and bigger portion of our Wi-Fi business over time. So, we think connected cars is important.

The second is in Ethernet, and that’s still small revenue today but tremendous opportunity. And I’ve been following this potential for Ethernet to be adopted in the vehicle for some time. It’s been talked about probably for the last six or seven years. And BMW is obviously an early adopter there.

But, slowly but surely the other car OEMs have really come around. And to my pleasant surprise, when I joined Marvell a little over a year ago, it really appeared as though that transition is going to happen.

And so, we’re very well-positioned, not only with having the industry’s first and only gigabit PHY that’s automotive qualified but also we’ve got small port count switches, 100BASE C-PHYs, [ph] other products we can sell, and there is a lot of traction and activity there.

Beyond that, I think there is other opportunities in Marvell, which are longer term to leverage storage, solid state storage, controller technology, and maybe some other product areas that we haven’t mentioned yet so. So, we think automotive actually is going to be an important part of our Company.

And starts with Wi-Fi and moves to Ethernet and then probably goes to SSD after that. And we look forward to updating you as we make progress in this area because I think it’s going to be an exciting one for us as we make progress..

Thank you. Our next question comes from Harsh Kumar of Stephens. Your line is open..

Yes. Hey, guys. First of all, congratulations on solid execution in a tough HDD market. Matt, I wanted to ask you, if you could perhaps try to summarize the HDD market. Do you think you’ve seen the worst, and how would you tell us and investors to think about quarters passed this with this inventory overhand? And I’ve got a follow-up..

Okay. Well, again, as I said earlier when Chris asked this question. We do attribute the challenges that we see in the supply to hard drive industry really because of the supply chain and factory transitions with inventory at our end customers being built to support how they’re retooling their global footprint. So, that one is sort of hard to say.

We had the worst. Normally, those comments are -- there is some other supply demand market, the fact that’s going on, and then you need to call those. So, I don’t -- we guided it flat in terms of storage. We guided different range on our guidance. We’re going to manage around that.

It really depends on how fast they consume inventory, what happens in the overall HDD market. So, I don’t know if I have a great answer, but it’s one that we feel we’re managing it. As Jean pointed out, we were pretty judicious when we guided Q2 and we’re pleasantly surprised that we actually came in storage a little bit higher.

So, our plan is to kind of keep managing it that same way.

I don’t know, Jean, if you want to add anything?.

Yes. Harsh, I just want to just follow what Matt just said. If you look at our storage business, just based on the middle point of our guidance for Q3. First three quarters of fiscal 2018 compared to last year is actually up 7% year-over-year right. So, certainly our SSD business has been ramping up rapidly.

But on the HDD side, frankly, it’s quite reasonably stable. So, I think at this point, we feel pretty good about prospects going forward, about the overall storage business. .

Got it. And for my follow-up, Matt, you guys mentioned that you have some legacy overhand.

I was curious, in networking, if you could quantify how much that was for the July quarter, how you’re thinking about that? And in October, the last of this legacy impact, and then we’re off to kind of pretty good growth?.

Yes. This is Peter. With regards to the legacy exposure, it’s roughly in the 15% to 20% of total networking range. Now, please remember that legacy is going to have a long tail to it but it’s going to be on a slow gradual glide path down.

But the good news there is that the ramp of the new switches we’ve been talking about over the last couple of quarters are starting to get to a size where they will enable growth as we look into Q3 and Q4, which is right in line with what we said last quarter..

Thank you. [Operator Instructions] The next question comes from the line of Craig Ellis of B. Riley. Your line is open..

Hey.

Thanks for taking the question, and I wanted to use the follow-up just to ask a question that’s little bit less in the hearing now and less modeling specific and more of an opportunity, Matt, for you to reflect back on the last year, because in the last year, since you and Jean have been hosting the calls together, we’ve seen gross margins rise, I think it’s 600 basis points, operating margins 1,200.

You’re minimizing your PC HDD exposure, you’re getting growth back in networking.

So, if we looked ahead a year from now, to mid-2018, what would be the things that you would want the business to have accomplished over this coming year?.

Sure. Thanks, Craig for the reflective and forward-looking question as well. So, no, I think it’s important to point out that. Because I think when you think about the future, you’ve got to really understand obviously the past and the trajectory around. And so, we’re pleased with the turnaround that’s been accomplished by the team here at Marvell.

And it’s been on multiple fronts. The one that we are most excited about is that we’re growing this Company again, while we’re expanding our profitability and our margins, and we’re attacking and going after some very exciting areas.

I think we want to continue to see progress and make sure we capitalize, I would say, first, on our networking opportunity.

We do see a strong second half here in fiscal 2018 and we certainly hope that that’s going to continue and should continue into 2019 and beyond as the R&D pipeline that was really in kind of full effect when I got here, starts to bear some fruit.

So, I think we clearly want to be -- and regain some of our past glory in networking, storage which I think when investor transparency wasn’t all that hot a year ago and people didn’t really know what was going on, I think people sort of assumed that that business was going to be really challenged.

And again, we feel very good of opportunities in both HDD, again growing in the nearline and enterprise drives, taking advantage of some of the technology transitions, which are going to enable more content, more features as capacity increases.

And then, clearly, SSD is just growth driver in the industry in terms of that being a much more relevant memory technology that goes -- continues to go fully mainstream. We intend to be right in the middle of that. And so I think continuing to bolster storage and networking and really making that the anchor of the Company is critical.

Clearly, we’ve got nice opportunities within the areas in wireless where we can really innovate around the standards that are out there and we think certainly things like automotive and infrastructure kind of Wi-Fi lend itself to that.

And finally, I would say that there was questions earlier from Kevin Cassidy about automotive, and we are excited about that one. And I’d like to be, a year from now, talking about more progress that we are making there. And that one is a longer journey.

But, I think if we can get to a point where we are having some milestone updates on that in 2019, I think that’d be a win too. So, I think really it’s about growth, Craig, is the bottom line. It’s been the one big concern that sort of left on Marvell.

Gross margins in good shape, management team in good shape, operating expenses under control, predictability very good. Then you say, okay, great, guys. But, what’s next? And, it’s, grow the topline.

And that’s why we brought in Tom Lagatta from Broadcom, and that’s why we’ve put in tremendous effort to not only do a better job for the customers we’ve got but also expand our customer reach and acquire those customers where we didn’t have a strong relationship prior to distribution channel.

I mean, you can imagine there is a whole host of things that you go often do when you pivot from being in restructuring transformation mode and into growth mode. And that’s really the exciting I think kind of act too here in Marvell is moving into growth mode..

Thank you. We have a follow-up question from Harsh Kumar of Stephens. Your line is open..

Yes. Hey, Matt and Jean. You guys in Wi-Fi and Bluetooth have traditionally been on high-end, high-performance type applications.

What precludes you from getting into some kind of high-volume type wins? First of all, is that something you guys think about doing or want to do? And then, if you want to do that, is there design hindrance or some of the kind of problem that precludes you from doing that or is it just the lack of efforts so far?.

Harsh, on the Wi-Fi side, right, we have been really focused on the high-performance, the connected home, the ones our solution can offer unique and differentiation. And we’re really trying to choose the business that can also maximize the profitability of our wireless business.

So, we’re taking a very balanced approach with our Wi-Fi business to just focus on the areas and segment we can take advantage of our unique offering and also get the margin, which is more similar to -- close to our corporate average. That’s a really an objective for us for wireless business..

Thank you. At this time, I would like to turn the call back over to management for any closing remarks..

Okay. That’s it. I want to thank everyone for joining us today and we will talk to you next quarter. Good night..

Thank you for your participation and have a wonderful day. You may disconnect your lines at this time..