Good day ladies and gentlemen and thank you for your patience. You've joined the Q4 2019 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 Instructions] As a reminder, this conference may be recorded. I would now like to turn the call over to your host, VP of Investor Relations, Ashish Saran. Sir you may begin..

Thank you and good afternoon everyone. Welcome to Marvell fourth quarter and fiscal year 2019 earnings call. Joining me today are Marvell President and CEO, Matt Murphy and Marvell's CFO, Jean Hu.

Before I turn the call over to Matt, I want to remind everyone that certain comments today may include forward-looking statements which are subject to significant risks and uncertainties and 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 press 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 refer 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, Ashish and good afternoon to everyone on the call. Let me start with a quick recap of Marvell's financial highlights for fiscal year 2019. Our GAAP revenue was $2.9 billion, GAAP gross margin was 50.9%, and GAAP loss per diluted share was $0.30. On a non-GAAP basis, our gross margin was 63.9% and non-GAAP earnings per share was $1.19.

Fiscal 2019 marked another year of solid accomplishments. We continued our drive toward operational excellence and scale, shifting our focus to the infrastructure market, and delivering more value from our engineering efforts.

The result was an increase in profitability as we transform Marvell into a leading silicon supplier to the infrastructure market. During the year, despite a tense and challenging geopolitical climate we secured regulatory approval for the Cavium merger.

After the merger closed on July 6th, we rapidly integrated the Cavium team and increased our prior synergy target to $200 million which we are on track to achieve by the end of fiscal 2020 on a run rate basis.

The combined Marvell and Cavium team quickly and successfully aligned our growth trajectory with the major market trends of 5G, cloud, AI, automotive, and enterprise refresh cycle. The result is a stronger and more diverse company with the scale and broad portfolio to deliver significant long-term value to customers, shareholders, and employees.

The merger also accelerated Marvell's ongoing shift to the growing and lucrative infrastructure market. Integrating Cavium gives us leading positions in processors, security, and fiber channel storage, all which offer customers an unmatched end-to-end infrastructure portfolio.

On the operational front, we improved our year-on-year non-GAAP gross margin by two and a half percentage points to 63.9% and increased our non-GAAP operating margin from 25.9% to 27.6%. In addition, standalone Marvell delivered non-GAAP operating margin over 30% in the second quarter of fiscal 2019, six quarters earlier than projected.

Even as we improved operational efficiency, we continued to invest in R&D, the lifeblood of our future, which will further fuel long-term growth.

As we detailed in our recent 5G announcements, we are poised to become a leading semiconductor supplier for 5G infrastructure and when you add in our recent design win momentum in the data center, automotive and enterprise, and edge markets, we are well-positioned to drive compelling long-term growth.

While we've made significant progress as a company in fiscal 2019, we did experience some end market headwinds, particularly for storage, which impacted our fourth quarter results and our current projections for the first quarter of fiscal 2020.

Like many of our customers and peers, Marvell is not immune to the macroeconomic forces affecting today's market, but I'm pleased about our new products and development which we will continue to invest in and a better design win pipeline. Infrastructure customers value innovation.

And while design wins take time to ramp, they typically last many years. This provides predictability and long-term growth and that's why I'm so confident that Marvell is well on its way to becoming one of the world's leading infrastructure suppliers. Moving onto our fourth quarter results.

Our revenue for the fourth quarter was $745 million at the upper end of the preliminary estimate we announced on February 6th. The majority of the weakness was in storage due to lower than expected demand in our storage controller business.

Networking revenue was also below expectations with the exception of embedded processors for networking and LTE in pre-5G wireless infrastructure which met expectations. Now, turning to our core businesses of networking and storage. Networking revenue was $387 million down 3% sequentially.

This was lower than expectations, primarily due to the macroeconomic conditions mentioned earlier. The one exception was embedded processor revenue which grew by double-digit sequentially, driven by stronger than expected demand from the wireless base station market.

We have now sampled the latest generation of our highly successful multi-core OCTEON-embedded processor to several key customers in the enterprise market and to our lead 5G base station OEM. This innovative multi-core design also provides the foundational architecture for our 5G Fusion baseband processor, which will start sampling next quarter.

Now, as a reminder, our OCTEON-embedded processors manage and control data-plane functions and are responsible for the secure and efficient movement of data packets within networking infrastructure such as base stations.

Our Fusion baseband products include advanced DSPs to process, encode, decode, and manage voice and data signals within base stations in the radio network.

Our design win momentum continues in 5G and we recently announced a significant long-term partnership with Samsung to deliver multiple generations of embedded processors and baseband processors for both LTE and 5G base stations.

We expect shipments of our 5G products to start to ramp towards the end of this fiscal year 2020 and continue to grow rapidly into fiscal 2021 and beyond. In addition to supplying Samsung, we are also now working with an additional Tier 1 5G base station OEM.

We currently expect to sample of 5G Fusion baseband processor targeted to their requirements in early calendar year 2020. We continue to engage with additional base station customers for our 5G solutions.

As we work with our customers on their 5G roadmaps, it's becoming apparent that they want to implement artificial intelligence and machine learning to improve the performance and quality of 5G services.

In particular areas where AI and ML have demonstrated clear value, include both radio and edge functions like channel estimation, intelligent beamforming and digital pre-distortion. Marvell has already been developing solutions for the AI inference market and we are well-positioned to integrate these capabilities into next-generation 5G processors.

AI has become a very critical building block technology and we believe that this capability can be deployed into additional Marvell product lines in the future. Given our strong traction with 5G customers, we are expanding our processor capabilities and we have recently opened a new R&D center in Raleigh, North Carolina.

At its core is a very experienced R&D group and we intend to add more resources taking advantage of the area's rich talent pool. Moving to Ethernet, Marvell's Ethernet switch and PHY business delivered another quarter of double-digit year-on-year revenue growth, driven by our refresh product portfolio.

However, revenue declined on a sequential basis as our customers tightened inventory and their supply chains, we believe in response to macroeconomic uncertainty. But our design win pipeline remains strong and we continue adding high volume wins such as a recent access switch design for a leading networking OEM.

As we discussed at our Investor Day, we've been working on expanding our addressable market for Ethernet switches into the data center. Next week at the Open Compute Summit, we will be announcing a new high bandwidth feature-rich family of Ethernet switches.

This new product family extends our proven and widely deployed for Prestera architecture to meet the distinctive data-centric requirements for edge computing. These products can deliver multiple capacity points from a few terabits per second all the way up to 12.8 terabits.

This modular and scalable design maximizes our ROI to deliver a range of products from a single development effort, customers benefit from being able to select cost and power optimized silicon tailored to their specific bandwidth requirements.

These products are not only very competitive on capacity, but also deliver a much richer set of features enabling advanced workflow visibility, improved analytics and network simplification for our customers. Early customer interest is high, and I look forward to sharing our progress in the coming months.

Our WiFi business will soon start ramping next-generation products built on the latest WiFi 6 standard. With a series of design wins already in place we expect our WiFi business to return to growth starting in the second quarter of fiscal 2020.

Now a quick update on some of our emerging investment areas, ARM server processor evaluations with cloud and high performance computing customers continued to make solid progress. We are also making great progress on our next-generation ARM server processor ThunderX3, which is being developed in 7-nanometer technology.

We currently expect to sample this product with customers in the second half of this year. Similarly, our liquid security products continue to gain traction in the cloud market. Earlier this week, we announced a collaboration with Oracle to deliver secure key storage using our HSM adapters for Oracle cloud infrastructure customers.

Along with Amazon and Google, this constitutes another cloud customer that has adopted Marvell's solution. And as we've announced at the most recent RSA conference, we are extending our portfolio to include liquid security appliances to provide private cloud and enterprise data center deployments, which significantly increases our addressable market.

Our automotive business continues to make progress as well. Our new gigabit PHY transceiver will soon go into production, which is a companion solution to the secure gigabit switch we released last year. These two parts have now been designed in at 16 car manufacturers, including top OEMs in North America, Europe, China, Korea and Japan.

These devices are used in multiple domains in the car including telematics, infotainment and gateway applications. Moving now to our first quarter outlook for networking. In fiscal 2020, we expect an approximate 10% sequential decline in revenue.

This projection reflects the residual impact from the tight inventory control we experienced from our customers in the prior quarter, seasonality and the continued cautious outlook from our China-based customers. Now let me turn to our storage business.

Storage revenue for the quarter came in below our expectations at $317 million declining 22% sequentially. The majority of the shortfall was due to a reduction in demand for our storage controllers. Our fiber channel business was slightly lower than expected too, but within a normal revenue range for that business.

We believe that demand for our storage controller products was impacted primarily by macroeconomic uncertainty, a reduction in cloud capital spending and PC CPU shortages.

In addition to a reduction in direct orders, we also experienced changes in customer demand for products consigned to third-party logistics hubs commonly referred to as vendor-managed inventory arrangements.

Changes in consumption through these arrangements can occur without any prior notice and in the fourth quarter, these were particularly pronounced and volatile.

As we noted at our Investor Day, we expected that the majority of the remaining notebook market using HDDs would shift to SSDs over the next few years, creating a headwind for HDD storage controllers.

However, we expected to more than offset these headwinds with growth from our investment areas in nearline HDDs, preamps and enterprise and data center SSDs, including our new flash solutions.

We continue to believe that this is the right strategy for this business, but the sharp contraction in NAND pricing is accelerating the conversion to SSDs in the PC market faster than expected.

While this does not change our long-term strategy for this business it does present a near-term challenge and this is reflected in our fourth quarter results and guidance for the storage business.

In addition to the impact from NAND pricing as we had indicated in our preliminary revenue update in February demand weakness is carrying over from the fourth quarter into the first quarter. Inventory levels in customer supply chain need time to rebalance and the first quarter is also seasonally weak for the storage end market.

As a result of these factors, we expect storage revenue in the first quarter to sequentially decline approximately in the mid-teens on a percentage basis. However, we do expect the first quarter to be the bottom for our storage revenue in fiscal 2020. Our customers have indicated that they expect demand to increase in the second half of this year.

We also believe that we started to under ship the HDD end markets starting in the fourth quarter and project this under shipment to continue in the first quarter, which is a strong signal that inventory is starting to deplete in our customer supply chains and our shipments will increase to catch-up with end demand, as we progress further into fiscal 2020.

We continue to grow our position in the data center market. We have started shipping our controller and preamp solution in a recently announced 16-terabyte high capacity HDD, which is targeted at both cloud and traditional data center applications.

This drive has an industry-leading multi platter architecture that delivers significantly improved data storage capacity by using two Marvell pre-amps per drive and uses advanced signal processing enabled by Marvell's high performance controller.

By closely coupling in the controller and pre-amp design we were able to develop a comprehensive chipsets solution that delivers capacity leadership. This win has increased our dollar content in this drive by approximately 75% from our prior nearline solution.

In closing, Marvell is entering an extremely strong new product cycle driven by our design wins in the 5G data center, automotive and enterprise markets. These will increase demand for our embedded and baseband processors Ethernet switches and PHYs, Wi-Fi, security and server processors.

We believe that our enterprise networking business will stabilize and keep growing over the long term. Storage which is a cyclical end market is going through a downturn, but our storage products will remain very profitable even as they become a smaller percentage of our revenue as we diversify into higher growth networking markets.

We are very encouraged by recent improvements in booking trends which bode well for a recovery. Thus we currently expect the first quarter which tends to be the softest seasonally to be the bottom for revenue in fiscal 2020. We anticipate resuming growth in the second quarter as end market conditions improve and customers' inventory levels normalize.

Through these near-term headwinds we will remain disciplined in managing operating in discretionary expenses. As you may recall, we have already reduced our forecast for operating expenses, exiting fiscal 2020 to be approximately $10 million lower on a quarterly run rate basis from the $290 million, we had outlined at our Investor Day.

However, our focus remains on our long-term growth strategy, which is unaffected by current market conditions. With this in mind, we intend to continue to invest in R&D through this period of market softness.

I want to close by thanking the more than 5,000 Marvell employees around the world for their hard work and performance during the year and for their continued commitment. Without their contributions and effort none of this would be possible.

With that let me turn the call over to our CFO Jean Hu for more detail on the fourth quarter fiscal year 2019 performance and our outlook for the first quarter of fiscal 2020..

Thanks, Matt and good afternoon, everyone. I'll start with a review of our financial results for the fourth quarter and then provide our current outlook for the first quarter fiscal of 2020. Revenue in the fourth quarter was $745 million. Our core business of storage and networking accounted for 95% of revenue.

Networking accounted for 52% of revenue and the storage accounted for 43% of revenue. Other product revenue was $40 million and accounted for 5% of revenue. GAAP gross margin was 43.2% which included amortizing the remaining balance of $98 million Cavium inventory step-up cost.

As a reminder, we step up Cavium inventory as part of acquisition purchase price accounting. Our non-GAAP gross margin was 64.5% slightly lower than guidance, due to lower than expected revenue in the quarter. GAAP operating expenses were $375 million.

Non-GAAP operating expenses were $286 million at the low end of the guidance range provided in December. We tightly managed OpEx in a difficult environment and are committed to doing so in the future. Non-GAAP operating margin was 26%. GAAP loss per diluted share was $0.40 and the non-GAAP earnings per diluted share was $0.25.

Now turning to the balance sheet. In the fourth quarter, we paid down $75 million of our long-term debt and returned $89 million to shareholders through $50 million in share repurchases and $39 million in dividends. We exited the quarter with $582 million in cash and short-term investments.

Our long-term debt was $1.75 billion and we expect to continue to pay down debt to achieve our target leverage ratio. Let me now move on to our current outlook for the first quarter of fiscal 2020. We expect our revenue to be $650 million, plus or minus 3%.

Our expected GAAP gross margin will be approximately 55% and non-GAAP gross margin will be approximately 64%. Note that we expect to complete our planned $50 million of COGS-related integration synergies by the end of this fiscal year.

We expect our GAAP operating expenses to be between $378 million and $388 million and non-GAAP operating expenses to be in the range of $295 million to $300 million. This forecast reflects the seasonal increase in OpEx in the first quarter, driven by employee payroll taxes and matching contribution and our annual merit process.

We will continue to tightly manage our operating expenses and we anticipate operating expenses to reduce rapidly as we progress into fiscal 2020 and realize the remaining synergies to exit the year at a quarterly OpEx run rate of $280 million. We expect our non-GAAP tax rate to be approximately 4.5% in fiscal 2020.

This forecast reflects the impact of the Cavium acquisition. Leaseback net interest expense to be $19 million. We anticipate the GAAP loss per diluted share in the range of $0.05 to $0.09 and non-GAAP income per diluted share in the range of $0.12 to $0.16. We're now ready for your questions. Operator, please open the lines for questions. .

[Operator Instructions] Our first question comes from the line of Vivek Arya of Bank of America. Your line is open..

Thanks for taking my question. I guess Matt the main question is where we go from here and how you're looking at revenue growth for the rest of fiscal '20.

You mentioned Q1 could be the bottom of the cycle for you, but when do you think you can return to organic year-on-year growth later in the year?.

Sure. Great. Yes thanks Vivek. So yes, the way to think of it is we do see Q1 as the bottom and we are encouraged based on the booking trends rolling over the last several weeks and months that this would lead to revenue growth in Q2. When you look at our Q2 and Q3 normally those are seasonally up quarters for us. So we see that trend happening.

And then if you think about sort of by the time we get to the fourth quarter, we believe that by that point end customer inventory level should have rebalanced and normalized. And then on top of that in the fourth quarter you layer in the ramp that we project for our 5G shipments.

And so when I think about it on a year-over-year basis and when do we return to growth, I think about it really as being Q4 for those reasons just given seasonality, inventory rebalancing and 5G starting to take off.

And just as a reminder, when we talk about our long-term growth rate what we outlined at the last Analyst Day was in the range to 6% to 8% on a year-over-year basis..

Got it. And for my follow-up on the gross margin side, I think before you had reset for Q4 you were expecting to do over 65%, but that was at $800 million plus revenue run rate.

I'm wondering Jean, if there is a certain revenue level we should think about as to when you get back to 65% plus and then hopefully toward your longer-term target beyond that?.

Yes. There are a few puts and takes that impact our gross margin. So if you look at the Q4 result and the Q1 guide, our gross margin was lower as you point out primarily due to a much lower revenue level.

The model -- our model leverages significantly so when you have lower revenue officially, we lost a 50 basis point on the gross margin side compared to the 65% guide. But going forward when you look into the fiscal '20, we are going to realize the $50 million cost of synergies with Cavium acquisition.

So our gross margin actually is going to step-up from the 64% level gradually through exiting the quarter with affecting Q4 fiscal '20 to about a 65%. And of course in Q4 and Q1, the mix also is less favorable. So going forward towards the second half of the year, certainly mix is also going to help us to improve gross margin.

And as far as our long-term model as Matt mentioned once we return to the 6% to 8% organic revenue growth goals, our model will help us to leverage to get it to the 65% to 66% gross margin in the longer term..

Thank you..

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

Hi guys, thanks for letting me ask a question. Matt, I want to go back to the storage side, you gave some helpful details about that switch from HDDs SSDs with NAND et cetera.

If we took it to a slightly higher level and we just thought about your core business ex the fiber channel and that was running north of $300 million in the first half of last year. Talk about what you think it would take to get back to that level.

Do you expect to get above that level this year? Or some of those secular changes going to take a little bit longer to take advantage of as you switch your business over to the SSD side?.

Sure. So I'll make a few comments and Jean can add as well. So I think the way to think of it is clearly we're going through a pretty severe period of inventory correction of which the duration is not certain although based on our customer data points, people are hoping for a recovery in the second half.

I would state that it's pretty dynamic at this point. I think there is a number of factors that are going on. We highlighted some of them which is obviously the cost structure of NAND, driving some shift and adoption of drives. And in the notebook market, you've also got share shifts going on within the NAND players.

So it's a fairly dynamic environment is what I would say, at this point. But I don't know -- I think that recovery back to that level is going to take some time to work its way through, probably more like the end of the year..

Got it. And I guess for my follow-up question, switching over to the networking side, it's good to hear you talk about another customer on the 5G side of things.

Could you give us a little more color on how you expect that to roll out between both your key customer, your first customer and the second? You've talked about the content per base station, but is there any way you can help us judge a little bit about how that per base station turns itself into revenue exiting the year, any sort of kind of goalpost around that?.

Sure. Yes. Let me start with the content first, just to reframe it and then we can talk about the range on timing. So with our lead customer and what we talked about at the Investor Day, what we call our 5G platform solution.

That's really where having multiple baseband processors, multiple control and data-plane processors, plus Ethernet switches and PHYs. That's the 4X increase in content we talk about. So think of that as the TAM for us to the super set content that we could achieve, which we have at our lead customer.

Beyond that, we're not really in a position on any other customer to comment on content, although we've got a lot of engagement across a range of key OEMs who are going to play a very meaningful role in 5G. With our lead customer, we expect them to ramp into production by the end of this fiscal year.

And just rough timing-wise, to the extent we're successful in our product development and our customer's successful in qualification, the normal things you go through, you should think about ramps beyond that probably being staged about a year behind where our lead customer is.

And I think -- but we're currently on track to sample that product as we said in the first part of next year..

Thank you..

Thank you. Our next question comes from Timothy Arcuri of UBS. Your question please..

Hi, Tim..

Tim..

Mr. Arcuri, please make sure your line is unmuted. If you're on speakerphone, lift your handset. We'll go to the next question from John Pitzer of Credit Suisse. Your line is open..

Yes. Thanks guys. Thanks for letting ask question. I apologize for background noise. I'm at airport. I want to get a little bit more detail on your OpEx comments in your prepared comments Matt. Just it makes sense to me not to cut OpEx, given the growth opportunity you see ahead, especially if you think this revenue blip is kind of a one-quarter issue.

I'm just wondering, if you can help me understand where you're prioritizing that OpEx now? And I guess, importantly, as revenue growth starts to come back how should we think about OpEx growth from these levels? And are you thinking about adding more customers on the 5G front and/or the AI server -- the AI and server opportunity? Is that an incremental step-up in OpEx? Or is that already sort of being accounted for in current run rates?.

Sure. How about -- we'll break it into two. I'll take the first part, which is how are we thinking about our spending right now in this environment, where are we prioritizing R&D and then Jean will talk about when and if she'll allow the OpEx to increase at some juncture.

But if you go back to what we're doing right now, I think we outlined at our Investor Day pretty comprehensive products and market strategy. And if you look at where we're investing those dollars, it's very consistent with where we were kind of on the heels of integrating the Cavium team. And so, we're currently staying the course on our investments.

I'd say, within that, there's always some mix as an example, given the strong traction we're seeing on the processor side of the business. That's why we're doing things like expanding our design capacity by opening up the Raleigh site.

So within our OpEx, you'll see some level of movement and we're pretty dynamic inside Marvell in terms of how we think about investing. But the thesis that we outlined at our Investor Day is still very much intact and we're very committed to investing for the long term through this cycle.

Jean, maybe you want to talk about how we think about once we get through this, what OpEx looks like, assuming we see the revenue growth..

Yes. As Matt it said right, we're funding all our programs, because all the opportunities are ahead of us, but we're striking a balance, also making a lot of cost control and aggressively managing our cost.

So I think for fiscal 2020 we are doing both in a sense is, we are continuing to increase the efficiency of operation to really streamline our business to really manage our discretionary costs, at the same time investing all those programs that Matt mentioned.

I think, we feel pretty good about the balance we have for the rest of year, but certainly with all the 5G opportunities to continue to ramp and the design wins that we continue to have, our team literally as every quarter goes, they win more designs.

Of course, when our revenues start to grow, we'll increase the OpEx to fund additional investment opportunities. I think if you go back to our long-term target model, we basically said, hey, top line revenue is going to grow 6% to 8%, but we are going to fund R&D at 24% to 25% of revenue.

We're going to control SG&A to be around the 6% to 7% of revenue. So that's how you should think about beyond this year. We're going to just migrate it toward our long-term target model..

That's helpful guys. And maybe for my follow-up, just on the 5G front. Matt, as you think about the two potential large customers in Europe, you could add -- clearly, I think both have had some fits and starts and some issues with around ASICs for base stations.

And I know you've said in the past that you don't want to commit resources to adding a new customer if it's just going to be a stopgap solution until their ASICs come out.

So I wonder if you can help me understand, where do you think that dynamics sit today? And I guess help me understand, what think you can do with your silicon, either on the embedded networking side or the baseband side, so that's appealing to companies that have these ASIC efforts internally?.

Sure. Yes, John. That was a thoughtful but very detailed question. I think at this juncture, probably just keep it at a very high level, which is, we're happy with the engagement. We've got a lot of confidence in that engagement and our customer, I think, is happy at this point.

So would -- I'll leave more details on this one for later, as we make progress and as it's appropriate to discuss in more detail..

Perfect. Thanks, guys..

Yes..

Thank you. Our next question comes from the line of Blayne Curtis of Barclays. Your line is open..

Hi. Thanks for taking my question. I apologize for the noise as well. Matt, I was just wondering, I noticed at the Analyst Day you talked about I think 7% exposure to mobile hard drives due to faster adoption of SSDs. So with the ample guidance, maybe just dial us in what that exposure is left.

And then I'm just kind of curious from a data center perspective, both across nearline and SSDs what you're seeing there? And do you expect a recovery in the second half?.

Sure. I'll take the first part and maybe the second too. But on the first one, just to clarify, the 7% we showed, I think that's what you're referring to, was really our estimate at the time of the Investor Day of what our total company exposure was to HDD controllers that sold into notebooks right. That was in October of last year.

Just candidly through this down cycle we're going through, I think trying to actually pinpoint exactly what percent exposure we have on a quarterly or monthly basis, isn't all that helpful. I think we really need to see this inventory -- these inventory levels and demand rebalance before we can comment on that again.

Otherwise, we're just in a very dynamic market where things have come down and then based on obviously what we're seeing from a bookings perspective. They will pick back up at some point.

Then that's probably a more relevant discussion about where do we end up when this is all done, but we certainly continue to see that the networking part of the business is going to continue to grow faster than the storage part of the business, which will over time reduce our exposure to that segment.

And then even within storage, I think our progress to your second part of the question on the data center and enterprise type of applications, both on just for our storage controllers, which span both types of media will also continue to grow and diversify.

And we see that, but I think first things first is we got to work through the supply demand imbalance and get back to a normal state before we can comment on exposure..

Thanks..

Thank you. Our next question comes from the line of Hans Mosesmann of Rosenblatt. Your line is open..

Thank you. Hey Matt. A question on the processors, the multi-core OCTEON processors in 5G base stations. What's the competitive dynamic there relative to what it may have been in the past for these types of products? Thanks..

Sure. Yes, hi Hans. So on the embedded processor side, which is -- again, we're very pleased with the sampling and the performance of our latest generation OCTEON. That product in the 5G market really has one main competitor, which is Intel. And we're both battling for sockets in this cycle and we like our product, we like our chances.

And certainly, the part is performing extremely well. So that's a dynamic from a competitive standpoint..

Okay, great. Thank you..

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

Great. Thank you.

Within solid state drives, how are you thinking about the opportunity? And I guess, how are you seeing competition from custom solutions versus merchant just the market share dynamic that you see over the course of the year? And I guess to the extent that that market is a little softer as well, is that a function of prices going down so customers are reducing inventory or what's happening there?.

Sure. Yes. Thanks Joe. So I think the more customized or what we call do-it-yourself solutions or what continue to have -- we have a lot of traction. At the Analyst Day, we talked about that's really where that business model I think is where Marvell can add the most value. So that's where we're putting our effort and our energy.

And to the extent that on the merchant side, we can address the data center and enterprise applications, we're doing that either with merchant parts or in some cases we're doing customer specific products. I think on the merchant controllers selling into retail and PC type of applications that's when where we pivoted the R&D some time ago.

So we've got sockets there. We're going to continue to ship what we have. But in this cycle and that's why I made the comments that as the remainder of this notebook market continues to convert over time, which makes sense to SSDs, we're not going to really participate in that.

But we do see large opportunities, especially in the -- with the large cloud OEMs as well as in the enterprise segment for our solutions in SSD and we're continuing to invest there..

Great. Thank you..

Thank you. Our next question comes from Karl Ackerman of Cowen and Company. Your line is open..

Good afternoon Matt and Jean. I had a question on networking.

Now that you have been to grow ARMADA and XPliant switching road maps, have you seen enhanced interest from new enterprise and service provider customers and/or meaningful design wins from a more streamlined product set?.

Sure. Yes, thanks for the questions. So let me comment on them separately. Just get XPliant out of the way.

So XPliant was a product line that we decided to not continue to invest in, so it will obviously take some of the advantages we got from a technology point of view, IT point of view and people point of view and we've combined that in our larger Prestera Ethernet switch group. So, that one is not go-forward product line.

ARMADA we're extremely pleased with the take-up of that call it our lower core count processors now that we've got the Cavium team on board. Just as an example, our newest products that were in flight that were quote ARMADA products, we're going to actually release them as OCTEON products, so they're going to use the OCTEON SDK.

I'd say the Cavium marketing team has done an extremely good job of driving design wins for that product line and even that new product that will come out as an OCTEON primarily because in many of our applications, the customers want all the way down to single and dual core, quad-core all the way up to the highest end OCTEON and everything in between.

And one of the gaps that Cavium always had what they didn't really have in offering at the lower end of the market. So the fact that we're able to leverage all the effort and all the software capabilities of the OCTEON franchise onto ARMADA, I think is going to be very compelling.

I would add on top of that that same team along with our sales group has done a great job of also really proposing solutions to our customers, which also include our Ethernet switches and PHYs.

And so that's another area where I'm pleasantly surprised that we're finding the ability to actually cross-sell all those products together and I think our team is doing an outstanding job there.

So I think having -- in short I think having a larger processor home for the ARMADA lower core count family inside our company now will actually drive way more growth than we'd ever have gotten on that product line had we not had OCTEON as the flagship to pull us through..

That's very helpful. For my follow-up if I may. I was hoping if you could update us on your design win progress across not just automotive connectivity, but also automotive Ethernet. I was -- should we expect revenues to accelerate meaningfully in 2019 and perhaps when could automotive Ethernet reach your $100 million revenue target. Thank you..

Okay. A couple of things. So just to be clear in my prepared remarks, I made some commentary. So just for everybody on the line, the prepared comments were around automotive Ethernet, just to be clear. So connectivity is where we started in automotive that continues to do well.

We've been in that business for some time, we've got new products there that's going well. But specifically when I said we were designed in at 16 different car manufacturers across all the critical geographies that was for automotive Ethernet both on our gigabit PHY as well as our Switch.

Those design wins are things that we've locked in over the last few years. But you should think of that as really being more than a year away, so those are not a calendar 2019 ramp. They're really a ramp probably in more significant volumes at the end of calendar 2020, which would be for model year 2021. But the progress has been very good there.

I think that that trend of Ethernet being a critical backbone in almost all the new different car models is real. And I think we've hit the sweet spot with our gigabit products there.

So yeah just to be clear, we're going to have I think very strong offerings both in Wi-Fi as well as in automotive Ethernet in model year 2020 and 2021 timeframe depending on if it's Wi-Fi or Ethernet..

Thank you. Our next question comes from Harlan Sur of JPMorgan. Your line is open..

Good afternoon and thanks for letting me ask a question here. On the decline in the networking that project you for the April quarter, I guess first of all is April quarter the bottom from networking as well? And then you talked about the tech inventory management by customers in your enterprise business driving the weakness.

What's happening with your service provider, cloud and wireless businesses in the April quarter? Are they declining sequentially as well?.

Yes, Okay. Yeah, Harlan. So, yes, let me answer that first. So on the -- the overall business is going to bottom -- overall networking will bottom in Q1. All those segments you mentioned whether it was service provider, cloud or enterprise they're all declining in Q1.

I'd say that the end-user data points are encouraging if you just look at the -- our large OEM customers and what their reporting in terms of their sales in their outlook. It looks relatively stable.

But clearly as all of you that have been through these cycles know when uncertainty gets injected into the equation, supply chain professionals around the world decide to tighten the belt and make sure that they don't get caught to the extent that there is a downturn.

So we we've seen that and that's clearly happened, but we do see that working its way through starting in Q2. The other thing I would note is that the service provider or a carrier portion of our business is lumpy. It's lumpy by design and our lead customer is even lumpier than the lumpy market. So that does present its challenges from time to time.

And then the final data point I would give is that with respect to our Q1 bottoming one of the factors that we also saw was that we believe in the second half of last year, and we talked about this on the last call although it's been difficult to quantify that certain Chinese customers took product in advance of the tariffs kicking in and we don't how to size that exactly, but we certainly seeing the effect that had manifest in a little bit in Q4 and really into Q1 in terms of that inventory needing to work its way through.

So that's the breadth of what we see across all the moving pieces within our networking business..

I appreciate it..

Harlan to add to what Matt said is our booking actually improved a lot after Chinese New Year. So that's really support our networking will be in the bottom in Q1 and Q2..

Great, thanks for the insights there. And then on the ARM based ThunderX program, you've obviously had some great traction with the high performance computing. That and you've got several OEMs locked up like HP. As you mentioned Matt you're qualifying with several of the cloud and hyperscale customers.

Given what you know of their timing if all goes well with the qualification, do you anticipate them ramping ThunderX2 in the second half of this year?.

Sure. So yeah we're pleased with the traction. As I mentioned our next generation ThunderX3, which is in seven-nanometer it's going to be a very competitive product and we're going to sample it this year. With respect to X2, you're right it's got very good traction in HPC. We put out a bunch of announcements about that.

And on that front in addition to the cloud side, you should really think of that more being calendar 2020 versus in end of 2019 primarily because across both of those markets there's not insignificant call cycle times that are involved with these things. And we anticipate that that's going to consume a lot of the calendar 2019 activity.

And so I would think of it more as a next year calendar 2020 event..

Great. Thank you..

Thank you. Our next question comes from the line of Quinn Bolton of Needham & Company. Your line is open..

Hi, Matt and Jean. I wanted to follow-up on the 5G opportunity. Looking back to Cavium's position in embedded processors and 4G, they sold OCTEON to three of the five leading base stations. You guys had talked about your success with the lead customer in 5G taking your entire platform.

Just wondering if you could comment, how do you see your market share relative to x86 converting your 4G OCTEON processor customers as they convert up to their 5G base station platforms? Thanks..

Yeah, thanks. We feel good. We feel good about that transition in the 5G cycle and our ability to have a very strong presence with OCTEON in 5G.

And again we got a lot of leverage out of that development because the core architecture we also use in Fusion, and then we actually when we design our platforms, we actually design those products to interoperate and work better together. So, yes, we like our position in 5G and the ability to transition from 4G successfully..

Let me just quick for Jean just, obviously, with a lower revenue outlook in the near-term.

Any updated thoughts on debt repayment outlook over fiscal 2020?.

Yeah, I think we’ll strike a balance.

We’ll continue to pay down debt each quarter, probably less than the original plan of $100 million, but we definitely will pay down the debt because the business continues to generate strong cash flow even with a much lower revenue, we are still very well-positioned to generate the cash flow to both paid down the debt and also return cash to shareholders..

Thank you..

Thank you. Our next question comes from CJ Muse of Evercore. Your line is open..

Yeah, good afternoon. Thank you for taking my question. I guess, first question Matt. As you think about geopolitics over the last few months and incorporate what you've learned at MWC.

What's your view today in terms of your lead customer and market share outlook over the next 12 to 24 months?.

Oh, I see. Yes, so. Thanks for the question. No I think our -- yes, it's hard to comment on the geopolitical side, I think that's playing out that we're all seeing that on the news every day. I think in our -- when we look at -- a couple of things are encouraging for our lead customer.

One is when you just look at their announced partnerships and deployments with new operators in new countries I think that's very encouraging. They're certainly as usual very aggressive company and very bullish on their prospects. So there is a view out there that they're going to do very well in 5G and we're obviously hoping that they do.

But it's hard for me to handicap, how that plays out exactly with some of the dynamics in some of these countries. We just think that they're going to have a strong product offering and probably do incrementally well in the cycle..

That's helpful. And I guess as my follow-up to you Matt as well. You talked about booking signaling April quarter as a bottom. Can you give little more color around that? I mean, is that specific to both storage and networking one or the other? And just anything to help frame that would be helpful. Thank you..

Yes, the booking that's really one of the metrics we follow to judge our revenue forecast, right. We also get customer feedback, customer forecast. On the booking side, we do see the strength for both networking and storage.

And Matt mentioned earlier, our storage a lot of revenue is sell through VMI and we can see as a company we're under shipping the market in the storage HDD side. So typically, that means the inventory situation is getting reduced and fixed. That certainly will help us to get through the bottom of the storage HDDs cycle basically..

Next question please..

Our next question comes from Srini Pajjuri of Macquarie. Your line is open..

Thank you guys for taking my question and apologies for the background noise here. Just first a clarification Matt on the networking business in the quarter that you just reported, you said it tracked little bit below expectations, but at the same time you said, Ethernet was pretty solid up double-digits and also looks like embedded did pretty well.

I'm just curious as to what was weak in the quarter that's reported in networking?.

So probably I'll start and Matt can add the Ethernet. When you look at our networking business certainly, if some of you recall, we do have a legacy piece of our networking business. That certainly is a little bit below our expectation and the inventory conditions of some of our customers also temped down some of our product lines.

Matt?.

Yes, I just say, the way just to phrase it is when we guided we had a certain expectation for that quarter, sequentially in networking. So for example, Ethernet switch and PHY, even though it grew year-over-year double-digits, which was great it came in lighter than we had thought.

So on the one hand we are happy that it's still growing at a good rate through Q4. On the other hand, it probably wasn't as high as we thought. And again, some of that is due to the issues that I mentioned on supply chain tightening, China pull-in and some other factors.

So it was modestly below what we had guided, but certainly some of the business performed well. If you look at it from a different point of view..

Got it. And then Matt on the same topic I think you alluded to data center switching as well. Obviously, it's pretty large market and you have the capability. I'm just curious in terms of your focus on that market.

How should we think about it in both organic and potentially maybe through M&A, if you can talk about how important that market is for you?.

Sure. So yes, we -- as I alluded to in my prepared remarks and I don't want to steal the team's thunder too much, because there is going to be a -- we're going have a very strong presence next week at Open Compute. But we are going to be demonstrating and showcasing our high-end data center class switches.

The way to think of it is, we've come at this from the angle that says, we've got a very strong position in the enterprise market. We've been feature rich, strong operating system and software capability there.

Those customers many of them want to start migrating their way up into the data center applications, primarily on-prem and we're able to actually migrate them upstream from that point of view.

So think of as -- this product family is not going to be just feeds and speeds, streamlined, totally optimized like some of the other solutions that are out there just for hyperscalers. Think of this is being a much broader offering. And we're very comfortable with our switch portfolio today.

We've got I think we've got good technology all the way from SMB to enterprise to aggregation all the way up to now really data center class switching. And so next week you'll be able to see some more information and hopefully we'll talk about this product family in future quarters..

Great. Thank you..

Thank you. Our next question comes from Christopher Rolland of Susquehanna. Your line is open..

Hi, guys. Thanks for the question. Just thinking back to the Analyst Day slide, where you guys talked about your 4X base station content in 5G.

Can you guys help us think about what's contributing? What there in terms of dollar value between OCTEON versus Fusion and versus networking? Should we think of that as roughly a third a third a third? Or is it....

Yes, without getting to -- so Chris, you're breaking up a little bit, but I think the question was talk about how the content in our 5G platform is a portion between the different technologies. And the way you just think about it is, the bulk of this is in processors and I would combined kind of Fusion and OCTEON together there.

The switch and PHY portion is meaningful, but it's much lower. Within the processor business, we're not really in a position to break out exactly how much is from each portion and quite frankly, it's going to depend on also the different configurations that those ship in what line cars they're on.

So it's not a real -- there's a lot of variability even within the content. So it's probably not -- just think of it is -- the bulk of it is going to be on the OCTEON and Fusion side..

Excellent. And then we haven't heard a lot about Liquid IO or SmartNICs recently. At one point, I know it's a 10% products for Cavium.

What's your outlook for the market there? And is the problem that cloud guys have really migrated to doing it their own or is there still a market there?.

Yes, I think it's a combination. So again, we've kind of certainly a product and a product line we have we're working on the next-gen of it. I think that that market is clearly happening. I think Smart NIC offload is a real trend and I think it's going to be a combination of merchant solutions, as well as I think a bunch of it is also going to go ASIC.

It's not clear how that's all going to shake out. So, that's obviously a product line that's in our wheelhouse, because we have the connectivity, we have the processor capability. So -- but I think that's when where we're going to continue to size our investment there relative to the opportunities and what our customers want us to build.

And certainly one of the dynamics as you mentioned is the desire for some of the hyper scale guys to really want their own very special customized ASICs for that application. So, how much will be merchant versus ASIC I don't know.

But that's clearly a market trend that's out there and we're paying attention to it and we can participate to the extent that our customers want to..

Great. Thanks guys..

Thank you. Our last question comes from Timothy Arcuri of UBS. Your line is open..

Thanks.

Can you guys hear me now?.

We got you, Tim. There for the last one..

Thanks, Matt. So, I'm still trying to understand what's going on within storage. So, I'm going by memory, but I think that the core storage business minus fiber channel was like $320 million last year and which was like $100 million SSD and maybe $220 million HDD. And it seems like it's down to maybe $200 million this -- for the guided quarter.

So, can you just maybe provide a little more disclosure than you normally would? Because the business is just so bad, could you kind of help us understand exactly what's really happening year-over-year? Thanks..

So, Tim, this is Jean. So I'll start and Matt can add. So, when you think about this we're really dealing with a very broad slowdown in the overall storage market and the inventory condition, right, both across -- both HDD and SSD. So that's the first thing is that's actually impact the both of our HDD business and SSD businesses.

So, if you are listened to our biggest customers they all have significant issues and challenges and we continue to see more inventory in the channel.

And of cost, the second thing, Matt mentioned earlier on the PC client side, HDD certainly declined more significantly and SSD side over PC client they're certainly picking up quickly, but that's in the market that we have a chosen not to participate.

So, overall, you do see -- going through fiscal 2020 before we really ramp up some of our customer ASIC business and business in the enterprises and the datacenter market, we're going to see some headwinds in the overall storage market..

Yeah, Tim, I would add, I think -- we've tried candidly to provide as much disclosure as possible, given what we know.

And I think what's complicated -- well, so couple of factors, right? One is we said it last quarter I'll say it again this quarter, HDD and SSD both down, almost uniformly across the board, every customer -- every sub segment and that makes it hard to get into a lot of analysis, because not only are all the different end markets going down, both segments are going down.

There is all kinds of reasons codes as to why this is happening.

And so to parse through that and figure out how much of it is because the cloud guys decelerated their spending, how much of it is because the leading microprocessor guy can't make enough processors to shipping enough laptops, how much of it is because there was just a lot of inventory that was built up last year et cetera.

So, I think we'll have better visibility on all the moving pieces as we go through this process, but right now what we are communicating is both of those are down, they are down significantly. We -- and it looks like for the external third-party data points that we're able to -- to get that we're under shipping the end market.

So that's as much as we can tell you right now.

We're just going to report the number as they are and tell you what we see and we'll do that again next quarter, right? And -- but it certainly is -- it's been dramatic, right, in terms of the change in how fast and I think it's been compounded by the fact that it's not just one particular end market or end customer and end dynamic, it's got all the things I mentioned, plus it's got uncertain macro layered on top of it in addition to some very specific things that are affecting the storage customers..

Got it. Got it. Okay, Matt. And then just last thing for me. So, just from a strategic perspective, obviously the Company is nowhere near as large as you thought it would be when you went into this merger.

So, does that -- does it sort of change the calculus in terms of how willing you are to support some of these very high development cost -- products like Thunder and things like that? Just given the sheer size of the Company at this point even on a combined basis, does it not make you begin to start to take a little different calculus in terms of what you're willing to fund and what you're not? Thanks..

Yeah. Sure. No, I don't -- it hasn't changed our calculus, I think, for a couple reasons. One is because of our belief that the primary reason for the reduction in demand over the last two quarters was related to things that were outside of our control i.e.

macroeconomic conditions and excess of inventories across a wide range of customers and end markets for a wide range of reasons.

The way I'm thinking about is okay, when we work our way through this cycle and when I look out to calendar 2020 quite frankly which is not that far away now and we look at our growth drivers in all the areas you mentioned by the way, 5G, embedded processors, Ethernet, Thunder, as well as I think storage coming back at that point we have a very strong outlook for that year.

So, the way -- we size R&D, right, and we sit down as a management team and we look at it, we aren't looking at it because that Q1 was bad, so therefore we should resize our R&D to fit the Q1 envelope. We're going to continue to run our -- to manage our expenses from a investment point of view relative to the future opportunity.

And so until something changes there, right, which says hey, 5G is not going to happen for a long time or people don't -- ThunderX3 is going to take longer than we think or some of these -- that the long-term view of the changes that we're not going to adjust our investment.

That being said, as Jean mentioned, outside of the R&D envelope, we're going to tighten the belt and we've already done things to as you saw I mean, even heading into this -- from our last call, we took out an additional $10 million of OpEx a quarter roughly on top of the already increased Cavium synergy target.

So, we're going to manage expenses, especially from the discretionary point of view or things that we can push out a little bit that are not related to our investment profile. But just to be super clear, we're going to size our R&D and our investment levels to the opportunity we see a year from now, let's call it and to stay the course..

Okay, Matt. Awesome. Thank you..

Thank you. At this time, I'd like to turn the call back over to Ashish Saran for any closing remarks.

Sir?.

Thank you everyone for joining us today and we look forward to talking to you again next quarter. Thank you and goodbye..

And that does conclude today's conference. Thank you for your participation. You may disconnect your lines at this time. Have a wonderful day..