Marvell Technology Group's (MRVL) CEO Matt Murphy on Q3 2017 Results - Earnings Call Transcript

| About: Marvell Technology (MRVL)

Marvell Technology Group Ltd. (NASDAQ:MRVL)

Q3 2017 Earnings Conference Call

November 17, 2016 4:45 PM ET

Executives

John Ahn – Head of Investor Relations

Matt Murphy – President and Chief Executive Officer

Jean Hu – Chief Financial Officer

Analysts

Craig Ellis – B. Riley

John Pitzer – Credit Suisse

Harsh Kumar – Stephens

Chris Rollin – Susquehanna Group

Quinn Bolton – Needham & Company

Timothy Arcuri – Cowen & Company

Vinayak – Morgan Stanley

Ian Ing – MKM Partners

Kevin Cassidy – Stifel

Mike Burton – Brean Capital

Operator

Good day, ladies and gentlemen, and welcome to the Marvell Technology Group Third Quarter Fiscal 2017 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 follow at that time. [Operator Instructions] As a reminder, this conference call is being recorded.

I would now like to turn the conference call over to John Ahn, Head of Investor Relations. Please go ahead sir.

John Ahn

Thank you, Abigail, and good afternoon, everyone. Welcome to Marvell Technology Group’s third quarter of fiscal 2017 earnings call. With me on the call today are Matt Murphy, Marvell’s President and CEO; and Jean Hu, Marvell’s CFO. We will all be available during the Q&A portion of the call today.

If you have not obtained a copy of our current press release, it can be found at our company website under the Investor Relations section at marvell.com. We have also posted a slide deck summarizing our third fiscal quarter 2017 results in the IR section of our website for investors. Additionally, this call is being recorded and will be available for replay from our website until December 17.

Please be reminded that today’s discussion may contain forward-looking statements. These statements are based on currently available information as of the date of such statements are subject to risks and uncertainties that could cause our results to differ materially from management’s current expectations. To fully understand the risks and uncertainties that may cause results to differ from our expectations and outlook, please refer to today’s earnings release, our latest quarterly Form 10-Q and subsequent SEC filings for a detailed description of our business and associated risks. Please be reminded that all of our statements are made as of today and Marvell undertakes no obligation to revise or update publicly any forward-looking statements except as required under applicable law.

During our call today, we will make reference to certain non-GAAP financial measures, which exclude the effect of stock-based compensation, amortization of acquired intangible assets, acquisition-related costs, restructuring costs, litigation settlements, and certain expenses and benefits that are driven primarily by discrete events that management does not consider to be directly related to our core operating performance. Pursuant to Regulation G, we have provided a reconciliations of the non-GAAP financial measures to the most directly comparable GAAP measures in our third fiscal quarter 2017 earnings press release, which has been furnished to the SEC on Form 8-K and is available on our website in the Investor Relations section.

Please note that Marvell Technology Group announced a significant restructuring action on November 2 of our fourth fiscal quarter during the prepared remarks section of this call Matt and Jean will be providing details of our third quarter results before our restructuring actions. Then Jean will provide comments on our restructuring actions and provide our fourth quarter fiscal 2017 guidance for continued operations.

With that, I would now like to turn the call over to Matt Murphy, Marvell’s President and CEO.

Matt Murphy

Great. Thank you, John. Good afternoon, everyone, and thank you for joining us. Before I review Marvell’s results from our fiscal third quarter, I want to provide you with some insight to our recent announcements and strategy going forward. As I mentioned on our last call, we completed a comprehensive evaluation of how our R&D resources are allocated across our product development efforts. This included a thorough review of product lines, discussions with customers, and feedback from key stakeholders throughout the company.

Our assessment confirmed that Marvell’s core strengths are in the high speed movement of data particularly in the storage, network infrastructure and wireless connectivity markets. As a result of this review, we are focusing Marvell on these strengths that have developed clear strategies to grow in each of these markets. Let me share the details on our strategy for each market starting with storage.

Data storage is a Marvell’s DNA and we hold leadership positions in both hard disk drive SoCs and solid-state drive controllers. For HDD business our strategy is to maintain our leading position in client drives and continue expanding in the cloud and enterprise storage with our higher performance solutions and strong OEM relationships. The strategy is already yielding design momentum and we are gaining traction in the high end of this market.

In SSD our strategy is to extend our leadership in this fast growing market by leveraging the breadth of our portfolio and continuing to expand our solution offerings. We continue to set the industry standard across a range of enterprises from SAS and SATA to our leading PCIe based solutions.

Our portfolio includes cost effective DRAM-less solutions, custom ASICs, mainstream client products with firmware that provides full turnkey solutions and new generations of ASSDs for the rapidly growing cloud and data center markets. We are the first merchant controller provider to offer products built on advanced process node and along, with our proven error correction technology enables higher performance, lower power and smaller footprint. All capabilities that our customers desire.

Innovations equally important and we are also leading in the deployment of emerging standards such as NVMe, which is enabling a new generation of high performance computing systems. All together, we are very excited about the profitability and growth potential of our storage business. Network infrastructure is another area of historical strength for the company. We are one of the pioneers and low power, low cost, CMOS based Ethernet Transceivers. Today, we have reenergized this business and our 2.5 and 10-gig, Ethernet 5 switches and versatile multi-core Arm SoCs are gaining traction in the marketplace.

Expect us to continue with our recently announced 25-gig solutions for the data center, the private cloud markets are also showing promise. We are continuing to invest in this business and moving up the value chain to grow in this market. Particularly in products that target the cloud and enterprise data center. Wireless connectivity is a core strength and one that we’ve grown organically as we’ve established Marvell as a market leader. Our strategy is to refocus on Wi-Fi technology and invest in high performance areas. For example, our innovative 802.11ac integrated wireless solutions deliver industry-leading performance with a reduced footprint at a lower cost. As the performance, leader we are shifting from the low end towards market that value high performance, such as enterprise access points, automotive, a connected home and gaming.

Overall, Marvell’s core strengths aligned with a broader trends emerging in the marketplace. Literally doing the connected devices not just appliances but also cars, cities and entire industries are moving to the cloud. Virtual reality, artificial intelligence, autonomous cars, smart city, depend on high bandwidth video and data multiplied by social sharing. This is creating an explosion of digital traffic.

Data needs to be moved and stored not just to the cloud, but also to the edge for greater accessibility at ever increasing speed. Enterprise infrastructure and cloud providers are being forced to innovate at an unprecedented rate just to keep on. Building on our core strengths in storage, wired infrastructure and wireless connectivity and providing differentiated solutions Marvell is well position to transform how data has moved and stored across a range markets from the consumer to the cloud.

Now as part of our R&D review, we looked at our total portfolio from a product by product and holistic perspective. We examine where we had differentiated technology and a path to market leadership that would produce profitable growth. We also identified areas where we could improve the return on our current technology investments, and which markets don’t make sense for us to participate in. Based on this analysis, we announced on November 2 that we will exit or divest non-core businesses, consolidate R&D sites, and eliminate approximately 900 positions worldwide.

These difficult but necessary actions focus Marvell on areas where we can win and deliver a higher return on our R&D investments. This restructuring is the first phase in our efforts to improve Marvell’s performance. Our next phase includes the continued improvement in gross margins and operational efficiency. We’ve had a number of initiatives in place to increase our supply chain efficiency, including consolidating purchasing and other functions to leverage our scale. We are raising the bar on our R&D investment so that new products have clear differentiation and yield a high return on investment.

Our goal is to achieve 58% to 60% gross margin within the second half of our fiscal 2018. With a renewed focus on our core product portfolio and on markets in which we are a leading technology provider, we are confident that with discipline and execution we will deliver profitable growth. As we achieve greater cash flow and profitability, we are also committed to returning cash to shareholders. With this in mind I am pleased to announce that our Board of Directors has authorized a $1 billion stock repurchase plan. As part of this, we intend to return $500 million to shareholders through share repurchases over the next 12 months, while also maintaining our current dividend plan.

In summary, we have made significant progress over the four months that I have been with Marvell. And I want to thank the entire team for their efforts. We have assembled a strong management team, refocused our R&D on the Company’s core strengths, developed strategies that will put Marvell on a path to faster and more profitable growth, and implemented changes to make more effective use of our capital. All together I am very confident that these actions will improve our execution as a company, accelerate innovation, and yield greater returns for our shareholders.

Now I’d like to review the results of our third quarter. We delivered strong financial performance for the third fiscal quarter of 2017. Our revenue came in above the high end of our guidance, growing 4% sequentially to $654 million. This was driven by stronger demand from our storage and networking businesses, as well as from our mobile and wireless sales, which came in as expected.

We achieved non-GAAP gross margin of 56.7% which is a significant improvement from 45.9% one-year ago. We also generated non-GAAP operating income of $115 million and delivered $0.20 in earnings per diluted share, beating the high end of our range.

In terms of business highlights, storage revenue came in stronger than expected driven by growth in both HDD and SSD solutions. Our HDD revenue grew as customer saw continued stabilization and demand for client drives. In SSD, Q3 was a record quarter with revenue increasing significantly both quarter-over-quarter and year-over-year. SSD controller sales now represent approximately 20% of our total storage revenue.

In the networking market, Q3 sales of Marvell solutions were better than anticipated. They grew 20% compared to the third quarter of last year driven mainly by continued traction of our solutions for the campus and enterprise markets. In the wireless connectivity market, our third quarter revenues came in as expected. This was mainly due to anticipated decline in wireless connectivity solutions related to mobile handset and low margin modules.

Now I’d like to turn it over to our Chief Financial Officer, Jean Hu, to provide more details for Q3 and our outlook for Q4. Go ahead, Jean.

Jean Hu

Thank you, Matt and good afternoon everyone. First I will review our third quarter financial results. Then I will discuss our restructuring actions and provide our fourth quarter fiscal year 2017 guidance for continued operations. As a reminder, our Q3 results do not include any impact of our restructuring actions, which we announced on November 2 in our Q4 of fiscal 2017.

Our revenue in the third quarter was $654 million, which represents a 4% increase from second quarter revenue of $626 million. Our Q3 revenue included a $60 million of a storage shipment deferred from Q2. Normalizing that the $60 million deferred revenue between Q3 and Q2, our storage revenue in Q3 would represent an 8% sequential increase and a 21% increased year-over-year driven by higher HDD and SSD demand.

Networking revenue in the third quarter of fiscal 2017 increased 16% sequentially but it grow 20% year-over-year. Mobile and wireless revenue declined 11% sequentially as expected. Mobile handset related revenue was $4 million.

Our GAAP growth margin for the third quarter was 56.3%. Non-GAAP gross margin was a 56.7% above the high end of our guidance range provided in our Q2, 2017 earnings release. This increase was primarily driven by product mix and the improvement of operational efficiency.

Our GAAP operating expenses for the third quarter were $285 million. Non-GAAP operating expenses were $256 million lower than our guidance primarily due to better operating expense management. Non-GAAP R&D expenses in the third quarter were $202 million, and non-GAAP SG&A expenses in the third quarter were $54 million. Non-GAAP operating income increased to $150 million from a $27 million a year-ago.

This represents an operating margin of 17.6% versus the 4% operating margin a year-ago. Our net other income was $5.5 million. Tax provision was $60 million. GAAP net income was $73 million for the third quarter, and the non-GAAP net income was $105 million.

Third quarter GAAP earnings per diluted share was $0.14 and our non-GAAP earnings per diluted share was $0.20 versus $0.6 a year-ago. We have made a significant progress to improve our financial performance.

Turning now to our balance sheet, our cash and marketable security were $1.65 billion or over $3 per diluted share at the end of the third quarter. Net cash provided from operations in the third quarter was $121 million. During the quarter, we’ve resumed our stock buyback and our original plan. We returned $87 million cash to shareholders, which included $30.7 million in dividend and $56.5 million in stock repurchases.

As noted in our press release, our Board of Directors approved $1 billion share buyback program. This newly authorized program replace its entirety the prior $3.25 billion stock purchase program, which had approximately $150 million for repurchase authority remaining.

Now I’d like to recap the restructuring actions we announced on November 2, which included the three initiatives. First we’re discontinuing specific R&D program, streamlining, engineering process and the consolidating R&D side for greater efficiency. These actions will result in eliminating approximately 100 positions worldwide which is about 70% of our total headcount.

We estimated the revenue associated with this R&D programs was about 7% of our Q3 fiscal 2017 revenue. This revenue is primarily under our mobile and wireless, as well as other end markets.

We do expect this revenue to decline over the next several years, but to have a very long tail. We will classify this revenue under other markets in Q4. So we can provide more transparency of our core business in storage, networking and wireless connectivity. We also expect a significant reduction in legal and accounting costs. All together these actions are expect to reduce annual operating expenses by $188 million to $200 million.

In addition, we are divesting non-strategic businesses with approximately $60 million in operating expense and $100 million in revenue, based on first half 2017 annualized run rate. These businesses have a gross margins of approximately 40% and they will be classified as asset held for sale and reported as discontinued operations in Q4. Our guidance for Q4 excluded estimated resulted of this business, which will primarily affect our other end market revenue category.

Now I would like to move onto our guidance of Q4 fiscal 2017 for continued operations. We expect our Q4 net revenue to be approximately $565 million, plus or minus 2%. Excluding the impact of the $60 million deferred revenue in storage, we expect our storage revenue to be down slightly in Q4 compared to Q3, but will grow year-over-year.

Networking revenue is expected to be flat sequentially, but to show double-digit growth year-over-year. Our wireless connectivity revenue is expect to decline sequentially due to normal seasonality. Our GAAP and net non-GAAP gross margins are expected to be approximately between 57% to 58%. Our GAAP operating expenses are expected to be in the range of $322 million to $332 million.

And the non-GAAP operating expenses are expected to be in the range of $225 million to $235 million. GAAP and the non-GAAP net other income is expected to be approximately $3 million. And the GAAP, non-GAAP tax benefit is expect to be approximately $1 million. GAAP and the non-GAAP diluted share count I expect to be approximately 524 million and 532 million shares respectively. This will result in GAAP income per diluted share in that range of negative $0.01 to positive $0.03, and the non-GAAP income per diluted share in the range of $0.17 to $0.21.

Looking ahead, we will detail our strategy for profitable growth including our long-term target financial model and the capital allocation strategy, at an upcoming Analyst Day in early 2017. We will send out more specifics on this event soon, and look forward to seeing many of you in person.

With that, I would like to turn the call back over to John to open up for Q&A.

John Ahn

Thank you, Jean. We’ll now open the call up to your questions. Operator, we’ll take the first question, please.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] Our first question comes from Craig Ellis, B. Riley. Your line is open.

Craig Ellis

Thanks for taking the question. The first question is on gross margins. So one, congratulations on the significant progress you are making there in other parts of the business. As we transition from the improvement in gross margins to 56.7% and then 57.5%. Can you talk about what changes in the business to drive it towards 58% to 60% over the next three to four quarters? And should we think about that 58% to 60% being a peak margin level for the business or is that just the an intermediate level what potentially higher margins down the road?

Matt Murphy

Hi, Craig this is Matt.

Craig Ellis

Hey, Matt.

Matt Murphy

Hey there. So yes – so we’re clearly pleased with the progress the company has made in short order to really address the cost side with respect to the product margin. Additionally, we are benefiting from improved mix with higher sales of our networking and storage. So that’s helpful and helping in the near-term. As we look out into the longer-term model we’re communicating for the second half of 2018, we see further mix improvements and additional benefit that we anticipate and really addressing cost to goods in a very strategic and meaningful way.

As far as anything above 50%, we are not going there yet. It’s a tough crowd. I think we are pretty happy after this period of time to come out and be comfortable guiding in that range, but we do feel confident that the quality of the business that we are winning and that we are delivering is very good and that’s the road map of new products that we are going to be introducing also has a gross margin profile that supports that type of guidance. So overall we are pleased with the progress on gross margin.

Craig Ellis

That’s helpful. And the follow-up question is more of an operational question. It was helpful to get the summary of which businesses you think are growth businesses and which are more maintenance businesses. As the company brings down its operating expenses in R&D significantly in the near-term, when do you think you will have the – is the R&D allocated to your satisfaction in growth year areas versus maintenance areas? And when do you think we’ll start to see sustainable revenue growth out of the business as you’ve gotten the R&D teams in place and as you make whatever tuning adjustments are necessary with field engineering and the marketing program?

Matt Murphy

Sure. So let me break it in two pieces. So the first part of your question was around when do you think we’ll have the R&D movements allocated appropriately to the areas where we believe we can grow. And what I’d say on that is – and Jean gave some numbers on it. What we have really done is edit and address the areas of the company where we had R&D applied that we didn’t see acceptable returns and meaningful growth prospects. So on the core businesses of storage networking and wireless, we are pretty comfortable with the R&D allocation there. There are some moving pieces within each of those businesses, but overall we have been investing in those businesses so there is some fine-tuning going on.

But actually I’m quite comfortable with the road map, the team and the execution we are seeing out of those three businesses. That being said there are minor tweaks we are making. So really what we are doing is addressing the part of the portfolio that is not part of the long-term road map.

Craig Ellis

Thanks and good luck. Go ahead.

Jean Hu

Yes, just to added to Matt is really if you look at the restructuring action we are taking modulates the focus on those non-core areas that we should have a very large R&D, but a very small revenue and the return on investment. And I think we articulated that over the next four quarters that will reduce those R&D programs to the point, which has the run rate of comfortably at quarterly $210 million, so that’s the objective exiting Q4 the fiscal 2018. I think then the question is where you might seen all those core areas Matt talked about that, which we are very comfortable and we do believe the revenue growth will come from those market we’re focusing on.

Craig Ellis

Thank you.

Operator

Thank you. Our next question comes from John Pitzer with Credit Suisse. Your line is open.

John Pitzer

Yes, good afternoon, guys. Thanks for let me ask a question. Congratulations on the strong results. Matt, I guess even if I – the divestitures and look at an apples-to-apples point to the compare, your guiding gross margins for the quarter flattish sequential despite the fact that storage is going to be down. So Matt, I guess what we understand a little bit better is to drive support to this new model on the gross margin line. Do you think all of your products – devoted products portfolio will sit inside of that gross margin range, such that the gross margin variability is not going to be as dependent as historically has been on the storage business. How should I think about that? And I guess how you are achieving sort of flat gross margins sequentially despite a mix these will be against you a little bit in the quarter.

Jean Hu

Yes. Thank you, John. So on the gross margin question, if you look at our portfolio overall some of the portfolio, we are investing going forward above our corporate average, there are few areas we’re investing and we do think there is a greater potential in the future at the gross margin actually they are below our corporate average. So we do have the product mix will continue to be long for the driver of our gross margin going forward.

As Matt talked earlier right, we’re going to focus on the differentiation of our product that going forward over longer-term, we’re certainly try to get our gross margin higher. And the second question is on the guidance for Q4, you are right, the mix will be changing in Q4, but we are making effort to really improve the cost over sales to the operation efficiency. So we do get benefit from operation efficiency, but on the other side the revenue compared to Q3 is a lower – we do have the overhead assumption and all those headwinds. So in balance that’s what we’re guiding and of course, that we’ll continue to be disciplined and then try to do better.

John Pitzer

That’s helpful guys. As my follow-up Matt, do one of the things that was holding you back from reinstating the buyback was just trying to decide what kind of M&A strategy you might follow. I’m wondering if you could just update us on your M&A philosophy now that you reinstated the buyback and should we read anything into that philosophy with the reinstatement of the buyback?

Matt Murphy

Yes, thanks for asking about the buyback. So yes, we’re pleased to put a sizeable authorization out there, which I think signals, our confidence in the company and the business. Yes, we felt that was important to get that communicated and authorized and announce at this call and get moving on it. In the context to the buyback, clearly we’ve looked at our capacity in our capital structure the day and also comprehended the reality that M&A is real and the semiconductor industry today. We have to think about that. And we do have some thoughts around it. We’re not ready to communicate those, but clearly that’s a reality that we have to deal with.

So I’d say in the context of an industry that’s going through – the transformation is going through it’s on our minds. But first and foremost, we’re focused on driving Marvell’s organic improvements that’s first and foremost, we think we have a good opportunity with the products that we have. And second, we felt that was important to put an authorization and the commitment to return significant portion of our capital to shareholders, while still maintaining dry powder.

John Pitzer

Perfect. Thanks guys, congratulations again.

Matt Murphy

Thanks.

Operator

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

Harsh Kumar

Yes. Hey guys, congratulations as well stellar results. I wanted to follow-up on the first question asked. If I heard it correctly it was 58% to 60% gross margin in second half fiscal 2018. What are some of the levers that’s still need to happen in a big way for you to get there and then I had a follow-up as well?

Jean Hu

Harsh, thank you, yes. To get to 58% to 60% in the second half of fiscal 2018, there are two major drivers. The first is, we will continue to refine our product strategy just based on the portfolio met articulated we’re investing storage, networking and the wireless that we’re going to look at it areas where we really can get a return back in the investments in those areas.

Secondly I think within the next several quarters the most importantly is, we are focusing our supply chain efficiency, not only just your typical operational streamlining improvement of cost but also like a testing, consolidating test to labs – although since we do think, we have a lot work we can accomplished – some of them as you can imagine, will take some time when you want to consolidate the testing facilities across all the global locations for Marvell. So those are very important drivers that product mix and cost reduction effort.

Matt Murphy

And Harsh, this is Matt. Let me just add to that I think what we found is on the cost side, as we brought in a very seasoned and experienced operations management team we’ve come to a few conclusions. And one is, as Jean mentioned there is really tremendous opportunity to rationalize our supply chain in the backend by consolidating some of our spend with key partners. If you think of the drivers of our cost, it’s obviously in way for – its obviously in the packaging, in the backend – some of that backend is done inside Marvell, but most of it’s done with partners.

So those levers are being pulled, negotiating and partnering with the right people to drive our cost structure much more positive way. There is also programs we are implementing that are very structured around leveraging in our strong product engineering and test engineering teams to drive yield improvement. That’s another big lever we can pull. And then finally, back to the matter is Marvell has always been very, very strong in small by size and optimized design techniques, [indiscernible] we also have that advantage as well.

So I’d say, it’s very much a comprehensive approach we are taking from design to supply chain on the cost side, which has some short-term benefits, which you are even seeing today in our current results and we think that those efforts are going to continue to yield gross margin leverage over the next four quarters.

Harsh Kumar

Okay, thanks. Thanks and for my follow-up I think one of the key things that has to happen for Marvell to grow is the winds and for example, enterprise and cloud both had networking and storage and I think I heard you guys say that you are starting to get some of those. I was wondering, how should we as investors measure that success? Would you have some metrics like number of design this year versus last year or anything else you can give us to buy into the data?

Matt Murphy

I think what you can expect going forward as we get into a rhythm of these earnings calls is now that we have gotten restructuring announced, buyback, we’ve gotten through strategy. We will begin to give more color on our business, things like design winds, pipeline and where we see the opportunities in a lot more detail. I am seeing them firsthand. I am visiting customers and I am very encouraged. But as far as the data points, I think those are the things that we would like to call – we would like to cover as we make progress as a company and start highlighting some those things. And then ultimately call them out as we see them in our business results.

John Ahn

That’s also another good topic for our Analyst Day that’s coming up right. So we will have – you will have the opportunity to meet with a lot of our business unit hedge, and especially networking. So you’ll get a lot more details about what you are looking for, I think that’s the best going forward.

Harsh Kumar

Fair enough. Congratulations again guys.

Matt Murphy

Thank you.

Jean Hu

Thank you.

Operator

Thank you. Our next question comes from Chris Rollin with Susquehanna Group. Your line is open.

Chris Rollin

Hey guys, hi. Echo, my congrats as well. Perhaps you guys can drill down a little more on the non-strategic businesses with $100 in revs. In mobile and wireless, what exactly was it – was it kind of the stub that remained in kind of cellular investments? Or was it something else? And then what are we talking about any other bucket as well? And then lastly how should we think about the potential drag on gross margins from these businesses as well.

Jean Hu

Yes, thank you, first. So I’ll answer your first question on the discontinued business side. Those businesses are currently under the category of other end market. That’s the most I can tell you because we are running a sale process and as you can imagine at this stage we will not be able to disclose, which business we are trying to run a sales process. And on the – your second question about other category, so why look at all the revenue that get impacted by those R&D programs, we discontinued investment. They are largely under a – either a mobile and wireless, all under our other markets.

Some of them want this probably albeit these under mobile and wireless we do have the mobile computing like the application processors to those kind of business, Marvell have had long time. So for instance application processor they tend to have a very long life. So we’re going to stop investing for the future generation product, but we do expect the revenue to last for several years and the declining. From margin perspective, of course, we are going to try to optimize the gross margin of those products when we don’t have an investment R&D anymore. And so we do think from the few margin dollar perspective those business will continue to – contributed to the operating margin line.

Chris Rollin

Okay. Great. Thank you. That was helpful. And then pacing on the $1 billion of buyback, so you guys said $500 million over the next 12 months, I guess my first question is, should we just kind of expect that to be somewhat linear, do you guys have a different strategy around that. And then secondly should we just assume another $500 million in the next year or is this kind of a multi-year plan in your eyes.

Jean Hu

I think we’ll try to do the buyback in the most efficient way we can. And so frankly, when we guided our Q4 will be now to include any buyback impact in our guidance, I think for modeling purpose was, you probably can streamlining for the year. I think we are really focused on the Fortune 500 right now the fall of the authorized $1 billion, which is multi-year plan and right now we’re very focused on first $500 million.

Chris Rollin

Okay, great. Thank you.

Operator

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

Quinn Bolton

Hi all. Congratulations on the nice margin results. Jean, just wanted to make sure I heard you right. When you talked about the discontinued ops you said, it’s about $100 million of annual revenue and I think $60 million of annualized expenses. Did you also say was running roughly a 40% gross margin?

Jean Hu

Yes, yes. That’s exactly what we said. It is the business, it’s about $100 million revenue about 40% gross margin and $60 million operating expense roughly.

Quinn Bolton

So is that business gets categorized as discontinued option the January quarter, you clearly get a little bit of a positive gross margin effect, since you take that 40% gross margin revenue stream out of the continuing operations, is that right?

Jean Hu

Yes. Absolutely, you’re right.

Quinn Bolton

Got it, great. And then sort of a second question, it’s sounds like most of the products that you’re walking away from on the mobile side or looking to categorize as discontinued ops are in the other category. Just within – what’s less than within mobile? It sounds like most of the wireless LAN will be focused on segments where you expect to continue to invest. I just want to make sure that – I know you’re stopping the investments in Wi-Fi or mobile handsets. But is there anywhere else that you’re stopping to investment in a wireless LAN, are you looking to kind of continue that investment in sort of higher performance Wi-Fi across the remaining segments of that wireless business.

Matt Murphy

Yes. Hi, Quinn, this is Matt. I will take this one. So the way to think about it is we have this category mobile and wireless, and then within that is our Wi-Fi business is the piece of – largest piece today. And we are investing there, when we look at that business, the handset portion now is pretty diminishes, it’s almost sound nothing. When you look at the Wi-Fi market non-mobile, and you break it into a few categories like enterprise access points, we actually have a leading position there. When you look at automotive, we’ve got a leadership position there as well, connected home, high-end gaming. So these non-mobile higher performance, more robust, Wi-Fi enabled applications is a place where Marvell has got a market position, it’s got traction, it’s got design wins. And we’re going to try to build up for that. So that’s how we’re thinking about the investment portion of the mobile and wireless category.

Quinn Bolton

And Matt, correct me if I’m wrong. It sounds like most of those Wi-Fi designs will be more access point solutions perhaps have integrated CPU’s rather than lower end sort of client devices is that right?

Matt Murphy

That’s the way to think about it, yes.

Quinn Bolton

Great. Thank you.

Operator

Thank you. Our next question comes from Timothy Arcuri with Cowen & Company. Your line is open. Your line is open.

Timothy Arcuri

Sorry.

Jean Hu

Hello, we cannot hear your question.

Timothy Arcuri

Hello?

Matt Murphy

Hey Tim, are you there? Can you hear us?

Timothy Arcuri

Hello, can you hear me?

Matt Murphy

We can hear you Tim.

Timothy Arcuri

Hi, okay, great. My question is first one on margins within storage. And really how much higher SSD gross margins are then HDD gross margins?

Jean Hu

Sorry, we don’t disclose that information and I think that the only comment I would say is, our overall storage margin is higher than our corporate average.

Timothy Arcuri

Okay, great. And then I guess a question really for Matt. There is some concern that if you did a M&A deal right now that it could interfere with your ability to basically take cost out of the current businesses. But you obviously have about $2 billion worth of liquidity between your real estate and your cash and which you could borrow against. So the question is would you be willing to do a deal, are you still right sizing the cost of the existing business. Thanks.

Matt Murphy

Sure. Thanks, Tim. What I’d say is you are absolutely right. Key focus of the company right now is to execute. Execute on the plan that we laid out to the investment community, lay out the plan that we’ve discussed internally and really drive that. And if we do that we think we can unlock a lot of value in the company. We have comprehended what you mentioned with respect to our buyback thoughts but, at this point, again we’re laser focused on the internal development and we’ve got all hands on that gun on executing.

Timothy Arcuri

Okay. So I guess the right way just think about that would be that you want to take the cost out of the existing business to fully go into the deal to be clear right.

Matt Murphy

Yes, I think all I’d say that’s we – that’s clearly the priority. We have to keep our eyes open. We’re not unaware of what’s happening in the industry and we do think that overtime as we execute our plan. Marvell is a phenomenal company. It’s a phenomenal platform. We’ve got a great brand, great infrastructure, great engineering talent and great scale. And so overtime, we think we can grow this company organically and inorganically, but first things first.

Timothy Arcuri

Okay, awesome. Thank you, Matt.

Matt Murphy

Yes. You’re welcome, Tim.

Operator

Thank you. Our next question comes from Joseph Moore with Morgan Stanley. Your line is open.

Vinayak

Hi, this is Vinayak calling in for Joe. Thanks for taking my question. I want to follow-up on your SSD business. Matt, can you just talk about the growth you are seeing there, your share position as well as the pricing and the competitive profile at that market?

Matt Murphy

Sure. Yes, happy to take the question. So we’re very pleased with our performance on our SSD business. As I mentioned in my prepared remarks, it’s now becoming a meaningful portion of our overall storage revenue. Its growing much faster than our overall storage revenue, market that’s growing quite fast. We have a wide range of technology that we offer there. We participate primarily at the higher end of the market. And we’re also seeing traction especially in the last year or so even in the lower end of the market, we’re really having not only the hardware, but the software and the firmware the full turnkey solution is required.

So I couldn’t point to anyone individual specific growth driver meaning all of the areas that we’re investing in SSD, all the difference sub markets are actually all performing quite well. And we’re encouraged by the traction we see especially as large OEMs who are transitioning from hard drive based systems to SSD based systems, start thinking about tailoring their storage requirements around their own special needs. And when they do that they can think about using Marvell Technology and controllers in conjunction with sourcing their own NAND and coming up with their own solutions for their tailored applications. So we really participate again in a broad range from all the way from ASICs at the high end for high end applications down to broad-based solutions for the retail market.

Vinayak

Got it, that’s helpful. From a follow-up, can you touch upon what traction you are seeing for final level cash and MoChi. That’s something you guys were pretty vocal about last year like any comments on customer traction there.

Matt Murphy

Sure. So the way we look at those two technologies is there, both technologies that are continue to be in the Marvell roadmap. With respect to MoChi, we’re in production today with devices that are based on the MoChi architecture. But I’d say more broadly the company really took that vision of MoChi as an interface, as a design standard, and actually is embrace modular design and modular technology in a number different ways outside of just the MoChi specific interface. So we see modular design is important for Marvell especially as processor cores want to migrate down to advance note, but I/O really still can be efficiently designed and leveraged at legacy notes. So that’s a technique we are taking advantage of today.

FLC is a little further out and that leveraged primarily from our storage group. So both of them are new product design pipeline, MoChi is further along and we are going to continue to leverage those technologies that have been incubated inside Marvell for our own product benefit.

Vinayak

Very helpful. Thank you.

Operator

Thank you. Our next question comes from Ian Ing with MKM Partners. Your line is open.

Ian Ing

Yes, thank you. First question for Matt, I mean Marvell largely a OEM business, but in your cost you also have extend that experience with distribution representatives and other types of channel. So do you foresee perhaps adding other types of channels some of other products? I know IoT and connectivity some competitors using channel distribution channel. Thanks.

Matt Murphy

Yes. Hey, yes, great question. And it’s not something we’ve talked a lot about, but I’ll just spend a little time here on it. So you are correct, Marvell historically has been a very much an OEM direct account, R&D to R&D partnership type of company and that’s great. I mean the company is actually I’m very impressed with the level of relationship that have been developed over the years in Marvell up to very, very senior levels at our customer. So that’s an assets we have and that’s great.

We do have business that goes through distribution and you are right. Some of its in connectivity actually a lot of it is in our networking business. In spite the sound of the broad market as well as some of our switches. So that revenue today isn’t terribly large as a percentage of Marvell, so it hasn’t got looked at in a lot of detail, but in an aggregate dollar amount its actually not insignificant. And when I look at our distributor network that we have in place today, it really hasn’t been actively managed in my opinion, it’s not been a priority.

So think about this way, we sell a lot through distribution to a lot of customers. And our view here is – this is in the next sort of phase of Marvell, now that we’ve got in all of the strategy in place and the restructuring and the things I’ve mentioned, our attention is now turning to how do we take the technology we have in Marvell and sell it much more efficiently and much more broadly. And distribution can be a great mechanism to do that and I think there is a lot of low hanging fruit in distribution today to really leverage that revenue we’ve already got with those partners, maybe think about how to focus within distribution on some key partners and actually motivate them and enable them to sell Marvell products much more competitively. So that something I think you’ll be hearing more from us on. I think it’s an opportunity for the company to get incremental sales with technology we’ve already developed.

Ian Ing

Thanks Matt. And for my follow-up, that the strategic review is done. Do you think, there’s any opportunities in terms of the process of green lighting new products investments perhaps revisiting the hurdle rates or ROI and investment requirements?

Matt Murphy

Yes. You’ve got my playbook figured out. So that process in the company I mean again it’s a very, very innovative company and that innovation that level of creativity in Marvel has created a lot of technology that’s very, very valuable to the company. So that’s something that, I’m very focused on making sure we maintain as we go forward. But that being said, the rigor in the company around having a very robust process to evaluate all the new investments that we’re going to make in R&D, all the new projects. What’s the true realistic, derisk, return on investment for those. Does that meet the hurdle rate that we need to grow the company over time?

Is it differentiated? What’s the development cycle time? What’s the cost? That whole process in the company is something that I think can really be improved upon a lot. It’s something I have a lot of passion around and myself on the whole management team as we think about Marvel going forward, are going to be spending a lot of time with our engineering groups and really making sure that what we’re putting into the pipeline on this is very precious R&D budget that we have is being spent wisely.

And again I think that’s just like you said on the other question with distribution it’s just another opportunity optimize with already working in the company and do a much better job at it. And I think we should start seeing dividend paid on that next year and the year after. But to really manage a company of this scale for the long-term, we’ve got to have a very efficient capital allocation process in R&D budgeting process. And we’re putting that in place.

Ian Ing

Thank you, Matt.

Operator

Thank you. Our next question comes from Kevin Cassidy with Stifel. Your line is open.

Kevin Cassidy

Thank you. Matt, my question is along the same lines. You had mentioned revitalizing your networking especially Ethernet networking. I wonder if you could talk little more details about that if – say you’ve mentioned the 25 gig 5. What are you going to be bringing to the market that isn’t there already?

Matt Murphy

Sure. So you’re right. And I think many of you know the history of the company Marvell really one of the way that made a mark in the industry was that at one gigabit Ethernet, the company really took the market by storm and gained a leading position. And along with pioneering and the re-channel area in HDD as well as in Wi-Fi these are kind of the core businesses I grew Marvell what it was? What it is today – excuse me.

Company did get behind for a number of reasons. And starting in early 2015, there was a leadership change and within the company, within the networking business and we will be focusing in that area. We do see strong demand and opportunity for us, both to do some refreshing on the existing portfolio that we’ve now started to get products out that our leading products and what we call [indiscernible], which would be things like 2.5 gigabit Ethernet, 5 gigabit Ethernet that are addressing new segment to the Ethernet market. As well as 10 gig which even though that standard has been around for some time actually has not – does not represent a material portion of the gig of the Ethernet shipments today.

We have our 10 gigabit solutions as well and we think we can participate there especially because of our strong position in switches and selling our switches and fight together as a solution to our customers has a very powerful prospect and one that one of our largest competitors has done really well for many years. So we think there’s plenty of market to participate in Marvell is very well recognized in this area and we have a suite of products from 1 gig, 2.5, 5, 10 gear boxes and other interface IC that 25 and beyond. And again coupled with our switches and our ARM based SoCs by the way. It’s a very nice solution for a wide range of our customers. So we are investing there we are seeing traction.

Jean Hu

Yes. Just to added to Matt, he said, right. If you look at our networking revenue for the past four quarters, we had experienced year-over-year growth consistently. So we do see strong momentum from that business not only during the past several quarters but going forward.

Kevin Cassidy

Okay. Thank you. And Matt you mentioned – my follow-up question. It was around adding the ARMADA or the ARM-based processors to the strategy too. Maybe if you can expand on that a little more.

Matt Murphy

Sure. So I think that was a very good decision that was made – that was done before me and the – that product line has actually – if you look at our networking revenue. And as Jean mentioned it’s been growing pretty nicely, actually the fastest growing piece of it has been the ARMADA family. It’s getting traction across a range of applications and range of geographies. It’s doing well and products for campus SMB even small cell base stations and things like that.

And we also see that there are some legacy architectures out there like our PC format that ultimately customers want to see a migration path to ARM. The ARM architecture, which is really everyone knows who come to industry standard. So as that transition happens and people moved to ARM, Marvel’s got a pretty competitive offering there. So we do see some positive trends in the SoC area. It’s still relatively early days, but we are getting revenue growth and if I mentioned it’s growing faster than our overall networking business. So we’re encouraged.

Kevin Cassidy

Great, thank you. Congratulations.

Matt Murphy

Okay. Thank you.

Jean Hu

Thank you.

Operator

Thank you. [Operator Instructions] Our next question comes from Mike Burton with Brean Capital. Your line is open.

Mike Burton

Hi and thanks for taking my questions and congrats on the results. I would like to follow up on the SSD comments you have just gave congrats on the record quarter there. Did I interrupt you correctly that the majority of the revenues currently are for enterprise SSD’s and when you look at those newer opportunities on the low end, Matt are you looking more at client PC as the low hanging fruit or are you looking in mobile flash controllers.

Jean Hu

So maybe I will take the question. It’s a combination of our today’s revenue, because enterprise and the client side. And I think when we look at to continue to grow this business where certainly like Matt said we are going to focus on the high end. We’re doing a sake of a lot of customers those are greater foundation business, we’ll expanded to the client side, not mobile handset we’re more focus on the PC, the things we can either mobile you.

Mike Burton

Okay. Understood, and then I know it’s early but with the changing mix of businesses can you give us a sense of what seasonality looks like in your segments and any initial thoughts relative to market trends as we contemplate the April quarter and our models. Thanks.

Jean Hu

That’s a good question. I think you can imagine the business. If you look at the last year also had changed very significantly, right. We used to have a very large portion of our revenue from mobile side. So the seasonality has been all over the place frankly. I would say going forward if you look at the Q4 when we guided Q4, on the storage side typically Q4 the seasonalities that you have 2% to 4% decline sequentially, we actually excluding the $60 million before the revenue shipment our guidance actually better than normal seasonality.

And the networking side I think Q4 typically is a flattish sequentially. I think right now, we can see networking and storage are quite consistent. The wireless connectivity side Q4 is very significantly sequentially decline quarter as you can imagine a lot for that consumer mobile, gaming those are the really seasonally down quarter and going forward I think since our investments are going to focus storage, networking and the wireless connectivity and overtime those three business seasonality will dictate overall company to seasonality. We will give you more color next quarter when we have a clear cutoff for three segments. So we can provide more insight.

Mike Burton

Fair enough. Congrats again.

Jean Hu

Thank you.

Matt Murphy

Thanks, Mike.

Operator

That does conclude today’s question-and-answer session. I’d now like to turn the call back to John Ahn for closing comments.

John Ahn

Okay, great. Thank you, Abigail. I’d like to thank everyone for their time today and your continued interest in Marvell. Please note that we will be presenting at the Credit Suisse TMT Conference in Scottsdale, Arizona couple of weeks from now, Wednesday, November 30. So we look forward to speaking with you there or again very soon. Thanks very much.

Operator

Ladies and gentlemen, thank you for participating in today’s conference. This does conclude the program. And you may all disconnect. Everyone have a great day.

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