Good day, ladies and gentlemen, and welcome to the Marvell Technology Group Fourth Quarter and Fiscal Year 2016 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to introduce your host for today's conference, Mr. John Ahn, Head of Investor Relations. Mr. Ahn, you may begin.

Thank you, Andrea, and good afternoon, everyone. Welcome to Marvell Technology Group's Fourth Fiscal Quarter and Fiscal Year 2016 Earnings Call. With me on the call today are Rick Hill, Marvell's Chairman; Matt Murphy, Marvell's President and CEO; and Dave Eichler, Marvell's Interim CFO. We will all be available during the Q&A portion of the call today. If you have not obtained a copy of our 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 fiscal 2016 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 August 19. Please note that since we are still in our quiet period and will continue to be so until we are fully up-to-date on our financial filings, our commentary today regarding Marvell's business trends and finances will be largely limited to past periods, specifically to fiscal Q2, Q3 and Q4 and full year fiscal 2016. We will not be providing any specific financial guidance for future periods on today's call. Please keep this in mind when posing questions during the Q&A portion of the call. We thank you in advanced for your understanding. Please note that we anticipate releasing the results of our first quarter for fiscal 2017 results during the week of July 25, and we'll hold a conference call to discuss those results. We will announce the exact timing of the Q1 release and call via a press release several days before the event. Please be reminded that today's discussion may contain forward-looking statements as defined in the Private Securities Litigation Reform Act. These statements are based on currently available information as of the date of such…

Thank you, John, and good afternoon. I would like to thank everyone in our investor and analyst community for your patience over the past 9 months as we have worked through a number of issues, including the completion of the independent Audit Committee investigation, the hiring of Deloitte & Touche as our independent public accounting firm and the completion of the audit of fiscal year 2016. We anticipate filing our annual report Form 10-K, as well as our second and third quarter 10-Qs within the next week, followed shortly thereafter by our 10-Q for Q1 fiscal '17. We will then be current with our required SEC filings and compliant with listing requirements of NASDAQ. Now let me spend a few minutes highlighting our financial results for fiscal '16 and the fourth quarter before turning the call over to Rick Hill, our Chairman. In fiscal '16, we reported total net revenues of $2.7 billion, a decline of 26% from fiscal 2015 revenues of $3.7 billion. On a GAAP basis, our gross margin in fiscal 2016 was 45.2% compared to 50.3% in '15, while our operating expenses were $2 billion compared to $1.4 billion in '15. Please note that operating expenses in fiscal 2016 included $655 million related to the CMU settlement, and I want to point out that the total CMU settlement amount of $715 million contains multiple elements which we are required to allocate under the accounting rules with $655 million allocated to operating expenses as the settlement and covenant not to sue component. $79 million was allocated to cost of goods sold as a fair value of the license related to prior periods, leaving $16 million to the amortized in future periods. R&D spending in fiscal 2016 was $1.1 billion or 40% of net revenues compared to $1.2 billion…

Thank you, Dave, and good afternoon, ladies and gentlemen. This is Rick Hill. I'd like to thank all of you for joining the call today. And I know it's been a very long time since the company has had an opportunity to communicate with you. We have decided to break this up into separate calls for finishing fiscal year '16 and then the first quarter of fiscal year '17, which we will hold on the 27th, which is a week from now -- a week and a day from now, just so you're aware. Today, we're going to focus on fiscal year 2016 and the 3 quarters where we have been in the dark. Now before I start, I want to make a few opening comments to refresh everyone's memory on how we have gotten to where we are today. In August of 2015, before we announced Q2 of fiscal year 2016, we started an investigation of pull-ins. The board and the Audit Committee launched an investigation to determine the facts of the situation. As a result of the investigation, the Audit Committee and their legal representation determined that there were no fraudulent activities that they could find in the organization nor were there any material misstatements within the fiscal year 2016 which would have needed to be restated. So the financials for 2016, there were no material changes to any of those numbers. And so therefore, no restatement was necessary. And we filed an 8-K to this effect, I think, on March 1 of this year-- the findings of the Audit Committee. All right. A team of people that included the board, outside -- our outside counsel of Gibson and Dunn as well as Sheppard Mullin's, KPMG, E&Y and several other auditing firms were all pouring over, working tirelessly…

Great. Thank you, Rick, and good afternoon, everyone, and thank you for joining our call. It's truly a pleasure to meet all of our investors and analysts today, and I look forward to speaking with many of you personally over the coming months. Today, I'd like to talk a little bit about my background, why I joined Marvell, some initial thoughts on the company and what I plan to work on in the near term as I formulate a strategy to take Marvell to the next level. In terms of my experience, I've spent the last 22 years at Maxim Integrated. And in that capacity, I took on a number of different roles and responsibilities. Most recently, I was running all of the business units, sales and marketing, product development, field applications and central engineering. Prior to that, I led the Communications and Automotive Solutions Group, and I also turned my career at Maxim, spent 5 years as the Head of Worldwide Sales and Marketing. I'm thrilled to have this unique opportunity to join Marvell during, in my opinion, a very exciting time for the company. Marvell has always been well respected in the semiconductor industry as a leader in engineering and innovation. It's really an iconic, global brand filled with talented people and cutting-edge technology. I feel that very few semiconductor companies today offer true systems and platform solutions that encompass silicon, software, firmware and support. And Marvell is one of those few companies. I give a lot of credit to the founders of the company, Sehat and Weili, for having the vision to create and grow this special company into what it is today. I have tremendous respect for them, and I'd like to thank them for all of their contributions. Now I realize that Marvell has had…

Okay. Thank you, Matt. We will now open the call up to your questions. As I indicated initially in my opening remarks, we will not be providing any guidance into future periods on this call. So please keep that in mind when you're posing your question. So with that, Andrea, we'll take the first question, please.

[Operator Instructions] Our first question comes from the line of Craig Ellis with B. Riley.

The first question I had was following up on a comment that you made, Rick. I think you said that you wanted the business to have a margin structure that was at-peers. Can you be a bit more specific on what you would expect there, even if broadly speaking from a gross margin and operating margin standpoint?

Well, I don't want to put Matt into a box at this particular point in time, so I've been hesitant to give you a range of numbers. But needless to say, there has to be always a minimum of a 5 handle and then ideally a 6 handle on the number from a gross margin standpoint.

And the follow-up is for Matt. Matt, I know you've been there just 7 days, and maybe it will require some input from Rick on this, too. But as you look at the product portfolio and as you look at the operating parameters of the business, what do you think the greatest opportunities are for growing the revenue profile of the company and what are the greatest opportunities for improving its margin structure?

Sure. I'll take that, Craig. Thanks. Again, this is -- as you mentioned, this is, what, 7 days of data, but I've been digging in quite a bit. So here's what I'd say. I think there are many businesses in Marvell where they have a strong -- where we have a strong leadership position and a strong base of profitability. And actually in some of those businesses, even where have a strong position, we have the ability to grow those. I think there is also a lot of other businesses in the company that potentially are smaller in scale. Maybe they're not the largest player. And so really, portfolio management and the decisions around where we're going to invest and not going to invest is going to be the biggest portion of the time I spend over the coming weeks as we develop the new strategy.

And Craig, I want to add something on this. If you look at Marvell, one of the things I've been most impressed with over the last 10 weeks is the quality of the design capability that we have within the company. In particular, when you look at the storage market, we have a core competency in storage, whereby there's a huge opportunity focusing on growing segments within the storage business that we need to take better advantage of, particularly in the enterprise and the cloud space. And we have the knowledge, skills and ability to do that. Also, we've lived with the luxury of being more efficient in our designs. And as a consequence, that may be slipped a little bit on really focusing at driving our supply chain costs down, and so we see a huge area in storage with an opportunity to do that. In the area of networking, it's another area where we have a strong core competency. And frankly, we missed -- we took our eye off the ball as we tried to really focus on the Internet of Things which is often difficult to get your arms around, and we sort of got away from our knitting. And again, we have this core competency and an ability to do a lot of data manipulation and data crunching, which are essential in this arena. And by refocusing again on the cloud and the enterprise infrastructure, we believe and we've already begun to see our ability to win incremental sockets that lead to long-term growth in this business. And so again, if you look at what's going to limit the world going forward, it's the pipe and it's the area where Marvell has the greatest expertise. And finally, from a growth standpoint, clearly, virtual reality and augmented reality are 2 new emerging opportunities where again Marvell's core competency will come into play. And I think you'll see during the Christmas season this year strong growth in this area, and Marvell is going to be part of it and a big part of it. I hope that helps.

Our next question comes from the line of Tim Arcuri with Cowen and Company.

First of all, Rick, let me say that having known you for many years, the company is in very good hands. There's not a better person that could be leading the ship, so that's great, first of all. And I guess, I had a question for both you, Rick, and also, Matt. The first step seems to be the costs. I mean, OpEx is more than 40% of revenue in fiscal 2016. Semi's average is more like 20%. So it seems like you could pretty easily take out, I don't know, $250 million to $300 million out of OpEx and that would still leave you higher than most of your peers. So can you just talk generally about OpEx and sort of how you think about what you could cut and what you can't?

Well, we're going to talk more about that after Matt's been on the ground a little while. But I can tell you one thing. Matt was mentored by a friend of mine who was probably the toughest guy in cost on the planet, and that was Jack Gifford over at Maxim. I have no doubt in my mind that nothing on the income statement has escaped Matt's eye in the last 7 days. So I'll toss it over to him as a softball, but go for it.

Thanks for setting it out for me there, Rick. And I was fortunate to have worked for Jack Gifford for many years. But yes, I think it -- we have to dig in, and clearly, it's well understood by me and the company where the peer group sits and where large semiconductor companies of this size run from an OpEx point of view. I think my focus is really starting with the strategy and which product areas we want to focus on. And then from the strategy, obviously, that will derive what kind of spending we need to support those businesses and win and be wildly successful and then also would like to pick the businesses that we don't want to participate in. And I think that will really be the framework which shapes our operating expenses going forward.

Got it. And I guess just a quick follow-up. It's more of a logistical question. But once you get current on the filings, which it sounds like it's going to be next week or maybe shortly thereafter once you get the filings out. Would you be able to theoretically begin to buy back your stock at that point?

Well, first of all, Tim, just so you know, we'll report Q1 next Wednesday. I believe that's the 27th, right? And then it takes us a little while to get all the paperwork filed. So it'll be whenever we get the Q filed. So that's what we have to do in Q1, but it's just forthcoming, hopefully. And relative to capital allocation, I think that's something we need to take a hard look at and we don't want to ad lib it on the call. But it's a very, very, good question and it's something that we've certainly started to look at. But job 1 is going to be the -- get the cost structure in line as well as making sure we've got a long-term growth strategy in a business that really is attacking markets where there is clearly growth. And there aren't a lot of businesses you can say that about. There's many, many commodity businesses, but Marvell is more than a commodity semiconductor company. It is a company that is steeped in system on a chip design capability, and it's something essentially needed for where the industry is going with the Internet of Things that's going to be attached to it. So make no mistake, we'll get on to capital allocation, but it isn't going to be in the next month or 2 months, but it'd probably be within -- before the end of the year. Hopefully, that's helpful, Tim.

Our next question comes from the line of Christian Schwab with Craig-Hallum.

Can you give us an update at the end of fiscal year '16, where your market share was in disk drive controllers in your viewpoint as well as your market share in solid-state drive controllers non-captive?

Well, unfortunately, I don't have that information right in front of us, but I can give you a generalization. From the standpoint of our decline in the storage business, I have looked at it quite extensively, is a combination of things that occurred, all right? In the solid-state drive arena, okay, there was one major customer that we lost and there were some competitive losses that we had. But overall, that business is continuing to grow very positively even during the year after we lost the one major customer. So that's on a very bright note. The HDD business declined by 28% overall, which was worse than the industry, okay? And the reason behind that was our focus largely on the mobile business or the PC business, okay, which the industry came down. Also, we're heavily weighted where we're very, very strong at Toshiba and they declined more-- declining 24.4%, which was greater than the industry at 16%. And aside from that, we were weak on a mix between the enterprise systems and the PCs. So the enterprise HDD was actually flat, while the PCs were down 19% and we were more biased to the PC business. So there was some loss of market share. We have refocused that. We've also broadened our product offering and are offering system solutions to the equation now, and we believe that we can basically outperform the market going forward. Hopefully, that helps, Craig (sic) [ Christian ].

Yes, that's great. And my second question is what amount of the discontinued mobile business as far as either a percentage or a revenue amount was in Q4?

Do you know that, Dave?

In Q4, no. I know the difference between fiscal '15 and fiscal '16.

That's it.

So in fiscal '15, our mobile handset business was $505 million. In '16, that dropped $281 million, and we still have a residual amount in fiscal '17, very small.

Okay, that's helpful. And then a follow-up if I may on that question. When you decided to exit the mobile business in September of '15, you talked about reducing annual expense, which did include stock-based comp at $170 million to $220 million. At the end of fiscal year '16, is that complete?

No. You mean, as far as the restructuring?

Yes. Are we done restructuring? Or how far -- how far -- on that -- of the targeted range of $170 million to $220 million, how much of that has been accomplished at the end of the fiscal year '16?

Okay. So initially, there was an estimate that was put out that we would -- the restructuring would be between $100 million and $130 million. And restructuring that we've recorded in fiscal '15 was about $60-some million dollars. There's a small piece that's prolapsed initially. We were looking to reduce headcount by 1,100 employees, and the initial cut as we've -- we had terminated 825, with the additional 100-some people we decided to stay on as it relates to the mobile product business. And we have some people that were basically on temporarily as we've winded down some of these products. So we didn't achieve what we had -- to answer your question, we didn't achieve what we had hoped to achieve. Some of these equipment we thought we would basically get rid of, we decided to repurpose to alternate uses in the company. So to answer your question, instead of reducing headcount by 1,100, we're going to wind up reducing headcount, as it relates to the mobile business. by I think about 950 employees.

And our next question comes from the line of Harlan Sur with JPMorgan.

Matt, congratulations on your new role. Questions for both Rick and Matt. I know you've -- you haven't been on board that long, but just given all the disruption over the past 9 months, what's been the feedback by your customers? Has there been any loss of design engagements? And has employee retention been an issue and the ability to keep the workforce focused on critical programs?

Harlan, I'm going to answer that because I've been around the employees. In fact, Weili made the joke that even though I've been here 8 weeks, it seems like 8 years. It must have been painful for everybody. But the bottom line is I cannot tell you how impressed I am with the talent that -- given the disruptions that we have, that we have within the company. I have no question in my mind that we've retained and attracted additional extremely good talent to the business. And it's a credit to the culture of the company of really recognizing knowledge, skills and ability and the ability to really get into complex design opportunities for people. Now relative to customers, when I first joined, one of my first actions were to visit customers to reassure them that, in fact, the company is going to continue to invest in the semiconductor business and we're not having a going-out-of-business sale. And I think we've been successful in convincing our customers that we are here for the long term. I even made a trip to Asia, which I hadn't done in over 4 years. And as much as I love Asia, I don't like the trips over there and -- but it was very, very fruitful. And we met -- I met with a key customer in China and a key customer in Japan, and I think they believe we're here for the long term as well. And I think Matt will have no problem at all demonstrating the ability to convince the customers that not only are we stable, but we're back in the growth mode. That's my feeling, Harlan.

All right. Good to hear. Data center and cloud networking segment, primarily switching in FIS, that's a double-digit growth segment going forward. I know, Rick, you talked about focusing on this area. When should we expect the Marvell team to start launching products targeting this segment?

I think you should see it imminently.

Our next question comes from the line of Quinn Bolton with Needham & Company.

May I have a question for both of you? Just to start off, a follow-up on the last question. As you look at the product focus, obviously, the core storage or HDD market is in decline which you talked about. Matt, as you refine the product strategy, focus on which market you want to target, do you think that takes a year or 2 before you can sort of turn the ship? Or has there been product development underway, especially cloud and the like to be able to get those new products and to start to see some revenue growth in a shorter period than, say, a year or 2?

Yes, sure. Great question, Quinn. And I'll give you my initial observations. So we spend a lot of time on the FY '16 look back, and you can see the implications of the performance of the company relative to some of the markets it served. And as you can see, a lot of the emphasis on things like the cloud and data center, both in storage as well as in the networking business that doesn't appear -- that was not apparent in FY '16. However, as I've dug in with the team so far, it's very clear that in the key markets that both Dave and Rick talked about, storage, networking and wireless, the teams have already underway pivoted their businesses to more B2B-oriented segments. You could talk about the shift away from PCs and storage to things like cloud computing and data center. Same in the networking business, Harlan indicated some segment growth, very high, and some of those opportunities. That's already underway, and the same in the wireless business. So I don't think we're starting from scratch at all. I think the instincts of the team were right and the pivots have been made in R&D if the question is execution in getting the products out. So I think there's a good head start, and I'm optimistic in these core areas where Marvell already has the leading position that there's been some really good work done.

Great. And I look forward obviously to some of those new product launches. Second question I have is with sort of the Audit Committee investigation seem to be the pull-ins on the storage side of the business. Obviously, as you pulled revenue into current periods, that could -- that means that, at some point, the future periods were affected. As you exited fiscal '16, do you sort of feel that the business was back to shipments matching consumption in that market? Or there's still -- as we come into the first quarter, still some overhang from previously pulling in shipments into fiscal '16?

There are no pull-ins going on within the company whatsoever. I believe that quarter one seasonally is always down, and we don't expect it to be any different. And relative to going forward, we're optimistic that things will continue to improve.

But you don't feel that there's an -- there's inventory of your controllers at the customer level that still needs to be burned through as a result of that pull-in activity, I guess, that was sort of what I was driving at.

No. No, we do not. Go ahead, Dave.

I was going to say we essentially stopped the pull-in practice in the third fiscal quarter of '16 and we've officially ended it in the first quarter of fiscal '17. We're no longer doing that. So there may have been a little bit of a catch-up in the third fiscal quarter, but certainly by now the inventory has been bled.

And our next question comes from the line of Ian Ing with MKM Partners.

My first question is on gross margins here for the fiscal fourth quarter, rebounded nicely, sequentially on the mobile exit. But still gross margin is about 30 basis points higher than the first fiscal quarter when you had a full mobile business. So I'm just trying to understand why it's not a little bit higher. I mean, is that residual smartphone business still in that mix or some pricing pressure?

I think it's a good question to ask next Wednesday when we talk. So let me defer that for a week, okay? You got a follow-up?

Yes, sure. I mean, you got some interesting comments about doing some R&D pivots already to the B&B applications, so should we think there's going to be some reset in terms of the new product pipeline? In the past calls, it was talked about things like Final-Level Cache and modular chips and search engines and things like that. Should those -- we consider those that are going to get reassessed?

Well, I think from the standpoint of those particular FLC and also MoChi, which I think is what you're articulating, we see those as key building blocks for the challenges that face people who want to use integrated circuit technology -- complex integrated circuit technology going forward. As everyone knows in this industry, the cost of a design is escalating exponentially. And Marvell has the vision that in order to continue to optimize the use of integrated circuits over a large -- larger volume of people, okay, we've got to be able to not have to do a custom design for every single application. And as a result, MoChi is a very interesting design alternative in order to address a broader set of the market who needs complex IC design to solve their challenges. And so they'll be a vital part of our portfolio, but they and of themselves are not products that will be introduced to the marketplace, at least not over the next couple of quarters. Matt, you might want comment.

Yes. And I'd just add to that, Ian, I think the -- -- what I'd say is within the, again, limited discussions I've had already with the various teams on the road maps, both FLC and MoChi have a lot of enthusiasm around them in the company and they are both part -- depending of the product line and the technology, they are part of the Marvell product road map.

This is John. You mentioned the search engine, and I think you're talking about the TCAM that we had talked about for a brief period. That pertains to our networking business, and we have really moved to refocus the networking business on our core technologies. And I think we've talked about this before. Core technologies are Ethernet switches and FIS and are embedded networking processors, okay? So the search engine that you're talking about is no longer a focus for the company. In the past, we've also talked about switch fabric products. That is no longer a focus as well. So those 3 things that I just mentioned, Ethernet switches and FIS and embedded networking processors, is what we're going to be promoting a lot more.

That's helpful. Sounds like the founders are still busy with the product development.

I don't know what that means, but thanks.

And our next question comes from the line of Joe Moore with Morgan Stanley.

I wanted to ask, you guys have, at one point, been facing an inquiry from the SEC and the U.S. Attorney's office. Is there any update on that? And can we safely conclude that that's behind us? Or is there still uncertainty around that?

Yes, Joe, that's a voice from the past. I haven't talked to you in years. The inquiry continues to go on. We're hopeful that the extensive communications with them, along with the thorough investigation we've done, we hope we can end that at some time in the future. But at this time, we have no update on it whatsoever.

Okay. And then I think you had mentioned gross margins could have a six handle. I thought that was a curious comment. The -- and I know you -- I don't want to try to pin you down on any specifics on that. But when you actually think about that, is that -- with the current product portfolio, does that require you to exit businesses like that? I was a little surprised that, that number seems pretty healthy.

Well, there's 2 ways to go there, right? One way is to improve your cost structure, okay, which is really optimize your supply chain management and make sure you're not overpaying in areas where you may have been in the past. The second thing is I've always looked at gross margin in a systems business as a function of the quality of engineering because it allows us to value price. And one of my observations about this company is when you look at the heart of IC design, it's basically your ability to efficiently use silicon. And I have been extremely impressed on the design capabilities of the people at Marvell and their efficient use of silicon. And so that's why I firmly believe that the company can attain margins others can't, and it remains to be seen. And as I said, I don't want to box Matt in, but I know how good he is. And I know he knows how to get at the cost line. I also know he knows how to identify markets where we can add value. And so I'm optimistic and I wouldn't throw that number out the door.

Okay. I think at this time, we'll probably have time for two more questions. Two short questions, please.

And our next question comes from the line of Ross Seymore with Deutsche Bank.

I'll just make one question to keep it timely. You talked about the OpEx and how, I think, everybody realizes there is opportunity to unlock value by trimming fat. In that trimming process, do you think the revenues have to be trimmed as well? That's, I guess, a third way to get the gross margin up for your last question, Rick. So did you have to get smaller to get stronger? Or -- and before you start growing? Or is this a base off of which you think you can start to grow?

Well, from my standpoint, I don't think we need to get much smaller. We always have -- we have the residual decline that Dave talked about from the standpoint of the handset business that we have to get through and we have this overwhelming downward trend in the storage business that's been going on for a while. We've got to make sure we can get into the parts of the segment of the business that have growth opportunity, particularly in enterprise and cloud. But I think those are the headwinds we have to a growth model. But I believe quarter-over-quarter, we ought to start seeing growth beyond the first quarter, if that's helpful.

And our last question comes from the line of John Pitzer with Credit Suisse.

I'll follow Ross' lead and just have one question. I guess, guys, can you help me understand a little bit given that the SSD controller market's going to be kind of a focused area in storage, how big is that market relative to your storage business? How did it fare in the fiscal year? And you said in your prepared comments, it was flat to down a little bit sequentially in the fiscal fourth quarter. I'm just trying to kind of circle the square with some tipping point within SSDs right now and some other controller companies showing pretty good growth. What happened in your fiscal fourth quarter? And I guess why are you confident that you've got sort of the secret sauce you need there to be successful?

Well, I think the major reason is the refocus on how we're attacking the SSD market and the HDD market from a standpoint of not only providing hardware, but also software. And again, when you're dominant in a business like the PC business that suddenly takes a sort of a precipitous decline, it takes you a couple of quarters to refocus. But we believe that we do have the design capability. We also have an opportunity to enhance our position due to preamps that we'll take advantage of. And so we believe those are the biggest things that we can change in the short term. I think the majority of the heavy growth in the storage has come on the SSD side and has come from smaller companies with a healthy growth, and we think we'll get a larger share of that going forward.

Rick, that's helpful. Can you give us a sense of how big the SSD business is inside of storage today?

We don't disclose that, so I can't pull that out right now. I don't want to start announcing that every quarter, especially since Matt's only been here 7 days. But it's -- John, you haven't changed. That would have been the same question you would have asked me in the systems business.

And this concludes our Q&A session for today. I would now like to turn the call back over to John Ahn for any closing remarks.

Okay, great. I'd like to thank everybody for their time today and your continued interest in Marvell. We look forward to speaking with you again next week. Thank you and goodbye.

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