Marvell Technology, Inc. (MRVL) Q2 2017 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Marvell Technology Group Ltd. Second Quarter 2017 Earnings Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to turn the conference over to John Ahn, Head of Investor Relations. You may begin.

Thank you, Nicole, and good morning, everybody. Welcome to Marvell Technology Group's second quarter of fiscal 2017 earnings call. With me on the call today are Rick Hill, Marvell's Chairman; 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 second 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 October 6. 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 statements and 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 report on Form 10-Q and Form 10-K 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 as -- 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 settlement 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 reconciliations of the non-GAAP financial measures to the most directly comparable GAAP measures in our second 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. With that, I would now like to turn the call over to Jean Hu, our Chief Financial Officer.

Thank you, John, and good morning, everyone. I'm extremely honored and excited to be CFO for Marvell. Now let me review our financial results for the second quarter of fiscal 2017. I will then turn the call over to Rick Hill, our Chairman, who will provide some additional color on our operating results for Q2. Our revenue in the second quarter was $626 million, which represents 16% sequential increase from the first quarter revenue of $541 million and a 12% decline from $710 million in the same quarter last year. Our storage revenue increased 13% sequentially, reflecting higher HDD and SSD demand. Networking revenue in the second quarter of fiscal 2017 grew 12% sequentially due to continued strength in enterprise networking demand. Mobile and wireless revenue grew 21% sequentially, mainly driven by seasonal ramps of high-end consumer products. Mobile platform revenue in the second quarter of fiscal 2017 were $9 million, down from $22 million in the first quarter, reflecting the anticipated declines due to the restructuring actions announced on September 24, 2015. We entered the final phases of restructuring our mobile platform business and anticipate the ramp-down in revenue to continue through fiscal 2017. Our GAAP gross margin for the second quarter was 54.1% versus 35% in the second quarter of last year. As a reminder, our Q2 fiscal 2016 gross margin of 35% was negatively impacted by $14 million inventory write-down related to restructuring of the mobile platform business, the higher mix of lower-margin mobile platform revenue as well as a $79 million charge related to the back royalties we paid in connection with the CMU settlement. Our Q2 non-GAAP gross margin was 54.6%, about the high end of our guidance range provided in our Q1 fiscal 2017 earnings release. Our GAAP operating expenses for the second quarter were $299 million, down 19% compared with the $367 million in the second quarter of fiscal 2016, largely due to the restructuring of mobile platform business that has now been completed. Our Q2 non-GAAP operating expenses were $262 million. Our GAAP net income was $51 million for the second quarter, and the non-GAAP net income was $92 million. Our second quarter GAAP EPS was $0.10 per diluted share, and our non-GAAP EPS was $0.18 per diluted share compared to $0.02 per diluted share for the first quarter of fiscal 2017. Please note that our Q1 fiscal 2017 non-GAAP EPS was adjusted from $0.01 per diluted share, as previously included in our Q1 fiscal 2017 earnings release, to $0.02 per diluted share as a result of an error made in calculating the non-GAAP tax provision month. This error had no impact on Marvell's reported GAAP results for the first quarter of fiscal 2017. Turning now to our balance sheet. Our cash and marketable securities were $1.6 billion or over $3 per share at the end of the second quarter. We continue to have a very strong balance sheet and have no debt. Net cash provided from operations in the second quarter was $59 million. With that, I'd like to turn the call over to our Chairman, Rick Hill, to provide additional color on Marvell's Q2 operating results. Rick?

Thanks, Jean. Hello, everyone, and thank you for joining our call today. We returned to seasonal strength, with revenue growing 16% sequentially. This was driven by strong demand from our customers across storage, networking, wireless end markets. Partially, it was negatively offset by expected declines in mobile handset platform revenue. In the storage market, revenue increased sequentially in the second quarter of fiscal 2017 due to a broad-based strength in HDD and SSD. Our HDD SoC sales grew due to a combination of demand improvement and also inventory replenishment. Sales of SSD controllers also grew, mainly due to strong demand for SATA and PCIe controllers across both the OEM and retail end markets. The company continues to invest in comprehensive solutions that build upon our leading position in the storage market, and we expect to continue to lead in this area. In the networking market, sales of our networking solutions, again, grew sequentially in the second quarter of fiscal 2017 compared to the first quarter of fiscal 2016 due to continued strength in enterprise campus networking demand. In fiscal 2016, we refocused our engineering and marketing efforts on our core networking markets and repositioned our ethernet switches, PHYs and embedded network processors. These efforts address growth opportunities in enterprise and SMB transition to 2.5-gig and 10-gig ethernet and data center high-throughput networking, utilizing 25-gig and 100-gig ethernet. We see continued strength in enterprise and SMB networking demand with 1 gig transitioning to 2.5 gig and 10 gig and the migration of embedded processors to performance 64-bit ARM. We also see continued strength in carrier migration towards higher bandwidth, primarily in the wireless infrastructure. The strategic efforts in our core networking products have started to manifest in a number of new designs that will enable growth of our networking revenues. Sales of ethernet switches and PHYs continue to grow in enterprise campus and SMB application. And these products are also seeing increased design traction at cloud and data center accounts. In the wireless connectivity market, our wireless connectivity revenues grew in the second quarter of fiscal 2017 due to seasonal strength in high-end consumer products, partially offset by anticipated decline in wireless connectivity solutions shipping into the mobile handset customers. We continue to see greater demand and growth opportunities in access points, high-end consumer and set-top box and streaming devices with our new generation of WiFi solutions. We believe the increased bandwidth of our solutions with advanced signal processing and location capabilities will enable a significant upgrade cycle in enterprise, service provider and connected home appliances. In summary, I am pleased with the progress we've made so far, and I'm very confident that Marvell is in good hands with Matt Murphy and his management team. I'll continue in my role as Chairman, and this will be my last conference call. I'm back to downward-facing dog. With that, I'd like to turn the call over to Matt to give his 2-month report as well as provide our Q3 guidance.

Thank you, Rick. Good morning, everyone, and thank you all for joining our call today. It's been an intense 2 months, and while we still have a lot of work to do, we've already made significant progress. My team and I have been reviewing Marvell's product strategies, meeting with key customers and gaining deeper insights into our business. Recently, we began a comprehensive review of our R&D priorities. This analysis confirmed that Marvell continues to have strong core competencies, broad IP portfolio and deep engineering expertise in developing technologies that enable high-speed switching and transmission of data in the storage and networking markets. While there are many R&D activities being pursued inside Marvell, there has not been a disciplined approach to assess return on all R&D activities. It's clear from discussions with the team that focus and discipline are needed to achieve our goals. Our priority going forward will be to focus our R&D efforts on our core competencies in a way that delivers consistent profitable growth and increasing shareholder value. In recent months, there has been an increased priority and focus placed on operational excellence as well, starting with the appointment of Andy Micallef in June. Finally, as we make progress on our R&D focus areas and operational model going forward, there is an opportunity to align our sales and marketing teams accordingly, along with the various G&A support functions, to establish operating leverage to deliver increased profitability. Now I'd like to move on to guidance for the third fiscal quarter. We expect our third quarter net revenue to be flat to down 4% from the second quarter. We expect our storage revenue to grow sequentially, driven by improved industry demand in HDD, augmented by continued SSD demand strength. Networking is expected to be down sequentially following 3 straight quarters of growth due to lumpy carrier spending patterns in the third quarter. However, we do expect to see networking business grow year-over-year. I believe the product and business development efforts in networking that Rick spoke about earlier sets us up for sustained long-term growth going forward. Wireless connectivity is expected to decline sequentially due to softer build of high-end consumer products, following a sharp ramp in production in the second quarter. Our GAAP and non-GAAP gross margins are expected to be in the range of 52% to 54%. While we expect to see continued improvement in costs based on product mix, we are guiding conservatively at this time. Our GAAP and non-GAAP operating expenses are expected to be approximately $290 million and $260 million, respectively. GAAP and non-GAAP net other income is expected to be approximately $3 million positive, and GAAP and non-GAAP tax provision is expected to be approximately $11 million negative. GAAP and non-GAAP diluted share counts are expected to be approximately 518 million and 528 million shares, respectively. This will result in GAAP income per diluted share in the range of $0.03 to $0.08 and non-GAAP income per diluted share in the range of $0.08 to $0.13. With that, I'd like to turn the call back over to John to open it up for the Q&A portion.

Thank you, Matt. We will now open the call up to your questions. Please note that we are not yet in a position to provide long-term guidance or strategies. Operator, we'll take the first question, please.

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

First, just clarifying a couple of things from the results. The significant gross margin upside, were there any special items that benefited gross margin and operating expense much better than I had expected? And what were the causes of the positive variance there?

Yes, this is Jean. So on the gross margin side, as both Rick and Matt mentioned, we have been really focusing on improving cost of sales. Certainly, we start to see the results of our efforts. So it's, from the cost improvement, increasing efficiency and the leveraging. And on the operating expense side, we certainty benefited from increased relocation hours during the summertime, but also it's the case that we are focusing our operating expense management. So that's what really helped us.

And then, Matt, the follow-up question, you mentioned that there is room for efficiency gains in R&D. Can you quantify the degree to which you see further gains? And how soon could the company realize those gains?

Sure, Craig. Yes, great question. So at this point, I'm not in a position to quantify the specific amount, but I can tell you that what we are focused on is really the process, and the process is to take a very thorough, disciplined, data-driven approach to looking at the entire R&D portfolio and investment profile of Marvell. There's an incredibly diverse set of technologies being developed in the company, addressing a wide range of markets. The challenge has been focus, and I think the company has been focused on a number of areas across, again, a wide range of applications, of which we've probably left ourselves not invested in the profile that we want to really drive future growth. So that's something that's top of mind for me and is a priority. I've also got to continue to meet the customer base and spend time with the team to really develop our plans here. So I'm not in a position to quantify, as I said, but I do see that there's opportunity to focus on some of these areas where Marvell has a history and a core competency of success.

So is that something we could expect to get from you in the late November time frame, Matt?

Yes, I don't think we're putting out a date yet. But clearly, as we have these calls and make progress, we'll keep you updated. But we are moving with a sense of urgency internally to get us focused. So that's really job 1 is get the investments identified, get the teams organized in a way to make those successful. And so the faster we do that, the better. So looking forward to continuing to update you on that.

And our next question comes from the line of Timothy Arcuri of Cowen and Company.

Rick, you've had a lot of good ones over the years downward dog. I'm going to have to add up to the list. So I guess the first question for me really...

I'll be there.

Thanks, sure -- is really, Matt, I know that you don't want to quantify development or the possible savings in terms of development, but you're still spending 40% of sales on R&D during the first 6 months of fiscal 2017, and your peers are about half that, in fact, less than half that, the ones that have size. So I guess my question is, is there any fundamental reason why the company would have to operate with development higher than its peers relative to revenue?

Yes. So I think the answer would be, over time, there's no reason why the company's model cannot evolve to where the peers are. I mean, I'm very aware of the benchmarks and the level of spending that Marvell has today relative to its size. It's -- it is too high. And as I mentioned, that comes from really having a lot of debt spread across a lot of different areas. So we fully intend to refocus the company down and do fewer things and do them very well. And in the process of doing that, it will really make an impact on the expenses that we have relative to the size of the company.

Okay. And I guess, maybe also just a question on gross margin. The company was doing almost 60% gross margin back in fiscal 2011. And I know things have changed a lot since then. Mobile and wireless was definitely helping back then, now it's been hurting. But of course, you've sort of gotten out of the mobile handset business. So when you look at the company sort of on a pro forma basis, is there also any reason why -- or is there any change in sort of the markets you are serving that would lead you to conclude that, hey, maybe you can't get back to 59%, 60%? I guess I'm asking, is there any reason why the company can't be a 59%, 60% gross margin company the way it was back in fiscal 2011?

Yes. I think the perspective I'd give is that I agree with you, the comparisons within Marvell today in fiscal '17 to where they were in fiscal '11, it really is a different company. It's a different mix of businesses. It's a different customer base. That being said, for high-performance companies with the kind of engineering talent and innovation that Marvell has, there is no reason that the profitability and the gross margins of the company shouldn't improve with better focus, especially on segments of the market where we can really get cash of the value for what we bring to the table. Today, there's quite a range, if you look at our various businesses, of gross margins that we can command. And that has a lot to do with how differentiated the underlying technology is, how standards-driven some of the technologies are, are we in a leadership position or not. So really going through and trying to capture all of that. And it's clear that there are areas where we're strong that we can command gross margins well in excess of the company average today. So our goal going forward is to drive the portfolio improvement and drive the mix improvement as well as really bring a new level of operational excellence to the company, which has started with bringing in folks who have a lot of experience in managing that aspect of running a large semiconductor company. So we're really going to focus on both, and we're going to focus on driving gross margins higher in the future.

Our next question comes from the line of Harlan Sur of JPMorgan.

Typically, the wireless ramp into the game console customers occurs over 2 quarters, July quarter and October quarter, with the seasonal dropoff in the January quarter. Looks like the seasonal profile has changed a bit this year, so it looks like you're looking for a decline in October. How should we sort of think about the seasonal trend for the wireless business in the January quarter?

Sure. Thanks, Harlan, and nice to hear from you. This is Matt. So what I'd offer on that one is you're right, we did see a much stronger ramp than we normally would see from a holiday season perspective in Q2. That being said, given the fact that it is consumer oriented, we are guiding conservatively on that part of our business, and we're sort of watching it weekly to see how that develops. So while we did see a stronger Q2, which was great, meaning we've got revenue and backlog build, we're still watching it for Q3, and that will evolve as we progress through the quarter.

Okay. Got it. And then you've got 3 good quarters or you've driven good improvements in gross margins, both mix and efficiencies and savings on the COGS side. Can you help us understand, Matt, what is the team doing on the COGS savings side and your view on how much more you have left to extract from these initiatives?

Well, I'd say that on the COGS side, we're really in the early innings. We've really brought a different culture and tone and focus in the company around that. So I'd say we're early days from that point of view. I think there's a number of activities we can pursue. So again, not in a position to quantify a time line on that yet or what that's going to look like on a quarterly basis, but what I'd say is in reviewing the opportunities, and I'll let Jean comment as well, I think there's a number of things we can do in operations, working with our partners, working on our own efficiency opportunities to extract more value. But we're -- as I said, we're fairly early in that process.

Our next question comes from the line of Harsh Kumar of Stephens.

A couple of questions. First of all, Matt, I know you sense -- I know you said that you have no time line on the R&D cost cuts, but you did put [indiscernible] emergency. I'm curious in your assessment so far, if you can give us any color whatsoever on how you're thinking about this, whether that 30% goal is even achievable on the OpEx side.

Sure. Yes. I think I'll just give you a couple of comments more around our process and our way of thinking. The way we're thinking about this and the way we're looking at the portfolio is really to take a -- both an outside in view of our business, meaning where are we today in the markets that we participate? What is our relative position in those markets versus our competitors? What is the differentiation we bring to the table? What's the profitability of the business? All of that -- and then what are the prospects? And I think really from an engineering point of view, what are the core technologies or IP that we have that can really differentiate us? And so as we unpack the spending and the portfolio, that's really where you begin to see patterns of investments where we're making investments in areas that maybe we have a very low share today or no share, but we're betting on a huge growth, and then some areas we've already got a leadership position and maybe we need to invest more actually to even extend that. So those are the ways we're thinking about it. It's -- as Tim pointed out earlier, the spending today is significant. And so there's a lot to go through, and the company is quite complicated and diverse from its number of sites that support all these R&D efforts, number of product lines, number of technologies. And so the reason I'm not giving a time line is we're -- we really want to be careful and thoughtful as we go through our analysis and make sure that we get it right. And of course, when we're in a position to articulate more detail around that, we'll be out front and center with the investment community on that.

Fair enough. And for my follow-up, maybe a question for Rick as well as you, Matt. There's a lot of investor debate on this, but you put up this July quarter pretty good, really good growth actually. In your assessment, guys, have you guys figured out if Marvell is a growing business on an absolute basis, all 3 parts and pieces put together? Any color on that based on what you've seen so far?

I'll take that question. This is Rick Hill. So from my perspective, clearly, getting out of the handset business gets us back focused on core businesses where we can truly add value. And as I've commented before, Matt and I have spent a lot of time discussing. Relative to growth, you have to be in growing markets. And clearly, we have headwinds when we look at the HDD market, but we've taken some steps relative to our design technology, really addressing SSD to where we can soften that slope, all right, and then we can overcome the downward trends with our investments in the networking business at this juncture. But there are select opportunities in other areas such as automotive, but going into the automotive industry on a broad basis, I believe is a fool's errand. But clearly, areas where we have expertise -- we should be in the car, we are in the car, and we'll continue to grow in the car, but we won't take a frontal assault on that particular business because we -- one of the most important things in really getting Marvell from where it is today to where it needs to be is we've got to really get value out of this large engineering expenditure that we've been making. And as I've been telling the engineers for the last few months, our ability, our gross margin is a report card on the quality of our engineering design and to the extent we can continue to drive gross margin, which we're doing by driving the value we're selling in the product, but at the same time, going in and attacking each element of the cost. It starts on the design end by being able to design very efficiently and shrinking the dye, being smaller than everyone else. It also comes from us having a very aggressive approach with our suppliers to make sure we're driving down costs. And I know Matt has that in progress and is continuing to drive that. We've got wafer supply that we have to make sure we continue to have at competitive prices. And given our volumes at most favored nation type of prices, packaging is a big part of this game, and there is tremendous room for us to become much more efficient in the packaging end of this business, which, again, can enhance our gross margin performance. And by narrowing the focus, as Matt talked about, in R&D, which he is actively pursuing at this particular point in time, we can apply our best engineers at our best opportunities and, therefore, have more value to sell and be able to get higher prices for our components. And so it's that combination that will allow us into a growing market, and I do believe we've refocused in the growing markets, allow this company to grow and simultaneously continue to improve our cost structure. As we spoke in the last call, we've been burdened with high expenses, with legal and auditing costs. Those are going to roll off and have begun to roll off and will continue to do so over the next 2 quarters. But active cost savings, we haven't really gotten to what I would call the optimum point yet, but I know Matt will in the next 1 to 2 quarters. So that's my assessment. Hopefully, that's helpful.

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

First, a question for Matt then one for Jean. Matt, you talked about the refocusing on the networking business to 2.5 gig in the campus enterprise and 25 and 100 gig in the data center. As you look at those products and the timing of when they roll out, is there a risk that sort of the mainstream 1 gig in the enterprise and 10 gig in data center declines before you see the real ramp at the 2.5 gig and 25 and 100 gig? How do you see that transition playing out?

Yes. Just to give my perspective on that, I think the -- again in my reviews of the -- these different businesses, I really continue to look at the 2.5-gig transition, the 10-gig transition and then the 25 to 100 as incremental opportunities. The sort of incumbent business that we have that was established some time ago has actually had some pretty good staying power. And so I think that those design wins have held up quite well over the years. So I don't view a rapid degradation of that core business sort of needing to be offset. I see that as those designs are in place, they're sort of running along. Maybe they're declining sort of slightly. But the new design wins that we're getting and the new traction should more than offset any decline of legacy business there.

Great. And then for Jean, I know you mentioned sort of you're guiding conservatively for the time being on gross margin, but if I just look at the revenue guide for the third quarter, it looks like you should see a positive mix shift with storage increasing and mobile and wireless declining. You obviously have the cost reduction program underway. Is there anything that would be an offset to those positive factors for gross margin in the October quarter? Or is it really just reflecting your conservatism?

Yes. I think there -- you're absolutely right, there are 2 things that primarily drive our gross margin, one is product mix, one is the cost improvement initiative. On the product mix side, at this point for the quarter, we certainly have a directional -- how product will ramp up and ramp down. But overall, we are quite confident about the mix. And on the cost improvement side, we are going to continue to drive the improvement of our COGS. So overall, we're -- as Matt said earlier, we are conservative, just without knowing the rest of the quarter how it's going to progress. But we are quite confident. We are focusing on the gross margin improvement going forward.

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

Could you remind us of your view on share position at your top storage customers? I believe at one point, Western Digital exposure, fairly stable. I think at one point you were talking about some enterprise gains at Seagate perhaps at some point.

Sure. I'll take the question. Well, here's the -- I wouldn't comment specifically on individual customers and individual programs. What I'd say in overall, we continue to lead in the HDD market. We've been more exposed to the client side, which is really PCs and notebooks, which has been some of the challenge that we've had over the last year as the HDD market has declined. That portion of it, obviously, with PC sales declining, has dropped more. That being said, we really haven't seen any meaningful share shifts. We continue to be the market leader. We are focused on the enterprise and cloud applications in HDD. We have a number of engagements with customers on those, and product development has been shifted in that area. So we're very comfortable with our progress from that point of view. And going forward, our goal is to increase our share and increase our position and drive that sell into the enterprise and into the cloud to help mitigate some of the declines that we're going to see as a secular decline in the PC market. And this is kind of adding to what Rick said earlier about storage being our largest market, being one that's been challenged. Again, there are a number of things we can do within that market. One is to increase SSD, which we're doing, and another is to try to improve our mix within HDD. And so we continue to be well positioned in the top 3 accounts on all aspects of their business. And obviously, our goal would be to be -- increase our exposure to the cloud as much as possible.

And for the October quarter, you talked a bit about some conservative approach here. Could you talk about for October visibility or relatively how much you're booked for the October quarter versus historical? It sounds like from the consumer business, it's more of a wait-and-see approach in terms of where orders come in.

Our -- if we look at the linearity and the shipment and the booking pattern, it's actually quite consistent. So when we guide, we did look at everything we have so far. We are comfortable with our guidance range, and it's consistent with our previous quarters' seasonality and the last years' seasonality.

Our next question comes from the line of Joe Moore of Morgan Stanley.

You just gave us color on hard disk drives. Can you talk similarly about your solid-state disk drive portfolio, how do you feel about market share and what you think is the direction of your market share and also pricing going forward in that space?

Sure. Yes, this is Matt. So on the SSD side, we've been pretty pleased with our performance in that business, especially at -- over the last few quarters. There's a dynamic in that business where some of the customers are going to vertical integration, some of the customers are looking for suppliers, some of the customers are actually adjusting their thoughts in that area. That's a growing market. We're actually growing faster at this point than the market. So we've -- our penetration has been increasing again, and especially over the last few quarters, our progress on turning design wins into revenue has been happening. Won't really comment about the pricing environment per se, but I'd say that the technology we have is competitive and it's an enabler. So we're very comfortable with the pricing we have on that business. And again, it's been a nice way to offset some of the challenges we've seen in the HDD area. We continue to invest in that business pretty heavily, and we're believers that we can participate in the growth of SSDs as they take a higher share of the storage market.

Okay. That's very helpful. And then separately, the prior management team was pretty enthusiastic about the Final-Level Cache technology and opportunities in storage and other markets. Is that still something that's a -- the focus for you guys and -- or is that less of a focus going forward?

Sure. So yes, it's interesting. I think there were -- there's really 2 technologies that were very much pioneered by the prior management, and Sehat in particular, which was Final-Level Cache, or FLC; and also MoChi, which is our modular chip architecture. What I'd say on both of those is in reviewing the portfolio, those approaches, which is sort of unique ways to think about caching and also unique ways to think about modularizing your designs, are very much alive and well in various product developments that we have ongoing. So from an architecture point of view, those technologies are making their way in where appropriate and where they fit the product needs. So we do see applications for both of those. And we were treating them like internal IPs that are valuable, and we're going to instantiate them in products where it makes sense. So you should see utilization of those. And it's -- again, it's another way that you can look at the level of innovation that's in Marvell. I mean, these types of IPs are very unique to the company. And they've actually -- the concepts that were outlined, again, in caching and modular architecture, they've actually made their way into products in very different ways than I think we had even imagined at the beginning. And so these concepts, I think they're going to be very, very valuable to us as we think about driving our business going forward.

Our next question comes from the line of John Pitzer of Crédit Suisse.

Matt, I apologize, I'm still a little bit confused about the gross margin guidance for the October quarter. I was always under the impression that storage within your portfolio was a higher-margin business. And so with storage being up and everything else being down, I would assume that you would have more tailwinds on the gross margin line in October. Is that just not the case? And I guess with all the restructuring you've done, can you level set us on sort of byproduct gross margins relative to corporate average? What's above and what's below?

Sure. Sure, John. So maybe I'll address the second part first and then give you my views again. So while we don't break it out specifically, what we will say is that generally speaking, you're correct, storage is higher than the company average gross margin. Our mobile business and our wireless business is less than the company average, and then networking is kind of at or above that level. So you're right, depending on the mix that we end up with for Q3, we could see -- and that's why we stated on the guide that it was very conservative, we really should see that at the higher end of the range or even above the range depending on the mix that we achieve, especially if storage comes in stronger than we expect. So you're right on that. Again, we're -- our process here is really to make sure we get our arms around this business and that guide to you -- guided the investment community effectively. But you're right, if there's no other unusual events and our mix unfolds the way we think it could, then we should be at that high end of the range or even an opportunity to exceed it.

That's very helpful, Matt. And then as my follow-up, you're sort of well beyond just stabilizing the business. You've now seen good sequential growth, getting your arms around costs. As you mentioned in your prepared comments, you've got a lot of cash on the balance sheet. I don't think you bought back any stock in the quarter. Can you just talk conceptually about your views on buyback and whether or not you would use the cash to augment your organic activities with some tuck-in M&A?

Sure. Let me take it, and I can have Rick or Jean add the follow-on. So clearly, the opportunity around capital returns is a large one and it's an important one. And it's one that the management team and the board take very seriously. What we said in the last call is really kind of expect some communication around that and some strategies around that closer to the end of the calendar year. And the reason for that, as you can imagine, is we really want to step through this thing in a very structured way, which is really getting the portfolio nailed down first the areas of focus. That will then give us a view of what the organic and inorganic opportunities are around those markets that we want to invest in. And that'll help be an input at least in to how we think about capital returns. But it's something that we're very focused on. And again, as a management team and a board, we're committed to putting out a comprehensive program around that.

Yes, John. I mean, from my experience and my belief, clearly, buybacks are a very efficient method to return value to the shareholder. And going forward, that will be a part of the Marvell strategy. However, in the short term, there are holes that Matt's going to need to fill, and we definitely are open to utilizing our cash to have tuck-ins that enhance the value of the company overall, and so we're in the process of looking at those as well. But make no mistake about it, we're still in the early stages of getting a complete handle on Marvell 2.0. And Matt's laying out that strategy piece by piece. He's made great progress. The team is in place. They're working as a team. We've got things that we need to improve operationally. Clearly, me from the past, I never liked to see a mistake in financial numbers, and we had a couple of gotchas here just in the last couple of quarters that we've clearly got to fix those things. And so it forces us to be very conservative when we're trying to forecast the future until we get a full grip on every $0.01 that moves around within the company. But clearly, shareholder value, capital allocation is a big topic on the agenda of the Board of Directors. But it isn't as though we're going to let the cash burn a hole in the pocket or going to go out and have a bonfire with the cash. My philosophy is pretty clear, you've got to have more cash coming in than going out, and we hope to see that happen quarter after quarter. So hopefully, that just gives you a little bit of a perspective. But your observations are correct, just give us -- have a little bit of patience.

Our next question comes from the line of Ross Seymore of Deutsche Bank.

I guess my first one, for Matt. Conceptually, when you were at Maxim, you guys did a great job of focusing on what you were strong on, getting out of areas that were weak where you didn't think you could grow, you didn't have sufficient market share, et cetera, and doubling down on areas that were winners. As you try to apply that sort of rigor to Marvell, do you think you need to get smaller to get stronger, to have the margins go up, et cetera? Or do you think the revenue base is relatively stable from here and the improvements will be much, much more meaningful below the line?

Yes. Great, Ross. Yes, so you're right, there -- I obviously lived through the experience at my prior company. And I think the same concepts definitely apply to Marvell, which is, again, deciding where we're going to place our bets and deciding also on areas where we're not using our R&D productively to move away from those investments. So that's clearly underway. I'm a big believer in focus. And as a result of that, there may be businesses that we decide that are better off somewhere else, that may be fit in another company's portfolio better than ours. So I think I'm not overly concerned about -- I'm more focused on where can we get the best returns on our R&D dollars, and that's really the guiding principle that we have. If they don't meet the criteria that we establish and that don't meet the -- that don't ultimately result in us having an economic benefit from those investments over time, then we'll find a way to disposition those. And so as a management team, again, we're very focused on putting our dollars where it makes sense. And to the extent that we need to shrink moderately to grow, that's not something that is really going to be an issue for us. We have sufficient scale at our level to do those kind of things and then sort of redouble our efforts where we think we can move the needle.

That's great. And I guess my follow-up question will be for Jean and a little bit more housekeeping on 2 separate numbers. You said that the mobile business was $9 million in revenues in the July quarter. Any color about how that trends going forward? And then Rick mentioned that litigation costs had started to come down. I believe in the April quarter, you said it was $15 million. Could you give us an update what it was in July and how we should expect that going forward?

Yes. So our mobile platform revenue, it was $9 million for Q2. And then for Q3 and Q4, it will continue to ramp down. So you can probably model a few million dollars each quarter coming down for the next few quarters. And on the professional fees or fees related to litigation and even to the outages, for Q2, it's around the same amount, $15 million. So it's still very high right now. And we're driving it down, I think, going forward. Certainly, I can see for Q3 it will be much lower, and Q4 it will be even lower. But for Q2, we did have $15 million of fees associated with other actions and litigations and additional auditor work.

And our next question comes from the line of Christian Schwab of Craig-Hallum Capital.

Just following up once again on the time frame for potential rationalization of the cost structure. Rick mentioned earlier that he was kind of confident 1 to 2 quarters that Matt you get to have the cost structure in mind. I would assume that the data that you're looking through -- I mean, we didn't start this process 2 months ago. You guys were all brought in, in essence by an activist. And so that elephant has been in the room for quite some time, and their model for creating shareholder value, I think, is pretty well understood. So I would imagine that the team has been working diligently for some time on this product rationalization. Do you -- when you started looking at that type of material, Matt, did you have to start over? Did you feel like you had a good running start?

Yes. Clearly, a good running start. I mean, there were -- there was a lot of activity that had been ongoing, you're right. I think the way I'd describe it is a lot of activity, a lot of awareness, okay, in the company at the management level before I joined that this was a priority. So you're right on that. The ability, though, to really dive into the details and build a thorough, detailed bottoms-up view is no small task. So I'd say there was excellent work done that was tops down looking at where we could probably get to. But the devil is always in the details. And so when you actually have to go through now and build out profitability models for each of the businesses to understand where all the money is being spent, to look at the market share of each of these businesses that we're in and get all of the various teams around the globe organized in a room to get these vetted, it's no small process. So we're moving with urgency on that, and clearly, the company was sensitized. But my commitment to our team and also the investment community is that we're going to go through this in a thorough, rigorous, disciplined way such that we don't make a mistake and we actually come out with a really good outcome on how we organize this thing. So pressure is on from me directly to the team. I've got tremendous pressure on myself to make sure that we get this figured out quickly. So no question, it was not a stunning start, but there's still a lot of work that we need to go through.

Great. And then my quick follow-up, your 2 largest customers in storage, one of them has made a pivoting strategy of leaving low-capacity drives to other players in the space. That shift to allowing one of your other customers to probably where you're more -- where your market share is higher. Do you believe that, that has benefited in the near term and may continue to benefit where you are strong in PCs and notebooks for a while as they continue to seed share to somebody else where I believe your market share is materially greater?

Yes. No, that's an excellent observation, and I think it's quite accurate. We do have -- we are over-indexed to have higher share at the company that you mentioned. They've been doing well, and we benefited from it. And that's one reason why we've seen -- one of the reasons why we've seen our storage business recover and begin to rebound and show strength is due to our exposure at that customer. So it's definitely helping us.

Thank you. And that is all the time we have for questions at this time. I'd now like to hand the call back over to John Ahn for any closing remarks.

Yes. 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 Citi Global Technology Conference here in New York later today. We look forward to speaking with you again soon. Thank you.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program. You may all disconnect. Have a great day, everyone.