Marvell Technology, Inc. (MRVL) Q4 2017 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Marvell Technology Group Fourth Quarter and Fiscal Year 2017 Earnings Conference Call. [Operator Instructions] As a reminder, today's program is being recorded. And now I'd like to introduce your host for today's program, Peter Andrew, Vice President of Investor Relations. Please go ahead.

Thank you very much, Jonathan, and good afternoon, everyone. Welcome to Marvell's Fourth Quarter Fiscal Year 2017 Earnings Call. I'm very excited to join Marvell, and I look forward to reconnecting with all of you to talk about the Marvell story. Joining me on the call today is Marvell's President and CEO, Matt Murphy; and CFO, Jean Hu. Matt will begin with an overview of our performance, after which, Jean will provide more financial detail and our outlook for the first quarter of fiscal year 2018. We will then take your questions. Certain comments today will include forward-looking statements, which are subject to significant risks and uncertainties, which could cause our actual results to differ materially from management's current expectations. Please review the cautionary statements and risk factors contained in our earnings release, which we filed with the SEC today and posted on our website as well as our most recent 10-K and 10-Q filings. We do not intend to update forward-looking statements. During our call today, we will make references to certain non-GAAP financial measures. A reconciliation between our GAAP and non-GAAP financial measures is available on our website in the Investor Relations section. Please note that we have classified certain product lines as discontinued operations in the fourth quarter of fiscal year 2017. As such, all financial information we will be discussing today are from continuing operations, unless otherwise stated. With that, let me turn the call over to Matt, Marvell's President and CEO.

Great. Thank you, Peter, and welcome to all of you on the call. Fiscal 2017 was a year of significant transformation for Marvell. I joined the company last July at the midpoint of the fiscal year. And since that time, we have built a new management team, including this past quarter, the hiring of a new head of Worldwide Sales and Marketing, Tom Lagatta; and a new Chief Human Resources Officer, Karen Rohde. And just this week, Gary Ignatin and Peter Andrew joined Marvell. Gary's leading Corporate Development for us and Peter is leading Investor Relations. Marvell is attracting proven industry talent of this caliber because these individuals as well as our employees see the potential of this great company. And I am very excited to have them on our team. In fiscal 2017, we've put a number of distractions behind us and began refocusing the business around our core strength in storage, networking and wireless connectivity. These are strong businesses that capitalize on the explosion of data as a result of the connection of billions of network devices to the Internet. These connections are creating huge and increasing demands for data storage and network bandwidth. Marvell is one of a few select companies with the IP, system knowledge, products and customer relationships to capitalize on these major market opportunities. Our recent refocusing actions have repositioned the company for profitable growth, and I'm proud to report that we finished the fiscal year strong. We increased our non-GAAP gross margin to 57.6% in the fourth quarter, up from the 53.3% in the first quarter, and improved non-GAAP operating margin to 19% in the fourth quarter, up from just 2% in the first quarter. So let me turn now to our fourth quarter results. We delivered a strong performance in Q4. Revenue was $571 million, above the midpoint of our guidance. We also showed significant progress in improving our profitability. As I mentioned, we achieved non-GAAP gross margin of 57.6%. And we now expect our non-GAAP gross margin to be approximately 59% in the first quarter of fiscal 2018. Non-GAAP operating expenses were $218 million, significantly below our guidance of $230 million at the midpoint. Our team is executing very well and we are one quarter ahead of schedule on our restructuring plan. During the fourth quarter, we also returned $155 million in cash to shareholders through $30 million in dividend payments and $125 million in share repurchases. Now let me turn to our businesses. In the fourth quarter, storage revenue grew 8% year-over-year, driven by better-than-expected HDD demand and the continued ramp of our SSD business. During the quarter, our SSD business performed very well, growing both year-over-year and sequentially, and again accounted for more than 20% of our total storage revenue. While we have seen the impact of NAND shortages at some customers, we continue to benefit from 20-plus years of expertise in storage, our broad IP portfolio and market position with Tier 1 customers. Looking ahead, we expect our SSD controller revenue to be flat sequentially in the first quarter of fiscal 2018, rather than experiencing the typical seasonal decline. We are also making excellent progress in our HDD business to expand into the enterprise and data center markets. As a result of the ramp of products, which serve the enterprise and data center, we expect our first quarter HDD revenue to be approximately flat sequentially, better than the normal seasonal sequential decline. In our networking business, our fourth quarter revenue was up again double digits year-over-year as we continued to benefit from ramping design wins of our new products for the enterprise and campus market. Over the past 24 months, we have refreshed our Ethernet product portfolio to strengthen our competitive positioning and our core target markets of campus and enterprise. During the quarter, we saw the production ramp of our 10-gigabit Ethernet switch design wins with multiple customers, and we continue to see strong adoption of our ARM-embedded SoC in the enterprise driven by the technology transition away from legacy architectures to ARM. We also saw preproduction ramps in some of our new 25-gigabit Ethernet products which leveraged our mixed-signal and Fi expertise to provide optimized solutions for the data center. These include our gear box and retimer products which enable existing switch in mid-platforms to support the emerging 25-, 50- and 100-gigabit Ethernet standards. All of these represent early progress for Marvell in the data center market. Our wireless connectivity business was down in the fourth quarter sequentially, in line with our expectations. We believe our wireless connectivity revenue was stabilized as we have transitioned out of WiFi products for mobile platforms and refocused our efforts on high-performance markets such as enterprise access points, automotive and smart home gateways. As we look towards the first quarter of fiscal 2018, we expect our wireless connectivity business to grow by double digits sequentially, better than normal seasonality, driven by better customer demand in gaming and smart home gateways. Overall, I am very proud of what the team has accomplished so far. We've made a lot of progress and our employees are embracing the changes, which, combined with the caliber of talent we're attracting, is accelerating our transformation. As you could see in our first quarter outlook, at the midpoint of our guidance, we expect to deliver a 20% non-GAAP operating margin. This will be a significant milestone in our progress towards delivering predictable, profitable and sustainable growth. My team and I will provide more details on our strategy and growth plans as well as our long-term financial model at our upcoming Investor Day in New York on March 10, and look forward to seeing many of you there. And with that, I will turn the call over to Jean.

Thank you, Matt. In order to better align with our investment decisions to focus on storage, networking and wireless connectivity, we're refining how we categorize our revenue. We'll provide comments on 4 categories of our products for continuing operations, which are storage, networking, wireless connectivity and other products. Storage product remained the same and are comprised primarily of HDD, SSD controllers and Enterprise Storage Solutions. Networking products are primarily comprised of Ethernet switches, Ethernet transceivers, embedded ARM processors and automotive Ethernet as well as a few legacy networking product lines where we no longer invest, but will generate a long tail of revenue for several years. We moved the microcontroller WiFi combo products to wireless connectivity. Wireless connectivity products are primarily comprised of WiFi solutions, including WiFi only, WiFi/Bluetooth combos and the WiFi microcontroller combos. We moved vaxi [indiscernible] communication and application processors into the other products category. Other products now include the printer solutions, vaxi [ph] communication and application processors and others. We have limited our investments in these products, and the revenue from then will gradually decline, but they will yield profit for many years to come. We have included an updated historical quarterly revenue breakdown in our earnings release presentation deck in the Investor Relations section of our website. As a reminder, we have classified certain of our product lines as discontinued operations in Q4 fiscal 2017. We have made progress in divesting this product line. On February 8, we signed a definitive agreement to sell our G.hn product line to MaxLinear for $21 million. Now I will discuss our Q4 and the fiscal 2017 financial results and provide current outlook for continuing operations in the first quarter of the fiscal 2018. Again, and please note that these comments are from continuing operations and you can see the reconciliation in our press release and on our website. Our revenue in the fourth quarter was $571 million, down 5% year-over-year, primarily due to the decline of mobile handset-related revenue. Our core business revenue in storage, networking and wireless connectivity grew 5% year-over-year. Our Q4 revenue from storage products accounted for 54% of our revenue and it grew 8% year-over-year. Networking revenue in the fourth quarter of fiscal 2017 accounted for 26% of our revenue and it grew 13% year-over-year. Wireless connectivity accounted for approximately 12% of our revenue and it declined 19% year-over-year, primarily driven by the decline of mobile WiFi product revenue. Other products accounted for 8% of revenue and it declined more than 50% year-over-year due to the decline of the mobile handset platform revenue. Our GAAP gross margin was 57.3%. Non-GAAP gross margin was 57.6%, above the midpoint of our guidance range. Our GAAP operating expenses for the fourth quarter were $340 million, inclusive of $101 million in restructuring charges and the $21 million in stock-based compensation. Our non-GAAP operating expenses were $280 million, much lower than the midpoint of our guidance of $230 million. As Matt mentioned earlier, we are ahead of our restructuring schedule by one quarter. Non-GAAP R&D expenses in the fourth quarter were $169 million, and the non-GAAP SG&A expenses in the fourth quarter was $49 million. Non-GAAP operating income was $111 million. This represents an operating margin of 19.4%. Net other income in Q4 was $3.8 million. Our GAAP income tax provision for Q4 was $68.5 million due to our restructuring actions to consolidate the international design center. We've recorded approximately $50 million in tax expenses associated with the potential distribution of earnings from this location. These tax liabilities will only become payable upon the actual distribution of cash from associated locations, and they may be partially offset by any available tax credit and deductions at the time of distribution. We also recorded additional tax expense of $16.8 million due to related office closures and headcount reduction. Our non-GAAP income tax provision was $0.5 million. GAAP net loss was $77 million and non-GAAP net income was $140 million. GAAP loss per diluted share from continuing operations was $0.15 and the non-GAAP earnings per diluted share was $0.22. Let's now turn to our balance sheet. At the end of the fourth quarter, our cash and marketable securities were $1.7 billion or more than $3 per diluted share. Net cash provided from operations in the fourth quarter was $190 million. During the quarter, we've returned $155 million cash to shareholders, which include $30 million in dividends and $125 million in stock buybacks. Now let me summarize the fiscal 2017 financial results. As Matt mentioned earlier, we have made significant progress in the second half of fiscal 2017. Revenue was $2.3 billion. We delivered a non-GAAP gross margin of 56% and a non-GAAP operating margin of 14% and returned $304 million cash to shareholders through $122 million dividend payment and $182 million share buyback. Now turning to Q1 fiscal 2018 guidance. We expect our Q1 net revenue to be approximately $570 million, plus or minus 2%. We expect our storage revenue to grow double digit year-over-year and it to be approximately flat sequentially versus our normal seasonality of sequential decline. We expect networking revenue to grow single digit year-over-year and it to be down slightly sequentially. We continue to see new product ramps within our networking business, but the revenue ramp is being offset by the decline of our [indiscernible] networking product line. The headwinds from the decline of these [indiscernible] product lines will continue for next few quarters. We expect our wireless connectivity revenue to be flat year-over-year and grow by double digit sequentially back to their normal seasonality, which is primarily due to better customer demand in gaming and connected home market. Other products will decline 30% year-over-year. As noted earlier, we expect the non-GAAP gross margin to be approximately 59%. We expect our GAAP operating expenses to be in the range of $250 million to $265 million, and the non-GAAP operating expenses to be between $220 million and $225 million and with the approximately of $4 million of normal payroll taxes that are in Q1. At the midpoint of our guidance, we expect to achieve 20% non-GAAP operating margin in Q1 fiscal 2018. GAAP and the non-GAAP net other income is expected to be approximately $3 million. And the GAAP tax provision is expected to be 6% and the non-GAAP tax provision to be 4%. GAAP and the non-GAAP diluted share count to be approximately 521 million to 526 million shares. This will result in GAAP income per diluted share in the range of $0.12 to $0.18 and non-GAAP income per diluted share in the range of $0.19 to $0.23. With that, we'll now open the line to answer your questions. Operator, we'll take the first question.

[Operator Instructions] Our first question comes from the line of Timothy Arcuri from Cowen and Company.

I guess, Matt, I wanted to ask you about storage. And there were some comments last night from your peer that storage is going to sort of hold on into the first calendar quarter, but then it's going to roll over a little bit into the second calendar quarter. So I know that you don't to want to guide out that far. But can you talk a little bit about sort of what you see in storage and whether as HDD rolls off, whether your SSD business can basically buffer that?

Sure. Yes. Hi, Tim. So you're right. I'm not going to be in a position to guide out that far at this juncture. What I would say is that -- and as you've seen from our results, we're very pleased with our performance in storage, both in HDD and in SSD. I think if you look at our guide for Q1, we're definitely projecting our business to be strong and bucking seasonality. So we actually see HDD strong. And then if you look at our SSD business, that's also performing well. And I think for us, most of that's due to new products that are ramping and new programs. So we -- again, we're very comfortable with our outlook for both HDD and SSD in our storage segment overall. Beyond Q1, I'm not able to really postulate on what it's going to look like.

Got it, okay. And then, I guess, just a bigger-picture question about connectivity. And now that it's now down to a level where it's -- I mean, it's still a decent-sized business, but it's, relative to your other businesses, it's just not that big. So I guess the question is strategically, how important is that business to you? Because it seems like it's a structurally lower margin and maybe you could sort of redeploy some of those assets into networking. So the question is just on how -- why be in that business? Is it really strategic?

Sure. Yes, great question and I'll give you my view on WiFi. First of all, in general, standards-based businesses come with their challenges. And so for us at Marvell, really, the key has been to try to identify the areas of value in WiFi. And as it turns out, when you strip out the mobile-related WiFi revenue that we have, along with some module business that was kind of inherently low gross margin, what's left in the portfolio and where we believe we've sort of bottomed now is a portfolio that's actually levered to the higher-performance segments of the market within wireless connectivity where customers and end applications actually care about performance. So examples of that would be like in enterprise access points, which is highly performance-driven. Automotive is highly performance-driven, not only on the fidelity of the radios, but as well as the quality required and the supply chain to support it. And then even when you start looking at things like smart home gateways, the bandwidth requirements and the demands on those are quite high. So as we look at it, we -- the business itself looks quite different than it did a year ago structurally. I'd say also, on top of that, which is that I think that the segments of WiFi we're participating in are inherently higher performance and higher value, when you also look at our strategy going forward, and we're going to be giving more details on it at the Investor Day, but if you look at our customers that were -- for example, in campus and enterprise networking, that story is really about wired and wireless growth and data traffic exploding, really, even at that campus enterprise and SMB markets. So we think it's valuable to have both. I think the last thing I would add is that we do get leverage because many of the products we're selling in WiFi now either have an integrated SoC along with them or they sit next to one of our SoCs. Sometimes we're able to actually sell our SOHO switches in Fis. So there's also overlap from a portfolio set. So today, in summary, we're comfortable with our WiFi portfolio. We think it's a much higher-value mix of products and applications. And we'll be giving some more insight into what we see some of the growth drivers being in that business on March 10.

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

Solid job on the quarterly execution. On the better gross margin guidance for Q1, you're already trending within your targeted range that you had previously targeted to get to kind of in the second half of this fiscal year. I would assume that you have more positive mix-related impacts moving forward. Obviously, Matt, as you said, you're moving more and more into kind of near-line, high-capacity, high gross margin HDD segment of the market. Your networking products are doing extremely well, and we're also at the very early stages of manufacturing optimization. So should we assume gross margins can get to greater than 60% as they move to the second half of the year, given all of the margin tailwinds that you potentially have?

Yes. Hey, Harlan, so great to hear from you and appreciate the comments on the gross margin. I think at Marvell, as I said, even I think the first week I was here, we're really laser-focused on this because we view it as a management team and as a company as a direct proxy of the quality of the IT and the engineering and the value that we can deliver. And quite frankly, I always looked at Marvell from the outside and wondered why a company with such a phenomenal technology set was running in the low 50s percent gross margins when comparable types of companies with the sort of people that Marvell had were much higher. So we've been on this mission. As you're aware the -- and you pointed out, some of the benefit we're seeing is that what I would call, "better mix within our segments." So higher-quality revenue within storage, within networking and within wireless. But other one has been a real focus here in embracing operational excellence [ph] is a core competency of Marvell. And I think you can see some of that now flowing through into the COGS side. And I'd say on that subject, there's no silver bullet when it comes to improving gross margin and fundamentally lowering your cost structure. I was raised and trained that good general management is doing a lot of things well simultaneously. And so whether it's yield improvement, leveraging our great product engineering team here, supplier negotiations, freight and logistics, design for cost, you name it, we're attacking really the COGS side on all fronts so we can truly unlock the value of Marvell. With respect to guiding on gross margin, we're going to be talking at the Investor Day about our long-term model. We are ahead of plan. I'm ahead quite frankly of where I thought we could be as a company. I'm very pleased with it. I think the teams executed well, and it just shows you the progress that we're making. Last point, you all remember, 6 days into the company is, well, Rick Hill, my Chairman, decided to throw out a 6 handle as a target. He had the benefit of being with the company for a couple of months. I had only been there for a few days. In November, when we did the restructuring, we guided for the second half of 2018 fiscal being in the 58% to 60% range. I acknowledge, that I thought aspirationally we can get there. And so certainly, putting out a gross margin guide next quarter of 59% gives us comfort that we're going to be in line with the commitments we already made. And again, we're excited to talk about what we see even beyond that from a long-term model perspective at the Investor Day.

Great. And then -- thanks for the insights there. If I look at industry analysts' forecast, the SSD market is targeted to grow about 20% this year. And within that, enterprise and cloud SSD is targeted to grow about 25%. So relative to these growth rates, how do you think your SSD business will grow? And can you give us just a rough sense of what percentage of your SSD business was enterprise and cloud-focused versus client side?

Sure. So let's make this the last question and move on to the next one. So just quickly on that. While we're not going to give a year projection. You can back into and infer that our SSD business currently has been growing at much faster than the market. Even if you look into our Q1 guide, relative to what I think you're seeing out there, our performance is quite strong. And we don't break out the exact composition of our enterprise or cloud-based SSDs versus client. But you should assume that that's an important part of our business that we think is going to drive a lot of growth going forward.

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

Matt and Jean, nice job on the execution. Peter, welcome aboard. Matt, the question I wanted to ask was a little less quantitative than -- and a little bit more qualitative on the front end. I know you put high priority on product development and progress on that front with the team. I was hoping you could talk about that a little bit and maybe couple that with any quantification you can give on design win successes that the team is having and how they compare quantitatively in the recent past what we would have seen a quarter or a few quarters ago was a barometer of progress on that front.

Okay, great. Yes, I'll break it into 2 pieces. So on the first part of your question which was the qualitative side, how is the product development side doing, how's the R&D execution doing, how are we -- what strides are we making there. If you really think about it, and the way I've described it and talked about it inside the company as a team is that calendar 2017 for Marvell was really about getting the company back on track, refocusing it, fixing aspects of it that weren't working well, getting the new management team in place and being very operationally focused. I came out of the holiday break along with my management team and we really said, look, this next 12 months is really about focusing on product development, innovation, customer traction and really running the company in getting out of triage mode and moving into programmatically running Marvell to drive our business. So that's going very well. We've had -- we've been able to kick off now very detailed assessments of our R&D that's in process. We've also got some rigor now around what programs we're putting in to design and having appropriate hurdle rates and thresholds for those. So that qualitative side is going well. We're off to a strong start this year. And then, the -- quantitatively, unfortunately, as many of you on the call know, one of the challenges with Marvell, I mean, again phenomenal company, but one of the gaps has always been having kind of clean, repeatable historical data on things that you would sort of normally expect you have to run your business. So unfortunately, our history on having a really good baseline of design win data isn't where I'd like it to be. We've actually got a tool now to do it. And more importantly, we've got a leader in Tom Lagatta, who already has hit the ground running and is driving our sales force and our BUs and the whole company quite hard on the design win side. So I think that's something you could expect to get more color from us in the future. But I could tell you that, and I think we saw many of you at CES, you could see the level of customer activity at our booth. That's a proxy for the global engagements right now. So there's a tremendous interest in Marvell, in our pipeline, and I'm excited about the design wins I see. But unfortunately, that's a qualitative statement not a quantitative one.

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

First let me welcome back Peter. It's good to have you back and congratulate both Matt and Jean on the strong results. I guess, Matt, my question is on the networking side. Oftentimes, we investors get well ahead of trends. And when you kind of look at the 10-gig market, it doesn't actually peak until next year, I think, by third-party sources. So I'm kind of curious, what kind of growth opportunities do you think you have there? How should we think about your ability to gain share on the 10-gig side? And then conversely, any early sort of milestone you can share with us on 25-gig?

Okay. Maybe I'll take part of that question and I'll let Jean comment as well, because we've been spending a lot of time talking about the subject. So I think that's an astute observation that while today -- and I don't want to take anything away from it because we're very excited about the hyper-scale market and sort of those technologies and Ethernet that support that, like 25-gig, 50-gig and 100-gig. As you point out, even in 10-gig, we have not hit our peak from a market point of view. It's been talked about for a long time, but I think people that follow it recognize that there was a significant delay in the industry in moving from gigabit Ethernet to 10-gigabit Ethernet. So from a Marvell point of view, we've been quite focused on that market because that transition in the campus and enterprise is happening. We've got a whole suite of new products which are not only optimized, high-density, advanced node switches, but also a modernized lineup of Ethernet Fis to support that market. That's been part of what's been driving our growth in networking is the ramps of those products. So we actually see a very good opportunity for us in 10-gig and below. In particular, maybe Jean, you want the mention some of the NBASE-T things we're seeing in between. But we think that, that segment of the market, while it doesn't have as much hype as the data center side, actually represents a huge portion of the ports that are shipping today and there's still performance requirements on it. Jean, would you like to say something?

Yes, absolutely. And just to add what Matt said, right, there are other 2 dynamics that really benefit us. One is we're very strong in the enterprise and the campus market. There's a new upgraded cycle for 2.5, 5-gig. That upgraded cycle, we have optimized the product portfolio, like Matt said, to address that market. And we're ahead of our competitor. And the other thing to add to what Matt said is we have very strong relationship with China OEM customers and we have lots of design wins, with the 10-gig and refresh the portfolio. So those design wins are going to be coming to the market exactly as you said is 2017 and even 2018 because for a lot of emerging countries adoption of the 10-gig actually is right in the peak. So we're actually very excited about the opportunity for our business and to really get momentum in next several years.

Our next question comes from the line of Chris Rolland from Susquehanna.

Nice execution on the quarter, and a great next step in this transformation. And welcome, Peter. So you guys mentioned some tightness in NAND. Perhaps you can talk about how that kind of nets out in your business model. I mean, if you're selling, let's say, fewer SSDs or growth slows there, that's a market where you have higher ASPs, but lower share versus the HDD market where you guys have higher share but lower ASPs. As you have the movement back and forth, let's say towards hard disk in this case? Is it a net-positive for you or a net-negative?

Sure. So I think it's a good question. Let me answer it in 2 pieces. Maybe the second half first. From our point of view, we're very comfortable with the profitability of both of our HDD and SSD businesses such that if one is moving directionally differently than the other, we don't -- we don't see a big impact on that. It's not material. It really depends on actually within the details, which customer, which program, which design. But in aggregate, I would say you shouldn't assume that there's either from an ASP or profitability point of view, it's that big an impact. I think the reason we called it out proactively is we expected the question candidly. I think it's out there from everybody. So supplying into that market, we figured we'd address it in the comments. And really our comments were just meant to suggest that while we see some tightening -- we're hearing that anyway, again we're the supplier into the drives not -- we don't have all the insight in the world. But we do hear it from some of our customers. But we think we're very well positioned to perform through this cycle because the customer base that we have is really the Tier 1 customers in the SSD world. Many of these companies control their own NAND, so we're supplying to those companies so they actually control it, or we're selling the partners who have actually partnered with an end OEM like a cloud OEM or somebody like that, who's going to have enough influence on the supply chain that they should get their parts. So we think we're positioned to perform very well through the cycle here, but we're staying close to it. And again, the reason for the comment was just to address it proactively versus wait for the obvious question.

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

This is Vinayak, calling in for Joe. I wanted to talk about your SDD (sic) [ SSD ] business. Like, can you talk about the market dynamics you're seeing there, any opportunities you're seeing to gain share and what are you seeing on the pricing front?

Yes, so our SSD business, if you look at the market, it's certainly, it's very different from HDD side, right, that's a mature market, there's 3 customers, 2 suppliers. On SSD side, really, it's very dynamic. You do have the vertically integrated part of the market, but the merchant market is actually growing very significantly. I think earlier, somebody mentioned that it's growing 20%. When you look at the market, basically, you have the client side and you have the enterprise side. Marvell is actually very well-positioned with both, we're especially strong in the enterprise segment, providing solutions for Tier 1 OEMs and some of the cloud data center customers through our partners. On the client side, we also have a very strong position, too. So we feel quite good about participating in 2 different -- both client-side and the enterprise side. And also, it's -- we have a strong IP, strong engineering expertise we can leverage. So we do have a ASIC business, too. So overall, from all different angles for SSD market, we feel like we are participating, so that's why we are gaining share and growing faster than market.

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

Matt, if I can ask you a quick question on HDD side, it's performing better than seasonal. We know that there's stabilization in the PC market, but I was wondering if you could distinguish how much of your success is from that versus the new products? And then what's so special about the new products that you're able to gain share?

Harsh, this is Jean. So when we look at our guidance for Q1, our HDD business is performing better than normal seasonality. I think as Matt mentioned during our prepared remarks, we do see the ramp-up of our new product design wins in enterprise and the data center market. I think the way I would look at it is if you look at the overall market, look at some of our major customers' guidance, they guided sequentially decline, but still better than seasonality. So I would say our performance of sequential flattish included 2 factors: one is the overall market is better, we certainly did perform better. But certainly, we feel strongly we're gaining share here.

And then for my follow-up, could you give us an idea, Jean, on OpEx, is coming down again, remind us on where you are with your restructuring and how we should expect OpEx to trend as the year goes by?

Yes, so for Q4, our operating expense was 2-point -- $280 million, which was much better than we guided, $230 million, primarily due to 2 reasons. We were ahead of our restructuring schedule by 1 quarter, part of what the reduction is the legal company expense and the other is just our team is executing extremely well ahead of plan. If you look at our Q1 guidance, so we actually guided flattish, with $4 million, the payroll tax step-up. Really, the restructuring actions, there, some of the actions that takes a long time, like 6 to 9 months, because of the local requirement of some foreign locations, when we try to consolidate facility and also transition programs. So what you're going to see is the Q2 and Q3, you will see the operating expenses step down and get to Q3 will be our target run rate, which is 1 quarter earlier than we guided in the past on the restructuring schedule.

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

My question is kind of a follow-up to a statement you said earlier about only being there for a few days and then being told that you could do 60%-plus gross margins. Now that you've been there for a while and the transformation has kind of begun, looking forward, are you more -- most excited about Marvell's opportunity for growth, gross margin expansion, greater OpEx optimization or even some of the hidden assets that could generate a bunch of cash, like sales leaseback on your corporate headquarters or sale of the Singapore facility?

Sure. No, it's a great question and you're right, especially for those of you that know my Chairman, he's also from the South Side of Chicago. So when you get a target ascribed to you, you've got to take it seriously. So no, in all seriousness, I did come to the same recognition that he did, that this company had a lot of value to unlock. So we continue to be excited about the gross margin opportunity for Marvell, primarily because not only do -- we're seeing a path with respect to building a culture of operational excellence here and bringing in some discipline into the supply chain. But also more importantly, I'm just -- the quality of the designs, the quality of the engineering, the quality of the business that we're driving here is very differentiated unique applications. It's not commodity, consumer-type of business, like maybe a big portion of Marvell was in the past. So that gives me optimism. I think I'd phrase it this way. When I joined, I felt that there was tremendous value to be unlocked by just improving the existing company and getting the expenses in line and getting the margins up and doing the portfolio review and management. The more exciting part, and this is going to be the anchor next week of our Investor Day, is that we also are excited that we can grow the company. And so when you take a look now at a business model whereby you've got expanding gross margins in a predictable programmatic way, you've got end markets that are growing faster than the overall semiconductor industry, and we'll make an argument next week from a long-term perspective that we can grow with those. And then we've got very good discipline in OpEx and controls. And the combination of those from a financial model point of view gets us excited. But as I mentioned, we are really more excited about the participation that we're able to have in this incredible revolution that's happening in technology, which is the growth of the data center and the explosion of digital data and Marvell's ability to use its IP and assets to grow the company and allow our engineers here to actually contribute their intellect and IP into growing something great. So yes, as you can hear from my language, we're -- I'm quite enthusiastic about not just the cost and operational side, but the growth prospects that we could have, and ultimately, the goal is to deliver a very sustainable, repeatable, predictable company from a results point of view. And that would be a great thing.

Our next question comes from the line of Stephen Chin from UBS.

Jean, if I could, just had 1 quick working capital-related question. In terms of inventory days, things are pretty well-managed for much of last year, down in the low 60s. But just with all the commentary about new products ramping on both the storage and networking side, should we be expecting any meaningful increases in inventory ahead of big product shipments in the coming -- for this quarter and possibly next quarter?

I think we're very disciplined in managing our inventory, and as Matt mentioned, we are really building a process internally to try to do better on forecasting side, on managing inventory and the supply chain sales operations side. I think what you should expect that we're going to try to manage inventory turns at a level of -- this level and maybe even better. So that's our objective. So if we end up getting higher revenue, because inventory will be higher, but we're going to manage it, the turns, inventory turns, at really a leading industry level kind of inventory turns. That's the target we're striving to.

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

I wanted to come back and sort of follow up on a question that Harlan asked earlier about sort of the mix, but this time on the HDD side. I think [indiscernible] your share on the client side of HDDs has been [indiscernible] probably approaching the high 60s. Can you give us some sense what [indiscernible] sounds like that's enough [indiscernible] just trying to [indiscernible]?

Quinn, you're breaking up quite a bit.

Contemplate the mix shift as you guys gain share. So just hoping you can provide some details there, what you think the opportunity would be.

Quinn, can you please try repeating real quickly? You were breaking up quite a bit.

Okay, yes, just was hoping you can give us some sense of where you are in the enterprise and near line in terms of market share in HDDs. The client side, I think you guys have been north of 60% now for some time and was just trying to think, from a mix perspective, as you mix to enterprise, how much opportunity do you have in terms of those share gains?

Sure, I'll take it. No, I heard you much clearer on that one, thanks. So we don't want to get into the exact details of, in our estimates, of who's got what share and what segment at what particular time. It is a pretty established market. It takes a while to move share. It's really dependent on individual products, individual programs. So we try not to get into all that. We are encouraged, and we said publicly that we are interested in applying our team's efforts to designing products for the segments of the market that you mentioned, which is the enterprise data center, nearline type of drive, primarily because that market opportunity is one where those, that segment of the drive market, is growing. And it has higher than average ASPs, and there's all kinds of reasons why we like that market. It's also a technical challenge. But remember, these things take a long time in established markets to move the needle. We're simply calling out the fact that we are pleased with our progress, because it's one of the things that we have been noting since I got here, which was a goal. And we achieved, we're pretty happy to see we actually got some ramps projected for Q1, that if all goes according to plan, it actually helps us buck the seasonality trend. But beyond that, we're not going to be the kind of company that sort of gets into a quarterly discussion of market share by segment, by individual business. This is a long-term journey that we're on.

Our next question comes from the line of Atif Malik from Citigroup.

Matt, a question on your growth strategy. It sounds like you're pretty confident you can grow the company with the 3 pieces that you have, but can you just talk about your appetite for M&A in the current environment? And then I have a follow-up.

Sure. So yes, and I think, again, as you point out, there's a great opportunity in New York on the 10th, where we're going to -- it won't even be me talking about it, you'll actually hear myself, my business unit leaders, Jean and other executives from Marvell, try to articulate that growth story. The modest growth story, and I think it's going to be a good one. On the M&A side, the way we think about it here is that we have a belief among the management team that one of the drivers of shareholder value creation through the last cycle and the consolidation cycle has been really smart M&A. And so we view that as a thing that when done right, it's good for shareholders. And so that's something that we clearly comprehend. When we thought about our buyback, as an example, we tried to take a balanced view of returning cash to shareholders, but also maintaining flexibility. That being said, you should assume that we're going to be disciplined if we take a look at anything. We're going to be thorough, and anything that we would look at, large or small, would be something that would be in line with what we know how to do. That being said, I mean, we are still heads down in this company, on turning it around, focused on achieving, where we're -- look, we're ahead a quarter on our restructuring. We want to make sure we execute on that. We still have a good gross margin opportunity in front of us. We're going to drive for that 59% next quarter, and so we got to have a balance here of trying to turn around this company which, as many of you know, was in a little bit of a state of -- a challenging state a year ago. So we try to balance all those things, what's our capacity, but we also recognize that if you do these things right, it's been a tremendous opportunity for the companies that have done it right, the employees of those companies and the shareholders.

Our next question comes from the line of Kevin Cassidy from Stifel.

Within the SSD controller market, are you seeing opportunities or maybe you can talk about the market size for 4-bit per cell, flash devices and SSDs made up of those?

Sure. I think on that one, we're going to tell a little bit more of a detailed story on SSD next week. And so I'd prefer, if you will, let's wait until we can put the whole technology story together on how we see the SSD market evolving and what segments we think we can address and leverage our IP against. If I do that, I'm going to steal my team's thunder if we start talking about this kind of thing on the call today. They've been preparing for like 3 months, okay, so let's give another week and then we'll...

Our next question is a follow-up from the line of Harlan Sur from JPMorgan.

As you think about your position as one of the leaders in enterprise networking and moving into data center markets, potential area I can see for SAM growth is optical. Obviously, Matt, you drove a very strong optical business at your prior company. It would certainly complement your switching and Fi products, you have all the right technology building blocks to capture a key portion of this value chain. What are your thoughts around this? Do you have any internal programs underway here?

Yes, so thanks for remembering. You're right, although I wasn't a considered to be an analog guy, and a catalog guy, as you know, at my other company, the optical transceiver business was a very good business for us. And I actually had quite a bit of early insight running that group into the early developments that were happening, actually at 40-. We were the first company, at my old company, to have a chipset to support that. And so on the optical side, I've sort of seen how that played out. And look, that is a pretty established segment. What we see though is that as you go from copper-based Fis to optical, as you hit the 25-, 50- and 100-gigabit nodes, and legacy 40-, if you want to talk about that, too, where Marvell's playing that is that we do have technology and we do have products now to address the gearbox market or the retimer market or the mux/demux market, whatever you want to call it, these are products that basically sit between the switch and the optical module, or the Fi, and they allow us to connect higher frequency switches down to, for example, you could take 40-gigabit and make 10-gigabit, you can take 50-gigabit and make 25-gigabit. And so these optical Fis, as we're calling them, or gearboxes, are an area of investment. We actually started shipping those products, I called that out in my notes, or my comments, I don't know if you picked up on it, but this is something we'll give a little bit more of a view to you on at the Investor Day, but it's a nice way for Marvell to actually establish a foothold in the data center, using our mixed signal and Fi technology, but without having to kind of go into the SiGe-based, module business, compete against large-scale incumbents that use a China module supply chain. That's a different business than we see at Marvell, but we do see a way to actually participate in the growth in optical module deployment by enabling it through these -- through the gearbox products.

Our next question is a follow-up from the line of John Pitzer from Crédit Suisse.

Matt, I apologize if I misheard you, but I thought in your prepared comments relative to wireless, you talked about opportunities in auto. I'm wondering if you can just elaborate a little bit about how you're thinking about the auto market. And then in general, when you look at your IP portfolio in wireless, are there things that would make it look attractive to go into industrial 4.0? Or are the connectivity standards going to be still too standardized even in that type of market? How are you kind of thinking about those 2 opportunities, longer-term?

Sure. So yes, I'll break it into 2 pieces. So you're right, we do like to talk about automotive, because we see the connected car as a real opportunity for Marvell. The first leg of that is in the products we're shipping today, which are primarily are Wi-Fi or Wi-Fi-Bluetooth combo products, where we've got really a leading position and if you just looked at the chart that showed vehicles per year and how many of them were coming with Wi-Fi capability, you'd see that chart obviously going significantly up and to the right. So connected car is happening, I think there's a nice opportunity for Marvell to participate in. There's some adjuncts off of that market, which would be things like 802.11p, or vehicle-to-vehicle, or let's say, follow-on wireless standards that may do some unique things around enablement of the connected car. So there's a nice wireless opportunity there. But more importantly, the reason that I continue to push internally and the team is continuing to push internally in automotive, is that behind that we see a large opportunity, multiple years out, on the adoption of Ethernet as the in-car networking standard. And this is something that we'll give some discussion on next week as well as at Investor Day. This is a longer-term growth driver for Marvell, but as you guys know, I had quite a bit of experience in automotive from my prior company. And we're seeing great opportunities there as well, albeit out a little bit farther. So Wi-Fi for automotive looks like a nice business on its own, but it actually plays to a bigger strategy we have to push our way over into automotive. And then quickly on industrial 4.0, what I'd say there is I think just in general, the company's been totally underserved and starved to even think about calling on industrial customers. I think the distribution channel we have today is quite fragmented and more just generally speaking overall, tactical in nature. And so one of the big initiatives that Tom Lagatta and his team have this year is to actually put together a broad market distribution plan where we can take some of these products like catalog Wi-Fi, standard switches, Fis, even some of our ARM-based SoCs, and make those more broadly available to customers. And there is a desire, by the way, from the general market to get their hands on Marvell technology. We just didn't have a sales and marketing distribution network and the collateral capability. So those are all future opportunities, but nothing would stop us, certainly, in the future from addressing what we would call the industrial IoT or industrial -- or Industry 4.0, which we think can be quite value-added for Marvell. But that's an optionality, longer-term growth driver for us, along with automotive.

And this does conclude the question-and-answer session, as we have reached the end of our time. I would now like to hand the program back to Peter Andrew for any further remarks.

Okay, thank you very much, Jonathan, and thank you, everyone, for all your time today and for your continued interest in Marvell. Please remember, we will be holding our first Investor Day in New York City on March 10 and we look forward to seeing everyone there. Thank you very much.

Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.