Marvell Technology, Inc. (MRVL) Q1 2019 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the Q1 2019 Marvell Technology Group Ltd. Earnings Conference Call. At this time, all participants are in a listen-only mode. Following management's prepared remarks, we will host a question-and-answer session and our instructions will be given at that time. [Operator Instructions] As a reminder, this conference call is being recorded for replay purposes. It is now my pleasure to turn the conference over to Mr. Peter Andrew, Vice President of Treasury and Investor Relations. Sir, you may begin.

Thank you, and good afternoon, everyone. Welcome to Marvell's first quarter and fiscal year 2019 earnings call. Joining me on the call today is Marvell's President and CEO, Matt Murphy; and CFO, Jean Hu. Before I turn the call over to Matt, I wanted to remind everyone that certain comments today may include forward-looking statements, which are subject to significant risks and uncertainties and which could cause our actual results to differ materially from management's current quotations. Please review the cautionary statements and risk factors contained in our earnings press release, which we filed with the SEC today and posted on our Web site, as well as our most recent 10-K and 10-Q filings. We do not intend to update our forward-looking statements. During our call today, we will make reference to certain non-GAAP financial measures. A reconciliation between our GAAP and non-GAAP financial measures is available on our Web site in the Investor Relations section. With that, let me turn the call over to Marvell's President and CEO, Matt Murphy.

Great. Thank you, Peter, and good afternoon to everyone joining us on the call. We are here today to talk about Marvell and our strong Q1 performance and Q2 outlook. And although I will touch on the status of the Cavium acquisition, a reminder as Cavium is an independent publicly-traded company, and we will not be able to comment on their financial results. Marvell delivered a strong first fiscal quarter for 2019, driven by the growth of our core businesses and continued improvement in operational efficiency. Total revenue for Q1 came in above the midpoint of our guidance at $605 million, up 6% from a year-ago. Our non-GAAP gross margin continued its positive momentum and reached a record high of 62.5%. As a comparison, our revenue has grown 18% compared to Q1 2017 two years ago, while growing gross margin dollars by more than twice that rate. Looking ahead, we expect to continue expanding our gross margin in Q2 to 63% to 64% as we capture more value from an improving product mix and other margin expansion initiatives. Gross margin is the key indicator of the innovation and quality of engineering in the company, and Marvell has quickly moved into an elite level of companies within the semiconductor industry. Our non-GAAP operating margin for Q1 was 27.4%, up over 5 percentage points from a year ago. You may recall at our Investor Day in March of 2017, we set a non-GAAP operating margin target of 30% by the end of fiscal 2020. I’m pleased to report that we expect to achieve this target in Q2, six quarters earlier than we had initially projected. To be clear, we expect to achieve this on a standalone company basis. Non-GAAP earnings per share was $0.32 above the midpoint of our guidance and up 33% year-over-year. The bottom line is that quarter-by-quarter we continue to unlock Marvell's earnings potential, and in the process, we're delivering tremendous value to our customers and our shareholders. So let's move on to the performance of our core businesses, starting with storage. Our storage business exceeded expectations growing 4% year-over-year. This growth was driven by two factors. First was record SSD revenue, which contributed more than 30% of total storage revenue. Second was the shifting mix of our HDD and SSD storage solutions as we expand in the enterprise and data center markets. The segment of our storage business grew 50% year-over-year, and overall demand continues to grow. The storage market shift to the enterprise and data center has been a key contributor to the recent strength in our HDD business. We continue to expand our presence in this market segment and anticipate a multiyear tailwind for our HDD business as we facilitate new storage technology transition such as HAMR, MAMR, and multi-actuator drives to increase aerial density and performance coupled with the ramp of our preamp business. We believe this strength will continue to largely offset secular declines in client HDDs. Meanwhile at the Open Compute Project Summit in March, we announced the industry's first NVMe SSD chipsets that address emerging cloud and enterprise data center SSD requirements. These chipsets include the industry's first NVMe switch and two data center optimized SSD controllers. These key building blocks powers the largest EDSFF and F1 and customized cloud data center form factors, new architectures that enable customers to better meet the rigorous demands of applications such as machine learning, deep learning, and advanced analytics. The NVMe switch allows operators to virtualize cloud data centers to aggregate and manage multiple SSDs to deliver high-performance storage to their end customers. NVMe controllers support single and dual port functionality as well as open channel architectures which are powered by Marvell's fourth-generation of NANDEdge LDPC error correction technology. This technology supports the latest 3D NAND TLC and QLC technologies and extends overall SSD lifetimes, all while maintaining best-in-class latency and performance consistency. Also these chipsets align to the recently announced OCP Microsoft Project Denali, of which Marvell is a founding member. All right. Moving on to networking. Our networking business grew 6% year-over-year in line with our guidance of mid to high single-digit growth. This was driven by new product momentum, particularly with our switch and PHY solutions for the enterprise campus market. In addition, we are seeing early momentum for our data center products, particularly our 100-gig PHY portfolio which showed strong year-over-year growth. We also sampled our first 400-gig PHY for the data center during the quarter and are seeing strong interest for the product. Overall, our core portfolio of switch PHY embedded processors grew greater than 10% year-over-year and I’m pleased with the performance and future prospects of this business. Our automotive ethernet business also continues to gain traction. As I mentioned in past calls, this business is still in its early stages, but we are already achieving switch and PHY design wins across multiple Tier 1s and OEMs in the U.S., Asia and across Europe. Recently Nvidia selected our secure automotive ethernet switch for their Pegasus platform. This makes it the first commercially available solution with embedded security built into the core. The Pegasus computing platform has been designed to handle Level V driverless vehicles. Our secure switch powers an in-car network that enables sensor fusion, cameras, safety and diagnostics, while preventing cyber attacks that could compromise a safe and seamless driving experience. Marvell's leadership position is the result of our extensive OEM and Tier 1 relationships, leading IP, and engineering excellence. While automotive ethernet is an emerging market, we're already the leading company with proven ethernet in switch PHY products offering solutions that meet or exceed to customers’ EMC, EMI, security, and overall performance requirements. Automotive is a good example of edge computing as cars are essentially becoming data centers on wheels. And looking ahead, we see numerous opportunities to promote and grow Marvell's ethernet, Wi-Fi and storage, HDD today, SSD in the future. Finally moving on to connectivity. Marvell's connectivity business grew 19% year-over-year driven by our broad-based demand for our solutions across all of our targeted market and segments, particularly performance client and enterprise access. Our success in these high-performance market segments is the result of a shift in our strategy over the past two years. We are focusing primarily on markets that value the differentiation we deliver through our system level solutions. In these high-performance end markets, we were able to offer solutions comprised of processor, RF, switch, PHY, security, and software IP, which together helps customers accelerate their time-to-market. This solution-focused approach continues to be embraced by the market. Great example is our recently announced 802.11ax products which have generated a very strong design win pipeline with leading Tier 1 customers. Overall, I’m pleased with the performance of our core business and proud of our teams for their continued efforts to position Marvell for success both now and into the future. Moving on to an update on the Cavium acquisition. First, on March 16th Marvell and Cavium shareholders voted overwhelmingly in favor of the proposed merger. Second, the HSR antitrust process is complete and we recently obtained CFIUS approval. The final regulatory review approval we are waiting for is from China's State Administration for Market Regulation, SAMR also known as the new MOFCOM. We continue to currently believe the transaction will close in mid-calendar year 2018. Third, while the deal isn't closed yet, integration planning is going extremely well. This will enable us to hit the ground running once the transaction closes and I’m confident in the synergies we projected. $150 million to $175 million within the first 18 months and expect to achieve $200 million over the long-term. Finally, the strategic rationale of this combination is compelling. It’s financially accretive, technically accretive from the addition of new product lines in IP, increases our scale, significantly diversifies Marvell, doubles our TAM, accelerates our presence in the cloud and data center market, and with synergy capture creates a best-in-class financial model. Now before wrapping up my remarks, I want to mention two other things. First, Forbes recently named Marvell as one of America's best employers for 2018. Notably, this award is based on employee feedback and it's not something a company can apply for. To be this validates the hard work we've been doing over the past 18 months to create a new company culture built on integrity and transparency, one that empowers and inspires innovation, customer focus and rewards high-performance. While tangible benefits can sometimes be hard to quantify, I do believe that most people make an extra effort when they are treated fairly and rewarded for their hard work. And while our work here is never done, I’m very proud that Marvell made the Forbes list and I’m proud to be part of this team. Second, we recently announced changes to our Board of Directors. Gerri Elliott and Peter Feld have decided to not stand for reelection to Marvell's Board when their terms are up at the end of June. Gerri has joined Cisco. She is their Chief Sales and Marketing Officer and Peter decided it was the appropriate time for him to step down from the Board to free up capacity to serve on other star board portfolio company boards. Candidly, I do not think Marvell would be nearly as well positioned to succeed today and in the future if Peter have not helped drive some hard, but very necessary changes two years ago. And Gerri's unique point of view has helped us progress over the last year too. Well, I’m sorry to see such talents of Directors leave along with Dr. Randy, who previously announced he was not standing for reelection due to his new position at Intel. I wish them all the best. I’m happy to welcome new Directors Donna Morris and Bethany Mayer, as they’re going to bring great insights from their leading roles at companies such as Ixia, HP, Cisco and Adobe. Altogether we’ve a great Board and I’m excited about our future. As a team, we are working very hard to build the world's next great semiconductor company, one that provides highly differentiated infrastructure solutions that help megatrends such as cloud niche computing, AI, and the explosion of data realize their full potential. It takes many talented people to achieve this vision and we're making great progress in developing a culture that will attract the best and brightest among them. With that, I will turn the call over to our CFO, Jean Hu. Jean, go ahead.

Thanks, Matt, and good afternoon everyone. I'll discuss the highlights for our first quarter of fiscal year 2019 and provide our current outlook for the second quarter of fiscal 2019. Revenue in the first quarter was $605 million, above the midpoint of our guidance we provided in March. Due to the timing over the BTE ban, there was not an impact to Marvell's forecasted Q1 revenue. Our core business of storage, networking and connectivity accounted for 93% of revenue and grew 7% year-over-year, slightly ahead of expectations. Storage accounted for 52% of revenue and grew 4% year-over-year, well above our guidance due to record SSD revenue and continued growth in enterprise and the data center revenue for both our HDD and SSD solutions. Networking accounted for 26% of revenue and grew 6% year-over-year, in line with expectations, driven primarily by growth in our core switch, PHY and processor solutions. Connectivity accounted for 15% of revenue and grew 19% year-over-year. It was below our expectations as some of the expected demand got pushed into Q2. Finally, other product accounted for 7% of revenue, and declined 10% year-over-year, largely consistent with our expectations. GAAP gross margin for the first quarter was 62.1%, and the non-GAAP gross margin was 62.5%, a record level for Marvell and an increase of almost 2 percentage points from last year. GAAP operating expenses were $251 million, and the non-GAAP operating expenses were $212 million, better than expected due to disciplined operating expense management and our teams continued effort to improve the efficiencies. GAAP operating margin was 20.7%. Non-GAAP operating margin was 27.4%, up over 5 percentage points from a year ago as we were successful in continuing to drive leveraging our model. GAAP earnings per diluted share was $0.25, and the non-GAAP earnings per diluted share was $0.32. Let's now turn to our balance sheet. We ended the quarter with $1.9 billion in cash on hand of $3.64 per share based on non-GAAP share count, and we currently have no debt. In Q1, we distributed $30 million to shareholders in dividend. As a reminder, we have not been in the market with repurchased shares due to the pending Cavium transaction. Now moving to our Q2 outlook. We expect our total revenue to be in the range of $600 million to $630 million. At the midpoint of our guidance, it would represent a 2% year-over-year growth. Please note that our Q2 revenue guidance reflects the loss of approximately $7 million in ZTE networking revenue due to the current trade restrictions imposed by the U.S government. For comparison purpose, including ZTE revenue, our Q2 2019 revenue guidance would represent 3% year-over-year growth. We expect our storage revenue to be up low to mid single-digit year-over-year. We expect our networking revenue to be up high single-digit year-over-year. If we were to include $7 million in ZTE revenue, networking would be double-digit, up year-over-year. We expect our connectivity revenue to decline in the mid teens year-over-year as we were not experienced the normal consumer gaming ramp that would typically start in Q2. As Matt mentioned earlier, over the last two years we have been shifting our strategy in the business to focus on the high performance segment of the market, while customers value the differentiation we deliver. Part of the shift in strategy involves accessing low margin consumer based platform. The result is an increase in design traction with gross margin improvement, despite the revenue headwinds as some consumer products ramp down. As an example, gaming in Q2 will be accounted for 8% of connectivity revenue compared to a year-ago, while each represent roughly 22% of revenue. This transaction is by design and we expect the gaming revenue to continue to ramp down in Q3. Overall, we continue to be excited by the long-term prospect of our connectivity business. We expect other revenue to decline in the mid to high single-digit year-over-year. We expect gross margin to be in the range of 63% to 64% driven by greater product mix, continued focus on margin expansion initiatives, and the manufacturing cost discipline. We expect our GAAP operating expenses to be between $260 million and $270 million, and the non-GAAP operating expenses to be approximately $210 million. We anticipate GAAP income per diluted share in the range of $0.22 to $0.26, and the non-GAAP income per diluted share in the range of $0.32 to $0.36. Before I turn the call over to operator to take questions, I did want to ask that you please keep your questions focused on Marvell and our financial results. We are quite committed from legal prospective of what we can comment about Cavium's financial results. With that, we will now open the line to Q&A. Operator, we'll take the first question, please.

Thank you. [Operator Instructions] And our first question will come from the line of Tim Arcuri with UBS. Your line is now open.

Thank you. Thank you very much. The first question I know that you don’t want to talk too much about the Cavium results, but can you confirm or comment on whether you've merged the ERP systems or you’ve aligned them?

I will take that question. So, on the , ERP systems, especially after we close the transaction, we will have a plan to merge the ERP system. Typically, it will take us 9 to 12 months. From the integration planning perspective, we are actually actively planning the merger of the ERP system, but that’s a lot of you know -- that’s the item that typically takes 9 to 12 months after we close the transaction.

Thank you, Jean. Thanks. And then, can you give us a sense also on the SSD? Is that in the low 30s as a percent of the storage revenue or is it more like mid 30s? Thank you.

Hey, Tim, thank you for the question. I’m not going to give you that detailed answer. I think we said more than 30%.

That’s right. And just to add the perspective, Tim, I think you were not in the last call, but as we have sort of followed this continuum over the last you six, seven quarters, it's just in constant progress each quarter. So I just sort of view, the quarter we just had which was record revenue for us in SSD, as you know now crossing the 30% threshold. But as Jean said, we're not -- we never provided that level of precision, but you should just view it as another positive data point that our mix in storage continues to improve both in SSD as well as the content of enterprise and data center percent of revenue.

Thank you so much.

Thank you. And our next question will come from the line of Vivek Arya with Bank of America Merrill Lynch. Your line is now open.

Thanks for taking my question. For the first one, good to see the strong growth in networking, Matt. I think if I look at the Q2 guidance, it's sort of like the fourth quarter of accelerating revenue. I’m curious what’s driving this acceleration and how much legacy business is still left in networking?

Sure. Yes. Vivek, thanks for the question. So, no, that’s really the new products continue to have a strong ramp as we indicated. A number of new products that target not only the enterprise in the campus area, but as well as the data center in switch in PHY, and in our embedded processor area, all three of those are doing extremely well and have been driving kind of double-digit growth on their own. Legacy continues to shrink as a portion of our total, and we have some lumpiness in the last quarter. I think, Jean, you want to give the exact number that’s in the …?

It's still around 15%.

Yes. So it's sort of maintaining in that area, but the new products are a bigger scale and are growing faster.

Got it. And then in the storage business, I think you’ve gone sort of back and forth between assuming sort of a flat trajectory for that business over the longer term versus some amount of growth given the growth in SSD controllers and the shift to enterprise and data center. What is the right way to think about it? For example, what is the mix of the growth parts of storage now, so we can think of this as a somewhat growth business rather than just flatlining from here?

Sure. So I'll give you my view, and Jean could add, but we’ve been -- when we’ve had conviction that storage for us is a grower, and we’ve had that conviction for some time, the model really to think about is the HDD portion which is larger. We’ve been able to manage that largely flat despite the kind of well-known secular decline in the client portion. We’ve more than offset that with increases in what we consider to be the higher value segment and the growing segment which is the enterprise and near line type of drives. That’s been going on in that trend, we think is going to continue. As client declines, we are going to see continued growth in solutions that really enable higher levels of capacity for cold storage and then we have this preamp product line that we believe will continue to kick in over time, so that keeps HDD in a flat type of area. Some quarters, it grows a little bit, some quarters it's down, but generally speaking it's flat. And then SSD, if you go back over the past four to six quarters, it's been our strongest growth driver in the company as evidenced even by this past quarter where it exceeded 30% of our storage revenue. So we see the combination of those as HDD being flattish, although we are doing our best to grow it a little bit and then having SSD layer on top with kind of the fundamental end market of data center and cloud pulling through on both segments. We continue to see it as a growth market that's being growing for us and we see that going forward.

Okay. Thank you.

Thank you. And our next question will come from the line of Blayne Curtis with Barclays. Your line is now open.

Hey guys. Thanks for taking my question and nice results. Just curious on the strength in SSD's record, maybe you could talk about between client and enterprise in April. And then maybe just talk about that transition, I know you have a lot of different growth areas in hard drives, but just that transition from client hard drives, SSDs, if you could just talk about your competitive position as that transition happens?

Yes, I will take this question. So when we look at enterprise data center versus the client, as Matt mentioned during the call is we have seen the revenue of enterprise data center grow 50% at the overall storage, that’s how we look at the business. And frankly during the last several quarters, that growth rate we have delivered either higher or similar growth rate. So overall when you look at it, it is our enterprise data center business that have been growing significantly. Of course, when you're looking to both SSD side and HDD side, SSD side, both our client and enterprise data center businesses are growing, it is enterprise data center growing even faster. On the client -- on the HDD side, Matt has just mentioned the trade off there, right, is we do see our data center and enterprise nearline business growing much faster, which offsets the decline on the client side. I think if you look at the market on the client side, everybody is predicting like 7% to 10% of decline rate, I would say our business is quite consistent with that. But we have been able to offset that with our data center and the enterprise side of the business. I think that's how we look at the overall dynamics of our storage market and storage business.

Okay. Thanks. And Jean if I could just ask you on the gross margin, you are seeing a nice uplift, I'm assuming the wireless LAN helps with the mix. I was wondering if there is anything else contributing to that uplift?

Yes, we are really pleased with the gross margin improvement. The team has done an excellent job in execution. So when we look at Q2 -- guidance of Q2 gross margin versus Q1, about half of that increase is from the mix. The other half actually is coming from continued margin improvement initiatives. So overall, the increase is really exciting.

Yes. Blayne this is Matt. I would just add that we have been fighting mix for the last several quarters as connectivity outperformed our expectations in many of those quarters, and so we have -- although we have been able to grow gross margin every quarter, we sort of kept saying hey, when mix really moves our way it should have an uplift and it certainly did. I think that was validation that mix worked our way in our favor. Clearly new products are kicking in and then as Jean mentioned we have got an outstanding ops team that continues to drive manufacturing cost reductions and efficiencies on top of that and that's how we continue to get leveraged in our gross margins and we think we are extremely pleased with the progress there.

Thanks.

Thank you. And our next question will come from the line of John Pitzer with Credit Suisse. Your line is now open.

Thank you. This is Charles Kazarian asking question on behalf of John Pitzer. At your Analyst Day you kind of outlined a storage SAM CAGR of about 3% with 4% decline in HDD and about 10% growth in SSDs. As you now kind of gain conviction and HDD is being a little flatter to potentially up and that's before your kind of comment on factoring in the HDD preamps and it looks like SSDs are kind of growing about the target as well. Is it fair to assume there is kind of potential for the storage market to be more of like a mid -- little bit above mid single-digit grower for you? And then in that same vein how would you kind of think about kind of the blended growth rate for the company relative to the 6% to 8% target you outlined at your Analyst Day? Thank you.

Okay. Yes, great Charlie. Thanks for the question. There is a few pieces to it. So, first I would say is that since Analyst Day we have given some qualitative updates to that model. Obviously, when we have another Analyst Day we will give a formal update, but what we said so far is that SSD in the market has actually increased in velocity. Since that time we said 15, now we sort of said it's probably more like 20 plus. And then, depending on which portion of HDD look like, you look at the market, at least it's still in decline and the it's probably at the range we said or maybe even a little bit more depending on the trajectory of the client. So from a market standpoint, it's probably around where it was with maybe SSD having a little bit more of an uplift. Clearly for our business, we're tracking very well to our commitments we made at the Analyst Day, which was to in spite of a declining HDD market manage it to flat, which we have been able to do. And some quarters it's actually been up a little bit now performed. And then SSDs, based on that 15% market estimate we made, Marvell is a company that's growing much faster than that. So you can create your models based around that, but we continue to see storage as I mentioned earlier when Vivek asked this question, as a growth market for Marvell. And when we say 6% to 8% for the combined company, with the Cavium portion layered in, we're not breaking that down specifically by product line, but clearly the core Marvell we have always thought we could grow and we set a target we have been doing 6% kind of an aggregate on that which includes networking and connectivity in the blend. And so we got Analyst Day coming in October and that will be a chance where we can reset some of these models and give a better view, but I hope that color is helpful to walk you through the trajectory of where we are versus where we are -- where we were versus where we are today.

Yeah, that was very helpful. Thank you.

Thank you. And our next question will come from the line of Karl Ackerman with Cowen. Your line is now open.

Hi. Thanks for taking my questions. I guess, I just kind of want to circle back on the SSD controller business. I think one of your competitors has been pretty vocal on winning the lion share of new design wins for PCIe controllers, but your implicit results for your SSD business this quarter suggests you are still growing over 30% a year or well above the market. So, a, could you talk about the revenue opportunity in fiscal '19 and how you see maybe your SSD business growing as a portion of your total storage business? And, b, how do you think about the competitive landscape in SSD controllers? There also appears to be some several Chinese controller players trying to disrupt the SATA portion of the market. So your thoughts there kind of longer term would be helpful. Thank you.

Sure. I will give you a couple of comments there. One, with respect to the competition discussions, this is something that was maybe around two years ago with a certain competitor that was making a lot of noise and then obviously last year that noise did not materialize. So we don't comment on our competition there. We tend to look at our own business and as you point out, it's growing very nicely and in line or above our own aggressive plan. So we are very well positioned in SSD. With respect to new and emerging competitors, look it's a lucrative market, it's a large and growing market, but it also requires tremendous engineering IP, scale, firmware software there's an ecosystem aspect of it as well and there is -- in particular in the cloud and the data center portion there is a large barrier to entry just to get qualified. So when we look at our business as really the number one or two player with respect to market share, other competitor being an internally sourced company. We think our scale really matters in this case. And it allows us to invest in next-generation IP to handle all of these different technologies that I mentioned in my prepared remarks. And so we are going to continue to focus on our roadmap and continue to make sure that we stay head and that's been our strategy from day one here.

Here, too just add to what the Matt has said, right, data point, I remember six quarters ago we said our SSD revenue would be more than 20%, then we said we're going to march toward 30% of the overall storage revenue. So that exactly what we have done, right, despite what the competitors saying is you have seen our revenue growing significantly quarter-by-quarter, year-over-year, expansion literally doing about last six quarters from 20% of the storage revenue to 30%, more than 30%. And our storage business are growing. So that's basically a representation of how we are -- have been growing our business.

Perfect. If I may just squeeze one more in, I'm curious if you could discuss how sustainably you take the $210 million OpEx level is beyond the July quarter. Clearly you’re working on some supply chain initiatives, but revenue should grow I think quite a bit from here. So how do we take about the OpEx level beyond the July quarter for that level? Thank you.

Yes. On the operating expense, I really want to emphasize since last -- during last two years, right, we are laser focused to build a very efficient operating model. The team really have the increasing efficiency across R&D functions and SG&A functions. So this operating expense level when you compared to a year-ago, we grow revenue, but we actually reduced our operating expense level. The whole company is much more efficient today compared to two years ago. I think going forward, we actually see we are going to continue to keep at this operating expense level. We are investing R&D and the talent, but there we are making the company more efficient. So this is the level we are comfortable right now.

Thank you. And our next question will come from the line of Ross Seymore with Deutsche Bank. Your line is now open.

Thanks for the -- let me ask question on the connectivity side, Matt you talked about some of the push out from what you expected in the April quarter to now be the July quarter. Can you just talk about is that still benefiting things, but the decline year-over-year and it seems like sequentially is just gaming business going away? Just want to know some of the puts and takes in the guidance there please.

Yes. Hey, this is Jean. I will take this question. So, yes, so when you look at the wireless revenue there are lot of puts and takes. I remember last quarter we need to say one of our large customers had a really unusual high forecast, some of the forecast did not materialize and so it pushed into Q2. And then Q2 we do have the gaming revenue coming down quite significantly, continue to go down in Q3. So that's just the different trade-off of with the quarter, but overall I think we give you an idea about the gaming ramping down and as a percentage of connectivity revenue. But put gaming on the low margin consumer business aside, we do see our enterprise access, automotive, the other business continue to grow going forward.

Yes, I would just add Ross that this is a business where we have been able to significantly improve the margins in this business and as I mentioned it's been part of a strategy that we have been playing out here for some time. And as you think about some of the puts and takes in the -- in particularly the ramp down of the gaming business, also keep in mind that that margin profile was significantly lower than even the average margin profile of our overall connectivity business such that sort of up gross margin contribution in terms of dollars in Q2 and even in Q1 was quite minimal. So as Blayne mentioned earlier, that’s one reason why we are seeing -- its a mixed shifted we're seeing margin expansion. But we are very comfortable with this mixed shift from consumer to high-performance and this trajectory we have been on and we are going to continue to do that and drive value where we can.

Perfect. I guess my quick follow-up, you mentioned a couple of times about the enterprise side of your storage business growing, specifically in the HDD portion of that. Is there any sizing you could do about that or -- and just kind of describe how you expect growth on that side of the business to go going forward admittedly as an offset to what would be happening on the client side?

Yes, thank you for the question. So we are not going to get into all those detailed percentage of storage HDD, SSD, but to directionally right is when we had our Analyst Day, our enterprise data center business as part of HDD revenue was really low. So over the last six quarters, we have seen significant growth over that business. It become very meaningful, but bear in mind it's still a small portion of our HDD business. Going forward, we'll continue to see the growth, but I think we are going to give you directionally where it's going when we have another Analyst Day. Quarter-over-quarter we are not going to get into the details of the percentage.

Is it fair to assume that that transition is also accretive to gross margins?

Oh, absolutely.

Perfect. Thank you.

Thank you. And our next question will come from the line of Gary Mobley with Benchmark. Your line is now open.

Hi, everyone. Thanks for taking my question and congrats on a strong quarter. I guess, implicit in your second-quarter guidance is that the consumer related, the game comps related, Wi-Fi connectivity business is going to be $7 million in the second quarter. So just get a sense of the revenue headwind that presents the second half of the year, could you give us a sense of the rate of decline in that business what good or nothing by the time we get into the second half of the year. And then also implicit in your second quarter guidance is that perhaps other revenue increases year-over-year and sequentially at the time when that's posted a decline. Am I reading that right and can you explain the moments there?

Sure. I will give you my take, Gary, and thanks for the question. I will let Jean add. So I think the way you should think about it is that -- and again we are not -- there's a portion that I can give some color on, and a portion of that obviously we're not guiding out to Q3 and Q4. But for the purposes of the gaming trajectory you should assume that in Q3, the revenue on this is very low, probably $1 million and then it's -- just assume it's not there. I would say that I wouldn’t assume it's just a net drop. We obviously have other programs in other end markets, and our wireless business continues to remix. But for the purposes of if you want to model the gaming, I think that's probably the safest way to do it. Jean, do you want to add anything?

Yes, I think on the other your question about other revenue, it's flattish sequentially I think and year-over-year actually continue to decline, right. The other revenue category it's a little bit lumpy quarter-over-quarter, sometimes you'll have a last time buy for certain products. So -- but directionally in the longer term, we think the other categories mid to high single-digit year-over-year decline.

All right. Thank you guys.

Thank you. And our next question will come from the line of Quinn Bolton with Needham. Your line is now open.

Hey, just first clarification on the connectivity business. The large OEM that you had expected to ship in April, that's not a gaming customer, correct?

No, that's not. It's what we call the high performance like voice-assisted solutions.

Got it. Okay, great. Thanks for the clarification. And then just on the SSD business, about this time last year I think you guys gave us some projection that said business would go from the low 20% of storage to 25% to 30% and you hit that. I'm just wondering as we look at fiscal '19, is it reasonable to assume SSDs can get to say, 35% to 40% of storage by the end of the fiscal year?

Sure, Quinn. Yes, we haven't set a target, but you should assume that that trajectory that we’ve been on is going to continue. We will update the model at another time, but you should assume that and it may vary quarter-by-quarter but that direction isn't changing, that mix between SSD and HDD.

Okay, great. And then last question, Matt, just on the automotive ethernet side. I was just wondering for the gigabit ethernet. Can you kind of give us a sense what you see on the competitive landscape? And then are you seeing any demand from customers for faster than 1 gigabit speeds in the autonomous vehicles going forward? Thanks.

Sure, Quinn. Yes, so we feel very good about our competitive position in gigabit ethernet. This was a very challenging product to take to production. We announced it a few years ago, but to go from sort of product announcement sample to passing all of the stringent EMC and EMI requirements was a real challenge and it was a testament actually to our team here, that's tremendous expertise in this area. And so that product we think in the context of your other question its sort of a one gig node is really where a lot of the volume is going to come also by the way still on 100 megabit as well. Certainly there are requirements for multi-gig and even up to 10 gig, in automotive and we are very aware of those. We are working on those, but we think the bulk of the market and the activity we see today is on the current solutions both for our PHY as well as our integrated switch. And we’ve got obviously the core IP to do all of these solutions, given the scale of Marvell as the number two ethernet supplier in the world and the dedication and focus we have on automotive, we think we are extremely well positioned across all the various technology nodes, including multi-gig as you mentioned.

Great. Thank you.

Thank you. And our next question will come from the line of Srini Pajjuri with Macquarie. Your line is now open.

Thanks, guys. Matt, just a couple of questions here. First on the China MOFCOM approval. I'm just wondering what kind of feedback if any you have been getting and what gives you the confidence that it will close, I guess, in midyear is what you're expecting? And also if you can maybe talk about the process once you get the approval, how long do you expect to take for you to close the deal?

Sure. So, I will just start off by saying on regulatory, we have gone through CFIUS obviously and there was a process we went through there and back and forth and active discussion and ultimately we received the outcome that we are looking for. There is also a process ongoing with MOFCOM as everybody can read in the paper every day, right. There are other events going on at the geopolitical level right, that are certainly factoring into MOFCOM at a high-level. We focus on our deals and providing the information that's required we continue to believe that the -- and we know that the overlap between the two companies is very minimal and the strategic rational makes a lot of sense and we are being very cooperative with everybody involved in the regulatory world. So that one, we are just continuing to be responsive and work through the process. And then with respect to closing, we have basically from when we receive approval, it's about two weeks we have to close. And so think of it as whenever we announced that we have got MOFCOM and we get that and within two weeks we would close the transaction.

Great. Thanks for that color. And then on networking, obviously you're guiding for a fairly strong quarter despite the ZTE headwind. But my question is more about the quarter that you just printed, I was hoping to see a bit more upside there, given the environment and given your new product ramps, I'm just curious as to why we are not seeing a bit more upside in the current quarter? Are there any puts and takes that prevented you from seeing that upside?

You know there is nothing specific other than we were obviously happy to see the 6% year-over-year. The next quarter you can sort of imply, obviously with ZTE it would have been over double-digits and we don’t know what’s exactly going to happen there. So this one has been hard I think for us to nail the exact timing on in terms of some of these ramps that we are seeing, but directionally certainly over the last three, four quarters we have been pretty happy with the progress on our core business and those ramps. And so we feel good about our Q2 outlook and obviously we see that continuing. So I can't -- Jean, maybe you have something, but I -- my view is it was a good quarter.

Yes, it's great. As Matt mentioned, our switch processor and the PHY actually grow 10% year-over-year. So legacy did decline double-digit year-over-year, but it's -- we feel like it's a good quarter.

Great. Thanks, Jean.

Thank you. And our next question will come from the line of Harlan Sur with JPMorgan. Your line is now open.

Good afternoon and congratulations on the solid results. We had Western Digital CEO at our Tech Conference couple of weeks back, and given the normalization in flash pricing, he talked about already seeing price elasticity and NAND driving higher attach rates of SSDs in notebook PCs. And then lastly, we heard a similar thing from Micron at their Analyst Day and I believe that these two companies are your largest client SSD customers. Is that what is helping to drive your strong SSD controller growth?

Well -- hey, Harlan, so nice to hear from you and thanks for the question. So, we’ve added a number of growth factors in our SSD business even as Jean I think mentioned. Across clients, across enterprise and data center, even on when we’ve taken a look at the companies that are also our customers that don't even make the NANDs that are procuring NAND to build their own SSD drives, we see that set of customers also starting to really grow this year because of the increased availability. And so, I think certainly those comments out of WD and Micron, clearly they are our customers, so we are benefiting, but I think the other broader theme is that we have seen really nice growth ex the companies that actually make the NAND which was a big driver for us in calendar 2017, we see some tailwind in 2018 as NAND loosens and other people can build SSD drives. So it's a combination, Harlan, of better market availability and our customers are doing well.

Great. Thanks for the insight there. You guys have been benefiting obviously from the campus and enterprise segments with networking market, and a nice upgrade cycle that is going there -- going on there and so one of the faster growing switch vendors -- Arista [ph] seems to have sort of a similar view and they recently announced their intentions to enter the campus market with a few new switching platform, I think Juniper also recently announced to focus on this market as well. So I'm just wondering if you can discuss switching design wins with other OEM customers, in addition to the solid traction with your large networking customer?

Yes, we can't get into the details by customer, but what we can say is that our engagements on our switches and obviously our PHYs that attach have been brought in nature, right with U.S OEMs as well as with the Chinese OEMs. And you got to remember too in all these OEMs in the various geographies they have multiple platforms, multiples SKUs, and then based on our product offerings across switch, PHY processor and other we got a wide range of products we sell. So, notwithstanding the question about sort of Western and Juniper won't go into that specifically, but I will say that our penetration has broadened and we continue to see ourselves as a broad-based global supplier. And we've been saying for a while, we think that the campus and enterprise networks at the world we do for an upgrade, I think large OEMs have followed suit and we think we are -- we continue to think we are well-positioned is that as that trend starts to materialize this year.

Yes, absolutely. Thank you.

Thank you. And our next question will come from the line of Kevin Cassidy with Stifel. Your line is now open.

Hi. This is John Donnelly on for Kevin. Thank you for taking my question. If the trade restrictions continue for ZTE, do you expect to be able to make up that $7 million per quarter by shifting sales to their competitor or is it kind of being viewed as lost revenue?

Yes, we're not accounting on it, which is why we called it out the way we did. We just decided to be super clear that this is the amount, this is what we took out to the extent that it comes back. It's approximately that amount of revenue that would come back, but timing plays a big role. And then to the extent that it delays and other vendors get share and we are in those boxes and we may or may not benefit, but it's hard to model, so we were just very clear about guiding without it.

Thank you. And our next question will come from the line of Craig Ellis with B. Riley FBR. Your line is now open.

Thanks for taking the question and nice job on the excision. I just have a couple of follow-ups and then a question. So the first clarification, Jean, with regard to the gross margin guidance and a portion of the increase that's really cost management and self-help in nature. Is that more one-time in nature or those initiatives things that can continue to bear fruit beyond the fiscal second quarter?

Yes, that’s a great question. I think, certainly in Q2 typically, the cost improvement initiative you see a step up, because it get included into the standard. But as a company I think we continue to do everything we can to improve gross margin, so certainly in Q3, Q4, you will not see the step up like we just had in Q2. But you would -- you should expect us to continue to improve the gross margin just from a cost stand supply chain management prospective going forward.

That's helpful. And then my next follow-up is regarding comments on the repositioning with the connectivity business. Matt, is that portfolio falls to one that’s seemingly more, sounding enterprise centric thing consumer centric, what is the longer term growth rate of that business look like? I would expect that it would be somewhere above storage, but potential below networking, but if you can put any quantitative color on that it would be helpful.

Sure. Well, Craig, I think the way to think of it is when we did our Analyst Day we outlined the different growth rates. Wireless in the market including consumer and these are the type of applications has a pretty healthy growth rate. Our strategy has been -- and by the way we have consumer business, we have no problem with consumers business. A lot of the consumer business we have is in platforms where we can really add value and work closely with the customer on the dimensions that I outlined. So consumer will always be a part of that portfolio, albeit as you said the pivot has been more to enterprise and automotive and things like that, but our focus has been although the top line is growing actually in connectivity if you look that, it's been during a period where we actively managed this transition which is really focusing on profit and margin improvement not so much on the top line improvement. So as we look going forward, you should expect that’s going to continue that we want to make sure that this thing is a solid contributed to the company and that we are being selective in where we engage and develop products. And so, from a growth rate perspective, although the market may be healthy, you should think of this as a slower grower, but with improving profitability along the way such that the profit dollars grow at least as faster than the market.

That makes sense. And then if I could just ask one question related to the deal and it's not related to Cavium's numbers. But in your prepared remarks you have indicated that integration planning was going very well. I was just hoping you could elaborate on that, given that that has a significant impact on the way, integration actually comes through when you get to that point. Thank you, Matt. Thank you Jean.

Sure. I’m happy to comment on the integration, Craig, and thanks for the question. So the way that we have been running this, first of all, the leadership has been outstanding and this we have got leader from Cavium, there is COO, Our Head of Operations, co-leading the integration. It's extremely thorough and systematically managed. The level of detail and planning that's going on across our IT systems, sales force planning, operations and manufacturing, and one that's been challenging and we got make sure we get it right at the R&D integration. And what I can tell you is on all of those various traps the executives from the merge company have put together extremely detailed plans which include synergy capture, include timeframes and time tables with commitments. And I'm obviously very involved in this whole process and so from where we were back when we announced this and saying let's here is the range that we think and here is what we expect we can achieve, having went through this now for the last many months. We are extremely confident in our numbers and our ability to execute those in the manner that we said due to the detailed planning and the buying from the senior leaders of both companies we are going to be involved and making all this happen.

Thank you.

Thank you. [Operator Instructions] For our last question it will come from the line of Mark Delaney with Goldman Sachs. Your line is now open.

Good afternoon and thanks for taking the question. I have a question on the networking segment, I think on the last earnings call, the company had talked about some of the legacy networking product, so getting pushed into the first half of fiscal '19. Can you talk about to what extent you were able to ship those in the April quarter or assuming that you will shift those in July and if those are coming through in the first of, is there any step down in those more mature products that we need to be cognizant in the second half of fiscal '19, we are doing our modeling.

Sure, Mark. Thanks for the question. So on -- you're right. We talked about last quarter that we had some specific push outs in this NPU area and those push outs we said would materialize or return back to the run rate in the first half of fiscal '19. That did come back somewhat in Q1 and we expect it to be back at its old run rate, roughly in Q2. So think of it as bottoming in Q1, we didn't get the for recovery in Q2, we got a little bit. And then we will get a little bit more in -- sorry, Q4 was the low point. Q1 came back a little bit , then we will get some more in Q2 such that's sort of the Q3 to Q2 compare is about the same.

That's helpful. My follow-up question is on preamps. Matt, Jean, you talked about that as an opportunity. Can you just give us a rough sense of the size of the preamp business at this point?

Yes, very small today. There is a number of engagements that we have on a number of different drive programs that multiple OEMs. But those really are going to -- the way that business works is there is typically a dedicated preamp product per drive, per program and each of those is going to ramp at its own pace. So I would model, a very small revenue today, that something that will be growing throughout the calendar year and ideally we have an Analyst Day and we can get a little bit more of an update at that point. But it continues to make progress and we do think that it incrementally will help us as it grows to offset some of this secular decline we see on the controller side [ph] of the client. And by the way those preamps that we have are targeted both for client and for enterprise and near line applications. In many cases they’re paired directly with our next chipsets that are coming out. So we’ve these in line of sight on a number of these programs on the timing.

Thank you..

Thank you. Ladies and gentlemen, this concludes our question-and-answer session for today. So, now I will hand the call back over to Mr. Peter Andrew, Vice President of Treasury and Investor Relations for some closing comments or remarks. Please ….

Okay. Well thank you everyone for joining us today and we look forward to talking again next quarter. Thank you and good bye.

Ladies and gentlemen, thank you for your participation on today's conference. This does conclude our program and you may all disconnect. Everybody have a wonderful day.