Q2 2020 Earnings Call
Thank you and good afternoon, everyone welcome to <unk> second quarter fiscal year 2020 earnings call. Joining me today are Matt Murphy, Marvells, President and CEO and to you our CFO .
I would like to remind everyone that certain comments today may include forward looking statements.
Which are subject to significant risks and uncertainties enrichment 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 press release, which we filed with the FCC today and posted on our website.
As one of the most recent 10 can 10-Q filings, we do not intend to update our forward looking statements during our call today people refer 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 with that I'll turn the call or what the math for his comments on our performance. Thanks, Ashish and good afternoon, everyone. During the second quarter of fiscal 2020, Marvell delivered solid results with revenue above the midpoint of guidance. Despite the challenging macroeconomic environment, creating weakness across several end markets and the impact from the current export restrictions on walk away.
We expect both of these factors to continue to impact us in the third quarter, but as we will discuss we remain well positioned to capitalize on infrastructure opportunities spanning five G data center enterprise and automotive applications as we look forward to our next fiscal year.
Specifically revenue for the quarter was 657 million with a GAAP loss per share of nine cents non-GAAP earnings per share was 16 cents slightly above the midpoint of our guidance driven by the higher revenue level and lower operating expenses.
GAAP operating expenses were 397 million $22 million above the midpoint of guidance non-GAAP operating expenses were 280 million.
8 million below the midpoint of guidance, we're continuing to prudently manage expenses as we navigate the industry downturn.
Keep in mind. This expense level reflects the complete realization of synergies we sought to capture from the Cavium acquisition.
Plus the incremental cost savings, we outlined in December of last year.
I'm pleased to report that we delivered these expense reductions two quarters ahead of schedule. This achievement is a testament to the operational platform. We have established within Marvell and the disciplined approach we have implemented as part of our transformation, enabling us to aggressively invest in high growth areas, even within a smaller expense envelope.
Our integration track record will serve us well for the upcoming acquisitions of a quantia and ivera as well as the divestiture of a wife by business that XP.
As we look forward, we are preparing for significant new product ramps within our infrastructure markets, particularly fiveg, providing strong growth catalyst and secular positive offsets to the weakness across the broader semiconductor industry.
Before I discuss our core businesses I would like to provide an update on marvellous executive team recall that back in May Tom Legato, Our current head of global sales announced his decision to retire later this year.
I'm very pleased to announce that we are promoting dean Jarno senior Vice President and head of global sales for Marvell, Dan joined US in 2017, as our VP of North America sales in global distribution and previously held positions of increasing sales responsibilities at Samsung Broadcom, Freescale Altera and Am D.
Deane is an ideal candidate to assume the strategic leadership role given his demonstrated success in building strong customer partnerships and managing global organizations. He will be an invaluable addition to our executive team.
I would also like to recognize calm for the enormous contributions he made in the transformation of Marvell, Tom joined Us at a critical juncture and built a strong global sales team, including the recruitment and mentoring of Dean.
We wish Tom all the best in the returns to retirement.
Now moving on to the performance of our two core businesses.
First in our networking business revenue during the quarter was 330 million down 3% sequentially with seasonal growth in Wi Fi products more than offset by the U.S. governments export restrictions on hallway and a pause in demand from our base station Oems as they transition from Fourg to Fiveg.
More importantly, I'm very pleased to report that strong execution by our engineering and operations teams.
Coupled with a very close relationship with our lead customer is enabling us to launch our first fiveg products, which include our fusion base band and OCTEON embedded processors, and our Ethernet switches and buys into production in the third quarter ahead of plan.
It's early production start gives us and our customer further confidence in ramping up in the fourth quarter. In fact, our fiveg silicon is enabling our lead customer to deploy trial base stations this quarter in Tokyo, the light up their Olympic village in preparation for next Summer's games. Additionally, we're on track for our customer to start deploying fusion processors for massive mimo offload in remote radio heads in the fourth fiscal quarter.
Even more exciting we have secured another strategic design win at our lead customer what their follow on base band solution in the next technology process node.
To provide additional processing capacity within a smaller power envelope for their next generation Fiveg base stations. This win builds upon our very successful multiyear partnership where we provide advanced.
Base band processors, enabling our customer to drive higher performance lower power and faster time to market.
In addition fusion base band development for a second tier one base station OEM is also proceeding on schedule and remain on track to sample early next fiscal year and ramp production at the end of next fiscal year.
Based on the design wins, we have secured so far and using industry analysts forecast for base station units, while holding our customers market share at their current positions. We estimate that in a few years, our fiveg revenue potential can exceed $600 million per year.
Of course, our revenue potential conflicts above this if our lead customer is able to gain share as they drive towards their long term goals and from additional design wins, which we are currently pursuing within our comprehensive fiveg platform to address base band transport switching fronthaul and massive mimo opportunities at multiple base station Oems.
Further next calendar year is expected to be the inflection point for fiveg adoption with industry analysts such as del Oro projecting fiveg macro base station penetration to grow from about 10%. This year to rapidly increase to 38% next year and then on to 55% in calendar year 2021.
Moving on from base stations to our enterprise and datacenter markets. Our revenue grew sequentially driven by stronger than expected demand from our Chinese customers, who have not been impacted by export restrictions. However, these markets have remained generally soft therefore, we believe that some of our relative strength could be due to these customers building inventory to guard against any future supply chain disruptions.
Nevertheless on the new product front, our refreshed Ethernet products continue to win new designs, which will drive multi year growth. Our five team had a very strong quarter with multiple design wins in three separate platforms at a tier one U.S. networking Oems.
These include gigabit and 10 gigabit.
Copper fives for a very high volume enterprise access, which 25 gigabit optical fives for a high capacity enterprise access switch and 56 gigabit pamfour optical flies for an enterprise aggregation switch.
Equally exciting I'm happy to announce the first strategic design wins for our 12.8 Terabit switch platform, which we had introduced earlier this year, which will be powering a next generation firewall appliance from a tier one networking OEM and we have also secured an enterprise aggregation switch at a large Asian networking Oems.
Science, which ones will go into production late next fiscal year with the bulk of the ramp starting in fiscal year 2022.
In our automotive product line as you may recall earlier. This year, we did announce design wins with 16 automotive OEM span a Europe North America and Asia. We've now started the initial ramp of our gigabit six gigabit Ethernet secure switches and fight that some of these Oems for their upcoming model year, 2020, Rollouts and expect to grow more substantially next fiscal year, we ramped the remaining majority of these design wins and support a model year 2021 launches.
Multiple design wins were secured across a variety of applications, including infotainment H. bass, telematics central gateway and body domain controllers.
The investments we made to establish in house automotive grade capabilities are now starting to pay off and we recently achieved a key qualification a spice level to an important software process developments or certification tailored specifically to the auto industry for developing high quality embedded systems. This represents a key differentiator versus our primary automotive Ethernet competitors.
We believe that our technology investments, which will be further enhanced by the multi gig capabilities from the upcoming acquisition of a quantia to have positioned us to become the leader in the automotive Ethernet connectivity market. Its market is projected to grow rapidly from a low base today to well over half a billion dollars over the next several years. The steep trajectory is not driven by automotive unit growth, but rather by the growing proliferation of high speed in vehicle networks connecting the increasing number of sensors and cameras for driver assist at higher levels of autonomy as well as richer infotainment and more advanced telematic offerings.
Coming increase in bandwidth and the sheer number of endpoints, which need to be connected and shared will require a secure standards based Ethernet fabric designed for speed and scalability in a few years, we believe that the overall automotive market can become another substantial growth engine for Marvell. In addition, Ethernet connectivity, we see opportunity to leverage additional technologies, such as our processing security and custom design capabilities in the automotive market.
Moving on to our outlook for the third quarter, we expect a low single digit sequential decline in networking revenue. This outlook reflects softness in demand from the enterprise networking end market due to current macroeconomic conditions and in particular, a recent significant forecast reduction from a key enterprise networking customer as well as the seasonal decline in Wi Fi, partially offset by growth from our base station products driven by the start of our Fiveg production shipments.
Turning to our storage business.
Storage revenue for the second quarter came in above our expectations at $275 million declining 1% sequentially better than our guidance for mid single digit sequential decline.
As expected our storage business was impacted by the export restriction on walk away.
But we benefited from stronger than expected demand from a broad set of storage controller customers in the HDD SSD and fibre channel end markets. It appears that previously elevated inventory levels have slowly started to subside at some of our storage controller customers.
We also believe that PC builds picked up in the second quarter with better CPU availability and that demand for high capacity Nearline drives also stabilized.
Growing our revenue from the enterprise and data center market is a key strategic objective for Marvell and to that end. We are now shipping in multiple nearline platforms with capacities up to 16 Terabyte. In addition, I'm also pleased to announce that we now have a design win and next generation platform targeting even higher capacity points well under the 20 plus terabyte range.
Our storage controller team had a very strong showing at the recently concluded flash memory summit or SMS Orient introduced to breakthrough products and then be over fabric Ethernet SSD controller and a family of PCIA Gen. Four nvme Pcie SSD controllers, we demonstrated both of these products as well as additional technology solutions, including artificial intelligence Ssds fiber channel over and be a me and centralized automotive storage at this premier industry events.
Are you concerned at SSD controller enables an SSD to directly connect to an Ethernet network without the need to go through a host such as a server disruptive new datacenter architecture significantly reduces cost by eliminating power hungry CP use smart next DRAM PCIA switches, while also reducing latency, increasing throughput and lowering downtime due to SSD failures.
These controllers fully integrate with Marvell datacenter Ethernet switches and their introduction marks a key milestone in advancing our end to end Ethernet storage strategy.
Also at Fms, Toshiba memory showcase the world's first direct to Ethernet SSD their dual ported 25 gigabit Ethernet solution, leveraging barbells Ethernet SSD controller technology.
Our new Nvme SSD controllers represent the industry's first pciethree genfour SSD controllers to be fabricated on a 12 nanometer process, which consumes lower power, while delivering better performance multiple ecosystem partners, including AMC, Lenovo Micron and Toshiba memory have expressed very strong support for these new products more importantly, these controllers provide the core architecture for our upcoming embedded and do it yourself customers. So see flash controllers, which we expect will start ramping late next fiscal year.
Moving onto our outlook for our storage business in the third quarter of fiscal 2020, we expect an increase in demand for our storage controllers from the datacenter and enterprise markets, especially from high capacity Nearline drives and some additional catching up in the SSD market from the under shipment in prior quarters.
Demand for fiber channel adapters should also trend up in the third quarter contrast demand for hdds from Pcs gaming is expected to remain soft with sub seasonal growth for this part of the fiscal year.
As a result, we expect an approximate high single digit sequential growth in our third quarter storage revenue.
In closing.
While we remain very rich, while we remain in a very challenging macroeconomic environment, which is certainly worsened recently and has impacted our guidance for the third quarter. We continue to focus on things we can control.
We're winning new design.
Optimizing operating expenses, introducing new products on or ahead of schedule and expanding our product pipeline.
It is particularly exciting to see the production of our first fiveg products accelerated into the third quarter faster than prior expectations of course, we expect our fiveg business to ramp more substantially in the fourth quarter and well into our next fiscal year from new Fiveg base station deployments in multiple geographies.
In addition, we also expect to benefit from our customers starting to replace SPG A's with our purpose built fiveg solutions in the pre Fiveg base stations they have already shipped.
At the same time, our storage business is starting to recover and we are increasingly pivoting this business towards enterprise and data center applications further with the Quantia and Ivera acquisitions, Marbella is well positioned to capitalize on product on a broader set of opportunities leveraging our unique standard semi custom and full ASIC design capabilities towards realizing our vision of becoming one of the worlds leading suppliers of infrastructure semiconductor solutions.
With that I'll turn the call over to gene for more detail on our results and outlook.
Thanks, Matt and good afternoon, everyone I'll start maybe deal flow financial results for the second quarter, and then provide now kind of outlook for the data quality of fiscal 2020.
Revenue in the second the quality it with the 657 DBM versus our guidance over 650, Mimi at Cedar point.
And we'll keep that present, the 50% of revenue in the second the quanta can lead to storage it contributing 42%.
Other product revenue with the 52 media and accounted for 8% of the total company revenue.
After a strong second the quality that we expect out of product revenue to decline sequentially in the third quarter.
GAAP gross margin was 53.4% non-GAAP gross profit was the 400 and the 15 media, 63.8% for value, reflecting the change in mix and maintain the quality.
GAAP operating expenses were $397 million 22 million above the midpoint of guidance driven by acquisition and divestiture related expenses.
Non operating expenses to a 200018 bps below the guidance range provided in May.
As Matt discussed earlier, we were very successful in achieving our planned expense reductions to clutch at the height of the schedule.
non-GAAP operating profit was 136 million or 21% of revenue.
GAAP loss per diluted share was nine cents.
non-GAAP earnings per diluted share was 15 cents slightly abad meet appointed.
Driven by higher revenue and lower operating expenses.
Now turning to our balance sheet in the second the quality lead they turn to 56 meeting.
To shareholders is through 16, each share repurchases and flicking meeting the meeting.
We exited the quality at least 573 meeting in cash and cash equivalent and the long term data for 1.7 Bebe.
We have paused to share repurchases and debt reduction, while we look forward to closing the acquisition punchy ampyra as well as the sales life I'd be happy to NXP and we currently anticipate all of these transactions to be completed to pay down our previously communicated timeframe.
Given the ongoing uncertainty and the Maquet, we actually would they be delisted China you mentioned the second the quality and the plan on doing the same again, a third question with no full reducing 10 no deal I two weeks it below our target level.
Let me now move onto our time to outlook for the third quarter fiscal 2020 . Please note that this guidance does not include any contribution from the pending acquisition, so plow quantia and there as well as to the divestiture of Wi Fi business.
Similar to last Quantifies the outlook, we expect our revenue in the kind of period to remain impacted by the U.S. it down into the export restriction on file weight.
Specifically, we are forecasting revenue to be in the range of 660 million plus or minus 3%.
We anticipate our GAAP gross margin will be approximately 50% to 53.5% and the 54.5% on a non-GAAP gross margin will be between 60% and 64%.
We project, our GAAP operating expense to be in the range of 385 million plus or minus five media.
We anticipate our non-GAAP operating expenses to be new venture for 280 million plus or minus 2.5.
We tried to meet opined that will be similar to the prior call. Tim we continue to maintain tight control for discretionary expenses that given the current uncertain macro economic environment.
We expect interest expense to be 20 media.
As a result, we anticipate GAAP net loss per diluted share you live angele from nine cents to five cents.
And non-GAAP earnings per diluted share Evangelical 15 to 19 cents.
Operator, we're now ready fluctuate. Thank you ladies and gentlemen at this time, if you would like to ask the question over the phone. Please press star and then one on your telephone keypad. If your questions have been answered it we should move yourself from the queue simply press the pound key and to everyone participating in today's Q and a session. We kindly ask in the interest of time that you. Please limit yourself to one question and one follow up.
Our first question will come from the life of that are you with Bank of America. Your line is now open.
Hi, Thanks for taking my question and thank you for all the updates on Fiveg might I had two questions first on Fiveg I think you mentioned youre starting to ship to your lead customer at a quarter ahead I assume that's just a partial quarter ramp and then the deals ramp should be in January and long, but I think you gave a $600 million reversal opportunity.
Is that just with the lead customer or does that include your entire fiveg opportunity with multiple customers.
Great. Thanks for that Gal I'll answer both of those so I think you're right.
Q3 is definitely a partial quarter and it's the initial production.
Originally we had been signaling going back some time that we would have this initial production in the fourth quarter. So we were able to pull some end, which is I think a great great achievement or our operations team and and design teams have done a fantastic job. So we'll get some shipments in Q3 with with the ramp.
Four full quarters worth of contribution in Q4, and then on your second question. The 600 million is the is the all in number that's with you know think of it as our lead customer plus our second customer plus factoring and other opportunities that we see in the pipeline and of course, we said depending on base station units and percentages.
Of share of our customers it could go higher but again the way to think of it as the 600 million is what we can.
What we've won so far and then anything that we can get thats above and beyond that on some of these new opportunities were pursuing would be incremental and again just to be clear. This is a this is a.
A run rate number we believe is achievable over time. So this isn't something that's going to start like next quarter. As an example, but overtime. We believe once these all roll into production it will be a substantial revenue driver for the company.
Got it and for my follow up on the storage side sales are down about 30% from the quarterly.
Level I realize that that is wildly effect in there, but what does the company look like for storage do you think revenues get somewhere in between where you would have the peak.
This is Barry you are right now and what would be the catalyst for the company and let's say if you don't see the recovery factor in storage are there other strategic alternatives that need to be considered thank you.
Okay got it yes, so I think I think at a high level.
It's difficult to give you a precise answer so I think it's probably what you said, which is it's somewhere in between I mean, obviously, we're taking this one quarter at a time I think the positives we see certainly in the short term is that this business appears to have stabilized after having dropped fairly precipitously for us as well as the rest of the industry and obviously guiding up sequentially in Q3 as a positive sign so I think.
Then if my commentary in probably the short term, which is at least for seeing some positive signs but.
And we do expect by the way that that.
You know as we look into next year when you sort of asked for catalysts I think one is obviously we are going through this inventory rationalization at the customer base, but we also have new design wins and new programs that were and I alluded to the traction in near line. As an example, which are which are programs that are currently in production as well as next generation I think thats kind of thats going to benefit us heading into next year as well as some new opportunities and SSD that come out of this do it yourself framework that we've discussed as well. So I think there's there's there's some sort of just general recovery plus we do have new design wins and traction.
And as a result, I think on your third question you know.
Storage remains to be an extremely important business for us it's a profitable business. That's one where we have with strong technology leadership and market position and we have a lot of customers that are counting on us to keep delivering the solutions that we are so we're investing in this area and we do see it as an important part of the Marvell story, having really compelling offering of storage networking and computer processor assets that from a system point of view are very important to our customer and offers a breadth that really very few to none of our competitors can provide.
Okay. Thank you.
Hello.
Thank you and our next question will come from Karl Ackerman with Cowen. Your line is now open.
Hey, good afternoon, managing two questions from me as well please.
First.
You indicated in your prepared remarks that you received some earlier shipments of five new products in the October quarter or in the upcoming October quarter.
How much Fiveg revenue do you expect in the October quarter, and what is the expected ramp.
In the January quarter.
And I guess from a qualitative perspective, what's the right way to think about your fiveg opportunity over the next few quarters.
Kyle I'll also the near term question, Matt can add about the future for Fiveg. So we just started forced to production shipment dates. So you should expect it's a very small revenue in Q3, certainly we expect the Q4 you will see the sequential rents have from the Fiveg product line in the longer term and Matt you probably can't give him that model number 10, when we talk about the 600 media failures the opportunity of course, it would take time from that.
Initial ramp that to get to that it takes to Hyundai media annual run rate. So that's it.
Hopefully that gave you some color about actually the near term and longer term, Neil yes, sure and maybe I'll add to that.
Karl as you think about.
Qualitatively how do you how do you think about this business heading into next year and the first is.
The base station for percentage of shipments as I highlighted even the external analysts soon got a range of estimates, but they're all kind of converging, yes, it's going to grow significantly next year, it's probably 10% of our base stations this year.
It will be north of 30%, maybe 40% next year. So that's that's one positive.
Deployments for us with our lead customer are going to really be for new base station shipments deployed in Korea, obviously, Japan is going to deploy there's a lot of activity there.
Well not fix being one of those catalysts and also the United States.
Second there are there are shipments that are going to ramp up as well, where there is going to be replacement of existing line cards that are installed today that are based on discrete solutions that are going to get replaced for us our optimized solution. So thats also going to be kicking in and then of course.
You have starting at the end of next year.
Our second customer coming online.
So we see it as a layering effect and the timing of all of these pieces you know, we really hard to nail them down exactly this is a fast moving and dynamic market, but you should expect that in calendar year next calendar year. This this business should ramp up very quickly.
That's helpful last question if I may.
I'm curious what your own view is on the campus networking upgrade cycle for your core.
Switching five business I mean should we assume that the growth opportunities more nascent.
Or is the October quarter law, a transitory effect. Thank you.
Yes, I think we should separated into two pieces I think one is.
One is what's the business conditions today and there is clearly there's clearly a pause in a slowdown going on driven by a lot of effects, which we've seen both from the effects that.
With with Wally obviously as well as recent announcements from large U.S. networking Oems as well, so I think that that sort of out there that's.
Thats the current environment, we remain.
Very bullish on our design win.
Capture that we've had that business and again prior to the downturn, we were growing that enterprise and campus switching inphi business fairly robustly. So while we see a short term pause, mostly driven by the macro issues the pipeline and the design win momentum has actually continued to accelerate and whether it's.
Our new 12.8 switch platform, which is a brand new market that we're servicing.
The fact that we've gone from basically announcing that product earlier this year to now being able to say, we've actually secured design wins that are going to go into production I think thats very positive.
On the switch side and on the five side I highlighted a number of examples in my prepared remarks, so I would just kind of separate the two currently there is clearly a lot of weakness in the market and a lot of a lot of choppiness, but we believe when that settles down our design win position is going to be continue to be very strong and drive longer term growth. Once we're back to a normal situation.
Thank you and our next question will come from Quinn Bolton with Needham and company. Your line is now open.
Hey, Matt just wanted to ask first on the Fiveg market. When you announced your second customer when you talked about the possibility of a winning at at additional customers beyond that and just wondering if you could give us any update on wins beyond your first two customers always that opportunity still out there.
Has it gone away just just any update you could provide on sort of.
Opportunities beyond your first few customers.
Sure so nothing formal to announce today or I would have called it out my prepared remarks, but what I would say is the.
The activity level.
Not only with our two kind of lead customers, but also beyond that is quite robust right now I mean, the fact that we've got strong offerings now in base band and transport.
Now in massive Mimo, which was something that really wasn't there sort of earlier this year front haul solutions and then obviously with Vera coming in the DFI capability in radio solutions. I think are and then add on top of that request to continue to improve and kind of optimize our Ethernet switch products is that part of the base station. The conductivity continues to evolve we have a lot of design activity and its not limited just to one or two customers. It's really limited I mean, it's really much broader than that across a lot of different technologies. So design design win opportunity is.
The pipeline very large right now and there is a lot of activity and that's how I would characterize it so.
Hopefully were sick, we continue to be successful here and we can announce sort of the realization of some of these wins that as we go forward but.
It's we're pretty excited about our technology lineup, because we really have all the key pieces that our customers are looking for.
Great and then just on the storage side at Flash memory Summit, a few weeks back you guys announced year do think Gen. Four controller that was DRAM less and allowed it.
Fewer number of channels, so smaller die size and I'm just kind of wondering you know as you look at the launch of that new controller does that have a negative ASP effect or negative margin effect as we're thinking about.
The SSD business going forward or do you think that that that new product comes in at similar margins to.
The business historically.
Hi, this is leading to the new product launch we are very excited about the gross margin. It's actually very similar to our team has done tremendous the work had to levy tighter designed to optimize the design the portfolio to make sure. We continue to drive it to get to the model for IP flat our design flow excellent detail I would say in general you should expect us to have Larry seaman across my change in our SSD actually ITD market, yet I just I'd just add I mean, if we actually highlighted that this product is in 12 nanometer. So we actually are leveraging both of our both our architectural experience as well as process technology leadership.
Which we've had for some time in the SSD area and we kind of continue to push the envelope. There so that obviously coupled with time to market advantage.
Ends up being a being a good situation with respect to margins in the kind of value can deliver so.
Great. Thank you.
Yes.
Thank you and our next question will come from John Pitzer with Credit Suisse. Your line is now open.
Hi, Good afternoon, guys I think somebody asked the question My first question.
In your prepared comments, you kind of called out two things one China strength to do just that you might see inventory related which I think is reasonable if you're trying to stay on the right side of conservatism just kind of curious if you could kind of size. What do you think that might be as you look out to fiscal third quarter guidance, whether or not you're still intending strength. There and then secondly, you also mentioned within the guide a single networking customer where you sort of.
Our revision.
In their orders I think you don't want to get too specific about customer say, but anymore color you can give around what's going on there or is that something you feels pretty transitory.
Is that a reflection of just macro uncertainty or something else going on.
Yes, no problem, John So I think Yankee captured it right on the dynamics and networking high level, obviously very choppy here on the on the first part of the question on the China strength I mean.
We're fairly detailed in how we look at our demand in particular, a lot of the China business gets realized through distribution. So.
We did see very strong Pos and as Weve double click through it.
A number of these customers seem to be.
Ordering a lot more than they normally would.
And so a couple things there one is it's not a huge number so just to size it.
No it's not it's not an enormous number but still.
We felt it was appropriate to call that out.
I would say also the way we're managing our channel is very much with that in mind. So just to give you a sense I mean, weve actually were running our our distribution days of inventory about two weeks below our target levels right now just bearing in mind that if there is some inflation in the Pos that we're going to be on the right side of that so so thats happening there again hard to pinpoint, but we think thats whats going on and then on on on the second one that the situation we called out I mean, it's definitely something that's.
Kind of evolved.
Recently, so we've seen this sort of situation develop over the last several weeks and obviously preparing for our guidance. We've had we've had to really assess that situation. So it's hard to say I mean, I think you have to look at the broader commentary out there in the market from what what our end customers are saying, but.
If you look back office make one final comment when you go back to the beginning of this down cycle.
We were fairly early there because of the way we reported and also our exposure to storage to see a lot of this weakness fairly early and so that first leg down if you remember earlier. This year was in storage I was followed by a compute leg down talking about industry wide were servers have weakened and I think a lot of investors have asked us are we going to see that in networking and.
While we don't predict that far out we definitely see.
So from our lens the networking business also now being weak so.
That sort.
Not predicting when you get back to that peak, but if you exclude the vagrancy that what goes cyclical vagrant seasonal storage market, especially given some of your new product launches and repositioning refocusing of the business is there any reason why at some point you don't get back to where you were last cycle peak in EMS or has your view of the growth rate of this business longer term changed at all.
Yes, sure, Yes, I think it's worth clarifying that John so.
The simple way to think about it as you know.
And again understanding we have momentum in that business from a new design win point of view on the markets I mentioned, but if you look at the PC exposed portion.
We did it we did a pretty good job on the kind of the first transition I would say when HDD was converting the SSD and you remember over the last few years, we sort of manage that HCV going down by winning new designs and SSD, We've said, even going back to our analyst day that that remaining assets HDD to SSD conversion and notebooks, which is typically at the lower end when that conversion happens, we're probably not going to benefit from that we really haven't put a lot of R&D into that area. That's that's a kind of a lower end client opportunity in our mission has really been around.
Enterprise and.
And.
Datacenter, so I think thats when I look at sort of the gap of if you hate it get back to peak and when I think we've got that headwind and thats sort of we've been very transparent about that one again, though being offset by by you know even next year, we were very confident in our ability to ramp up our new do it yourself solutions and ssds in some of those will be forthcoming.
And.
And then in the near line programs, we won which we believe were well positioned on both at 16, terabyte and even going to 20 and beyond our design win footprint is actually quite strong so.
That's the that's the puts and takes where we and again I'm being very careful to not call a complete sort of trough to peak on this winter peak to trough.
But we do see that business clearly recovering how high it gets back up to we need to kind of take this one quarter at a time.
Perfect. Thanks.
Thank you and our next question will come from Blayne Curtis of Barclays. Your line is now open.
Hey, good afternoon. Thanks for taking my question, maybe just two on Fiveg actually you mentioned that you're you sample your chip in its actually in trials now I was wondering you just walk us through that timeline is there anything else you have to do from on your side from Silicon perspective.
And then you mentioned a follow on generation if you could just.
When when would that start to kick in and then I just wanted to revisit you said greater than 600.
Yes, I think most people kind of thought about a fourx of content like you've talked about and if you just take the two customers to kind of get there and you've talked about some incremental wins. So maybe just kind of walk through that 600 and.
I know, it's a greater than 600, but I'm just kind of curious.
It seems like you're getting every call added wins and there are still opportunities that as incremental customers. So if you could just comment on opportunities above that 600 would be helpful. Thank you.
Sure. So on the first one which is really two parts with respect to ramping on Fiveg and what's still needed. There yeah. Those products are those products are.
They are done we're going to be able to ship them this quarter.
There's there's certainly a lot of work there with respect to getting the yields where we want them to production ramped I mean, I I'm, saying this because I don't want my team to come back to me and said you made it sound. So easy this is a very challenging ramp for our company, but from a silicon perspective for the first shipments were that parts done. So now it comes down to execution and how fast we can ramp and.
Matching the demand signals from our customer.
So that's positive the second one is we did win.
And next Gen or the next generation.
Product, which we're very pleased about.
That takes us down in the advanced node process area, which is a very big positive I think for our customer as well as just for us, but that's that's a design that's going to be kicking off now so think of it as we've got a very sort of solid runway on our current generation of products to last us at least for the next several years.
And so again this is just really.
A testament to the fact that we've continued to engage with our lead customer we've got the roadmap in place with them.
The 600 million.
So just to kind of set the stage I think.
On on.
First I mean, we felt it was appropriate to just talk about it because we get a lot of questions from investors on this and so so I think the baseline case is really you can sort of take the lead customer you can use the fourx increase in content right and that would get you to roughly call. It 400 million or so you would add the potential contribution from our second customer onto that and then obviously.
Theres more that could come later and then the timing of all of these things are still to be determined so were trying to establish what a base case by case would look like Blaine.
But certainly for the broader investor community. We get this question all the time and we felt it would be better to just get get that out now, but you should assume these other wins that were if we achieve them would layer on top of that number.
Excellent.
Thank you and our next question will come from the line of Gary Mobley with Wells Fargo. Your line is now open.
Hi, everyone. Thanks for taking my question. The question about Quantia gene I think when you mention a conscious.
Revenue run rate normalized at the time of the acquisition announced sort of from a $100 million. Most recently per the 10-Q filing from Quantia revenue was around $9 million is that.
Is that just inventory digestion or do you feel any differently about that business being above or below or at the $100 million Mark.
Hey, Thanks, Gary for the question. So you probably have seen from a punch as the 10-Q filing.
They are key customers to punch as soon as they have been reducing inventory. So thats why it has a significant impact a contest the revenue.
Frankly, we think it's a great operational discipline to really.
Thanks for taking my entry and the supply demand and to make sure.
Maybe being on that you want to add to customers. So thats it and that has always been my balance. The practice, we typically really don't have begun which we had the customers and I'd say needed.
So that process is ongoing I would say you know content team continued to win designs and also they had been ramping up a new designs are really the key networking customers. So we actually really are quite comfortable length of this inventory adjustment period, and and going into next fiscal year. We achieved our fiscal 20, why they should be able to ramp up back to the 100 million per year run rate here, we articulated it doing the deal announcement, so we feel pretty good about that and our team. They are doing the integration planning and everything we have seen quite consistently the what our steel assumption has been so.
We will give you more update when we get closer to the deal closure.
Okay. Thank you for that and the other category the products within that I believe you've communicated our long term decline, but certainly had a good first half of fiscal year 2020, and so can you speak.
About the strength and what's driving the growth and maybe any sort of update on your long term expectations for that business.
Oh, yeah, so it's not yet our other revenue category. So let me start by saying right. In this product category includes our printer business and assemble for the other consumer related business knows the business actually has a very long tail AOR lasted for multiple years, but it could be very lumpy because sometimes the customer wanted have a last time buy so thats what happened in Q2, you you actually sell that product line increased the revenue that's because of a last time buy in general and the way you should think about modeling Andy in the longer term issue to see the high single digit year over year decline last two for many years going forward.
So thats, how you should think about modeling this business going forward.
All right. Thank you.
Thank you and our next question will come from line of Ross Seymore with Deutsche Bank. Your line is now open.
Mr. Seymore. Your line is now open please check your mute button.
Hi, Ross.
Oh, that's one of the next question please.
Absolutely. Our next question will come from the line of Harlan sur with JP Morgan. Your line is now open.
Good afternoon. Thanks, Ryan Let me ask a question on good to see the quarter quarter resumption in your storage business, but it still looks like you guys are shipping about 13% to 15% below normal consumption levels I know that more of the headwind on for Q3 as clients storage, but on an airline. It also seems that the mix shift in the second half of this year is more towards 14 terabyte platforms, where your competitor has more controller share and less so maybe to the 16 terabyte platforms, where you guys have a strong position. So has the slight mix shift also moderated your view on the slope of the recovery of the storage business kind of second half of this year.
Yes, so I appreciate your questions Bill.
The way to think about asked already do business. So you're right you know from.
We have been and they're shipping the maquet here and there our storage business. The when you look at the overall you know I. Appreciate the question about the 14 terabyte versus 18, 16, terabyte or under our position going forward, Yeah on 16, terabyte and Abbas attorneys matches stronger, but overall when you look at the dynamics of our storage business. These actually we continue to to see just a stabilization now that like a significant pick up so were looking at the quarter by quarter life like Matt said earlier and overall the way to look at it is actually the datacenter, which show and the enterprise which include the both HDD and SSD solution you should the see that revenue continue to go up in the second half and also going into next year.
But as far as the dynamics, though for you know 60 pair by flicking her by actually right now at this point. It's the revenue is relatively lower percentages. So it's actually not impacting the overall revenue dynamics.
Okay. Thanks for the insights there Jean and then a question for you can you just give us an update on the cloud Hyperscale qualifications on Thunder X to your arm based server platform and are you still on track to ramp some of these customers in the first half of next calendar year, and then on Thunder X three or seven nanometer platform. I know you guys take this chip out is it back from the Fab have you started sampling this product any early performance metrics you can share with us.
Yeah, great. Thanks for the question. So yes, no update on on X two from what we said before other than those those quals that we referenced before proceeding as we had outlined before right. So thats something that we do expect to ramp up next year and.
You know with regards the X three you know and performance data. These products actually have a quite along fab cycle time, and it's going to take us some time to really.
Provide that information so I don't have an update there for you at this time.
Okay. Thank you.
Thank you and our next question will come from Tim Arcuri with United Bank of Switzerland. Your line is now open.
Hey, this is John on calling in for Tim Thats S Securities.
Anyway, Thanks for taking my question.
Kind of wondering about.
You know the Chinas strength that you see from customers not new Molly.
Kind of wondering was that isolated to this past quarter or when did you start seeing I'm just trying to get a gain some kind of.
Knowledge on when that might have started where they're starting to.
Colin orders a lot earlier than last quarter.
Yeah, Hey, John So yeah, it's kind of interesting I mean, if you actually.
Go all the way back in you look at even the end of <unk>.
Last year when the tariffs were announced there was unusual customer behavior in China that even started them right and you may remember this but we had one quarter and our Q3, a year ago, where we set our networking business was up like Marvell core networking was up by 29% year over year, which we had said basically it looks like there's people pulling and so there's been a lot of a lot of disruptive activity going on given all the all the trade tensions and macro issues in China. Specifically this latest go around I would say we saw that during the second quarter I'd say, we saw the.
Pos accelerate on the customer Poles.
But you should just kind of assume right around the time that that while it was put on the entity list I think that triggered some additional.
Ordering from the customer base there in terms of being worried about supply chain disruptions. So that's probably the timeframe, but I just wanted to bound it it wasn't like hedges sort of showed up I don't know if theres theres just been a lot of noise in the in the China market.
As a result of the trade tensions that are going on with which are obviously widely publicized documented on a daily basis.
So John just as Matt mentioned earlier right. This is the first to the exposure for US. This is the channel business and the China cannot businesses. So it's a very small percentage of our revenue and that also as Matt mentioned earlier, we have been really prudent to manage channel inventory and the took down channel inventory significantly really to think through this kind of work and the maquet behavior. So I think it's a small exposure for us the better.
It is the interesting phenomena.
Okay, great yeah. Thanks for that thanks for the color my follow up going back to the Fiveg business or what you expect coming into 2020 I know in the last Fourg generation I mean.
Order rates were always pretty lumpy.
I'm sure, it's going to be like that for the fiveg, but any initial ramp into 2020, what do you guys.
Seeing or what can you guys give us going into 2020.
Yes, its I mean, John it's too early to call that slope I think another caller was asking sort of the same thing at this point, we just need to stick to more qualitative because as I mentioned, there is a dynamic where there's multiple countries deploying theres our customers ability to get share in those countries. There's some replacement.
Opportunity, we're going to get we got a second customer coming in.
And you're right I mean.
The carrier business historically for all suppliers is a lumpier business. So you have to layer some increased volatility on top of that so as a result, it's difficult to give you. This ramp at this point, John but certainly as we get through Q4 and were looking out into into the next fiscal year I think we'll be in a better position certainly lining up with our customer and the market on whats happening, but but just to be clear I mean calendar 20 for us is going to be a very strong year.
There's no question.
When it.
Fully ramps and what quarter it by quarter I think we were too early to call that one.
Okay, great. Thank you.
Welcome.
Thank you and our next question will come from light Ambrish Srivastava with bank of Montreal. Your line is now open.
Hi, Thank you. Thank you, Matt I apologize for any background noise I had a question on the networking business. So the reported quarter you talked about the fourg pause as customers transition to Fiveg. So the question really is is there a bottom to that fourg that we should be thinking about what is the mix of the fourg or within the networking and so we're all focused on the 600, but is there cannibalization going on or before June . So the net net is not really 606 hundred minus whatever the businesses, which is yet to stabilize and then I had a follow up.
Sure, Yes, so I think the way to think of it as kind of 0.1 is when we sort of called this out the analyst day last year.
Today, you know the current Fourg LTE carrier business for US is not a big business right and that's one reason we're excited about fiveg, because obviously the big content growth and then and then you know all the dynamics associated with that so so today, that's not not a terribly large business and I don't think so the way to do it is try to figure out how much fourg, we're still shipping out versus how much fiveg because.
For gene is almost gone if you think about it because all the new systems were in.
At our lead customer pretty much all their new shipments once we're ready to go even if they're not ready to light up fiveg, yet they'll ship as a fourg base stations. So.
Thats why Weve, just sort of gone to this model to say look the business run rate was was X amount before.
At kind of its normal four quarter average, let's call. It and then you just take the average content increase and Thats, where you get the 400 million from.
So.
So I don't know if that's helpful. But it's not a it's not one that I don't think we spent a lot of time on in terms of because one it wasn't a big business for us in two.
Most of that has really slowed down in anticipation of this new ramp up which will cover fourg ocaliva in the next year.
Got it no that's helpful and I and I ask because you brought it up again about the about the slowdown or the.
Quarter to quarter, but it's clear I understand and then my follow up is a little bit more architectural maybe if you could just.
Please share your insights into you talked about SPG every placement you just help us understand what exactly you meant and what exactly what is going on on the architectural side.
Is it as simple as these products are now going into production. So the prototyping was in the Fiji and now we're moving to.
Sounds products treated by you.
Thank you know I think the I think I think you just said it I think that what we what we meant by that really was that.
You know and this isn't just for Fiveg I mean, if you go go dusted off and go all the way back to the two to Threeg transition in the three to Fourg transition. There's always been this wave of very strong FDG deployments that.
In some cases cover based ban they cover the radio head and they cover all the major applications because the standards are changing and the Oems are focused on time to market and then obviously once optimized solutions become available in the standards are sad than an Essex takeover and so what we what we've seen is just simply that I think one is kind of qualitatively from two to three g. three to 404 to fiveg the percentage of conversion from FP GA to a sick appears to be increasing certainly because of the processing density is increasing a lot and therefore, just to optimize on power and capacity and all the things that the.
The customers and the operators care about our optimized.
There's clearly a need to move to these custom solutions, but that being said you know pj's have always been an important part of.
Of the wireless communications.
Network design, but we are seeing very robust activity, where anybody can to basically leverage the IP said, we've got to go target not just the base band but.
But but these remote radio head applications and obviously, we have a very strong.
Transport business, which is which is just our embedded processor. So.
I hope that's helpful.
It's not anything that's terribly different from the prior generations is just that marvell today as a very strong offering in this area and therefore, we think we can.
Capture a lot more share than we had seen fourg.
That's very helpful. Thank you.
Thank you and our last question will come from line of Ross Seymore with Deutsche Bank. Your line is now open.
Hi, guys can you hear me this time.
We got you Ross.
Sorry about that last time lots of great question has been asked and answered already so I'll try to hit on to that haven't the enterprise weakness. The networking side that you talked about is that localized to one customer or is it something broader and Matt do you believe it's something that's just beginning or is this kind of a macro trend that.
Generally along the same timing we've seen across the weakness in most of the sectors.
Yes, So I would say 0.1 is it is broader and broader means obviously, a number of customers some of which are either flat or slightly down or they are just not sort of mean their forecast and then we did also call out that one of one large customer was it was quite pronounced in terms of the.
The change in the demand signals and the outlook that we saw heading into this call we had today so.
So it's not we're not we're not we're not signaling its just one customer we are saying, there's broader broader broader weakness certainly from our lens, but clearly our results and our guidance are driven mostly by.
Bye bye bye the large customer just given their contribution to our overall revenue.
Got it Thats helpful. And then maybe one for either you or gene you guys.
I've been busy in this last quarter lots of moving parts acquisitions divestitures et cetera.
If we look forward to whether it's a year or two years down. The road you guys before had a long term target I think at the gross margin to be above 66, an operating margin I think both those on a pro forma basis about 35%. If we think about the marvell of tomorrow. After these three deals are those targets still in the right ballpark does it expedite or delay the ability to achieve those just kind of wanted to see longer term what the company is going to look like after these deals versus at the time you guys gave those long term targets at the last analyst meeting.
Hi, Ross. Thanks for the question I think if you take a level higher to think about how we think about our business model. It continue to be the same now driving principle here, we really want to maximize returns for our stakeholders that which means to generate strong free cash flow strong earnings and strong operating profit. So when we think about our long term target model, which it was to set up and like almost like more than a year ago. When we said hey, the topline revenue growth it will be in the rangel for 6% to 8% gross margin is going to be around the 66% and the operating margin, 35% as you mentioned so right now when we do kind of the progress. The company has made it during the last a year or more than a year. We have it can tremendously more momentum than the analyst day in fiveg in the infrastructure market.
HM Matt talk about you the opportunity on the upside, which it was now the part over the R&D no I'm going to say an old costs at both the upon to other airlines and the Wi Fi divestiture, well not pardot for the ARINC business models. So the way you.
We are thinking about we can give you some perspective of budget, we're not updating the model the prospectively to basically on the top line. If we can drive an opportunity where how to design wins and everything else to normalize the micro environment, Yes, we should see our revenue growing Mccall with a high end Rangel file model.
On the gross margin side I think the way first I want to say as a company. We are laser focused on gross margin improvement and if you haven't seen us.
We have had a really strong track record it to improve gross margin going forward in their field take send the puds out for this gross margin dynamics.
I think certainly storage business is stabilizing the near line. The data center will help us to increase the gross margin and also secondly on the networking side, our automotive business, our suite shift by refreshed portfolio. They all going to happen to contribute positively to the gross margin on the fiveg side. It it's going to be a significant revenue driver, but the sum of while fiveg products actually right. Now currently have a lower than corporate average gross margin. So the way you should expect us to do we see going forward, we're going to focus and improve the yield the test time, because it's in the early ramp there's certainly a maturity of a production and on the yield side and pet segment pet pets time side, which will improve gross margin. So we continue to think when we balance everything out gross margin.
Should be still very high maybe in the 63 to 65 range, but yes over all the way to think about it because our topline revenue growth is going to be matched last year. The gross margin dollars to actually going to be much higher which on the operating margin side that we definitely are very committed to the 35% operating margin. We do think structurally if we can grow the revenue model with average of quickly to deliver that kind of the operating model. So hopefully that helps you to to think through the longer term model.
Thats great detail Thanks gene.
Thank you ladies and gentlemen, this concludes our question and answer session for today. So now it is my pleasure turn the conference back over to see certain head of Investor Relations at Marvell for any closing comments or remarks.
Thank you everyone for joining us today, and we look forward to seeing you at the upcoming Citi Technology Conference in New York City, and Bush of Bank Technology Conference in Las Vegas. Thanks Bye.
Ladies and gentlemen, thank you for your participation on today's conference. This does conclude our program and we may all disconnect everybody have a wonderful day.