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

Thank you, LeToya, and good afternoon, everyone. Welcome to Marvell Technology Group's first quarter of fiscal year 2017 earnings call. With me on the call today are Rick Hill, Marvell's Chairman; Matt Murphy, Marvell's President and CEO; and Dave Eichler, Marvell's Interim CFO. We will all be available during the Q&A portion of the call today. If you have not obtained a copy of our press release, it can be found at our company website under the Investor Relations section at marvell.com. We have also posted a slide deck summarizing our first quarter fiscal 2017 results in the IR section of our website for investors. Additionally, this call is being recorded and will be available for replay from our website until August 27. Please be reminded that today's discussion may contain forward-looking statements as defined in the Private Securities Litigation Reform Act. These statements are based on currently available information as of the date of such statements and are subject to risks and uncertainties that could cause our results to differ materially from management's current expectations. To fully understand the risks and uncertainties that may cause results to differ from our forward-looking expectations and outlook, please refer to today's earnings release, our latest quarterly report on Form 10-Q and Form 10-K and subsequent SEC filings for a detailed description of our business and associated risks. Please be reminded that all of our statements are made as of today and Marvell undertakes no obligation to revise or update publicly any forward-looking statements, except as required under applicable law. During the call today, we will make reference to certain non-GAAP financial measures, which exclude the effect of stock-based compensation, amortization of acquired intangible assets, acquisition-related costs, restructuring costs, litigation settlement, and certain expenses and benefits that are driven primarily by discrete events that management does not consider to be directly related to our core operating performance. Pursuant to Regulation G, we have provided reconciliations of the non-GAAP financial measures to the most directly comparable GAAP measures in our first fiscal quarter 2017 earnings press release, which has been furnished to the SEC on Form 8-K and is available on our website in the Investor Relations section. With that, I would now like to turn the call over to Dave Eichler.

Thanks, John, and good afternoon. Before I get started, let me say that we anticipate filing our 10-Q for the first quarter of 2017 in the near future. And with that, we will be current with our required SEC filings and be compliant with listing requirements of NASDAQ. I'll spend a few minutes highlighting Marvell's financial results for the first quarter of '17 before turning the call over to Rick Hill, our Chairman. For the first quarter of fiscal 2017, we reported revenues of $541 million, which represented a decrease of 12% from the fourth quarter revenues of $616 million and a 25% decline from $724 million in the first quarter of fiscal 2015. Revenue decline in the first quarter of fiscal 2017 relative to the fourth and first quarters of fiscal 2016 was primarily driven by an increased industry demand for HDD products as well as the anticipated decline in revenue resulting from Marvell's exit from the mobile handset business that we announced in September of 2015. Our first quarter is typically our weaker quarter, where we see revenues decline sequentially and the first quarter of fiscal '17 was no exception. Our storage revenues declined 16% sequentially, mainly due to the continued weakness in the HDD industry TAM. This was partially offset by growth in SSD driven by increased demand. Our networking business increased 5% sequentially due to improved demand for our networking products, while our mobile and wireless sales declined 29% sequentially due to the continued ramp down of our mobile handset platform business. Please note that the mobile handset revenues in the first quarter of 2017 were $22 million, down from $69 million in the fourth quarter of fiscal 2016 and $65 million in the first quarter of 2016. Our gross margin percentage for the first quarter…

Thank you, Dave, and good afternoon, everyone. And thank you for joining our call today. We're happy to report our first quarter fiscal 2017 earnings today. And we're also happy to report that we will be fully caught up on our filings after we file next week our 10-Q for this quarter. The first quarter is a seasonally weaker quarter for Marvell with revenues typically declining sequentially and the first quarter of fiscal year 2017 has been no exception. We saw our revenue decline by 12% sequentially mainly due to normal seasonal weaknesses compounded by a declining HDD market and the previously anticipated drop-off in our mobile and wireless sale as a result of the company's decision to exit the mobile business. Despite the previously mentioned declines, sales of our network and SSD products increased during the quarter and partially offset these weaknesses in other areas. In the storage market, our HDD SOC revenues were negatively affected by continued pressure on overall HDD industry builds, which is correlated with a persistently weak PC demand environment. Now the HDD decline was partially offset by growth in SSD controller sales, which was driven by improved demand for SSDs. The company continues to invest in comprehensive solutions that build upon our leading positions in the storage market for both HDD and SSD. In the networking market, sales of our networking solutions grew sequentially in the first quarter of fiscal year 2017 due to increasing demand in the enterprise and data center application. During fiscal 2016, we refocused our engineering and marketing efforts to our core networking technologies for ethernet switches, PHYs and embedded networking processors. These efforts helped us to address growth opportunities in cloud data center, enterprise and carrier migration towards infrastructure with higher bandwidth and speed as well as opportunities arising…

Great. Thank you, Rick. Good afternoon, everyone, and thank you for joining our call today. As you're probably aware, we successfully filed the Form 10-Qs for Q2 and Q3 of fiscal 2016 and Form 10-K for fiscal 2016 last week. This is obviously a huge milestone for Marvell and I would like to thank the entire Marvell team as well as our advisers for the months of hard work that they put in to make our recent filings possible. We look forward to finally catching up with all of our filings upon the completion of the Form 10-Q for the period that we just reported. Looking ahead, as Rick just alluded to, I've been working closely with my direct staff, employees and customers to get a detailed assessment of our business and operations in order to help formulate a comprehensive plan for Marvell moving forward. The demand environment remains challenging and we recognize that we need to align our structure to this reality. As I articulated last week in our conference call, I believe the strength of Marvell lies in the talented employees and the innovative technologies that we have here and we must utilize the strength in a targeted and efficient manner. This means focusing our efforts on growing in profitable businesses while tightly managing expenses. That has been foremost in our minds as we perform detailed reviews of all of our businesses. I'm sure many of you have questions on this topic that you would like answered today, but we want to make sure that we take a thorough and rigorous approach to our analysis, which will take some time. Therefore, I would like to ask you to hold off on such questions until we are ready to roll out our strategy in the coming months. With that, I'd like to turn the call back over to John to open it up for the Q&A portion.

Okay. Thank you, Matt. We'll now open the call up for your questions. Please be sure to keep your questions within the scope of the first quarter results and second quarter outlook. Please note that we are not yet in a position to provide long-term guidance or strategies. LeToya, we'll take our first question, please.

[Operator Instructions] The first question is from Craig Ellis of B. Riley.

The first question is just on the revenue guidance. I know that you said that revenue growth would be led by HDDs or storage, but I'm hoping that you can provide some further color on the growth of the other businesses within that overall 16% guidance.

Well, the growth is from $541 million to between $625 million and $635 million. The growth in storage is up roughly, probably in the order of 20%, a little bit less than 20%. And then, of course, growth in the networking market -- there will be growth in the networking market of near 10%, that's largely what's driving the growth.

And then the second question is on gross margins. At the midpoint, it would imply about a 50 basis point improvement. And I know the guidance for the baseband business is to mix that down over the course of the year. So at the midpoint, would the improvement be that smartphones mix out? Or are there other dynamics that are at play?

There is other dynamics as we're continually looking at our cost structure and we're making changes with our new chief operations guy. We're really attacking the cost of goods sold. And so I'm optimistic that we can meet those numbers and that hopefully do better.

And the next question is from Timothy Arcuri of Cowen & Company.

I had 2, I guess, Rick, this is more of -- and also Matt. This is sort of more a big picture question, the thing that everybody always says is, well, storage is not that great of a business and they say that the drive business is not really growing and SSD is still much, much smaller for you than the drive business is. So can you just address sort of how you see the mix of HDD being flat to down over time and SSD growing? Because today, I think your HDD business is significantly larger than your SSD business.

You're absolutely correct on that, Tim. But as you've seen in some of the announcements, there has been somewhat of a rebound in the PC demand business that we're seeing in the short term, okay, with a steady growth in the SSD area. And so there'll be ups and downs in this particular business, but basically, our second quarter, which shouldn't be all that hard to project since it ends on Saturday, we see it somewhat up. So that's -- I'll let Matt, comment what he sees on it as well.

Sure. I'll just add to that. I think Rick is right. Clearly, the HDD portion of our business is larger, SSD is smaller, but it's growing. And all I'd say is in my preliminary use -- reviews with the team, there's plans in place to address what would be a secular decline in sales of hard drives with some alternative strategies. And obviously, SSD is a very important part of our future as well. So we'll get back to you with more details as we roll out our strategy. But those are clearly some challenges we have, but there's plans in place to address it.

And clearly, Tim, as you know, in a market where the secular, secular decline, let's make no mistake about it. Hard drives aren't going away anytime soon. They're shifting, clearly more to the enterprise area that offers more value, more complexity and more opportunity for us in winning share in those areas as well. So I think it's a combination of those things that allow us to be modestly optimistic that we can do better in the storage business. All right?

Got it. And then just to follow-up on that. Can you just talk a little about capital return, Rick. I know maybe this is a sort of a discussion point for down the road, but just generally, you guys have $1.6 billion in cash, no debt, you came through this really terrible drive period and still generated cash and you're actually GAAP breakeven before you take out these one-time cost. So sort of like what's the minimum cash? You run many, many businesses, and so as you look at this, what's the minimum cash that you all think that is needed to run this business?

As I quoted a long time ago at Novellas, you can never be too cash-rich in the high-tech business. So or too thin, and I gave up on being too thin. So I'm only working on the cash piece. But with all seriousness, the one thing I hope you would want us to do is take a very, very measured look. And with this industry, we want to make the right moves and we want to have the ability to be able to make the right moves. And we just brought in a new management team and I can assure you, it's on the top of our list to discuss with the board what our capital allocation strategy is. And it isn't going to be that you're going to have to wait forever, we will disclose it in a subsequent call here. But at this point, I'm going to deflect your question because I don't want to get us committed into something that I wouldn't be set to execute. Hopefully that's helpful and honest.

The next question is from Christian Schwab of Craig-Hallum Capital.

When you guys look at the business on a go-forward business, if we just kind of take away some of the low gross margin products that you began to exit last, well, in the last few quarters and we take away all of the mobility business that were no longer going to be servicing and making. Is the remaining business, should we be thinking about as kind of a $2.2 billion business, plus or minus, $100 million? Or how would you look at that?

Well, I'm hoping that on an annualized basis, we can achieve numbers that are closer to $2.4 billion range, plus or minus $100 million and grow from there. That would be my hope and based on everything I've seen so far, I think it's achievable. Do we have it in the bag yet? Not in the bag, but we're making progress very, very rapidly.

Okay. Wonderful. And then just a follow-up to the previous conference call a week ago when you talked about a margin structure in line or better than industry peers on an operating margin structure, I think we all kind of think about that as 20% plus or 25% plus. Is that fair thought by analyst investors?

Well, we talked last week, I believe, regarding gross margin and I got boxed into having a 6 handle on my gross margin, which got a lot of activity, but as you can see, we're inching our way there even with this quarter. And we haven't even begun to see some of the savings that we are starting to get in the supply chain. Relative to the operating expenses, obviously, there's tremendous room to change where we are today. Clearly, R&D with a 3 operating handle is not sustainable for long periods of time. And we've got to be able to see growth in the top line or reduction in the R&D expense. Our SG&A, if you were to take out our -- this, what I would call, anvil around our neck with legal and auditing expenses, our SG&A expenses are not out of line from an industry perspective, although we can always get better in all of these areas. So rather than just put a number on it and throw it out on the table, I think things you should be thinking about is that clearly, on an R&D basis, we're going to be more focused. It's one of the things Matt and his team are really doing right now is taking a look at where the real opportunities are and focusing our R&D efforts to get the most bang for the buck. And in the operations area, we're really driving the supply chain and the efficiency of our organization to drive up gross margins. And we believe there's a lot of room to gain there and some will come in the short term and more will come in the long term. I hope that's helpful, Christian.

And one last question, if I may. I was surprised to see some enterprise, I'd say, drive released by Seagate, who continued to use your controllers instead of the controller that they bought from flash Avago a few years ago. Can you give us an update on your thoughts and your strength and positioning competitively on the enterprise side of the solid-state drive growth?

Well, I think from a standpoint of Marvell's overall performance is, we have this visibility to get better technical performance in a smaller area than any of our competitors. And as a result, it gives our customers a performance advantage that they can monetize and it allows us to even compete with people's internals capabilities. And we think that is one of the great strength of Marvell and we hope to continue to enhance that uniqueness.

The next question is from Quinn Bolton of Needham.

Just was curious, looking at the guidance for storage, where you have 20%. If I look at HDD TAM now that Seagate and Western just preannounced second quarter results, it looks like the TAM was actually down in June. So I guess I'm just wondering, as you look at the storage business for the July quarter, do you think that this reflects some of the customers building ahead for sort of the typical second-half seasonality? Or could there be some share shifts in various platforms where you guys may be actually gaining share that helps to account for that strength. And then I've got a quick follow-up on the mobile business.

Yes. Since we don't have anything called a pull-in anymore, that's building ahead. Obviously, this time of year is an important build time for the upcoming season. It's still a little bit early. But I think as I highlighted, there's somewhat of a rebound that has occurred in the PC business. And in addition to that, while the total addressable market has gone down somewhat, there are market share wins that we've had within that downward trend market. And so with those market share wins, we're able to grow this particular quarter. But make no mistake about it, it wasn't a very pretty quarter as far as we're concerned for quarter 1.

And just maybe -- can you give us maybe an update on where you think your HDD controller market share is? Is mid-60s kind of a good estimate for your current share?

I don't know that we disclosed that routinely what our market share is overall. I have to ask somebody who has been here longer. John, have ever disclosed that? I don't think so.

In the past, what we've said was we've always been at around 60% plus share, right? And it's been kind of ebbing and flowing from there. But we haven't really given the specific number lately.

Yes. We're going to be at the Citi conference in September and these are all good questions to ask. We'll go evaluate whether or not from a company standpoint, it's in our best interest to release those kinds of numbers and to the extent we can release them and discuss them more, we'll be prepared to do it at that time. So thanks for the input. Okay.

And then just a quick mobile platform. Does that include the combo chips, the $22 million in the first quarter? Would that include any combo chips or is that just purely the apps, processors and baseband?

No, they would include combo chips.

The next question is from Ian Ing of MKM Partners.

I think you said smartphones, $22 million in the first quarter, obviously, that winds down in future quarters. Just want to clarify, is there a policy of when there's last time buys in place? So perhaps there could be some end of period buys.

Yes. Ian, this is John. I think when we announced the restructuring, we had to place the 1-year last time behind, right? So we announced that back in September. So by the fall of this year will be our last time buys.

Your question is, do we expect any large surges? That's not in our forecast.

Okay. That's helpful. And in terms of the extra accounting costs in those following in coming quarters, I assume, the auditing and illegal?

I'm pushing them out the door as fast as I can get them, but you know, they're like their claws sticking to the concrete of the wall. So we're pushing it.

So you're suggesting perhaps a gradual wind down in this current fiscal year?

I'm hoping it's not gradual, but I can't say anything yet.

Okay. No guarantees?

Not until I can slam the door on their fingers.

The next question is from John Pitzer of Crédit Suisse.

Just going back to the mobile platform. I'm kind of curious when that $22 million of revenue is no longer in the P&L? What kind of gross margin uplift should we expect? So if we were to kind of look at current results ex that mobile platform, how do we think about gross margins?

Well, at this juncture, a $22 million, it's not that, that big a deal. It's pretty much gone out of there. So we're getting gross margin improvement because we're operating better, okay, and we're just getting more efficient. And we have a long way to go on that, believe me.

And then, Rick, and my second question, I was glad to see networking grow sequentially in the quarter and you're guiding it to grow again. You kind of talked about 3 buckets inside of networking, ethernet, PHY and embedded processors. I'm just kind of curious just a little bit of color of kind your positioning there? Because everyone knows your history in the HDD controller market. You have a strong position in networking. You kind of missed the product cycle, why often is now that you guys have the good product cycle set up here for continued growth?

Because I got confidence in the people. And I've been here long enough to know who the people are and who are delivering and their ability to deliver and so I'm pretty bullish.

Is it across the board ethernet, PHY and embedded processing? Or is there areas that you're more constructive on?

Well, ethernet, certainly, I'm very constructive on. PHYs, I'm getting more constructive on.

The next question is from Stephen Chin of UBS.

And also I want to start off with the networking business as well. Could you also provide some more color on what's been driving the growth? Is it clearly because of new products that are currently ramping that's driving the growth? Or is there pent-up demand? Or is the macro actually improving enough for some of your enterprise customers instead you're seeing budgets improving right now? Or ...

Well, it's largely due to some new product introductions by us, some wins, recover lost market share wins that we've had and we're digging ourselves out of a hole we created by taking our eye off the ball and the team now has their eye on the ball and are executing, it's that simple.

And as my follow-up, I also have a question on the mobile business. If I'd recall correctly, when you guys announced back last September that you're moving away from the smartphone business, I believe that there was still some R&D being maintained on the cellular modem side. Just kind of curious how the products that you're still focusing on over the last several quarters, how that's coming along and whether or not the IoT product strategy, if that's still moving along and generating the expected returns for the original plan?

As I said last time, our major focus at this juncture is back to the core, which is the storage business first and making sure we're optimizing that. Second is networking, which we've realigned our strategy and we're starting to get results with there. And then finally, our big opportunity from a standpoint of wireless and gaming and multimedia, that really exploits our high-tech capability and our ability to differentiate ourselves. And so that's the primary focus at this juncture. Everything else relative to smartphones and that type of stuff is sort of the Internet of Things, when somebody, don't get me wrong, I love the term Internet of Things, I just can't get my hands around which one of those things is going to lead us to the promise land yet. And until we do, it's pretty hard to just allocate willy-nilly R&D dollars to products. So I think that's where we are and I know that's where Matt is.

The next question is from Gary Mobley of Benchmark.

If I back out the $22 million from mobile handsets from the mobile wireless revenue generated roughly $90 million in revenue in the first quarter, is that steady state business, is that how we should think about it? And is most of what's remaining there related to gaming and considering that, what sort of seasonality should we see off that $90 million base?

So I do think it's an area that then is going to be more focused on gaming. It will have seasonality as you can expect due to the Christmas season. And if you're in a hot product, you take off like a rocket ship and if you're not in a hot product, you don't. But I think in the short term, we think we're in hot products and so there's upside, but we're not planning huge upside with that. Dave, you want to comment on it?

I'm not sure, there is anything I can add to what you've already said.

Okay. If I look at estimates from those who assessed the hard disk market and the solid-state drive market, it looks like the market in the March quarter for hard disk drive units declined about 20% and for solid-state drives, the market increased about 30%, and contrasting that with maybe a 1 month offset and looking at your April quarter results, you're down about 30% year-over-year. Is most of that disconnect explained by inventory depletion, not only for hard disk drives in the channel, but your hard disk drive customers depleting pulled-in inventory.

No. I mean, I articulated this a week ago that I felt that we have lost some market share in the HDD arena. And recently, we've won some market share back. So ...

[Operator Instructions] And the next question is from Mark Delaney of Goldman Sachs.

First question is on hard drive business. I think historically ASPs for controllers have been in the $4 range. Rick, I think you said last week, you're hoping to see better trends there going forward from preams. You guys talked about your pricing strategy and potentially being able to optimize pricing going forward. Maybe you can help us think about, as you think about those different factors what kind of price per hard drive opportunity you could see going forward?

Well, obviously, in the hard drive business, it's the typical semiconductor business of do more and more for less and less till you everything for nothing. So there's constant price pressure there. Now our strategy clearly is, is that we've got to take that pressure on the price. We got to make sure that we complete supply chain shares and what's needed in order to continue to get the drive market to grow. But the real big key is in our design capability and our ability to design uniqueness and that benefits our customer, namely speed and power consumption, primarily along with reliability, which are just sort of entry ante into the marketplace of itself. And we think we have a strong core competency here. So we believe that we can always have an advantage to our competitor from a pricing standpoint because of the performance that we're selling. That's strategically what we're trying to do. If you're asking the question, is there a pressure on the $4 price? There's some pressure on it, but from the standpoint of our products that are differentiated, we're able to maintain those kinds of prices.

That is helpful. And for a follow-up on the SSD strength that the company is missing in the last couple of quarters and you talked about guiding SSDs I think up for next quarter as well. Is that regaining market share? Or is that driven by end market growth? Or there was some combination of the 2?

It's a combination of the 2.

And the next question is from Rick Schafer of Oppenheimer.

This is Corey Grady [ph] on for Rick. In your storage segment, what's your current PC exposure versus enterprise?

I don't have that number handy. We don't have it handy. John'll get it to you after the call.

And do you have your current split between HDD and SSD? And can you tell us how that compares to your backlog?

We never break that out as you know for competitive reasons. So we're not ready to break that out at this point.

And there are no further questions in the queue at this time. I'll turn the call back over for closing remarks.

Okay, great. Thank you, LaToya. I'd like to thank everyone for their time today and your continued interest in Marvell. I think, Rick mentioned earlier that we're planning on entering the Citi Global Technology Conference in New York on September 6 of this year. So we look forward to meeting many of you there. Otherwise, we look forward to speaking with you again soon. Goodbye.

Thank you. Ladies and gentlemen, this concludes today's conference. You may now disconnect. Good day.