Ashish Saran - Vice President, Investor Relations Matt Murphy - President and Chief Executive Officer Jean Hu - Chief Financial Officer

John Pitzer - Credit Suisse Ross Seymore - Deutsche Bank Vivek Arya - Bank of America Merrill Lynch Timothy Arcuri - UBS Blayne Curtis - Barclays Mark Delaney - Goldman Sachs Harlan Sur - JPMorgan Quinn Bolton - Needham & Company Craig Ellis - B. Riley FBR CJ Muse - Evercore Gary Mobley - Benchmark Christopher Rolland - Susquehanna Nick Doyle - Stifel

Good day, ladies and gentlemen and welcome to the Third Quarter 2019 Marvell Technology Group Ltd. Earnings Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will be given at that time. [Operator Instructions] As a reminder, today’s program maybe recorded. And now I would like to introduce your host for today’s program Ashish Saran, Vice President of Investor Relations. Please go ahead.

Thank you and good afternoon everyone. Welcome to Marvell’s third quarter fiscal year 2019 earnings call. Joining me today are Marvell’s President and CEO, Matt Murphy; and Marvell's CFO, Jean Hu. Before I turn the call over to Matt, I want 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 expectations. 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 website 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 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, let me turn the call over to Marvell’s President and CEO, Matt Murphy.

Great. Thank you, Ashish, and good afternoon to everyone joining us on the call. The third quarter of fiscal 2019 was the first full quarter that Marvell and Cavium operated as a combined company and we delivered solid results. Working together, we completed several key integration milestones ahead of schedule, including establishing common operating practices, converging our technology, and integrating product roadmaps. During the quarter, we also hosted our Investor Day in New York City, which many of you attended on the call, where we shared our strategy and growth plans for the combined company as we continue our expansion into the infrastructure market. The breadth and depth of our combined portfolios will drive long-term growth in a broad number of areas including 5G, Ethernet networking, enterprise and data center storage, ARM servers, cloud security, AI, and automotive. During this call, we will provide you with an update on the progress we are making on a number of these growth initiatives and on our continued drive towards operational excellence. Now, I would like to cover the results of our third fiscal quarter. Our GAAP revenue was $851 million, GAAP gross margin was 45.1%, and GAAP loss per diluted share was $0.08. Now, switching to our non-GAAP results, Marvell’s revenue for the third quarter came in above the midpoint of our guidance at $851 million, driven by strong performance from our networking business and solid performance from our storage business, which met our expectations. As you may recall, during last quarter’s earnings call, we had identified approximately $20 million of excess inventory being held at Cavium customers, which was impacting our revenue expectations for the third quarter. This excess inventory was depleted during the third quarter and revenue from Cavium products came in slightly above our prior estimate of approximately $210 million. In the third quarter, we continued to improve our non-GAAP gross margin reaching 64.6%, 10 basis points above the midpoint of our guidance, and we continued to expand gross margin over the coming quarters. Marvell’s non-GAAP operating margin for the third quarter was 29.7%. Non-GAAP earnings per share was $0.33, just above the midpoint of guidance. Now, moving to our core businesses of storage and then networking. Our storage business, which includes fiber channel products and Marvell’s HDD and flash storage controller products performed well, meeting our expectations with revenue of $407 million. Storage controller revenue increased sequentially quarter-to-quarter with a seasonal increase from all storage markets. On a year-over-year basis, revenue from storage controllers shipping into the enterprise and datacenter market grew by approximately 30% year-over-year, which more than offset the year-over-year decline from the PC market. Our fiber channel business slightly exceeded expectations. Looking ahead to the fourth quarter and similar to what you have heard from many of our storage customers, we are also forecasting weak demand. There are several factors hurting this market including PC CPU shortages, trade tensions, moderating cloud CapEx, and large inventory increases at our customers. Given these headwinds, we expect storage revenue in the fourth quarter to sequentially decline by about 10%. However, we remain bullish on the long-term prospects of our storage business. During the third quarter, we won several storage controller designs that will continue to diversify our storage business by adding significant future revenue streams outside the PC market. These wins include three datacenter sockets and an Edge video surveillance application. We expect these wins to start ramping late next year and into fiscal 2021 and help drive growth in our storage revenue. We also sampled our new flash platform solutions, which include NVMe aggregators, accelerator,s and converters with several Tier 1 server and storage OEMs. Aggregators increased SSD densities to maximize throughput for new emerging SSD form factors and architectures. Accelerators and converters reduced the need for additional servers, while optimizing overall data storage utilization, performance, and scalability. Early customer reaction has been extremely positive, and these products once again demonstrate that Marvell is continuing to drive innovation in the storage market. The success of these initiatives will contribute to additional growth in our storage revenue from the enterprise and datacenter markets. Moving on to networking, our networking business includes Ethernet switches and PHYs, embedded processors, WiFi connectivity, security products, Ethernet connectivity, and ARM server processors. Altogether, we have a very broad and diverse set of networking products. Our networking business performed above expectations delivering $398 million in revenue, driven by solid results from our OCTEON family of high-end embedded processors and strong demand from Marvell’s Ethernet switch and PHY products. Embedded processors had a good quarter with stable demand from the enterprise market, and as expected our service provider OEMs depleted excess processor inventory they had built up over the past few quarters. In addition, during the quarter, we started shipping embedded processors into trial 5G deployments, which are a strong precursor for larger rollouts in the next year. As we detailed at our Investor Day, we expect 5G base stations to be a significant long-term growth driver for Marvell as our dollar content in these deployments is substantially higher than what we currently have in 4G. We anticipate our platform solution, which includes our 5G baseband processors, embedded processors, and Ethernet switches and PHYs to start ramping late next year as we have already secured a significant design win for our full 5G solution with a leading base station customer. In addition, since Investor Day, our momentum has continued in 5G engagements with additional Tier 1 customers. Marvell’s Ethernet switch and PHY business delivered another strong performance as new products continued to ramp in the enterprise market. Revenue grew by approximately 30% year-on-year. Our refresh portfolio continues to gain momentum with customers, and we won several new sockets during the quarter. These include a switch design with a major server OEM and several PHY wins with the top networking OEM. We believe our continued progress in the enterprise, combined with the 5G opportunity in the service provider market will fuel significant long-term growth. As expected, our Wi-Fi revenue declined due to our planned transition away from older connectivity products. We expect our Wi-Fi business to seasonally bottom out in the fourth quarter, then start growing again as we ramp our next generation of Wi-Fi 802.11ax, which is now called Wi-Fi 6. We have the industry’s most complete and fully compliant set of Wi-Fi 6 products, which are gaining strong traction with leading customers. These include 8/8, 4/4 and 2/2 SoCs targeted at the enterprise and retail access points, carrier gateways, as well as the automotive and premium home markets. Our ARM server CPU business continued to make progress with several cloud and high-performance computing customers who are qualifying our ThunderX2 family of processors. Given the complexity of introducing a new architecture, we expect this evaluation to continue over the next few quarters. In addition, Marvell was recently awarded funding from the Los Alamos National Laboratory to develop next-generation high-performance ARM processors optimized for excess scale workloads. And at the recently completed Super Computing Conference, there were multiple customer and partner announcements highlighting their adoption of ThunderX2. Meanwhile Sandia, NRL, GW4 and Gen C released a number of benchmarks, which demonstrate the compelling performance of ThunderX2 over alternative server processors. Notably, Sandia’s Astra Supercomputer, which is based on HPE’s Apollo 70 and powered by ThunderX2, became the world’s first ARM-based computer to enter the top 500 Supercomputer list. And finally last week, Amazon Web Services announced an ARM-based public cloud offering based on their processor. This is a major endorsement of ARM-based servers by another Tier 1 cloud vendor and meaningfully broadens the ARM ecosystem. Millions of end users will now have the opportunity to run their workloads hosted on an infrastructure powered by ARM and we believe that this milestone will help accelerate future ARM server deployments. We are also making strong progress in our new initiatives, including automotive, AI inference and cloud security with a very robust design win funnel at several key customers. In summary, our networking business delivered a solid third quarter. Looking ahead, we expect low single-digit sequential revenue growth for this business in the fourth quarter, primarily from an increase in demand from the service provider market for our embedded and baseband processors. Turning to our other products, which are our legacy products, revenue was $46 million and we expect this category to decline by about 10% sequentially in the fourth quarter. For the fourth quarter at the midpoint of guidance, we expect $810 million in consolidated company revenue and $0.32 in non-GAAP earnings per share. We also expect to increase non-GAAP gross margin to 65% and lower non-GAAP operating expenses to $287.5 million at the midpoint. In closing, while we need to navigate through some short-term market headwinds in the storage business, we continue to benefit from positive trends in our other businesses. First, Ethernet switch and PHY business has maintained a double-digit year-on-year growth rate over several quarters and we expect this to continue into the fourth quarter. Second, we expect growth in the Cavium business and at the midpoint of our guidance we are projecting this business to grow double-digit sequentially to approximately $240 million of revenue in the fourth quarter. We have now fully integrated Cavium and going forward we will not be delineating revenue between Marvell and Cavium. Third, 5G trials have started which we believe will turn into larger deployments that will drive significant revenue growth from existing design wins and from ongoing engagements with additional Tier 1 base station OEMs. We expect to be a leading supplier of merchant silicon for 5G base stations when they ramp to production based on our end-to-end portfolio. Fourth, despite anticipating lower revenue in the fourth quarter, we still expect to increase gross margins to 65%. We also project to continue increasing gross margins next year as we complete our planned $50 million of COGS related integration synergies. Throughout all of this, we will continue to tightly manage OpEx and drive operating margins while continuing to invest in the long-term growth initiatives we outlined at our Investor Day. Lastly, I am pleased to report that we delivered free cash flow with 30% of revenue this quarter, which is a strong result. We are putting this excess cash to good use by reducing debt and returning it to shareholders through buybacks and dividends. Altogether, these achievements represent another solid quarter for Marvell with the foundation and momentum we are building combined with the opportunities in front of us. I am as excited as ever about our progress in long-term potential. Let me just close by recognizing and thanking Marvell’s 5,000 plus employees around the world for their hard work and contributions during the quarter. As a result of their efforts, we continue to make great progress towards building the world’s next great semiconductor company. With that, let me turn the call over to our CFO, Jean Hu for more detail on our third quarter performance and our outlook for the fourth quarter.

Thanks, Matt and good afternoon everyone. I will start with a review of our financial result for the third quarter for full fiscal 2019 and then provide our current outlook for the fourth quarter full fiscal 2019. Please note our GAAP results reflect purchase price accounting, amortization of intangibles, acquisition and the integration related and non-recurring expenses as well as stock-based compensation. Revenue in the third quarter was $851 million, above the middle point over the outlook provided in September. Our core business of storage and the networking accounted for 95% of revenue. Storage accounted for 48% of revenue in line with our expectations. Networking accounted 47% of revenue better than expectations. Other products accounted for 5% of revenue. GAAP gross margin was 45.1%, which included $103 million for amortization of Cavium inventory step up cost. As a remainder, we step up Cavium inventory cost as platform for acquisition purchase price accounting. We anticipate amortizing the remaining balance of $98 million by the end of the fourth quarter for fiscal 2019. Our non-GAAP gross margin was 64.6%, a 90 basis point improvement from the prior quarter and it reflects the operating mix of the combined company. GAAP operating expenses were $404 million. Non-GAAP operating expenses, was $297 million, approximately $5 million below our middle point of the guidance provided in September. This was the result of the faster than expected realization of integration synergies and our continued focus on operational excellence in managing our core operating expense. Non-GAAP operating margin was 29.7%, GAAP loss per diluted share was $0.08 and the non-GAAP earnings per diluted share was $0.33 above the middle point of our guidance range. Now, turning to our balance sheet and the cash flow statement, we generated $299 million in cash from operating activities in the third quarter and this result include the cash impact related to Cavium merger and the restructuring activities. Capital expenditures were $30 million and the depreciation was $39 million. We also spent $33 million on purchases and the payment for technology license obligations in the third quarter. Our resulting free cash flow for the third quarter was $254 million or 30% of revenue. In the third quarter, we paid down $75 million of our long-term debt and returned $93 million to shareholders through $54 million in share repurchases and $39 million in dividends. We exit the quarter with $610 million in cash and short-term investments, an increase of $87 million from the end of the prior quarter. Our long-term debt was $1.8 billion and we expect to continue to pay down debt to achieve our target leverage ratio. Let me now move on to our current outlook for the fourth quarter for fiscal 2019. We expect our revenue to be in the range of $790 million to $830 million. Our expected GAAP gross margin will be approximately 46% and our non-GAAP gross margin will be approximately 65%. We expect our GAAP operating expenses to be between $375 million and $385 million and non-GAAP operating expenses to be in the range of $285 million to $290 million. At the middle point of this outlook, our non-GAAP operating expense would reflect achievement of $120 million of our operating expense and synergies and our continued focus on managing our core operating expense. And our current planning assumptions will project operating expense accessing fiscal 2020 to be approximately $10 million lower on a quarterly run-rate basis from the $290 million we had provided during our Investor Day. As a reminder, our operating expenses have a certain amount of seasonality and tend to increase in the Q1 of our fiscal year driven primarily by employee payroll taxes matching contribution and our annual merit process. We anticipate that these factors will drive our operating expense in the Q1 of fiscal 2020 to just above $300 million. We anticipate operating expense to then reduce as we progress into the rest of fiscal 2020 and exit the year at a quarterly run-rate of $280 million. We expect our non-GAAP tax rate to be approximately 4% and the net interest expense to be $20 million. We expect GAAP net loss per diluted share in the range of $0.05 to $1.00 and the non-GAAP income per diluted share in the range of $0.30 to $0.34. We are now ready to take your questions. Operator, please open the line for questions.

Certainly. [Operator Instructions] Our first question comes from the line of John Pitzer from Credit Suisse. Your question please.

Yes, good afternoon guys. Matt, congratulations on the solid results given the difficult environment. Matt, my first question is just on the storage guidance, you are guiding the overall storage business down about 10% sequentially into the fiscal fourth quarter, kind of curious if you could help us give us some color of how that breaks out between fiber channel, HDD, and SSD – are they all down about the same or are you still seeing some secular growth drivers in the SSD business, that would be helpful?

Great. Thanks John. So, I would answer your question, we see all of our sub-segments of storage down, fiber channel less and then our storage controllers, which is classic Marvell down more to equal to 10%.

Is there a big differentiation to HDD and SSD?

Both are down, and both are very weak when you look across the range of customers, so I would say directionally both are down the entire storage business whether its cold storage or hot storage is being hit.

That’s helpful. And then as my follow-up just on the 5G opportunity like the fact that you are highlighting more than just one Tier 1. If memory serves me correct, Cavium had a strong position at Samsung, I am kind of curious as you look to broaden out the OEM exposure, how long does that process take? And again, can you help me understand the TAM opportunity here, our math would suggest that you have got an opportunity to capture maybe $2,500 of content base day station and potentially a market that might have 1 million base stations per year, does that feel like the right ballpark?

Sure. So I will break it into the two pieces. One, is how is the progress going with the largest lead customer that we brought over from Cavium, and then second on the content. So, on the first one, we continue to do very well with the lead customer, and we are encouraged by their progress in the end market in terms of them expanding their footprint not only in Asia, but also domestically here in the U.S. And what I would say is that the solution we have is very compelling, because it’s a platform solution, and so we continue to get a lot of interest in actually all aspects of the portfolio. The Fusion, M base band, OCTEON for processing, and then our Ethernet switches and PHYs. And so, this is something we will keep you updated on, but just directionally we thought it would be helpful to share that we continue to build good momentum in terms of engagements on 5G. With respect to content, you are in the right zip code when in the type of content that you mention when we are all in with our full platform solution, and that’s certainly something that we expect with our large customer and that would be I think in the range of where you would say the TAM would be for our full solution in the base station.

Great, very helpful.

Thanks.

Thank you. Our next question comes from the line of Ross Seymore from Deutsche Bank, your question please.

Hi, thanks for letting me ask my question. I want to go back to the storage side Matt, but the answer to the prior question, the details are very helpful for the given quarter, but I wanted to see what your thoughts were on the duration of this weakness, I know there is a lot of moving parts around it, but how do you judge whether in aggregate your storage business or the different moving parts within it, how long this weakness is going to last, and maybe even what does it mean to seasonality in your April quarter considering you are coming off such a weak January?

Sure. So, the commentary that we are hearing from our customers and I think you hear the same thing is people are saying this is a “couple of quarters” in terms of the duration. It’s very hard to call, and in fact where we sit in the supply chain, we are one step removed or one step behind, so if you look at end OEMs that are consuming drives that have our controllers in them, we tend to be further back in the supply chain. So, we are not as close as the customers to it, but certainly their outlook, we tend to agree with and we are sort of following their leads. We will prepare obviously to the extent that things come back earlier, but we are planning for this to be several quarters.

Okay. And I guess as my follow-up question was, one of the comments you had in your preamble was on Graviton and the design of an internally developed ARM processor. I can see the side that you are saying it’s great for the ecosystem, but I could also see the side that they just removed a potential customer by servicing themselves, how do you think about the balance between those two and your commitment to ThunderX2?

Sure. So let me answer it in two ways. The first is, we were in the final stages of closing Cavium, there was announcements from one of the other large competitors that they were pulling back in their efforts. And what I’d say it in the short-term that, that helped us because it helps solidify our design position in a number of ways, but also there was a lingering question – there’s been a lingering question, is Marvell going to be the only last man standing with respect to ARM servers. On the Graviton announcement, all I’ll say is, I think we’ve had a view for some time that, that particular customer was going to do something on their own, and therefore that’s never been a part of our SAM assumption. So from – again, from our point of view, we’re happy to see them have made progress get an initial start in terms of putting up their instance. And I meant what I said, I do think this is going to be good for the ecosystem, and when I look out to 2019 and our next generation shift, which is ThunderX3, which will be taping out sampling I think will be very well positioned as Marvell and its ARM to compete very effectively with the next generation processors from the usual suspects. So that’s the continuum of how I see this market evolving.

Perfect. Thank you.

Thanks.

Thank you. Our next question comes from the line of Vivek Arya from Bank of America Merrill Lynch. Your question please.

Thanks for taking my question and congratulations on the consistently good execution. Matt, my first question on storage. In the past you had kind of sized storage growing at a low single-digit kind of growth rate. Is that still a useful construct for fiscal ‘19? I know it’s early days, but could you just help us right size where the business can trend because I understand that there is probably some excess inventory and CPU shortages on the hard disk drive side, but are there issues on the SSD side or other areas. Just overall, how do you think about storage from a fiscal ‘19 perspective?

Sure. So I think even with the weakness we see, if you look at our performance, storage is still hung in there pretty well and I think it’s probably flattish if you look at the performance in ‘19. Looking forward into ‘20, certainly understanding there’s going to be this inventory correction we have to work through with the growth drivers that we’ve highlighted especially the traction we see and the continued growth in the enterprise and data center portion of our storage business, we think that as we get through the inventory correction and we head back to a normal state, we’ll continue to see growth in our storage segment.

I see. And for my follow-up, how is all this noise around tariff and the potential for them to go from 10% to 25% or maybe they don’t go to 25% every day that news changes. But do you see your customers behaving a certain way right then, what are they telling you, are they taking certain steps to kind of pull-in inventory, any change in behavior that you are noticing from their side or anything else that you’re noticing in terms of cancellations or other things in your business?

Sure. So yes, so first of all, you’re right, the situation is noisy and it’s changing daily. It’s been interesting preparing for this call seeing what’s happened between Sunday and today. So yes, a lot of noise to kind of focus on your question, we certainly hear about this in the industry about pull-ins and anticipation of the tariffs kicking in. I’d say in our own experience, it’s very limited in terms of what we can actually point to and I’d say that we saw this in China through distribution for some of our networking products, so you end up kind of going pretty specific in terms of where some of this may have occurred, but even when we look at it, it’s speculation quite frankly, because we don’t have customers actively coming to us telling us, hey we’re planning on pulling in and here’s what’s happening. But we do hear about it in the noisy environment certainly isn’t helping the overall situation for us as well as our peers.

Okay. Thank you.

Thank you. Our next question comes from the line of Timothy Arcuri from UBS. Your question please.

Thanks a lot. Matt, I had a question on the networking business, you’re not giving us connectivity, but it seems like the guidance assumes like something a little more than $200 million for sort of the core Marvell business, which is up a good bit from the sort of $150 million here a couple of quarters ago. Can you talk about that, is that real demand or is that some of what you just talked about some of the pull-forward due to the tariffs? I’m just kind of wondering, whether that’s a reasonable baseline to sort of think of going forward? Thanks.

Hi Tim, this is Jean. I’ll give you some color about the WiFi business. It become really – it’s below 10% of the overall Marvell’s business now. As Matt mentioned during his prepared remarks, this is the quarter we actually see the gaming product line completely going out. And so when you look at it year-over-year, the business certainly declined significantly and kind of bottomed up in Q4. But I would say going forward especially after we get out of Q4, next year we actually see this revenue going to start to ramp up and growing in fiscal ‘20. And I think the run rate that you quoted is actually lower than what our actual revenue level. We do see this business continue to be going back, not at going back to the level of data gaming revenue, but certainly all the other business momentum continue to be good. So we are actually expecting the growth of WiFi business in fiscal ‘20.

Okay, okay, Jean. Thanks so much. And then as a follow-up, I know that you were talking about the Cavium business, the baseline being like $230 million and the guidance is now $240 million, so it’s a bit better, and the channel sounds like it’s been pretty cleared out. Is there some restocking happening there yet, I’m just sort of wondering, what we should expect for the trajectory of the Cavium business now that the channel is basically cleared out? Thanks so much.

Sure. Yes, so you rightly pointed out, we’re actually very pleased with how Cavium’s performing, it came in ahead of plan. For Q3, we did lean in the last call, we said $230 million and now we’re projecting it to be $240 million. So both of those were very positive and that’s really due to growth in the OEM business. All the channel stuff is clean, channel inventory is clean, our DSOs, everything is – linearity all that’s very good. So this is really a resumption of growth in that business and it’s performing well, but the – just to be clear, the growth quarter-to-quarter, as well as the increase over what we had indicated before was really the OEM customer base coming back primarily in the OCTEON and Fusion product lines.

Got it, Matt. Thanks so much.

Yes.

Thank you. Our next question comes from the line of Blayne Curtis from Barclays. Your question please.

Hey good afternoon. Thanks for taking my question. Just wanted to follow up on the SSD business. In the October quarter enterprise and data center was growing nicely year-over-year, client was down a little. I’m just kind of curious of your outlook into January, the whole segment sounds like it’s down a bit. Can you just give us some color between those two segments?

Yes. So Blayne so – sorry, so yes, both – the way to think of it is, if you look at the overall classic Marvell storage market, which is both our flash solutions products, as well as our HDD controller, that whole controller business for us is down from Q3 to Q4. It’s both HDD, as well as flash SSD and it’s broad-based across virtually every customer. In fact, when I was preparing for this, we took a look at all of the customers above the million dollars a quarter and every single one is down sequentially. So I’d characterize it is not related specifically to one or the other, but both are down in the fourth quarter.

Yes. I think this is the inventory adjustment, right, we’re really looking at the storage segment especially the controller side that we see the inventory adjustment it will take a few quarters like Matt said earlier.

Thanks. And then maybe actually the kind of same question when you look at the HDD business, this is the business that has had cycles, if you look back over history and clearly your end costumers are struggling. I’m just kind of curious your perspective of inventory of controllers when you look at your guidance for January, is that just reflective of what the end customer are doing or are you working down some inventory of controllers as well?

Yes.

Yes, again, just – yes, sorry, Blayne, just to be clear that the last answer I gave on which you asked on SSD, I’m really answering for both together. And the reason is because one, when we look at this business, what’s become apparent over the last couple of years quite frankly is that the – when we break out our business looking at it by market is much more helpful. So when we talk about our growth drivers, we talk about where our investments are, that whole commentary we’ve been pretty consistent, we actually gave a lot of data at our Investor Day around the enterprise and data center segment. When you bring it back to inventories I mentioned, we see inventory issues both on the SSD side, as well as the HDD side, both sides from a storage perspective have inventory are going to be down in Q4 and both are going to take some quarters to rebalance.

Got it. Helpful. Thank you.

Thank you. Our next question comes from the line of Mark Delaney from Goldman Sachs. Your question please.

Yes. Good afternoon. Thanks for taking the question. Question on the gross margin guidance for next quarter, which is coming up pretty nicely given the lower revenue. Can you give us a sense as to what extent that’s starting to benefit from COG synergies related to Cavium or is it more about the mix and you maybe can remind us of the $50 million of annualized COG synergies that you’re expecting to realize, what sort of cadence should we have in mind for that to issue it?

Yes. We are really pleased with our guidance of 65% gross margin. It actually has now included the $50 million cost of sales synergies that we outlined during our last earnings call. So there are few key drivers I want to talk about. The first one is, the mix of Cavium product, which when we include the Cavium as the combined company, the mix improvement certainly coming from the Cavium product side. Secondly, we actually talked about before is – when you look at the Marvell’s networking product, when we release new product and ramp new product into production, those product lines that actually have higher gross margin. So Matt mentioned, our networking business switch and PHY have been growing significantly. So we are benefiting from that mix change too is the networking product ramping up. Going forward, while our new product continue to ramp, we’ll continue to see that benefit. And third of course, is operational excellence and efficiency. Our operational team continue to drive supply chain efficiency and improve overall cost of sales. So this is really 65%, it’s a starting point for the synergy achievement. So going into fiscal ‘20, Matt mentioned, when we achieve the $50 million cost of sales synergy, we’re going to continue to expand our gross margin.

Yes. And I’ll just add, I think as Jean said I think this is a very powerful setup for us for fiscal ‘20, the fact that we’re guiding 65% gross margins on the level of revenue that we’re talking about. I think the mix improvements we’ve made and the new product progress we’ve made have been very good in terms of profitability. And I would note, I think this is something like the 10th quarter in a row where sequentially we’ve managed to increase our gross margins a little bit each quarter for the last couple of years and we don’t – we see that continuing into fiscal ‘20 on the back of higher revenue, improved product mix, and our COGS synergies, which have yet to flow through to the income statement. So we’re very optimistic on this for next year.

That’s very helpful. And my follow-up is on the broader topics of margins and synergies. And Jean you mentioned some reduction and how much OpEx you expect the company to be spending next year compared to your prior view. To what extent, is that just overall tight management of expenses given some of those inventory adjustments that you talked about or is there any change in how much synergies the company thinks they can achieve from the Cavium acquisition? Thank you.

Yes. You’re right. We’ve reached our synergy to $200 million during our last earnings call. That’s very well defined. Our team is executing ahead of achieving our $200 million synergy plan especially on the operating expense side. And we said that at the midpoint of guidance for Q4, we are achieving $120 million of the $150 million synergy. We still have $30 million to go, which we’ll achieve in the course of fiscal ‘20. So the rest of the operating expense reduction is really because our team is doing great job, really applying disciplined resource allocation approach to a much larger scale operation. So, that’s how we achieved better operating expense.

Thank you.

Thank you. Our next question comes from the line of Harlan Sur from JPMorgan. Your question please.

Good afternoon. Nice job on the quarterly execution. Within the networking business, the enterprise and campus Ethernet switching and PHY, clearly 2018, we saw a strong upgrade cycle. How is the team thinking about the momentum of that upgrade cycle heading into calendar 2019? What we are hearing is that we are still early days in the upgrade cycle given sort of the legacy infrastructure that hasn’t been upgraded in a while and also these customers also kind of solidified their plans in terms of what’s going to remain on-prem versus what’s going off-prem, but wanted to get your views?

Yes. Our view is very consistent with that. We believe that that cycle will continue into calendar ‘19. It’s been a growth driver for us over the last 12 months. We expect that to continue. So that’s a good market trend. And I would say on top of that layering in our new product success will further help accelerate our growth, our continued growth in our wired networking segment, which is as you mentioned our Ethernet switches and PHY products all of which are extremely competitive and are doing very well in the market.

Great. Thanks for the insights there. And then looking at the better Cavium results in October and the stronger sequential growth from Cavium in Q4, it sort of implies that the core Marvell business is down about $65 million sequentially. It looks like $40 million of that is due to the storage weakness, where is the other $20 million, $25 million of weakness coming from?

Hi, Harlan. This is Jean. So, your math is right. The rest of it is coming from other product line. It’s declining and also a little bit of Wi-Fi, because as we said, we don’t have the gaming product anymore and so seasonality really impacts that business too.

Great. Thanks, Matt. Thanks, Jean.

Thanks, Harlan.

Thank you. Our next question comes from the line of Quinn Bolton from Needham & Company. Your question, please.

Hi, Matt. Just wanted to follow-up on the storage business, it sounds like there are lots of moving parts. Some hit the clients, some hit enterprise/data center. Just wondering do you see sort of both segments down for a couple of quarters or you expect one to recover before the other? And then I have got a follow-up on the networking business.

Hi, Quinn. Just want to clarify, right, so, the enterprise and the data center of our storage controller business actually have been growing year-over-year and continue even in Q4, it’s going to grow. So really the decline of our guidance into Q4 is more related to other segments of the business. And I think that’s the one thing to clarify, right. I think it’s the inventory adjustment we are going through with the overall storage controller both HCD and the flash side. We are trying to manage the headwinds for the next one or two quarters.

Sorry, Jean. And that’s then mostly on the client side. The enterprise data center will continue to be strong?

Yes. Enterprise data center actually are growing year-over-year. So, the decline if you think about it is really largely on the other end client side.

Got it. Got it, great. And then just going through Harlan’s math there on the networking business with Cavium business up to $240 million, does the core networking business, the core Marvell networking business actually decline in the January quarter or is that stable?

So, Marvell networking business, if you think about, Matt has talked about it, both the switch and the PHY, they are actually growing year-over-year double-digits again. I think Wi-Fi is the major seasonally down quarter and without the gaming Wi-Fi revenue, that certainly impacts the business on this side.

Great. Thank you, Jean.

Thank you. Our next question comes from the line of Craig Ellis from B. Riley FBR. Your question, please.

Yes, thanks for taking the question. I will ask a question about use of cash since the cash generation performance in the business was so strong and with good margins in the outlook. So it was pretty balanced in the quarter with good share buyback and good debt reduction pacing, is that a proxy for what we should expect both in the fiscal fourth quarter and as we look into fiscal ‘20 or with the socket these prices Matt and I think relative valuations to the S&P 500 that are tenure lows, which would be more biased to take it up on the share buyback side?

Yes, so I think as you can see right, we generated a very strong cash flow in Q3, we’re really pleased with that going forward, we do think with our business model will continue to generate a strong cash from we have talked about there, we plan to pay down debt by close to 100 million each quarter to get to our target leverage ratio I think because how much cash we generated you can see, we can certainly have the strong flexibility to do buyback we certainly will try to balance both different quarter it could be different, but that’s the flexibility we have going forward.

Yes Craig, I would just add I think when we were certainly very mindful of our valuation relative to those other metrics as you mentioned, we are very bullish on our prospects and given the cash flow generation of this business clearly, we will be buying back stock, as appropriate I think we’re going to do our debt pay down as Jean mentioned and we’re going to be mindful of that, but there’s an opportunity here than and we’re going to continue to take advantage of the strong cash flow of the business.

And that’s helpful and then the follow up Matt is to you, you provided us with some very helpful color on the opportunity in base station both from our product standpoint in a way that can evolve from a customer standpoint, but at Analyst Day you and Jean identified two other upside growth drivers are you starting to get visibility that data center I think it was auto Ethernet can come into view in fiscal 20 or are those other two drivers really longer term with base station really being the principal driver of those three upside drivers for next year? Thank you.

Yes, so from a total dollar amount, the 5G will clearly be head and shoulders the largest of those upside drivers, both of those three initiatives as well as actually for the whole company that being said, we’re happy about all of them the other one you mentioned was automotive Ethernet now that’s coming off of the smaller base but off a small base that business has been growing quite rapidly and we expected to grow again significantly in fiscal 2020, but again that’s a much smaller base we’re talking about but design win pipeline is very strong there, our new products, which have been in leadership positions both on our gigabit Ethernet 5 as well as our secure switch have significant design win pipeline and those are starting to materialize into winds which would translate into revenue ramps and then the third one was really around ARM server, if I recall, is the third side lever and as I mentioned in my prepared remarks I think our showing at supercomputing 2018 was very strong in terms of ThunderX2 performing well on all benchmarks, both for cloud and for high performance computing applications and that will also generate year-over-year revenue growth and contribution will be part of why we’re going to grow in fiscal 2020 as well but I’d say the 5G by far is the one where we see the most upside potential.

Thank you.

Thank you, our next question comes from the line of CJ Muse from Evercore. Your question please.

Yes, good afternoon thank you for taking me in I guess, question on storage and specifically SSDs, can you walk through your thinking for calendar 2019, obviously, there’s an inventory correction going on, but big growth still should be at least north of 35% and you’ve got hopefully demand elasticity so would love to hear your thoughts on how you see that playing out for that part of your business through encounter 2019?

Sure. Hi, CJ. Yes so again, I think the way to think about our growth coming out of the cycle next year in storage, in controllers is really I’m focusing more around the end markets and the end applications that we’re going to grow in, which are by the way agnostic to whether it’s hot storage or it’s cold storage or it’s flash or it’s HDDs and that is enterprise and data center, it’s been growing very well for us, we believe it’s going to grow next year, we believe that once you’re through the cycle that will continue to drive our growth we’ve been less focused and we’ve talked about this in Analyst Day on the client side and particular in the PC exposed segments, that one, we’ve been we made our pivot to the cloud probably two years ago in terms of our R&D investments so I think as we go forward, I think that’s the more pertinent way to look at our business because that’s really where profitability is driven, that’s where R&D is focused and that’s where the growth is coming from and the future of our overall storage controller business.

Very helpful and if I could just follow up on that same theme specific to NVMe enterprise controllers, can you kind of walk through where you are in terms of customer design wins as well as what revenue opportunities could look like from just licensing IP etcetera?

Okay yes so, let me take the second one first so we don’t have any plans to do any licensing of our IP, our portfolio is rich in particular as you mentioned in NVMe and I think NVMe and then NVMe over fabrics as a technology that is very important to our company both because we own it at the drive level as well as now at the controller level, upstream and I think what I say there is that will be an important technology for us across a wide number of applications in the company, but I don’t think I’m going to go one click lower into the design wins for our specific NVMe products for the enterprise that’s probably a bit too detail for here, but we are certainly participating in that market but I just NVMe overall as you saw at our Analyst Day, we talked about our new products which are in the form of our Aggregators and our Accelerators and those kind of products and those solutions, I think, coupled with our SSD controllers, it provides the total solution for data center and emerging enterprise applications.

Very helpful. Thank you.

Thank you. Our next question comes from the line of Gary Mobley from Benchmark. Your question please.

Hi everyone thanks for sneaking in my question Matt I wanted to start with a technical question covering your largest storage customer I don’t think it’s been a secret that your largest storage customer has been a big supporter of risk five and as evident in the press release today, it’s evident that they are developing their own SSD controller for enterprise and data center applications and so with that specific customer in mind, I’m curious to hear your perspective on market share and then as well overall market share for SSD controllers captive versus merchant? And Jean as a follow up, housekeeping question looks like your share count came in below what I was expecting just based on the transaction value Cavium, is the baseline could you give us what the share count assumption is for the fourth quarter?

Okay hi Gary so, I’ll take the first-two, and then I’ll let Jean cover the third so, with respect to risk 5 this is something that we’re involved in also, we’re a member, we’re actively engaged and actually looking at a number of different process architectures obviously, we have most of our products from the Marvell side based on our from the Cavium side, they’ve made the miss to Arm transition so we’re very open in terms of processor architecture out there we’ve had very good discussions and we’re very closely aligned with WD as you can imagine because there are largest customer so I think we understand and I think they’ve been very vocal probably one of the most vocal OEMs, with respect to implementing risk 5 in their own products some of which they have announced and some of so I think we’re aware that and that ties into your second question, which is the verticalization question and captive versus merchant in that market and what I say is similar to what I said at the Analyst Day, which is this trend has been happening for some time, some of those products are already on the market today but the number of skews that are out there, the number of applications that are now present for us in the SSD market in the Flash solutions market across a wide range of not only the guys that make the SSD, but also the new emerging applications in terms of the Do It Yourself customer base in the data center and others presents I think that’s really where the trend is going and where we see the most traction, but we’ll continue to participate in both I think both are going to be important parts of our business but no question on the verticalization especially at the lower end and the PC market I think it’s made sense for these companies to make their own solutions for cost reasons and that probably will continue the DIY model though I think is one where it really plays to our strengths and that is because we have experience and knowledge of everyone else’s NAND we’re able to go in and actually do almost an SOC if you will for different cloud customers, enterprise customers and then as even some new emerging applications for the future where we can enable our customers using our technology to take advantage of multiple NAND sources out there and get their own IP implemented in our products and get their own design that they need and I’ll turn to Jean on the share count.

On share count, right, in Q3, we did about buyback to some of our shares of probably close to 3 billion shares, so in Q3 the share count and non-GAAP share count is about 656 million shares I think for Q4, you can model similar maybe a while to meet and shares the small, that’s what you can model for Q4.

Alright thank you.

Thank you, our next question comes from the line of Kevin Cassidy from Stifel. Your question please.

This is Nick Doyle on for Kevin Cassidy. Thanks for taking my question. Can you hear me alright? So following up on the 5G how should we be thinking the timing for revenue ramping on 5G deployments and I have a follow up?

Sure, best as we can tell and again this is a new technology transition so this is always subject to change by some quarters, but best as we can tell it’s about a year from now it’s Q4 of calendar, well it be our Q4 fiscal which is a year from now that’s when we start seeing I think some of the ramps for our products.

Okay great thanks for the color and how do you feel any flowing in your revenue from China due to security concerns or even restrictions on buying products from any other customers?

No, we haven’t seen that yes, we have a Chinese Customers and we have not seen that.

Okay thank you.

Thank you, our final question for today comes from the line of Christopher Rolland from Susquehanna. Your question please.

Hi guys thanks for letting me ask question I guess Matt, now there were a few quarters in the Cavium perhaps you can talk about the products that surprised you the most what’s been stronger than expected for you and what’s been weaker?

Sure, hi Chris so great final question so we have overall, we’re very pleased with the set of technologies that we got in fact I think you nick named it in one of your reports some time ago as a roadmap in a box and I think if we were very fortunate to get such a diverse set of product lines and technologies from them so I think in general, our feeling is from when we started the journey with them to now the expectations of largely been meet, I’d say that with 5G I mean if you go back to fall of 2017, okay, when we were announcing this. I think 5G at that point seemed like it was going to be sort of 2021, 2022 type of thing, we hit Mobile World in February and all the sudden everything changed and since then I think directionally we’ve seen Poland so I think the 5G opportunity on the basis of fusions success in 4G and then all the work that the great work the team did to get the 5G technology ready. I think that’s been a nice upside surprise to us I think the rest of it, whether see it’s OCTEON, which is sort of what we would call one of the franchise businesses of Cavium, it’s doing extremely well we see that it’s very complimentary with our switches and our PHYs when we go to market now, we’re able to sell that as a total solution team is doing a great job there I’d say, as we also integrated our ARMADA, our processor line under the OCTEON team I think they have also done a great job of taking their SDK and applying it your model products and in fact, we have some products in flight that were called ARMADA that are actually going to be announced as OCTEON and they’re going to be run like a Cavium product from day one so lots of lots of positive collaboration between the teams, the technologies are good, there’s a whole laundry list of things that they have and I probably won’t go on everyone in detail, but I’d say in aggregate we’re very happy with what we’ve got and I think the fact that the revenue has come back and it looks good for Q4 and we’ve got the outlook as we head into the second half of next year with some of the new ramps we’re very optimistic and I think again the combination of the two companies the ability to share the IT, the ability to sell a whole solution now with OCTEON as an example of the core very positive on that outlook.

Thanks again and appreciate the color.

Yes, thanks Chris.

This does conclude the question-and-answer session of today’s program. I’d like to hand the program back to Ashish for any further remarks.

Thank you everyone for joining us today and we look forward to talking to you again next quarter. Thank you and goodbye.

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