Yahoo Finance Marvell Technology Group Ltd. (MRVL) Q4 2018 Earnings Conference Call Transcript
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Marvell Technology Group Ltd. (NASDAQ: MRVL)
Q4 2018 Earnings Conference Call
March 8, 2018, 4:45 p.m. ET
Contents:
Prepared Remarks
Questions and Answers
Call Participants
Prepared Remarks:
Operator
Good day, Ladies and Gentlemen. Welcome to the Q4 2018 Marvell Technology Group Ltd. Earnings conference call. At this time, all participants are in a listen-only mode. Later, we'll conduct a question-and-answer session and instructions will follow at that time. If anyone should require assistance during the conference, please press * then 0 on your touchtone telephone. As a reminder, this conference is being recorded.
I would now like to introduce one of your hosts for today's conference, Peter Andrew. Mr. Andrew, you may begin.
Peter Andrew -- Vice President, Treasury, and Investor Relations
Thank you. Good afternoon, everyone. Welcome to Marvell's fourth quarter and fiscal year 2018 earnings call. Joining me on the call today is Marvell's President and CEO Matt Murphy, and CFO Jean Hu. Before I turn the call over to Matt, I wanted to remind everyone that certain comments today may include forward-looking statements which are subject to significant risk 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 reference to certain non-GAAP financial measures or reconciliation between our GAAP and non-GAAP financial measures as available on our website in the Investor Relations section.
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With that, let me turn the call over to Marvell's President and CEO, Matt Murphy.
Matt Murphy -- President and Chief Executive Officer
Thank you, Peter. Good afternoon to everyone on the call. The completion of Fiscal 2018 marks my first full fiscal year as the CEO of Marvell. Our performance over this period demonstrates that Marvell is successfully transforming itself into a much more capable and competitive company, one that delivers much greater value to customers, employees, and shareholders.
Since I joined Marvell 19 months ago, we have increased our focus on our 3 core markets: storage, networking, and connectivity. We've also added greater discipline into our product development process, retooled, and reinvested in our sales force and go-to-market strategies, and continue to drive efficiencies in our new business model. Our Fiscal 2018 results clearly show that these actions are paying off.
Fiscal 2018 year-over-year revenue from our core businesses grew 7%. You may recall from our investor day a year ago, that our stated goal was to grow faster than our core-end markets, which at that time were estimated to grow 6%. I'm proud to report that we exceeded that goal. I'm also pleased that this growth was broad-based, with storage growing 8%, networking growing 1%, and connectivity growing 14%.
It is worth noting that our networking business excluding legacy grew 7%, and I'll talk about that in a minute. For Fiscal 2018, non-GAAP gross margins increased over 5 percentage points from a year ago to 61.4%, exceeding our target of 60%. Non-GAAP operating margin increased to 25.9%, up over 11 percentage points from a year ago and we're making steady progress toward our long-term target of 30%.
Finally, in the 10 months leading up to the Cavium announcement, Marvell returned $647 million to shareholders, which is 130% of our fiscal year FY2018 free cash flow. By all measures, our results were an improvement.
Now, turning to our Q4 results. Revenue in the fourth quarter was $615 million, above the midpoint of the guidance we provided back in November. Non-GAAP gross margin reached another all-time high of 62.3%, which reflects both the value we deliver to customers and the great work our team has done to drive down costs. We see continued tailwinds to our gross margin due to a richer mix of storage and networking, new product ramps that are accreted to gross margins, and continued improvement in optimizing our manufacturing cost structure. Our non-GAAP operating margin for the quarter was 27%, and our non-GAAP EPS grew 45% year-over-year to $0.32 per share.
Moving to our core businesses. Storage continued its strong performance, exceeding our expectations and growing 3% sequentially. As I mentioned earlier, storage grew 8% for the full-year, driven by strong growth in SSD and continued traction of products targeting the enterprise and data center markets. Q4 was a record quarter for our SSD business, as we continue to see strong demand for our broad family of SSD controller solutions. During the quarter, we ramped NVMe-based products for new Tier 1 clients and cloud customers. These engagements, while early in their life cycles, demonstrate our continued traction in the NVMe transition, and we look forward to sharing more details on our progress in the coming quarters.
Our HDD business also experienced stronger-than-expected results in the fourth quarter, driven by growth in the enterprise and data center markets. We remain excited about this business as customers implement new, cutting-edge technologies that Marvell's SoCs help to enable. These new technologies are driving significant aerial density gains, which continue to make HDDs a very attractive solution for near-line storage in the data center market.
Overall, we're happy with the performance of our storage business and our Q4 and Fiscal 2018 results demonstrate this business as firing on all cylinders.
Moving to networking. Our networking business grew both sequentially and year-over-year. We saw strong demand for a refresh switch PHY and embedded processor products, which grew largely in line with their expectations during the quarter. However, this growth was partially offset by our legacy networking products declining more than expected, as we saw forecasted demand for legacy in Q4 push out into the first half of fiscal year 2019.
Looking into the first quarter of Fiscal 2019, we expect our overall networking business to grow in the mid-to-high single-digit range year-over-year, driven by growth of our new products. For those of you attending the upcoming OCP summit, we will be showcasing our end-to-end storage and networking solutions for the data center market.
We will be highlighting our brand-new PHY product we announced earlier this week, a high-density transceiver supporting 16 ports of 15-gig PAM4 signaling for gearbox and retimer applications, aiding in the transition in hyperscale data centers from 25-gig Ethernet up to 400-gig Ethernet. In addition, we will also be showcasing our data center switch portfolio, including our newest product, a 1-terabyte switch fully optimized for 10-gigabit data center applications, providing the lowest power of any such product on the market today.
Overall, our networking business continues to gain traction in the marketplace with strong design win momentum in the enterprise campus, data center, and 4.5 and 5G-based station markets with our refresh portfolio. With the upcoming addition of Cavium's processing solutions to our portfolio, we have a unique opportunity to bring truly differentiated solutions to our combined customer base.
Finally, our connectivity business delivered strong results for the fiscal year, growing revenue 14% year-over-year. We've been working to refocus this business on the high-performance market and this past quarter, we announced our leading 802.11ax family of products. This innovative technology delivers an industry-best implementation of the new 11ax standard, bringing customers up to four times greater capacity, support for the greatest number of users, symmetrical uplink, and downlink performance, and greater coverage in all deployments.
Marvell has a strong 16-year track record in this business. Because we deliver superior performance and reliability, we are a top choice for enterprise access points in automotive customers and are already gaining design win momentum with our ax solutions. Overall, we've repositioned this business for success and I'm very proud of the engineering and management teams for their focus and perseverance.
Before I close, I want to give a quick update on the Cavium acquisition. Since announcing the Marvell/Cavium transaction on November 20th, both companies have been actively working on integration planning. We've launched an integration team comprised of representatives from both companies, set up a steering team to ensure strong governance, implemented a robust project management process and kept employees of both companies updated on our progress.
Regulatory approval is progressing, with the HSR antitrust process complete and MOFCOM and CFIUS reviews under way. Shareholder meetings for both companies are scheduled for March 16. We continue to anticipate this transaction will close in mid-calendar 2018. Our planning progress to date has been laser-focused on developing detailed plans on synergies, both cogs, and OpEx. I'm extremely confident we can achieve our previously announced synergy targets of $150 million to $175 million within 18 months of closing and $200 million beyond 18 months.
Since the transaction was announced, I've had the opportunity to spend time with the Cavium team in customer meetings, business plan reviews, organizational strategy meetings, and integration planning. The feedback from the customer base, in particular from the leading companies in cloud computing, wireless infrastructure for 4 and 5G, and enterprise has been overwhelmingly positive. The quality of the people inside Cavium in BUs, engineering, sales, and other corporate functions have been truly impressive. I'm very proud of how the collaborative leaders from both sides have been at integration planning with the mindset being how do we truly create a best-in-class new company from the combination?
Overall, I want to thank the team for their commitment and contributions, both this past quarter and over the entire year. We've made amazing progress and I look forward to what we're going to accomplish together in the new fiscal year. Now, I'll turn the call over to our CFO, Jean Hu.
Jean Hu -- Chief Financial Officer
Thanks, Matt. Good afternoon, everyone. I'll discuss the highlights for our fourth quarter and the fiscal year 2018 and provide our current outlook for the first quarter of Fiscal 2019. Revenue in the fourth quarter was $615 million, about midpoint of the guidance we provided in November.
Our core business of storage, networking, and connectivity grew 8% year-over-year. Storage accounted for 54% of revenue and grew 4% year-over-year, driven by the success of our SSD products and the continued growth in enterprise and the data center segments in both our SSD and HDD solutions. Networking accounted for 25% of revenue and grew 5% year-over-year, driven by our new switch PHY and the embedded processor product.
Connectivity had a solid quarter and accounted for 14% of revenue and grew 31% year-over-year, driven primarily by growth in high-end voice-enabled and host-draining devices. Finally, other products accounted for 8% of revenue, which was about $2 million better than we expected, due to [inaudible] activity.
GAAP growth margin for the fourth quarter was 60.7%, and the non-GAAP growth margin was 62.3%, a record level for Marvell and an increase of 4.5 percentage points from last year. GAAP operating expenses were $319 million, higher than our guidance, primarily due to the settlement of the 2015 security class action claim for $72.5 million during the quarter. Non-GAAP operating expenses was $217.6 million, consistent with our expectation.
GAAP operating margin was 9%. The non-GAAP operating margin was 27%, versus 20% a year ago, as we were successful in [inaudible] our model. GAAP earnings per diluted share were was $0.10 and the non-GAAP earnings per diluted share were $0.32. For Fiscal 2018, we delivered a non-GAAP EPS of $1.19, up 80% versus Fiscal 2017.
Let's now turn to our balance sheet. We ended the quarter with over $1.8 billion in cash and hand and [inaudible]. Cash flow from operations was $120 million, excluding a one-time payment of $72.5 million to settle the security class action claim, which generated approximately $192 million cash from operations.
In Q4, we distributed $30 million to shareholders in dividends. For Fiscal 2018, we returned approximately 130% of free cash flow to shareholders. As a reminder, we have not been in the market for repurchasing shares due to the pending Cavium transaction.
I want to now take a minute to talk about our capital allocation philosophy in light of the announced merger with Cavium. As we mentioned when announced the deal, we expect a combined company with a generated strong and consistent cash flow. After the deal closes, our gross leverage ratio, excluding synergies, is expected to be 1.7X. We plan to use our combined cash generation to rapidly pay down the debt associated with the transaction. To get to a growth debt to EBITDA leverage ratio at one time, to [inaudible].
Our Board and the management team structured this transaction in a way to provide a high level for financial flexibility and to maintain [inaudible] financial profile, while also allowing an opportunity to return cash to shareholders. Returning capital to shareholders is a very key element of our financial policy. Based on strong and consistent cash flow generation of the combined company, we expect to revert back to returning 50% of our free cash flow to shareholders one or two quarters post-closing.
In summary, fiscal year 2018 was an important year for Marvell. We executed well to deliver both top-line revenue growth and a significantly higher profitability. Before we turn to guidance, I want to highlight a new revenue or company rule change. We have adopted the new revenue recommendations [inaudible] [00:15:11] effective the beginning of Q1 Fiscal 2019. This changes our revenue recognition criteria for distribution customer sales from [inaudible] [00:15:23] accounting.
This change does not impact how we conduct our business and we don't expect this change to have a meaningful impact on our revenue. In addition, we have evidence the major provisions of the Tax Cuts and Jobs Act. We do not expect the Tax Act to materially impact Marvell's effective tax rate currently. As a reminder, we are working on an integration plan of Marvell and Cavium. We'll provide our update on the combined company tax rate after the close of the transaction.
Now turning to our first fiscal quarter of 2019 guidance. As a reminder, the fourth quarter is a normal 13-week quarter, versus the prior quarter, which had 14 weeks. We expect our total revenue in the range of $585 to $615 million. At the middle point of our guidance, it would represent a 2% decline sequentially and a 5% year-over-year increase for the whole company. Our core business of storage, networking, and connectivity is expected to grow 6% year-over-year. We expect our storage revenue to decline 6 to 8% sequentially, due to normal HDD [inaudible] seasonality. This would represent a slight decline year-over-year. We expect our networking revenue to grow sequentially and in the mid-to-high single-digit range year-over-year driven by continued momentum in our new product ramp.
We expect our connectivity revenue to grow in the middle teens sequentially. Stronger-than-normal seasonality, primarily due to a customer earlier than normal product debut, which would typically occur over the Q2 and Q3 period. We expect other revenue to decline in high single digits year-over-year. We are pleased that our expected growth margin will be in the range of 62 to 63%, despite an unfavorable product mix, with a larger contribution from connectivity, and the revenue seasonality in Q1.
We expect our GAAP operating expenses to be approximately $250 million to $260 million, and non-GAAP operating expenses to be approximately $215 million. We anticipate a GAAP income per diluted share in the range of $0.22 to $0.26 and a non-GAAP income per diluted share in the range of $0.29 to $0.33. With that, we'll now open the line for Q&A.
Operator, we'll take the first question, please.
Questions and Answers:
Operator
Okay. Ladies and gentlemen, at this time, if you have a question, please press * then the number 1 key on your touchtone telephone. If you question has been answered and you wish to remove yourself from the queue, please press the # key. To prevent any background noise, we ask that you please place your line on mute once your question has [inaudible]. Our first question comes from John Pitzer with Credit Suisse. Your line is now open.
John Pitzer -- Credit Suisse -- Analyst
Good afternoon, guys. Congratulations on the solid result. Matt, maybe the first question from me just going back to the legacy networking business. Can you help us understand what percent of networking that now represents and given that you saw pushouts from fiscal fourth quarter into the fiscal first half, can you just give us a little bit more color on what drove those pushouts and why you have confidence that they're now going to solve in the first half of the new fiscal year?
Matt Murphy -- President and Chief Executive Officer
Thanks, John. Happy to answer the question. The answer to the first part, which is the percentage of networking today that's in legacy is around 15%. Last year it was in the 20% range. As new products have ramped up, that percentage that's legacy continues to go down. But it's about 15%. As I mentioned in my remarks, the core portion where we have our new product ramps occurring, came in pretty much in line with what we thought. We saw very strong year-over-year growth there. That was on track.
Within legacy and the pushout, it was kind of interesting. It was driven by really one product area, which was our NPU product area. It was pretty specific and it moved out from Q4 and it'll be consumed within the first two quarters of Fiscal 2019. My understanding of the pushout is it's related, not so much to in-demand weakness, as much as some issues around component supply within that particular customer and that particular box. So, it happened during the quarter. We see it selling through or resuming production.
But absent that, I'd say overall it was pretty close to what we thought. I will say, as a lot of companies have represented, communications have been a bit choppy for everybody. We would give some color that enterprise and wireline have held up pretty well. Things that are exposed to Carrier and Telco and others have been more choppy. But in aggregate, just to help everybody understand, I'd say it's primarily driven by one product, one issue, and we certainly see demand recovering on that one.
John Pitzer -- Credit Suisse -- Analyst
That's all. Then maybe as my follow-up, on the SSD controller business, I think one of the questions that I get asked often by investors is, the HDD controller market ended up being mostly a merchant supply market. When you look at the SSD controller market, guys that are providing demand are clearly trying to move up the value chain. I think last week Western Dig launched a family of SSD products with their own internal controller. Our work would suggest that hyperscale customers don't want to move in that vertically integrated direction, but I'd be curious on your thoughts on how you think the merchant versus the in-house market plays out in the SSD market over time.
Matt Murphy -- President and Chief Executive Officer
Got it. I'll give you my perspective. I'd say even going back a year and a half plus ago when I joined, I think this same issue was top of mind as we started talking to investors about SSD and our plans there. I think there's been an effort across a number of the producers of NAN to have their own internal solutions. Some of those have been successful. Some of those haven't. We've been operating in this world for some time now, so I think you should expect at least for the time being that you'll see a mix of Marvell solutions in the market, as well as some of our customers doing some of their programs internally. I'd say that's not necessarily a change. It's how we've been operating.
We've been able to, I think, execute and grow really well through the cycle and we certainly still feel very good about our outlook over the coming year. I think you sort of would take the words out of my mouth. I think you're right on where the puck is going in particular trends we see within the data center is that one of the models is for more control over that design by the cloud hyperscale companies. It's a great partnership opportunity for Marvell to step in and get much closer to the development of the end equipment and then work with NAN partners to enable the whole solution.
So that business model is very much alive and well, along with our merchant efforts. I'd end by saying my job and the team's job is really to continue to innovate in this area, invest ahead of the curve, and really eliminate reasons why our customers might even want to think about doing these things internally. I think our team's doing a good job of that. I think that will be my comments on SSD.
Jean Hu -- Chief Financial Officer
To add to what Matt just said, yeah, this is [inaudible] cycle of SSD products are quite long, really long cycles. So we're actually very encouraged and pleased with all the design wins we are working on. We don't see any issues there. Our team is really focused on the design wins and working on those wins to ramp up in the next several years.
John Pitzer -- Credit Suisse -- Analyst
Then maybe as the housekeeping, on the accounting change from a sell-through to a sell-in, what percentage of your revenue does that cover? You made the comment you don't expect a material impact on revenue. Was that a fiscal year comment or is that also true for the fiscal first quarter because we've seen other companies in the quarter where they make that change have a positive revenue impact. I'm just trying to make sure was not just a fiscal year comment, but also for the fiscal first quarter.
Jean Hu -- Chief Financial Officer
Yes, so first you're right. Marvell's distribution revenue is about 20% of our total revenue. More importantly, a very significant portion of that revenue actually is demand and fulfillment. So when you think about Marvell's revenue really generated from distributor, it's very small, probably below 10% of revenue. Typically, our inventory in the distribution channel is about the amount of fulfillment and to keep the operational flexibility. That's why we don't see much change in our revenue either for Q1 or going forward.
John Pitzer -- Credit Suisse -- Analyst
Perfect. Thank you, guys. Appreciate it.
Operator
Thank you. Our next question comes from Christopher Rolland with Susquehanna. Your line is now open.
Christopher Rolland -- Susquehanna International Group -- Analyst
Hey, guys. Congrats on a great quarter here. On networking, a key customer of yours has been talking up their new campus switch product. I think they described it as being the fastest growing product line in their company's history. Perhaps you can talk about what that means for Marvell and that opportunity there. As you guys size up networking, what do you think the biggest opportunities for Fiscal 2019 are? Thanks.
Matt Murphy -- President and Chief Executive Officer
Thanks, Chris. A couple comments. I think that particular announcement was really good for that company. It's going to be good for Marvell and I think maybe even on a broader scale, it really, I think, lit a fire within the industry to drive this upgrade cycle in the campus area, which as you've heard over our commentary for the last year, year and a half, that's really been an area where we've been very focused on a global basis to drive all of our new products that were refreshed into that segment.
We do think that the enterprise and the campus has a nice tailwind to it from that point of view and we do think that's certainly positive for us. I think that's going to be one factor as we look into '19 per your question. I think the other one really, I would say in terms of design win activity that appears to have really picked up and it sort of comes on the heels of a lot of the announcements that people were making at MWC and with, I think, the sort of view that 5G is really alive and well and probably happening earlier than people thought.
There's a tremendous amount of design activity going on there and in our networking product line, in particular, we're seeing very strong demand in our higher capacity switches, including our 10-gig switches, as well as our 25-gig switches that we had initially targeted for the enterprise data center. Those are now seeing very good design win momentum across that market as well.
So when we look out to '19, we see a mix of some resurgence in enterprise in campus, along with some new opportunities and new boxes being built to support the next generation wireless technologies that are coming.
Christopher Rolland -- Susquehanna International Group -- Analyst
Great. On the SSD side of things, you talked a little bit in your prepared remarks about some hyperscale engagements. Just any progress or details there? Then for SSD overall, I think you said that would be exiting this year about 30% of storage. Did you track for that 30%? How do you see that as a percentage exiting Fiscal 2019?
Matt Murphy -- President and Chief Executive Officer
On the first one, I would not get very specific, other than to say we've had a lot of positive engagement in this hyperscale area for some time. That's continued. I would probably also say that in the meetings I've had now with the Cavium folks with those types of customers, the level of engagement we're having is at even higher levels probably within those companies than we've been engaged, and I think it just presents an additional opportunity and validates the fact that's going to be a key part of our comprehensive solution sell when we look at engaging deeply in the cloud.
With respect to how did we do on SSD as a percent of storage, we set this bogey out there of 30%. We did have a record quarter in SSD, so we were very pleased. We came very close to our 30%. I wouldn't say it was 30%, but it was really darn close and quite frankly, as we noted in our comments, because HDD also had a very strong quarter for us and performed above our expectations, probably the fact that HDD did a little bit better caused us to come in just slightly below our 30% target. So that's one I really can't complain about because both businesses did better.
We're not setting an official target at this point for ending Fiscal 2019 at this time, but we absolutely expect that this will continue in terms of the mix shifting from HDD to SSD in an environment where even HDD we can hold flat. Any growth we see in SSD as a percentage will be because of top-line, not because we expect HDD decline to make up the difference. I hope that's helpful.
Christopher Rolland -- Susquehanna International Group -- Analyst
Perfect. Thanks, Matt. Congrats again to everybody.
Operator
Thank you. Our next question comes from Craig Ellis with B. Riley FBR. Your line is now open.
Craig Ellis -- B. Riley FBR -- Analyst
Thanks for taking the question. Matt, I just wanted to turn it to longer-term matters. First, congratulations on the very strong fiscal '18. Great job for the year. Looking at some of the growth rate benchmarks that you talked about -- storage up 8%, networking I think you said 7%. As you look at 2018, what are the gives and takes to growth in the business that would be in that mid-to-high single-digit range for a second consecutive year?
Matt Murphy -- President and Chief Executive Officer
I think, again, we were happy with the performance, as you know. We do see the momentum continuing. While we're not giving fiscal year '19 guidance, we do believe that our thesis on storage remains intact and very sound, which is really to continue to remix our HDD business and add incremental enterprise and near-line type of revenue as client as a secular decline in it due to the remix in SSD. Net-net, we're still sticking to our strategy. Along with pre-amps, by the way, of keeping HDD flat as a goal.
We're coming off a great Q4 in terms of SSD being a record quarter. We certainly hope and anticipate that kind of growth will seek that kind of growth in that business again in Fiscal 2019. So when you add those two, clearly you get something that's above flat when you look at growth rates. We're optimistic we can keep growing that business.
In networking, especially as legacy has come down and is a much more manageable portion of the total, I think that gives us more comfort that the strong momentum we see in our new products will have some runway and the headwind from legacy will be a little bit more diminished than we've had before. We think we can manage both of those.
I think in summary what I'd say is we see these two businesses for Marvell stand-alone, as well as even when we combine the two companies, as really being a strong growth engine in terms of both top-line contribution, as well as gross margin accretion. Again, it's on the heels of new products and really important secular trends that are driving the need for more storage, higher bandwidth data traffic management, more processing of data, and more security of data. I think all these things we see that thesis playing out and benefiting those two businesses that you mentioned.
Craig Ellis -- B. Riley FBR -- Analyst
That's very helpful. Then the follow-up would be, you made two comments I thought were interesting with respect to Cavium. One, the feedback that you're getting from customers, and then your high confidence in hitting previously stated synergies targets. I'm just wondering if you could elaborate on those a little bit further to help us understand what you're seeing as you get closer to closing that deal. Thank you.
Matt Murphy -- President and Chief Executive Officer
I'll comment on the customers. I'll give a point of view on synergies, and I'll also have Jean chime in on synergies as well since we've been joined at the hip on this one to make sure that we execute to everything that we've committed.
On the customer side, I've had the good fortune to spend a lot of time with Syed and the team since really, we got this thing announced. I say what's really resonating are a couple points. This would be I'd say across a wide range of end customers, including top cloud hyperscale companies, top companies leading in the wireless infrastructure race, and also some of these companies that are leading the resurgence in enterprise and campus demand, both wireless and wired. That is, we're able to come in and basically say look, we are a scaled-up, innovation-oriented, fully focused on infrastructure supplier to you.
Our primary focus in life as a company is to focus on being an infrastructure solution provider. This scaled-up R&D budget that we now have, much more bulked-up market cap and revenue provides a lot of assurance to those companies that we have the scale and the strength to invest. We also have the technology, the technical capabilities, the people, the know-how, and trusted relationships coming in from both sides. It's resonating really well because we don't look like a company that's going through distraction right now, even though we're going through an integration it looks like to our customers because this has been so positively received by both sides. It's really been a joint effort. I think when the customers look out, they see a really new, unique supplier to meet their needs. I'd say that's hit kind of a home run across all the customers that I've met with.
On synergies, just to give you a sense, we take this very seriously. Of course, the strategic rationale for this transaction we think makes a ton of sense. I told you that the customer reaction was very good, but we also are just very focused on making sure that everything we've committed from a synergy point of view happens and is executed as well as we did as a stand-alone company when we did our own transformation.
I'm pleased to say the level of detail that we have now on the different value drivers across almost every operation between the two companies on how synergy can be captured, I think it's very well understood. There's strong ownership from the leaders of both companies at a VP level and up to go make it happen. Because of the way we're managing it, there's really just top-notch governance around the process. I make myself and Jean and others feel very good. But maybe Jean you want to give some color on how you think the synergies are going to be realized and how the process is going?
Jean Hu -- Chief Financial Officer
I think it's really two things Matt mentioned. The one is very detailed planning. The second is really accountability of the team. The team takes responsibility. Of course, when you look at the synergy, we're very comfortable with the range of synergy within 18 months. But bear in mind, a lot of synergy will rely on system integration and the ERP. From the shape of the synergy, you're not going to see much in the first six months. But then once you get through the integration of the system and ERP, a lot of the synergy will happen between 9 to 12 months. I would say we have very detailed planning and a timeline of the synergy. That's really the comfort level we have about the synergy realization in the next 18 months.
Craig Ellis -- B. Riley FBR -- Analyst
That's helpful. Thanks, Matt. Thanks, Jean.
Operator
Thank you. Our next question comes from Joe Moore with Morgan Stanley. Your line is now open.
Joe Moore -- Morgan Stanley -- Analyst
Great, thank you. I'm wondering if you ...
Matt Murphy -- President and Chief Executive Officer
Hey, Joe, are you still there?
Joe Moore -- Morgan Stanley -- Analyst
Yeah, can you hear me?
Matt Murphy -- President and Chief Executive Officer
Now we can. You dropped off for a second there.
Joe Moore -- Morgan Stanley -- Analyst
You talk about the SSD business in the context of NAN supply. Obviously, very tight last year. It seems like it's more balanced now, but still pretty healthy. How does that change the mix of [inaudible] SSD and does that have any effect on your market share and your opportunities in that market?
Matt Murphy -- President and Chief Executive Officer
Thanks, Joe. I'll make some high-level commentary. Clearly happy to share some thoughts, but don't want to be the bellwether or the canary in the coal mine on calling NAN supply and-demand. I think even some comments last quarter may have gotten construed that way. It wasn't intentional, just trying to be helpful. With that in mind, what I'd say is probably continue trends in terms of what's widely publicized, which is that supply coming online, I think. What I said last quarter sort of ended up coming true and probably will continue. We think that's a good opportunity for us certainly, as some of the SSD customers we had last year who were supply constrained can now produce and probably get some or all of what they need.
As far as the outlook and the impact on HDD, it's something that we monitor. That business so far has performed quite well for us. Not only because our end customers have done well, but our increased presence in some of these newer areas for us like enterprise and near-line have given us a bit of a tailwind there.
I'm not in a position or ready to call a bigger picture what's going to happen HDD, SSD for the year, other than we think we see strong growth drivers for us because of our own unique design wins and positioning in both. For the time being, we'll stick to our thesis around keep dollars flat in HDD, albeit certain quarters will be a little higher or a little lower. Then keep really executing well on the SSD growth that's out there and try to make it happen. That's the landscape of what I can share at this time.
Joe Moore -- Morgan Stanley -- Analyst
That's helpful. Thank you. I wonder also, could you just touch on your gross margins keep going up. In a couple quarters now you said sort of mix is going against you because margins continue to rise. How should we think about that? Is that simply mix within each of the segments? Is there anything formulaic we can look at as to how much gross margin falls through as you continue to build revenues?
Matt Murphy -- President and Chief Executive Officer
I actually do think -- and it's not intentional, obviously, to sound like a broken record on this one -- which is hey, gross margins did better than we thought. Gross margin outlook is better than we thought, but we also have this mix issue going against us. It has been true. Really what's happened is connectivity was just a really strong performer for us last year. It's sort of been that way every quarter, it's done a little bit better than we thought.
That being said, we do think because of in what's been realized so far, absolutely has been improved mix within each of the segments. Meaning we've gotten higher value, design wins, or new product ramps, and storage of networking. Or in connectivity, despite the fact that business did grow year-over-year, we have been actively remixing quite a bit in that business in terms of letting lower value applications to go away and really focusing on areas where we could make a gross margin impact and really focus on profitability versus top-line, but top-line also worked well there. So what I'd say is I'd stick to my same story, which is we do think, certainly we gave a solid guide for Q1, which was 62 to 63% on the GM. I don't think anybody a year ago would've been sitting here thinking when we're at analyst day 2017 that we'd be talking about guiding 62 to 63% a year later, so we're really happy with that because of the way we've managed the company.
But beyond that, while we don't give specific ranges, our seasonally strong quarters in storage began in Q2 and Q3. Overall, bigger segment mix should help us there. We'll see. We take it one quarter at a time. But directionally, certainly, we're very pleased. I would also give a quick shout-out as well to our manufacturing and operations team, who continue to do an outstanding job really working with our supply chain partners and really optimizing our cost structure so we can both grow revenue, reduce costs, and make us more competitive in the market.
Jean Hu -- Chief Financial Officer
Of course, when we combine with Cavium, it will further expand our growth margin. As you recall, when we announced the deal, we did say the combined company target growth margin will be 65%.
Joe Moore -- Morgan Stanley -- Analyst
Great, thank you very much.
Operator
Thank you. Our next question comes from Blayne Curtis with Barclays. Your line is now open.
Blayne Curtis -- Barclays -- Analyst
Thanks for taking my question. I'd like to give my congrats on the quarter. I just want to follow up on connectivity. Maybe you could just talk about why the [inaudible] in seasonality is an inventory issue or just an earlier build? Then you telegraphed that mix away from some non-strategic business. As you look at this year, is there any kind of lumps in that or is that a [inaudible] as you get new product in, you let some walk out the door? I just want to understand as this year develops, new business coming in versus the consumer you're walking away from.
Jean Hu -- Chief Financial Officer
Hi, Blayne, this is Jean. I will take the first question about the Q1 guidance. When we guided, [inaudible] sequential increase it's better than normal seasonality. Largely because the one particular customer, they're actually building product in Q1 versus the typical building Q2, Q3 for holiday season. It's a very unusual situation. I do think the Q1 revenue for wireless is unusually high and in Q2, Q3, you're actually going to see some kind of decline, more than typical, for this particular customer, which is a large customer.
That's the dynamics of Q1 versus Q2 and Q3. As far as strategy-wise, overall, we are really trying to focus on profitability for the Wi-Fi business. We're certainly trying to get out of some of the low margin applications on the consumer side of the business. Matt, you probably can add more on the strategy side.
Matt Murphy -- President and Chief Executive Officer
Sure, yeah. I think just to reiterate it for all the investors on the call, as I said, we've focused on really profitability in that segment to make sure it's a contributor on certainly gross, and on operating margin. We've made huge strides in our wireless business. I think this question you've got, Blayne, about what does that look like as a consumer, maybe lower margin or lower value as business rolls off.
That's why even in the last year, we've been very judicious every quarter about how we think about that business and guide it because there's been a big remix that's been ongoing and will continue to be ongoing probably over the next year. As Jean mentioned, because of one of our customers doing a ramp that has some of what will probably be in Q2 and a little bit of Q3 in Q1, that probably linearizes more over say two and a half quarters versus two quarters.
But overall, there's been enough new stuff coming in and old stuff rolling off. Beyond that, I think that's as much as I can be helpful, other than we just can't guide Q2, Q3 and beyond in detail just yet.
Blayne Curtis -- Barclays -- Analyst
Thanks. Just on the gross margin, you think that the wireless business [inaudible] gross margin you're still growing it. Can you maybe just talk about the drive versus the gross margin [inaudible].
Matt Murphy -- President and Chief Executive Officer
Again, I think we have the headwind issue. We actually guided through seasonality, obviously, slightly lower revenue. Of course, it was still a solid guide. But again, very pleased to see on the GM. As I said, I think we see new products ramping up. If you think about networking, which has been a story we saw in Q4 and we certainly said we're going to see in Q1.
Those new products have been much higher value and much better margin than historical Marvell networking. Also, legacy is lower than the new stuff, so as that mix shifts within networking, that's helpful. Again, I say it's continued execution on the cost reduction side as well, which has been a benefit to the entire company, the entire enterprise. I just reiterate the fact to what Jean said when we think about integrating Cavium, all these fundamental improvements with how we manage our supply chain and operations and manufacturing overhead, all that benefit we see is just translating right over as we think about synergies and integrating Cavium.
To the extent we're getting improvements in our own margin, not only does that help what will be the blended margin of the combined company but those structural improvements we very much think we can pass on to the Cavium side. I just say it's a mix of things, Blayne. There's no one-trick pony on it in terms of why it's going up, other than we've been really focused on it and ultimately the only way you really do this over time is we believe strongly gross margin is the key indicator of the innovation and the value you're delivering. The fact that our new products have been ramping strongly across our different segments, it's helping our gross margins. That's the story.
Blayne Curtis -- Barclays -- Analyst
All right, thank you.
Operator
Thank you. For time management reasons, please limit yourselves to one question. Next is Vivek Arya with Bank of America Merrill Lynch. Your line is open.
Vivek Arya -- Bank of America Merrill Lynch -- Analyst
Thanks for taking my question. Matt, one more on the storage outlook for Q1 are down year-over-year. Conceptually, SSD growth should be more sustainably offsetting HDD declines by now. Is there something specific in Q1 that is preventing that and should we assume that storage starts to regrow year-on-year from Q2 onwards?
Jean Hu -- Chief Financial Officer
Vivek, this is Jean. When you look at the Q1 from a seasonal perspective, HDD typically declines actually 7 to 10% sequentially. So that's really HDDs decline much more in Q1. The SSD we're actually going to see year-over-year growth in Q1. It's just that we have a very large base on HDD business and that's why it will not offset in Q1, particularly this decline. As I said, the quarter-over-quarter it may be different. We do expect going forward, especially for the fiscal year, SSD growth is going to be faster than SSD market, which as the market is everybody's consensus now it's over 20%. From that angle, you can see what Matt mentioned earlier for the fiscal year we'll largely keep the HDD revenue to be more consistent to flattish for the year, and SSD growing much faster than market. I think the [inaudible] quarter-over-quarter there may be some volatility, but overall, we feel pretty good about the prospect of the future.
Vivek Arya -- Bank of America Merrill Lynch -- Analyst
Anything on SSD controller competition? I know you mentioned that the set-aside insourcing from the customer side, has the competitive landscape with other merchant suppliers changed in any way? Do you think you still have pretty strong competitive [inaudible] in that area?
Matt Murphy -- President and Chief Executive Officer
I think we've certainly had competition in this area for some time. We take nothing for granted. The competitors we've traditionally had over the last couple of years, we still have them. We're still battling out on these opportunities. I think the competitive landscape, I wouldn't say has changed, but I would say that as our scale has increased in terms of just the breadth of customers we're supplying, the types of applications that we're in, which range all the way from consumer and client all the way up to the most advanced hyperscale and enterprise applications in the world. That scale has allowed us to continue to invest in that business.
In terms of adding R&D resources and expanding our ability to develop more products and more IT, we're becoming, I'd say, increasingly more relevant than we were a year and a half ago just because that business scale is now at a point where we can really, we have a very comprehensive set of solutions. As I pointed out in my prepared remarks, despite the fact that we've had all this great run, we're still ramping new customers. This past quarter, we ramped up brand-new Tier 1 NAN company that we hadn't had before. We ramped also in a new cloud hyperscale application that we weren't in before. That's all new and incremental on top of what we've done. That's what I'd say.
I think it's never going to be a pushover between internal competition, merchant, ASIC, which we compete in as well as some other folks. But again, from having a breadth of portfolio scale of revenue in R&D investment, we do believe we have a significant competitive moat there and we're head and shoulders above the others in the market just because of that scale.
Vivek Arya -- Bank of America Merrill Lynch -- Analyst
Thank you.
Operator
Thank you. As a reminder, ladies and gentlemen, for time management reasons, please limit yourselves to one question. Our next question comes from Ross Seymore of Deutsche Bank. Your line is now open.
Ross Seymore -- Deutsche Bank -- Analyst
Hi, guys. I wanted to go back to the networking side. Matt, I know you said what the issue was in the fiscal fourth quarter about the pushout. But I wanted to ask as you think about it for this year as a whole, I would've thought you'd be a little better than flat in the near-term guide or flat to slightly up if that pushout from last quarter started to help this quarter, given the strength in the end market and some of your big customers. So, the near-term, can you just talk about what the puts and takes are for the April quarter? As we think through the year, where do you think that legacy business will exit this Fiscal '19, versus where we just exited the prior year? Thanks.
Matt Murphy -- President and Chief Executive Officer
Maybe I'll take the second part first and Jean, I don't know if you want to comment or we can both do this one together. But on the second part, we don't have an exact number, Ross. But I'd say if you sort of went from 20 down to 15, probably normalizes in that area, right? The 15 percentage that's left is really pretty long lifecycle stuff. While it will decline over time, it's not, I think the slope on the downside is kind of moderate. 15% or a little bit lower is kind of the range. In the near term, Jean, I don't know if you want to comment?
Jean Hu -- Chief Financial Officer
Yeah, I think if you were talking about Q1, our guidance actually is mid-single-digit or high-single-digit in year-over-year growth. It's really primarily driven or led by the switch processor and the PHY portfolio, the refreshed portfolio. The legacy is more likely. We're actually cautious because this component shortage challenge we had last quarter, we're actually very cautious about the [inaudible] side and [inaudible] really at the sequentially decline way. We'll see how the [inaudible] perform, but as Matt said because the shortage is really not because the end-market demand, but it's just because some memory component shortage we do think later on this year will recover and largely keep the [inaudible] business flattish. It has a long tail.
Matt Murphy -- President and Chief Executive Officer
I would add, too, if you look at the way we phrased it, and clearly, Ross, I was certainly disappointed just because I think overall that networking business really did well for us in Q4 absent this issue. That's why we're being very specific about calling it out, but it is what it is. If you notice, what I really said was that we expected a recovery in the first half, and that's exactly to back up Jean's point, just being pretty cautious on that one and just not assuming that there's really about that. Normally, you have a pushout, you just go it was the one quarter, it pushed to the other quarter, and that's when it comes back. So I think we've been very thoughtful about that piece of it. Absent that, I think the rest of it's still working pretty good for us.
Jean Hu -- Chief Financial Officer
Yeah, and the other one certainly is right is our PHY business is quite [inaudible] and the most you guys probably know, PHY business [inaudible] actually is declining high single-digits typically. So we actually will be able to offset it after seasonal decline of the PHY business in Q1. That's another factor. So it's a little bit long getting to the details now, but that's just dynamics of our networking. We actually have a portfolio for business.
Operator
Thank you. Our next question comes from Harlan Sur with JPMorgan. Your line is now open.
Harlan Sur -- JPMorgan -- Analyst
Good afternoon and congratulations on the solid results. The Marvell team has had great success with Google. I think you're a model multi-core processor and your Wi-Fi Bluetooth combo chip powers every Google Home, every Google Home Mini, and Home Max product. As we all know, these products have been doing pretty well in the connected home market. It's a pretty important initiative for Google. The question is, is this what's driving the strong connectivity growth in the April quarter? Then how can or how is the team going to leverage its dominance in the connected home part of this customer to potentially getting more silicon content within the data center segment of their business?
Matt Murphy -- President and Chief Executive Officer
Harlan, I give you credit for asking a very specific question. But as you can probably imagine, as you've seen from our M.O., we prefer to not really get into specific customers and specific content and talk at that level of granular detail. From my days as a Sales VP when I was at Maxim, I just learned that customers really don't appreciate it when you start talking about their business, in particular with seasonality things and other things that you're asking. So, I can't really comment on it other than to say that particular company is obviously of strategic importance to us, both in that particular product lineup, as well as I would say even of equal or more strategic relevance, obviously becoming a bigger supplier to them in the data center side of their business. But I'll leave it at that. Happy to answer another question but can't talk about individual customers.
Harlan Sur -- JPMorgan -- Analyst
Great, thanks. Okay, then maybe I'll just follow it up with just a very quick question. Great job on driving the OpEx lower in fiscal year '19, Jean. How should we think about the OpEx trends beyond the April quarter here in Fiscal '19?
Jean Hu -- Chief Financial Officer
That's a good question. I would say the way to think about OpEx is if you look toward the end of Fiscal 2018, our OpEx run rate is around $208 million per quarter. So when you think about 2019, you have to factor into about 3 to 4% inflation, including merit increases. $215 million for Q1, that includes the payroll tax, but then Q2 will have merit increases. I would say it's around this level for Fiscal '19.
Harlan Sur -- JPMorgan -- Analyst
Perfect. Thank you.
Operator
Thank you. Our next question comes from Karl Ackerman with Cowen.
Karl Ackerman -- Cowen & Company -- Analyst
Hi. Clearly, hyperscale CapEx is driving not only higher demand for networking, but also storage. I'm curious, do you embrace the view that near-line [inaudible] remain capacity constrained in the first half of 2018? If so, how is that impacting your ability to both service the hard drive or the HDD vendors, as well as receive premium ASPs in this environment?
Matt Murphy -- President and Chief Executive Officer
Appreciate the question. I think though, the best guys to ask would be the companies that we're supplying to. I think that one they clearly have much more insight than I do and there's only three of them to ask, so I would probably err on that side. Then with respect to specifics around ASPs and things like that, all we've said historically is at a high level, as we've penetrated into enterprise and near-line and HDD, we certainly have a higher ASP per drive than say client, but that's about it. I'm really not in a position to get into specifics about that one or what my end-customer dynamics are going to be in that very specific situation you mentioned, Karl.
Operator
Thank you. Our next question comes from Mark Delaney with Goldman Sachs. Your line is now open.
Mark Delaney -- Goldman Sachs -- Analyst
Good afternoon. Thanks for taking the question. I was hoping to follow up on the comments about distribution. Jean, I think you said it's about 20% of Marvell's revenue currently. I believe at the end of last year, Marvell announced a global distribution agreement with Avnet. So maybe you can help us better understand what you're hoping to achieve in distribution and the reason for the new agreement, and if Cavium closes, how are you thinking about using distribution going forward as a combined entity? Thank you.
Jean Hu -- Chief Financial Officer
I'll clarify the percentage of revenue and then Matt can answer that Avnet question. We have around 20% of our revenue is distribution revenue, but Marvell's distribution revenue, a very large percentage is demand fulfillment. Of course, we're trying to get more demand creation from distributors but I just want to make sure we understand the numbers first.
Matt Murphy -- President and Chief Executive Officer
Yeah, you're right, Mark to note that we did make a change in our distribution network, not only with Avnet, but we made a number of other changes. Really, I would put this one in the bucket of salesforce and go-to-market transformation that really Tom Lagatta has been driving since he joined. Soon after he joined, he and I both sat down and took a look at the global landscape. Given that it's 20% of our business, we quite frankly just had way too many distributors scattered all over the globe. There was not a comprehensive global distribution program, design registration management was all over the map.
The way we were incentivizing those distributors from a margin point of view was not consistent and I would say we basically had a whole bunch of distributors without a program. That's why Jean points out it is only 20% of our revenue and of that, maybe half of that has been created from distribution. That, to me, seems way too low. Tom's reaction was the same. We subsequently added an executive to run distribution and last fall, and then before the end of the year, we announced a series of changes, one of which was appointing Avnet as our global distributor and really expanding that franchise worldwide.
We terminated a number of others and really got a much more focused channel strategy in place that I think for both sides, both distribution and Marvell, actually optimized the incentive structure and certainly made it much more simple for us from a go-to-market standpoint. You should expect the same playbook that we've implemented on Marvell, we're going to take a very close look and already have, with Cavium's distribution network and the activities that they have going on there.
By the way, they have some very nice activities going on within distribution and with Cavium. So I think there's some top-line synergy there to take advantage of that. We're going to put those two together and you should expect we'll have a very professionally managed, efficient global distribution plan implemented as part of our sales track when we think about integrating Cavium.
Operator
We have time for one more question. Our next question comes from Harsh Kumar with Piper Jaffray. Your line is now open.
Harsh Kumar -- Piper Jaffray -- Analyst
Hey, guys. Thanks for squeezing me in. Congratulations. The first question for you, Matt, is would you be able to give us some sense of how much the [inaudible] revenues are when they become significant? Given that you're hopefully going to get that revenue to be significant, hopefully, this year, is it fair to assume that the HDD business could potentially grow in absolute dollars versus your commentary of flattish?
Matt Murphy -- President and Chief Executive Officer
Just to give you a sense of where that business is at, while we're not dollarizing it at this time, think of it as two years ago we had no revenue, no products in design. Last year, we started shipping in some low-volume, pre-production drives that were out there. We see this year as a year where we're going to probably see some of those drives go into full-volume production, but that would be in the back half. You should assume that level of revenue is not significant.
It's going to take time because the way that the pre-empts work is you really design them fairly specifically for individual customers and an individual drive program. Our strategy has been, obviously, to try to get those to pair up in applications where we have our own SoC. That's going to be an ongoing journey that we'll be on and we're not breaking out the amounts. Certainly, if you talk to my team that runs that entire HDD business, obviously their strategy and plan is to try to, I say flat, that's how we're modeling it as a company. Obviously, their plan is to try to grow that business by getting more share, getting more ASP, getting pre-empts to ramp.
It's not like we're trying to limit ourselves there but we will stick by our models that we indicated earlier in the call, which is pre-empt ramping is one of the aspects that allow us to keep HDD "flat" over the year, but we're not really able to get into the numbers. But as we make progress, you should assume, just like everything we've been doing, we'll be more transparent and we'll give you more details. Once it's more in front of us, and I think I've been served well by not trying to project not too far on new ramps. I think at the end of the day it's very hard to do that accurately and I wouldn't want you to over or underestimate too much. So, I think HDD flat is probably a good way to think of it with pre-empts being part of the equation.
Operator
Thank you. Now I'd like to turn the call back over to Peter Andrew for further remarks.
Peter Andrew -- Vice President, Treasury, and Investor Relations
Thank you, everyone, for joining us today. We look forward to talking again next quarter. Thank you and good evening.
Operator
Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program. You may now disconnect. Everyone, have a great day.
Duration: 70 minutes
Call participants:
Peter Andrew -- Vice President, Treasury, and Investor Relations
Matt Murphy -- President and Chief Executive Officer
Jean Hu -- Chief Financial Officer
John Pitzer -- Credit Suisse -- Analyst
Christopher Rolland -- Susquehanna International Group -- Analyst
Craig Ellis -- B. Riley FBR -- Analyst
Joe Moore -- Morgan Stanley -- Analyst
Blayne Curtis -- Barclays -- Analyst
Vivek Arya -- Bank of America Merrill Lynch -- Analyst
Ross Seymore -- Deutsche Bank -- Analyst
Harlan Sur -- JPMorgan -- Analyst
Karl Ackerman -- Cowen & Company -- Analyst
Harsh Kumar -- Piper Jaffray -- Analyst
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