May 22, 2015
Executives
John Ahn - Director of Investor Relations, Marvell Technology Group Ltd. Sehat Sutardja - Chairman & Chief Executive Officer Sukhi Nagesh - Interim Chief Financial Officer Weili Dai - President
Analysts
Harlan L. Sur - JPMorgan Securities LLC Tim M.
Arcuri - Cowen & Co. LLC Quinn Bolton - Needham & Company, LLC Sanjay Chaurasia - Nomura Securities International, Inc.
Christopher Caso - Susquehanna Financial Group LLLP Hans C. Mosesmann - Raymond James & Associates, Inc.
Craig A. Ellis - B.
Riley & Co. LLC Ian L.
Ing - MKM Partners LLC
Operator
Good day, ladies and gentlemen, and welcome to the First Quarter 2016 Marvell Technology Group Earnings Conference Call. My name is Derek and I'll be your operator for today.
At this time, all participants are in a listen-only mode. We shall facilitate a question-and-answer session towards the end of the conference.
As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to Mr.
John Ahn, Director of Investor Relations. You may proceed.
John Ahn - Director of Investor Relations, Marvell Technology Group Ltd.
Great. Thank you, Derek, and good afternoon, everyone.
Welcome to Marvell Technology Group's first quarter of fiscal year 2016 earnings call. With me on the call today are Sehat Sutardja, Marvell's Chairman and CEO; Weili Dai, Marvell's President; and Sukhi Nagesh, Marvell's Interim CFO.
We will all be available during the Q&A portion of the call today. If you have not obtained a copy of our current press release, it can be found at our company website under the Investor Relations section at marvell.com.
We have also posted a slide deck summarizing our first quarter of fiscal year 2016 results in the IR section of our website for investors. Additionally, this call is being recorded and will be available for replay from our website.
Please be reminded that today's discussion will include forward-looking statements that involve risks and uncertainties that could cause our results to differ materially from management's current expectations. The risks and uncertainties include our expectations about our overall business, our R&D investment, product and market strategy, statements about design wins and market acceptance of our products, statements about general trends in end markets we serve including future growth opportunities, statements about market share, and statements regarding our financial outlook for the second quarter of fiscal 2016.
To fully understand the risks and uncertainties that may cause results to differ from our expectations and outlook, please refer to today's earnings release, our latest Annual Report on Form 10-K, and subsequent SEC filings for a detailed description of our business and associated risks. Please be reminded that all of our statements are made as of today and Marvel undertakes no obligation to revise or update publicly any forward-looking statements.
During our call today, we will make reference to certain non-GAAP financial measures which exclude the effects of stock-based compensation, amortization of acquired intangible assets, acquisition-related costs, restructuring costs, litigation settlement, and certain one-time expenses and benefits that are driven primarily by discrete events that management does not consider to be directly related to our core operating performance. Pursuant to Regulation G, we have provided reconciliation of the non-GAAP financial measures to the most directly comparable GAAP measures in our first quarter earnings press release, which has been furnished to the SEC on Form 8-K and is available on our website in the Investor Relations section.
With that, I would now like to turn the call over to Sehat.
Sehat Sutardja - Chairman & Chief Executive Officer
Thanks, John, and good afternoon, everyone. I'd like to start today's call by thanking Mike Rashkin, who is retiring as our CFO.
Through his leadership, Mike has been extremely instrumental in improving financial discipline in the company. All of us at Marvell would like to thank Mike for his many years of service and dedication to the company, and wish him a wonderful retirement.
The board has also appointed our VP of Finance and Investor Relations, Sukhi Nagesh, as Interim CFO, and many of you already know Sukhi quite well and we expect this to be a smooth transition. Now moving on to the financial results for the first quarter of fiscal 2016, we reported first quarter revenue of $724 million, a sequential decline of 16% which was in line with our revised guidance.
The sequential decline was mainly due to softer-than-expected demand from the storage end market as well as from the emerging markets. Our non-GAAP gross margin of approximately 52% was better than our original guidance and we continue to effectively control our operating expenses, which also came in better than our original guidance.
As a result, our non-GAAP EPS came in at $0.13 per share. We believe the weaker demand in Q1 was due to near-term macroeconomic conditions as many of our customers and semiconductor peers experienced similar trends.
We expect this lower demand environment to persist in Q2, but expect growth to resume in the second half of the year. Despite the near-term headwinds, we will continue to invest in new and innovative technologies as we believe this will allow Marvell to emerge stronger when economic situations improves.
Now I would like to provide a brief update on each of our end markets. First, on storage; revenue declined 20% sequentially due to weaker than expected HDD sales and seasonally soft SSD demand.
In HDDs, our revenue declined on weaker than expected HDD TAM during the quarter. Despite the weakness in HDDs, we believe we maintained our market share.
Next, in SSDs, Q1 is a seasonally soft quarter and revenue declined sequentially as expected. We continue to maintain our technology leadership and focus on developing industry-leading solutions, such as DRAM-less NVMe SSD products, which we expect to do well in the market.
For Q2, we expect our storage end market to decline sequentially on continued end market weaknesses. At this point, I would like to take a moment and discuss a breakthrough technology that we believe will significantly benefit the storage industry.
This technology is related to the FLC technology that you have heard me talking about in the last few months. For those of you who have not heard about it, FLC stands for Final-Level Cache, a technology that developed to solve the main memory problem in computer systems.
It is a Big Data caching technology and today I want to talk to you about the adoption of FLC into storage devices. More specifically, using FLC, we will now be able to make an HDD perform like an SSD.
Why is this important? The HDD industry is at a critical stage where it is dealing with the competitive forces at play from SSDs, especially at the mid- and high-end of the market.
The HDD industry knows that the best way to deal with the competitive threat of SSDs is to adopt hybrid drive technology. Unfortunately, first-generation hybrid drives do not adequately address the SSD challenge head-on and, as a result, market acceptance has been lukewarm.
More specifically, the performance of these early hybrids is closer to HDDs rather than to SSDs. This is because the SSD caching algorithm that is used on the early generations, on the first-generation hybrid has the hit rate of only approximately 50%.
In other words, these early hybrid devices behave more like an SSD – more like – behave like an SSD half of the time and behave like an HDD the other half of the time. The problem is in mobile applications the user expects the storage device to be asleep when not in use, this unfortunately creates sluggishness whenever the drive needs to be awakened during that 50% of the time.
This latency time is clearly noticeable to the user and, therefore, user experience is poor. We have now solved this problem by using the breakthrough FLC technology.
Using FLC, every hybrid drive will soon be able to behave like an SSD about 99.9% of the time, basically, practically, for practical purposes, 100% of the time. So as far as the user is concerned, the hybrid is now practically an SSD.
Using this technology, we can now build a 1 terabyte consumer hybrid drive with FLC cache for only $40 of bill of material compared to a 1 terabyte SSD which would otherwise cost $300 of bill of material. Similarly, a four-terabyte enterprise hybrid drive with a 128-gigabyte FLC cache could soon be built with approximately $200 of bill of material versus a pure 4-terabyte enterprise SSDs which today would easily cost upward of 20 times or more.
So as you can see, it is not a matter of if but a matter of when the HDD industry adopts our FLC technology to power all of their hard drives. We have engineering samples now and we are actively promoting our FLC-based hybrid technology to our customers.
We expect first production to our customers early next year. Now next for our mobile and wireless end market.
Q1 is typically a slower period. Specifically in Q1, we saw weaker than normal demand last quarter due to the overall slowdown in China's smartphone build.
As a result, our mobile and wireless revenue declined 13% sequentially. In mobile, China Unicom recently launched the world's first 399RMB LTE smartphone using our 64-bit quad-core 1908 mobile platform, the same mobile platform used by China Mobile for their TD-LTE devices.
The same 64-bit LTE platform has also started shipping into global markets with Tier 1 customers such as Samsung. Additionally, our turnkey program is on track to launch at the end of Q2.
This will expedite our partners' adoption of our chipset and allow them to go to market sooner. Moving to connectivity.
Revenue was slightly below expectations primarily due to weaker mobile shipments in China and seasonality in gaming consoles. For connectivity, early this year, we've announced the industry's highest performance 4x4 11ac Wave-2 product and have seen broad market interest in adopting Wave-2 products this year.
Wave-2 provides multiple simultaneous data links of the Wi-Fi and increases network capacity for densely populated environment, thus extending wireless capabilities to a variety of new use cases such as real-time video streamings to multiple devices. Wave-2 is the future of Wi-Fi, and is the next growth driver in wireless connectivity.
We will be announcing additional Wave-2 products over the coming months as we refresh our key connectivity products to support the Wave-2 ecosystem to address all tiers of the market. In the meantime, our existing mainstream 11ac products continue to gain adoption at multiple customers.
For example, recently Linksys announced another flagship 2x2 ac router. Now moving the mobile computing space.
We are shipping our industry-leading 2x2 ac combo into mobile applications running Windows as well as Chrome OS. We expect to see mobile computing products on the shelf using our Wi-Fi solutions later this year.
Moving next to IoT. We continue to gain design wins for our connectivity and microcontroller solutions for IoT platforms at multiple Tier 1 OEMs.
For example, Xiaomi has recently – already announced a series of smart home products powered by Marvell's wireless microcontroller IoT platforms. Over the next decade, it is estimated that billions of IoT products will be used by consumers and businesses.
For this to happen, we believe there will be a fundamental change in how these products engineered to allow them to realize their full potential of being always connected. Historically, the vast majority of embedded devices have used simple 4-bit and, at most, 8-bit microcontrollers running rudimentary software and often with no operating system at all.
In order for these products to fully participate in the Internet, products will need to incorporate much more sophisticated software which will require more powerful 32-bit microprocessors. The end-user expectations of connected products creates a requirement for significantly more sophisticated software, which calls for building embedded software in a new way.
We're addressing the software challenge with KinomaJS, an application framework uniquely designed to address the application software needs for the IoT by providing embedded programmers with a modern high-level scripting language, JavaScript, to power their products. Today, JavaScript powers or repowers the web pages, mobile applications and web service.
As one of the most popular and productive computer languages, we believe it is poised to power embedded products, thereby accelerating the growth of the IoT. We recently released our KinomaJS software under an open source license to encourage customer adoption.
Using KinomaJS, Marvell's customers can create high-performance products across a wide variety of hardware platforms using common code across multiple chipsets, thus removing the barrier to adoptions and increasing scalability of their designs. Moving next to our multimedia business.
In Q1, we launched our next-generation multimedia SoCs, the ARMADA 1500 Ultra, which features a quad-core ARM CPU, 8-core GPUs, carrier-class security, and state-of-the-art power management. This product is designed to enable pay-TV operators and set-top box manufacturers to cost-effectively migrate all of their customers to 4K video capability.
As you know, 4K is the future of video. For Q2, we expect our mobile and wireless end market to be flat to up slightly.
Turning next to networking. Demand came in weaker than expected and revenues declined 7% sequentially, mainly driven by muted enterprise networking demand.
However, we continue to make progress in design wins with our networking SoCs in areas such as network storage interconnect applications, and we are gaining share at telecommunications and access infrastructure customers. In addition, we have secured more customers for our 10GBASE-T, which is our 10-gigabit Ethernet copper PHY solution.
Last year, 10GBASE-T deployment doubled compared to the year earlier to a total of 3.3 million ports. Over 8 million ports are predicted for this year by some analysts.
Every major switch OEM has introduced a 10GBASE-T interface option, and we are the leading supplier for the 10GBASE-T solutions. For Q2, we are expecting our networking business to be flat sequentially on continued muted enterprise spending.
In summary, despite the near-term market uncertainty, we continue to focus on execution and believe we are well positioned to return to growth in the second half of the year. In addition, we believe this year will be an exciting transition period for Marvell as we incorporate FLC technology in many areas, including storage, as I mentioned earlier.
On top of this major drive of implementing FLC, we are also implementing MoChi, our new modular chip technology, into all of our products and solutions. Once our MoChi technology is fully deployed, we will be able to drastically lower product development costs and improve time-to-market.
More importantly, MoChi will allow our customers to develop new products that we haven't even anticipated yet, since they will be able to create virtual system-on-a-chip to their liking using any combinations of our MoChi devices. I will speak about our progress in MoChi and FLC in the months to come, so stay tuned.
And with that, I would like to turn the call over to Sukhi to go over our first quarter results and our second quarter outlook.
Sukhi Nagesh - Interim Chief Financial Officer
Thank you, Sehat, and good afternoon, everyone. I'd also like to add my thanks to Mike and congratulate him on his retirement.
Mike has been a great mentor to me, and I hope to operate with the same level of integrity and principles in my new role going forward. Moving to our financials.
As Sehat mentioned, our first quarter financial results reflected a muted demand environment which is consistent with many of our customers and semiconductor peers. While revenues were in line with our revised guidance, gross margin was slightly better than our original expectation, mainly due to mix.
We reported revenues of $724 million for the first quarter, which was a decline of 16%, driven by softer demand trends across most end markets. As Sehat said earlier, we believe the demand weakness is temporary and we expect to return to growth in the second half of this year.
Moving to the details on our various end markets. Our storage revenue in the first quarter declined 20% sequentially and represented 48% of total revenue.
HDD sales were lower due to the well-documented weakness in the PC value chain while SSDs declined in line with seasonality. Our mobile and wireless revenue declined 13% from Q4 and represented 25% of total revenue.
Weaker LTE smartphone demand in China was partially offset by initial shipments into a Korean OEM's global smartphone platform. Connectivity sales were also weaker due to lower mobile and gaming seasonality.
In networking, our Q1 revenue was softer, declining 7% sequentially and making up 21% of total revenue. This was mainly due to muted demand from enterprise customers.
Moving next to margins and expenses. Our non-GAAP gross margin for first quarter was approximately 52% or roughly flat from Q4, but better than anticipated due to favorable mix.
Non-GAAP operating expenses came in at $307 million, better than expected due to continued operating discipline across all of our businesses. This resulted in a non-GAAP operating margin of 9% for the quarter.
Net interest and other income was about $5 million and we recognized a non-GAAP tax expense of $1.2 million in the quarter. This resulted in non-GAAP net income for the first quarter of $71 million or $0.13 per diluted share.
The shares used to compute diluted non-GAAP EPS during the first quarter were 535 million. Cash flow from operations for the first quarter was $59 million and free cash flow was $44 million or approximately 6% of sales.
Now summarizing Q1 results on a GAAP basis. We generated GAAP net income of $14 million or $0.03 per diluted share.
The difference between GAAP and non-GAAP results during the first quarter was mainly due to stock-based compensation expense of $33 million and approximately $24 million related to amortization and write-off of intangible assets, legal, restructuring and a one-time cash compensation payment. Now turning to the balance sheet.
Cash, cash equivalents and short-term investments as of the end of the first quarter was approximately $2.5 billion, a decrease of about $30 million from the previous quarter. We used $22 million to buyback roughly 1.4 million shares of stock during the quarter.
We currently still have $420 million remaining in our authorized repurchase program and we will continue to be opportunistic in our buyback. We also paid dividends of $31 million in the quarter or equivalent to $0.06 per share.
Net inventory at the end of the first quarter was approximately $340 million, an increase of $30 million from the previous quarter in anticipation of new customer programs that are launching over the next few quarters. Moving next to our outlook for the second quarter of fiscal 2016, we currently project revenues to be in the range of $710 million to $740 million.
At the midpoint, this would equate to roughly flat to Q1. We expect storage business to decline sequentially, our mobile and wireless business to be flat to up slightly and our network business to be flat to Q1.
We currently project non-GAAP gross margin of 50%, plus or minus 100 basis points, and anticipate non-GAAP operating expenses to be approximately $305 million, plus or minus $10 million. We anticipate R&D expenses of approximately $253 million and SG&A expenses of approximately $52 million.
At the midpoint of our projected guidance, this should translate to a non-GAAP operating margin of about 8%, plus or minus 100 basis points. The combination of interest and other income should net out to approximately $2 million and we expect tax expense to be approximately $2 million.
We currently expect diluted share count to be approximately 539 million shares. In total, we currently project non-GAAP EPS to be $0.11 per diluted share, plus or minus $0.01.
On the balance sheet, we currently expect to generate about $75 million in free cash flow during the quarter. We anticipate our cash balance to be about $2.6 billion, excluding any M&A activity, share buyback, or other one-time items.
We currently expect our GAAP EPS to be lower than our non-GAAP EPS by about $0.09 per share. With that, I would like to turn the call over to the operator to begin the Q&A portion of our call.
Derek?
Operator
And our first question will come from the line of Harlan Sur, JPMorgan.
Harlan L. Sur - JPMorgan Securities LLC
Hi. Good afternoon.
Thanks for taking my question. HDD industry shipment TAM was down about 10%, 11% sequentially in Q1.
I think your HDD controller business was probably down more like 25% sequentially in the first quarter. Here in Q2 I think HDD industry TAM is looking to be down about kind of 3% to 5%.
And now you're guiding your HDD segment probably down in about that range as well. So the Marvell team is essentially under-shipping consumption by 20% to 25% for two quarters in a row.
It seems like your customers are planning for some positive seasonality in Q3. If that plays out, should we anticipate a return to growth in your HDD business that is greater than the TAM growth?
And – just given how much you're under-shipping consumption here these past two quarters?
Sukhi Nagesh - Interim Chief Financial Officer
Harlan, this is Sukhi. You bring up a good point, but I think in our storage business, overall, we've never broken down the mix between hard drives and SSDs.
And all we can say is our SSD business was down more than HDD business in the quarter for a myriad of different reasons, I think, which is pretty well aware, so people know about that in the market. But in terms of the hard drive business for us versus the TAM, we have some customers who are actually seeing a pullback in their business and we just believe that our TAM over a multiple quarter period tracks that of the overall TAM – our business tracks that of the overall TAM.
It's very hard for us to synchronize exactly every quarter but I think over a couple of quarter periods, we are pretty similar to what the TAM is.
Sehat Sutardja - Chairman & Chief Executive Officer
Okay. But you did brought up a good point that the hard drive – I mean, the PC industry is – people in the PC industry's value chain are expecting to see the deployments of Windows 10 over the second half of this year.
So as a result, that is widely known that – by this time, it's widely known that there's a slowdown in the PC space due to that anticipation. So we'll see.
I think we do expect when Windows 10 sets its launch and have good reception, we all get the benefits from that uptick.
Harlan L. Sur - JPMorgan Securities LLC
Great.
Sukhi Nagesh - Interim Chief Financial Officer
So, Harlan, if there is an uptick in the drive industry for Q2 or Q3, and maybe we will see that benefit. But at this point, it's probably too early for us to comment on that.
Harlan L. Sur - JPMorgan Securities LLC
Okay, that's a fair point. And then a question for Sehat.
So last call when I asked, you said you'd clearly be doing what's right for shareholders in terms of strategic options for mobile. It seems like the pricing environment hasn't been getting any better.
The competitive environment continues to be fierce. If you exit – and so, and I – if you exit mobile, I think you're left with a business that can grow kind of low mid-single-digits top line and sort of being – throwing off sort of low mid-20% operating margins and free cash flow margins.
So given that your mobile business was down in Q1, and that's the fourth consecutive quarter, are you any closer or is the team any closer to making any sort of strategic decision with mobile?
Sehat Sutardja - Chairman & Chief Executive Officer
Oh, well, that's a good question. As you know, especially with the deployments from FLC's and MoChi's technology into all our product lines, we will be even more competitive in the mobile space.
So we – as a company, we have to focus on developing the best technology to differentiate ourselves. So mobile is no different.
However, as we said earlier, we have to be responsible also for the shareholders' interest, so we'll continue to be open to any strategic opportunities that come in front of us. In the meantime, we will continue to build even better, even more advanced technology to make it even more attractive for our customers to use our products.
Harlan L. Sur - JPMorgan Securities LLC
Thanks, Sehat.
Sukhi Nagesh - Interim Chief Financial Officer
Thank you, Harlan.
Operator
Your next question will come from the line of Tim Arcuri, Cowen & Co.
Tim M. Arcuri - Cowen & Co. LLC
Thank you very much. I guess my first question is, Sukhi, maybe you can talk about the CFO transition.
Why did this happen now? And maybe from a top level, Sehat, maybe you can sort of address whether or not the CFO transition might change how you think about any of the possible strategic decisions you might make with the mobile and wireless business.
Thanks.
Sehat Sutardja - Chairman & Chief Executive Officer
So I'll answer the second part, it's none at all, not even a bit.
Sukhi Nagesh - Interim Chief Financial Officer
Yeah. There was no – there's no linkage to that at all, Tim.
And as far as the transition now, Mike's been with the company for 16 years. He's been a fantastic leader for all of us and a great colleague for many people here who've been here.
And it was a personal decision for him to retire, and so there was nothing more to that than that.
Tim M. Arcuri - Cowen & Co. LLC
Okay. Then I guess for me, I'm just wondering how you might handicap, if I look at your SSD business, it looks like it's down more than I would expect, unless there was a decision by one of the large notebook manufacturers to maybe begin to use their own controller.
They recently did buy a controller company several years ago, and it looks like they might be doing that in a – in their flagship notebook now, using their own part. So my question is, how does that impact your business and how do you handicap the likelihood that that customer or any other customer might use their own controller over yours?
Thanks.
Sehat Sutardja - Chairman & Chief Executive Officer
Sukhi, do you want to answer that?
Sukhi Nagesh - Interim Chief Financial Officer
Sure, yeah. So, Tim, I think you're probably on the right track in some of your assessment there.
But we also have very strong portfolio of products in SSDs. Sehat mentioned about NVMe, DRAM-less NVMe SSD products, and the PCIe-based products, especially is going to be very critical for this market moving forward.
And we are engaged in with multiple other customers for this piece of a product as well. So we do believe that the SSD market is growing, and even if there are certain near-term product transitions at a certain customer, we should be able to move beyond that fairly quickly.
Sehat Sutardja - Chairman & Chief Executive Officer
Yeah. I want to add on top of that, there's always going to be a customer that might want to use their own solution, especially a customer that have a critical mass.
However, the vast majority of the customers do not have such critical mass and they will still use third-party suppliers, like, from us. And as far as from the SSD discussion, it's also – in terms of our differentiation, how do we going to differentiate ourselves in the long run compared against the competition?
And the answer will be similar to the HDD space. I said earlier, we are now deploying a hybrid technology into our HDD portfolios.
So to make our HDD solution to be very, very powerful, just like as powerful as an SSD solutions, it will help increase the adoptions of HDDs into the market to reverse the trend of converting the HDD to SSDs. Now, at the same time, using the same technology, we can also build an enterprise SSD, they have the cost of more like an HDD.
So this technology is applicable for HDD as well as for SSDs. So we believe that when the dust settles, we will have the majority of the market share in this area.
Tim M. Arcuri - Cowen & Co. LLC
Okay, Sehat. Thank you.
Sukhi Nagesh - Interim Chief Financial Officer
Thank you, Tim.
Operator
Your next question will be from the line of Quinn Bolton, Needham & Company.
Quinn Bolton - Needham & Company, LLC
Hi, Sehat and Sukhi. I just wanted to follow up on Harlan's question.
Obviously, you guys under-shipping the TAM here in the near-term, can you make any comments as to whether you're seeing your HDD customers holding lower inventory levels? And if so, do you think that's a permanent reflection of just greater supply chain efficiencies, or to the extent that demand conditions come back, as Harlan suggested, maybe allows for a snapback in the second half of the year?
Sukhi Nagesh - Interim Chief Financial Officer
It's a good question, Quinn, and that's entirely possible. We do know that some customers do very tightly manage their inventory and did manage their inventory in Q1 and their supply and their production towards the end of Q1.
How long that continues or if they're going to switch it back on? We don't have entire visibility into that at this point in time.
But if they do start to switch that back on, we may see a positive benefit.
Quinn Bolton - Needham & Company, LLC
Okay. And then just a follow on question on the FLC technology.
Obviously, it sounds like it probably adds some kind of price premium over a standard HDD controller. But can you give us any sense, as FLC starts to ship next year, what you think the penetration might be and how – to the extent that that technology is accepted, how much faster on a revenue basis could you grow rather than the overall HDD TAM?
Sehat Sutardja - Chairman & Chief Executive Officer
Yes. For FLC, the cost adder – the silicon cost adder of deploying FLC into the chip is actually quite insignificant, especially if we're talking about the storage market.
This technology – we've been developing this technology over close to three years and, over the years, we have improved the – we have mastered the implementation of this technology to the point where this is becoming very low-cost. So we do believe because of the delta difference between the hybrid solution is so small, basically practically just an addition of a single-device flash chip to the hard drive.
Once this thing is proven into the field, the adoption rate will be very rapid. There will be nobody in the world that wants to buy a standard hard drive once they see the significant improvement in the IOPS and response times of these FLC-based hybrid drives.
So as I said earlier, it's not a matter of if, it is just when and that time is just, really it's just a schedule of the time to port the softwares into these new device, their certifications, validations, their certification of device, and showing to their customers. And that's typically in the order of about nine months or so, nine months, maybe at most, 12 months.
So that will be the timing that we anticipate and after that I think everybody will want to demand FLC hybrids technology.
Weili Dai - President
Yeah – yeah, in addition to what Sehat said, FLC technology benefits storage, we are seeing the last few months, it's really across different markets, for example, mobile. There's a huge hurdle; everybody knows the battery, the power is a big issue.
FLC absolutely is going to be solving this issue as well as the cost, the memory cost, for the platform. So we believe our FLC technology is going to help companies differentiate in multiple markets, so therefore, we'll gain more business and new design wins.
Sehat Sutardja - Chairman & Chief Executive Officer
Sorry to interrupt you. So, do you want to say something?
Sukhi Nagesh - Interim Chief Financial Officer
Quinn, do you have a follow-up?
Quinn Bolton - Needham & Company, LLC
Oh, I just had a quick follow up, it was FLC versus the first-generation hybrid drives. Does it use the same size flash chip or do you need a significantly larger flash chip to implement the FLC?
Sehat Sutardja - Chairman & Chief Executive Officer
Very good questions. For the same size of flash chips, the improvement in the hit rate from 50% to 99.9%.
Actually, during benchmark, it's actually 100%. We're saying 99.9% because it's hard to believe that we could achieve a 100% hit rate, so just to give an idea that there will be once in a while occasion where the algorithm will miss and we will have to access the HDD, but that event is so rare with our FLC technology versus the traditional caching algorithm about 50%, sometimes less, sometimes slightly less, sometimes slightly better if it hits the SSDs.
But the other 50% of the time it hits the HDD. So – but during that time, typically the hard drive is sleeping.
So then during that 50% of time it has to go to the HDD. The drive has to spin up first.
It takes about 1 second and the data will be accessed then, you have to put it down to sleep again. And then the next access – if the next access happened to be in SSDs, you're fine.
But if next access goes to HDD again then you'll have to wake the HDD again. In our case, we – 99.9% of the time, it's SSDs.
So highly unlikely that the HDDs – if it's not on the HDD, it takes one second, then anybody will notice it because that's just a very rare event.
Sukhi Nagesh - Interim Chief Financial Officer
It's the same size footprint.
Sehat Sutardja - Chairman & Chief Executive Officer
Oh, for the same flash size, so if it's 8-gigabytes, no problem. We can still use 8-gigabytes.
A 4-gigabytes, no problem. We can still use 4-gigabytes.
Now, of course, nobody's building 4-gigabytes and 8-gigabytes flash chips any longer. So the smallest flash chip that we can buy is 16-gigabytes.
But we have run a lot of benchmarks, a lot of simulations that whether it's 8-gigabytes or 16-gigabytes the performance is exactly the same. Well, 16-gigabytes is slightly better but for practical purposes it's the same performance.
Quinn Bolton - Needham & Company, LLC
Great. Thanks for that clarification.
Sukhi Nagesh - Interim Chief Financial Officer
Thank you, Quinn.
Operator
Your next question will be from the line of Sanjay Chaurasia, Nomura.
Sanjay Chaurasia - Nomura Securities International, Inc.
Hey, Sehat, another question on FLC. There are multiple reasons SSD is being adopted in computing platforms, a couple of things, better power consumption by three times to four times, lower weight by 10 times and SSDs enabling thinner form factor such as ultra-thin notebooks.
So even if FLC allows you to bridge the gap in the performance versus SSDs, how much of the competitive dynamics you think you could change that could slow the decline in hard disk drives?
Sehat Sutardja - Chairman & Chief Executive Officer
Well, the – if you look in the laptops, the laptop markets, the difference between the laptops with the hard drive versus a flash, the difference in the weight is quite insignificant. So the biggest challenge of HDD in mobile laptop applications especially at the high-end where people are willing to pay $1,000 or more for their laptops, it's really this instant on, this practically – microsecond or millisecond latency that people expect from the SSD.
With our FLC, there is no way HDD could be put into sleep mode and be able to wake up in time for people to not to notice it. So the market acceptance, we expect the market acceptance of the hybrid drives to be very, very good.
Now, in terms of the weight of the HDD, today the thinnest hard drives in the world are 5-millimeters. Well, the vast majority that people are selling right now is actually to be 7-millimeter hard drives.
We have been working with our partners to develop 4-millimeter, extremely thin, thinner than a battery, like extremely thin hard drive which is going to be full hybrid drive. And if you look at it, if you see the sample of the prototypes that we have on hand, it is – I mean, it is so beautiful, it's so light.
So you wouldn't have to notice any difference by the time you get into the laptop.
Sanjay Chaurasia - Nomura Securities International, Inc.
Okay, this is very helpful. Another question on mobile.
Last quarter you indicated that your turnkey solution will be available by end of Q1. And I believe I heard correctly you said Q2 this time.
Just wondering what was the delay and if you could provide some progress in that area? And a part B in that question is, do you see your mobile and wireless growing year-on-year in fiscal 2016?
Sehat Sutardja - Chairman & Chief Executive Officer
Yes, so if you look at the – responding to the first question, the turnkey, so the turnkey is progressing. It's a lot of – actually, a lot of work needs to be done building the prototypes.
When I look at the prototypes, I say, I could understand why it is a little bit longer. It's very complicated.
And you have to build it nicer, so if it doesn't look nice, nobody wants it, right. So you need to get all the software running, validated, certified.
So a lot of certification work has been going on with the carrier, especially with China Mobile. We have to buy new equipment, test equipment, a lot more test equipment to get the certification process going on with China Mobile.
So those things have been progressing quite well. So the delay is just minor compared to the amount of work that has to be done.
Now in terms of the second question, so the volumes, we do expect that volumes will continue to grow. So in the second half of this year, we will be introducing our FLC-based cell phones – smartphone chip.
That will be – well, it'll be the one that will be like a – it'll be like a huge hit because for the very first time in the history of mankind, there will be – anybody will be able to build a phone with such a small amount of main memory, while behaving like a very high-end phone. So we can be able to compete with flagship phones that have 4-gigabytes of main memory with fractions of the main memory.
So that is going to be the defining time of our success into this business.
Weili Dai - President
Yeah. So in addition to what Sehat said, the China Mobile – as you guys know that the China Unicom, Marvell, also is the leading providers in driving mass-market LTE phones.
So there's a lot of effort there, and we have multiple OEMs are coming out with their phones in the next few quarters as well.
Sukhi Nagesh - Interim Chief Financial Officer
Right. And more specifically there, Sanjay, I think for – we think Q1 was probably the bottom for our mobile and we should probably start to see an improvement from unit and revenue going forward.
This particular quarter itself, I think, we should see a double-digit growth in unit volume and for our LTE business across both in China and in Korea. Okay, thank you.
Sanjay Chaurasia - Nomura Securities International, Inc.
Thanks, Sukhi.
Operator
Your next question will be from the line of Chris Caso, Susquehanna.
Christopher Caso - Susquehanna Financial Group LLLP
Hi. Thank you.
With respect to your revenue, it looks like the first half is running on the order of about down 25% year-on-year. Could you characterize how much of that you'd consider to be more due to, what I'd say, are persistent factors, things like pricing and market share, as compared to transient factors just the industry conditions and perhaps what's happening with inventory?
And I guess, your answer to that probably gives some insight into your level of conviction for growth in the second half.
Sehat Sutardja - Chairman & Chief Executive Officer
Well...
Sukhi Nagesh - Interim Chief Financial Officer
Yeah – go ahead.
Sehat Sutardja - Chairman & Chief Executive Officer
As we said earlier, the two factors that you just mentioned are the ones that are really the biggest factors. The transients – there are people waiting for their Windows 10 introduction.
So people are not buying replacements for PCs, I mean, whatnot, there is reduction in people buying but I think they're more people waiting for the Windows 10. And the other part was the slowdown in the smartphone shipments in China, I mean which was apparently, was already been quite well-known in the last few months.
As you see the pricing of mobile DRAM has dropped quite a bit over the last few months. So only just like the last few days that people have been talking about that sometimes or sometimes next month or so, it is expected that the DRAM price – the DRAM pricing will go back up to be above $3 for 4-gigabits for the mobile DRAMs for the smartphones and because people expect that the smartphones shipments to pick up again in the second half.
So we do believe that the market will pick up again as well as our continued tractions in the customer space, in the customer side on our mobile solution. We do expect we will get bigger shipments.
Now our customers also, we're getting on some new customers even with today's solutions while they are waiting for our FLC-based technology because as soon as they see the significant advantage they're going to have from our future FLC-based smartphones, they actually immediately could jump in and make decisions for people to have a new software solution, quickly actually they start working on our kind of solution because they know that once they are familiar with our solution they could easily make benefits of their next-generation solution which is going to be significantly lower cost, lower power, much lower power and much longer battery standby time. So, so we are very bullish on this.
Christopher Caso - Susquehanna Financial Group LLLP
Okay. Well my follow up question is regarding the FLC technology as well, and a lot's been said on that already.
But would you also potentially see licensing opportunities there in either businesses adjacent to what you do or perhaps totally different, is that something you guys would entertain?
Sehat Sutardja - Chairman & Chief Executive Officer
I publish the FLC technology because I know this will benefit mankind. So I'm open to licensing the technology to anybody in the world.
It's good for the world. It's good for us as well, so.
Christopher Caso - Susquehanna Financial Group LLLP
Great. Thank you.
Sukhi Nagesh - Interim Chief Financial Officer
That's something definitely we will be considering, Chris. Thank you.
Operator
Your next question will be from the line of Hans Mosesmann, Raymond James.
Hans C. Mosesmann - Raymond James & Associates, Inc.
Thank you. Sehat, just another one on FLC.
So you're basically incorporating a DRAM and a low-cost SSD. The DRAM, who provides that, or all vendors, suppliers capable of supplying that?
Sehat Sutardja - Chairman & Chief Executive Officer
Yes. For the very first generation, we're using standard off-the-shelf DRAM.
However, the true benefits of FLC will come whenever DRAMs – if future DRAMs are built differently. More specifically, future DRAMs will be built – again if you look at my presentation at the ISSCC, future DRAMs should be built for performance latency, lower power in mind than for increased capacity.
So those things are – if you look at the JEDEC, in JEDEC – JEDEC is the industry-wide organizations for memory – if you look at JEDEC, a lot of proposals in the new memory architecture, that have been shown in the last few months, those exactly follow our proposal for modifying DRAM to be truly, truly, truly optimized to get the maximum benefit from FLC. But for now, we use standard DRAMs.
Hans C. Mosesmann - Raymond James & Associates, Inc.
Okay. And then as a follow up, what is the incremental dollars to Marvell from a conventional approach or a hybrid today to going to the first-generation FLC?
Is it 10%, 50% of your existing silicon...?
Sehat Sutardja - Chairman & Chief Executive Officer
We don't want to talk about that. It's too early to talk about that.
Sukhi Nagesh - Interim Chief Financial Officer
Yeah, too early.
Sehat Sutardja - Chairman & Chief Executive Officer
Way too early to talk about that. It's more important that our customers at this point – our customer actually never even ask that questions.
So because they know that the benefits will way outweigh whatever the cost is to be – they have to incur to use this technology. The benefits, not just the money they will save from the less DRAM they have to buy, the money – they're saving also less battery, smaller battery, lighter, lighter phones, lighter mobile devices or they can use the same battery and have much longer battery life.
As I mentioned in my speech at the ISSCC, we can now build – down the road using this technology, we can build a smart watch with weeks of standby time. So that's beyond how much money we'd save to build this device.
It's like even you want to spend all the money in the world, you cannot do it anywhere today because your battery life is so bad. So the other benefits, there is not – it's hard to measure from dollar point of view.
Hans C. Mosesmann - Raymond James & Associates, Inc.
Okay, thank you.
Operator
Your next question will be from the line of Craig Ellis, B. Riley.
Craig A. Ellis - B. Riley & Co. LLC
Thanks for taking the question and congrats, Sukhi. I'll just follow up with the recent line of inquiry on FLC.
Sehat, you already have a very strong share position in your core storage market, but you said FLC would be much more broadly applicable. Where do you think that technology would be most meaningful in terms of helping Marvell gain share?
Which applications? Is it mobile and within mobile, would it be equally for smartphone and tablet or would it be in other applications?
Sehat Sutardja - Chairman & Chief Executive Officer
The answer is across the board. The benefits in the mobile, laptop applications, is clear.
It just make things like really, really low powered, so the drive is sleeping, 99.9% of the is purely sleeping, consuming zero power, so the benefit is very obvious. But the non-so-obvious one would be the enterprise.
Imagine if you have – if we have a, let's say, a petabyte of hard drive with a terabyte of FLC cache, a terabyte of FLC cache – caching – well, maybe let's not talk about petabyte – like 10 terabytes or 20 terabytes or 40 terabytes of hard drive, the performance of their solutions will be incredible. It will be – you will notice zero difference between a 10 terabyte of SSD, pure SSD, versus a 10 terabyte hard drive that has a 1 terabyte of SSD.
In fact, you would notice the difference in power because now the power dissipations of the SSD will be one-tenth compared to a pure 10 terabytes of SSD, so – while it's costing basically a tenth of the cost. So the benefit is – the optimization, the target optimization, the benefit it is the same.
So for the high-end, we just have to have high-capacity FLC cache. For the individual users, like the consumers, which is we could afford – we could actually live with smaller cache and everybody will see the same benefit.
Craig A. Ellis - B. Riley & Co. LLC
Got it. Thank you.
And then the follow up is for you Sukhi, and more towards the middle of the income statement. In the revenue outlook, not much change, pretty flattish, but there is a much more meaningful change in gross margin.
Is that just intersegment mix and with OpEx now at the $305 million level, is that a level that's sustainable? Or as the business grows, as the company is signaling later this year, is that going to move back up?
Sukhi Nagesh - Interim Chief Financial Officer
Good question, Craig. So, on the gross margin front, it is a function of mix, obviously.
So I think if you look at the end markets guidance across the three different areas, that should give you a fairly good explanation of why our guidance for gross margin is where it is for Q2. As far as the OpEx, even at $305 million, we are constantly looking at ways of improving ourselves, reducing our spending, be more efficient.
And the answer really – the answer is, no, you shouldn't see our OpEx going back up in the second half of this year.
Craig A. Ellis - B. Riley & Co. LLC
Thanks, guys.
Operator
And we have time for one final question and that question will be from the line of Ian Ing, MKM Partners.
Ian L. Ing - MKM Partners LLC
Yes. Thanks.
A clarification on mobile and wireless. It looks like guiding flat to up slightly, double-digit growth in unit volumes.
Does that mean the ASP declines are more benign than in recent quarters? And then how would you say octa-core pricing is based on some deca-core announcements recently from competitors.
Thanks.
Sukhi Nagesh - Interim Chief Financial Officer
Yeah. So, Ian, as you know, in the mobile space, pricing is always competitive.
We won't be sure what pricing is going to do in any given quarter. We do have a connectivity business as well as a mobile business, so we do expect to see growth in our mobile business in this quarter from multiple customers and maybe on the connectivity side, maybe less growth, if you will, or a flattish outlook.
So – and it's probably not appropriate for us to comment on pricing per se, and we did notice some of our competitors talking about deca-core. We're not entirely sure what – how the market will adapt deca-core.
Sehat Sutardja - Chairman & Chief Executive Officer
Well, pricing's always an issue. We all, in this industry, building similar stuff.
So the beauty about FLC is that once it's deployed, pricing will be a lot less of an issue, because it's not going to be about the cost of the chip any longer, it's the cost of the system that matters, all of a sudden.
Ian L. Ing - MKM Partners LLC
Okay, we'll look for FLC. And then just a quick follow up over to MoChi, this modular development of silicon.
Are you going to implement this as build-to-order parts for customers, or could you incorporate this into your standard ASSP products? It seems that you connect up from smaller silicon die you can get a cheaper solution than a big monolithic die?
Sehat Sutardja - Chairman & Chief Executive Officer
Right. So – like I say it, as I mentioned in my primary speaking as well as today's earning call's statement, we were building basically anything that's reasonably – anything that we build – I mean, almost anything that makes sense.
Anything – almost anything that makes sense to be built using MoChi interfaces. So meaning like, practically almost every application processors will have MoChi interfaces.
So we are also building MoChi southbridge devices, many different kinds. So we are – our engineers are busy building different types of this southbridge device functions so that our customers – once we are done with this, our customers do not have to specify what chips need to be built, all they have to buy – basically, it's like an à la carte menu.
They will take different application processors, different southbridge functions, different modems, and they can build whatever they want, and they can decide how much money they want to spend, how much of a functionality they want to have. It is all under their control.
They don't need certain functions, they can save money automatically by not buying those functionalities. So this is going to be – this is going to be so helpful for us, it will improve our decision-making process, we will improve time-to-market, it will get things done sooner because chips are going be a lot simpler from now on.
Ian L. Ing - MKM Partners LLC
Thank you, Sehat.
John Ahn - Director of Investor Relations, Marvell Technology Group Ltd.
Great. All right, I think that's it.
I'd like to thank everyone for their time today and the continued interest in Marvell. We look forward to speaking with you in the coming months.
Thank you and goodbye.
Sukhi Nagesh - Interim Chief Financial Officer
Thank you.
Weili Dai - President
Thank you.
Sehat Sutardja - Chairman & Chief Executive Officer
All right, thank you.
Operator
Ladies and gentlemen, that concludes today's conference. We thank you for your participation.
You may now disconnect. Have a great day.