Marvell Technology, Inc. (MRVL) Earnings Call Transcript & Summary

A lot higher during the pandemic.

And now you're sub-$100 million. And I think you talked about ultimately getting back to $200-ish million. Is that sort of the steady state if there is such a thing in this business?

Yes. I think -- when you look at it -- yes, so exiting this year, we don't think we get all the way back to $200 million, maybe 3/4 of the way. And so some decent upside next year. We do think it gets all the way back. I think the piece that it's very early and it's hard to know exactly what the impact is of AI, right? I mean feasibly there's a scenario where it starts creating a lot more data and so what that looks like when you intersect the sort of density and increase is sort of hard to tell. But sort of baseline, I would expect it to get back there. And then sort of -- be sort of a low to mid-single-digit grow.

We do expect there's going to be growth in data center storage, right? Both on the hard disk drive side, nearline remains the only way of mass storage, right, in terms of any workload you can think of. In cloud applications. And on top of that, we have a very strong and growing position on the SSD side. We pivoted our SSD business completely to data center about 5 years back. And we won a number of designs which are now ramping in production, and we have even more new design wins in next-generation PCI Gen 5 and Gen 6, which we one have not gone into production yet. So you should expect that overall data center storage once it renormalizes post the inventory correction is certainly a growth business. But to Willem's point, we don't count on fast growth here, but we do expect it's going to grow fairly continuously over time.

And I guess the slight recovery you're forecasting of this business is primarily a function of you guys going from under shipping end demand to converging toward end demand or because your customers still sound relatively subdued in terms of...

That's exactly right. Even like this [indiscernible] that they have, we're still undershipping where they are very significantly, right? And so exactly to your point, like we just assume sort of getting back to shipping to what they see as in demand towards the end of this year.

Okay. Great. Maybe I'll pause here and see if anyone has any questions. Okay. We'll keep going. So Enterprise Networking, I think you said you had expected a correction in the quarter but it got pushed out. And now you're guiding this business down 10% or more than 10% sequentially. Where are we in the correction process? Do you have visibility into customer inventory? How should we think about going forward?

Yes. I mean demand is still actually fairly healthy. I think as we said last quarter, we were trying to get ahead of that inventory correction. And certainly, it started, but we had some strong ramps in that custom ASIC product that offset it. And so like we saw pools continue to be a little bit stronger than we had expected. This quarter, we do expect a step down as you mentioned, a bit over 10%. And again, I think we're trying to get ahead of that inventory correction a little bit. And so -- but we do think that based on what we see from the end customer, it's probably soft through this year. We don't really -- in our internal model, forecast a recovery by the end of the year, certainly, sometime next year, we -- now I think the key thing there to highlight is we've taken a ton of share, right? And so -- and when you look at how significant, we've grown that business over the last couple of years, it's really driven by share gain. And so we don't believe we're losing share, it is more inventory correction and once that gross returns, we'll be part of that. I don't know if you want to add any.

No, I think -- I think you captured it. I mean, we're basically being cautious, I would say. So I think we guiding for a pretty decent step down in Q2, you'll see a little bit moderation over the next few quarters. Unlike some of the other market storage in particular, I think this one has been managed even by our customers in a much more clean way. So there's no real surprise here. I mean we were actually thinking of bringing the numbers down in Q1. That's what we guided to. We just never got there because we just never -- customers kept pulling. I think we're just trying to get this thing normalized. So I don't -- I think it's -- think of it as a cautionary outlook, but we're not seeing anything which is very different than what we expected.

Got it. I guess the medium- to long-term outlook for this business. I mean, to your point, you've gained share. I think there was good content growth with multi-gig. Three years out, plus or minus, how do you think about the sustainable growth rate in enterprise networking?

Yes. I mean we continue to invest in these products, right? And so I think we have very competitive product offerings. I think we'll continue to do really well. I think it's a changed world in terms of enterprise. I think people were very skeptical of that. But we've seen that sort of continue to grow, right? And I think there's all these applications from an AI standpoint, that's very nascent right now. And I do think it's sort of the connected workspace, that whole trend, more data. I don't think any of that changes. So I think -- I don't know if you want to.

Yes, I think the end market once [indiscernible] it's still a growing market, but it's more like a GDP plus or minus. And then we've generally done better. We did a lot better last year. We grew like 50% to 100% faster. I don't -- that's going to be a tough one to replicate, but I think we'll certainly continue to grow above kind of what the end market does. In terms of things like the next generation of Wi-Fi is still being rolled out, that generally puts more stress on the network. So multi-gig adoption is still fairly low in terms of total buying within enterprises. So there still are probably another 3 to 4 years, it's going to run, which has some very nice ASP uplift. So overall, I think we'll continue to outdo kind of what the end market does. It's just a couple of quarters to get through essentially.

In 5G, you've grown that business really, really nicely over the past couple of years. Ashish to your point earlier, good design wins, particularly at a couple of your base station customers. You grew that business 25% sequentially last quarter, and I think you're guiding that up this quarter as well. And I know you went on to guide, I think October flattish or up and then up and in January, down quite significantly. So it's very transparent, that's super helpful. How should we think about the medium term in this business, it's very lumpy.

That's right.

And I guess, 5G, you're kind of approaching the mid- to late innings from a deployment standpoint. So how should we think about this business?

Yes. So when you look back at like 8, 9, 10 quarters, maybe there's like one exception. But we've -- basically had quarter-over-quarter growth over this whole period. So very strong for wireless business because as you mentioned, it is typically very lumpy. And so 25% growth in Q1 and then sort of continued growth for the next couple of quarters here. We do then expect quite a significant step down and sort of lump down. When you look at the medium term, like to your point, I think there's some pauses. And so it will probably be weak for a couple of quarters. And then long term, I think there's a bunch of rollout that's still ongoing combined with we have another design win that's really only ramping second half of next year with one of our customers. So that's ahead of us. So once we get through this normalization period, we do expect growth to continue over the -- call it, medium term.

And beyond India, which geos are you guys sort of focused on as you look out?

I think Europe would be the next one, I would say. I mean, there has been some deployment for sure, but it's still been on the slow side. Some of it's macro impacted for sure. So I think -- also, remember, even when you look at India or even the U.S. as an example, while there's certainly a big phase of initial building in the first year, and there's typically a pause, you typically can't upgrade an entire large countries network in 1 year, typically takes about 3 to 4 years, right? So initially, you do what's called population coverage, where everybody gets a 5G signal. But then over time, you have to go actually add capacity, right? And if you live in any major city, you know exactly what I'm talking about, where your throughput isn't actually as good as you think, your battery doesn't last as long. And the reason it's key hunting for an active open channel, so you need more capacity. So I would say once you're past this first stage of deployment, which is, hey, I want to make sure all my subscribers get a 5G signal, then you start adding capacity, which typically is in year 3 and year 4, right? So you're going to start to see that as well. So I think it's a combination of additional geographic capacity coverage, coupled with some additional sockets, as Willem talked about. So we still expect decent growth out of the 5G business. I mean we said it hit $600 million kind of run rate ending last year. We just grew 25% in Q1. So you can see this business has gone from 5, 6 years back was basically sub-$100 million. It's done extremely well for us, and we still see pretty nice growth in front of us here.

Got it. Perfect. Transitioning to automotive, again, it's been a really nice grower for you guys. It's still low single-digit percentage of your portfolio. So not necessarily a big business. But again, in terms of contribution to growth, it's been a good one. Maybe talk about the medium- to long-term visibility you have in this business. Auto is an end market where investors are increasingly concerned because it's been so strong for so long. Should we be worried about SAR or because you're tied to secular growth, i.e., Internet adoption, you're good?

Yes. No, it's a great question. So because we don't have a legacy business there, like all of our ramps are sort of product into new platforms basically. And a lot of it is driven by both the EVs but also internal combustion. So it's not just EV. But specifically, that dynamic of new model years taking up Ethernet and it's not replacing anything for us. It's just a new ramp. We're less exposed to sort of the unit story on, okay, units might be up or down. We're sort of agnostic as we sort of ramp into these new platforms. And we've continued to see very strong design win traction there. I mean, as you know, like the automotive cycle is very long. And so like for that to translate. And so what we're seeing today is sort of work that's been done over multiple years. And when we look out ahead, we've got a very significant design win funnel that we still -- so we expect multiple years of growth here to continue. And so certainly, we expect growth this year. We expect growth next year. And so yes, so it's a very good business.

Yes, I think what's changed is maybe just kind of pivoting your question a little bit is if I look at the design wins we won about 3 to 4 years back, those tend to be singular in nature, meaning so the new technology for car OEM, especially traditional OEMs, where they would adopt you in one particular model type. And what's changed is the design wins, which we have won in the last year to 2 years have now been across multiple product lines because now the technology is proven. Now it's not a question of if, it's more a question of when, when do I adopt Ethernet? It's pretty much a de facto standard at this point. So the volume of design wins is significantly higher. And at this point, we have pretty much 8 out of the top 10 OEMs from a unit perspective worldwide. So you can think of any major manufacturing region in Asia, in Europe, in the U.S., where you can pretty much tick off all these key customers. And to your visibility, you may ask that the beauty of automotive is once you win something, it's a 7-year design cycle, there's multiples of spares after that. typically. And once the technology, think of this as the nervous system of the car now, right? This is not a piece part. Your entire electronic ecosystem is being designed around Ethernet as the backbone. That's a very, very sticky set of sockets. So that's why I think to your point, it's a small part of revenue, but it's a reuse of existing technology, Ethernet, which we've always had on the enterprise side. So it's a great leverage for us, and it's a very sticky product. And over time, it can lead to even more opportunities, not just on the Ethernet side, but in other areas as cars become more and more automated.

And to that point, Ashish, maybe talk about the compute opportunity within automotive. I know that's longer term, but what's sort of the customer engagement?

Yes, it's exactly the same model. I mean we started down this custom model essentially on the compute side in 5G and we talked about 2 key customers. They're ramping in high volume. We took the exact same idea, and now it's playing out on the cloud side, right? We've discussed our cloud optimized platform, where essentially we're solving a very specific compute need the customer has which they cannot satisfy effectively either from cost or power or utility from a merchant product. If you fast forward and think about what a car 5 to 10 years from now looks like, compute is a very big part of the differentiation. And that's a big part of the key IP and having a vertical stack, meaning hardware, software, firmware integrated and done by one single person is a big differentiator. We've seen this play out in other ecosystems like a phone is a perfect example of that. So you can imagine if you're a car OEM, you want to find a semi partner who can do these custom capabilities without you having to invest, right, thousands of engineers in building basically 1 or 2 chips a year, right? That just doesn't make a lot of sense. So that's the opportunity is what we see it. It is early days. I would completely agree with you. I think this is a discovery period where people are trying out different things. There's going to be a big merchant opportunity, which will always be there. But some of the OEMs will also find a way to saying, hey, we want to own our own IP, but we don't want to necessarily create a mini Marvell internally to do it. So we see that as an opportunity. We'll keep you updated. It is early days, but it can be quite exciting going forward.

Got it. Okay. And I guess given everything we've talked about in terms of revenue, dynamics and your outlook. Curious, the long-term CAGR that you had presented at your 2021 Analyst Day of 15% to 20%. Is that still the right range to think about and assume I think there was a moment in time where I think the market collectively was a little bit skeptical. But at this point, what were your thoughts on?

Yes, absolutely. I think when you look at the overall sort of driver for that. It's obviously very much leveraged to the data center and cloud. So when you go back a couple of quarters, I think there was a discussion around moderation and sort of the overall CapEx in that space. And that's clearly not pivoted to sort of continued growth, pretty strong growth. And then Ashish touched on the question earlier, but it's really is the sort of momentum of shifting [indiscernible] to AI going to impact our overall growth rate. And our view is it's actually really good for us. I think the content that's being driven directly is much higher. Over time, we see the pull-through on border networking being very significant. We touched on the storage. And so we still look at that sort of 15% to 20% is a very reasonable target from growth rate. I don't know if you want to add?

No, I think you hit it basically. This is the whole focus on shifting our data infrastructure. That's what drives the economy in different applications. We actually did better than that, quite frankly, if you go back and look at our performance over the last couple of years, right, you almost argue we overshot it. And -- but even if you normalize it, I'd say we pretty much grew in the pattern and this assumed before the meat of some of these big chunky sockets on cloud optimized actually hit our revenue. In fact, almost none of that actually has, right? And that was a big part of that long-term growth. And that's what's in front of us for the next few years. Automotive was very nascent and now it's becoming more meaningful. It's in hundreds of millions of revenue. So I would actually argue that we probably had a more difficult task in the last couple of years. And now given that some of these sockets, which we've already won are very imminent to ramping at all in front of us. So you're obviously very confident about that kind of growth rate going forward.

Yes. And then we haven't touched on it yet today, but there's other opportunities out there like CXL that we do think is very promising. We're investing there and at some point, over the medium and long term, that does turn into like a very nice opportunity. And I think the whole AI sort of trend is accelerating that where you could really see having the memory be able to be shared would be a big benefit to that architecturally.

Got it. Yes, that's helpful. I guess we have 5 minutes left. I want to pause here again to see if anyone has any questions. Maybe on gross margins, 3 months ago, we were a little surprised with the guide. I think you guys characterized it as for the perfect storm or mix just kind of flipped on itself. You are guiding to, I guess, 64% or the low end of your long-term range exiting the year. Maybe provide a bridge, if you will between 60.5%...

Yes. I mean, certainly, like perfect storm is probably a good way to characterize it. And -- just some of the puts and takes. We really saw a lot of our sort of core sort of higher-than-average gross margin product be impacted by the inventory correction in an outsized way and then we saw sort of carrier and ASICs, which typically are below our corporate average to sort of power through that cycle. And the combination there really created a significant headwind from a gross margin standpoint. Now clearly, we started taking very significant actions to manage our costs. I think as we went through the supply chain sort of shortages last year, for the most part, you're a price taker, right? You have very little ability. And -- but one thing that we were doing as we went through that was getting multiple sources for the back end. And so as we've now come through that, we're in a much stronger position to negotiate our pricing and then really drive very, very hard internally on efficiency around any taste times, looking at the engineering, really sizing our operations team for this level of revenue. But all of those actions go effectively into inventory, and you have to go through a couple of quarters for that to flow through your P&L. And so we're very actively driving improvement. So sitting aside that component, if I bridge you from next standpoint going forward, some of the main ones is really the wireless step down in Q4. I think that's a very significant tailwind for us. And then you see storage continue to recover. That's a nice tailwind. All the optical networking products, strong margin, and we see that growth accelerating and then consumer moderates from here into the back half. And so certainly, the majority of the story is mix, but then also the actions that we're driving from a cost standpoint will benefit us not through -- not only through Q4, but we see that continuing through next year.

Got it. Okay. Maybe in the last couple of minutes, I wanted to focus on capital allocation. Historically, you guys have been -- or had been quite acquisitive and very successfully. So on the call, you talked about using cash on our balance sheet to reduce debt, which is due, I guess, next month very soon. How should we think about, I guess, M&A going forward? Does that play a role in Marvell? Or are you pretty comfortable with the IP blocks and all the tech that you have internally? And maybe talk about buybacks as well.

Sure. Yes. So a couple of questions there. So on M&A, we've got this history of doing M&A. It's certainly one of our core competencies to sort of identify companies that's a strategic fit for us and then integrating those and getting accretion. When we look at our portfolio today, we're actually very happy with what we have. I think we're very focused on organic growth, always open to tuck-ins or if some opportunity comes but that's really not our focus right now. And frankly, when you look at data infrastructure, it's been so consolidated, there's really not a ton of opportunities out there. So from a capital allocation standpoint, as you mentioned, paying down $500 million in our bonds in June. And then we're very comfortable with our leverage at that point. And so we have a term loan that's due April next year. And so we'll be looking to refinance that over the summer. And so then that puts us in a position to really start doing buybacks. Our stated policy is to do at least 50% through buybacks and dividends. We would love to do more than that and really limit the dilution that through SBC dilution. And so yes, we're very excited to start our buyback program in the third quarter, and then we'll be opportunistic if we can do more than 50%.

Got it. I guess in the last minute or so, any aspects of the business or the broader industry that we collectively underappreciate or overlook? I know Marvell is a well-covered stock. But anything that you feel like we're missing?

No, I don't -- I mean, I think, as you said, we're pretty well covered. I think the story for us is very straightforward, right? I think the business is basically back on a growth path. Gross margin is improving. We've got a big tailwind essentially coming from the increased investment in AI. Storage business is going back up, basically bottomed out, data center bottomed out in Q1. Basically, things are all on a growth path with accelerating growth in the back half. We feel very good about our position going into next year with multiple very key programs going into volume production. So overall, currently more happy with the setup we see in front of us.

Great. On that high note, we'll close the session.

Thank you very much.

Appreciate it. Thank you.