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

Perfect. Welcome back, everyone. We're very happy to have Marvell here. Matt Murphy, Chairman and CEO; and Ashish Saran, Head of IR. So first off, thank you for being here.

Yes. Thanks for having us.

Really appreciate it.

You guys just reported earnings last week. I think a good way to kick off for those who didn't listen to the call, can you just give us the biggest takeaways from the call? And just the moving pieces in how this next quarter you see playing out?

Sure. Yes. I think maybe just start at the top, then we can go into the quarter. It's been a really interesting year. If you look at kind of where we were at the beginning of the year, we were faced with a lot of churn in the industry, a lot of transition that was happening. We decided to take control of our own destiny at that time and kind of adjust to the new reality. So couple things happened throughout the year. First is, is we sort of reset and kind of framed our outlook for the whole year. We actually ended up delivering pretty well to what we thought, if you went back all the way, like call it in the March quarter. But we got there in a very different way. We're going to get to that in a minute in terms of where the revenue came from and what sort of the dynamics were. But we definitely had a recognition that things had changed. So I'm very proud of our team. I mean, operationally, I think we took care of what we could control ourselves, so we took measures to basically refocus our R&D efforts and really pivot our focus to accelerated computing. We'll get to that a little bit later. We had gross margins in the low 60s. We talked about getting it back to the low end of our range by the end of the year. And we talked about also sort of in the context of our -- of the accelerated computing opportunities, also focusing our OpEx down and actually lowering it exiting the year. Those things we executed on. Right? We went from basically $460 million a quarter in OpEx. We're going to exit at $430 million. We've got a -- gross margin's back up to 64% at the midpoint. And kind of net-net, we're about where we thought we would be on top line for the year if you go back to where we were back in March. Now what happened is, one, we had just seen the beginning signs of generative AI, and we were sort of trying to size the impact of that, which basically we thought we'd do about $400 million this year and $800 million next year in AI. We thought by the end of this year, you'd have sort of the core markets recovering through inventory correction, and so on and so forth, and then we'd be off to the races. And I think what's happened is, and you can see it now going through into the quarter, we had excellent results in our data center business in the third quarter. We overachieved what we thought. We actually grew that business 21% sequentially from Q2 to Q3. And then we guided it up in the fourth quarter to grow, call it, mid-30% range on a -- from a top line perspective sequentially. So data center is roaring. The biggest portion of that is AI, which now is well over $200 million per quarter exiting the year, which is really a positive. On the flip side, like the core business, which we thought would sort of recover, is still going through its own cyclical correction. And that's going to take a couple of quarters, but long term, those markets, carrier and enterprise, are very, very important, and revenue and profit contributing markets from [indiscernible]. So at some point, those are going to normalize back. But in the meantime, we've got our data center business firing on all cylinders, and it's providing some buffer against weakness in other parts of the business.

Super helpful. So why don't we dive into the area of the business that's doing quite well, which is the data center side. So I've lost track a little over the years and I think it's helpful to kind of reset. So the way I've kind of thought about that business is you've got this optical portion that's clearly growing very quickly. You've got the storage portion, which has been bouncing off the bottom. And then you've got this host of switching and legacy Cavium business. Can you just try to shape for us the relative sizes of those businesses? Because I think with the optics portion growing so quickly, people have lost track of the relative size.

Sure. Yes, maybe I'll give you a couple of data points and a way to think about that business. And maybe I'll start with storage, and I'll kind of work my way back up. So our storage business historically was actually quite a stable and more predictable portion of our data center business. We had pivoted our storage business over the last few years from a consumer kind of footprint to data center. And that, call it at run rate, that was about $200 million per quarter is the way to think of the data center business for storage. It dipped well below $100 million per quarter at some point. So very much below kind of what we thought, I think, consumption is. It's now trended back up, right? So it's back up at, call it, $100 million this quarter.

Yes. It's a over $100 million, in fact. Yes.

And over time, at some point, I mean all the stuff is going to kind of work its way through the system. It's just got to, and it will trend back up towards that run rate. So that's sort of one piece to think about. The other one that you -- that I think was mentioned more in the basket of other things we do, but it's actually important to call it out is our switching business. And so we, with our own kind of R&D plus the acquisition of Innovium, now have a product focus and quite a big opportunity in data center switching. And so when we acquired Innovium, we talked about that being kind of a $150 million run rate business. We've achieved that in terms of what we thought it could do. And that's actually got some nice growth happening now in that business and it's going to grow again next year. So you've got that layering in, which is exciting. There is a basket of other products in there. You've got some DPUs, you've got some Retimers. You've got some gearboxes, those types of things. We haven't sized that exactly, but it would probably would be the smallest compared to those other 2, it's a little bit smaller. And then really the balance of it is our optics business, okay? So and then the optics, there's really 2 pieces. There's the sort of inside data center piece, right, which would be the optical DSPs, TIAs and drivers. That serves both traditional cloud infrastructure applications. That's sort of the 200, 400 gig PAM products. And then you have 800 gig for AI, and then both of those kind of have a road map to basically double from there. And then within that as well, we have our cloud optics, which is DCI or data center interconnect that connects data centers. And so that's been the growth engine. That's the biggest portion of the total data center business, and it's performing extremely well. It's the biggest portion of our AI revenues today. And from a year-over-year perspective, we expect it to grow again next year, even though it's been red hot this year.

Yes. So let's dive into that biggest portion of the bucket there.

Just one more. I think the other one which is becoming more relevant, is custom silicon. So custom silicon, in the scheme of things, really started ramping only this year, right? So last year, that really wasn't a big contributor to our data center revenue. But we've talked about that getting towards, call it, close to $200 million this year, right? And this is mostly in cloud applications, not AI. And then next year, you should expect to layer on top of that as we start ramping in AI, right? So that's the other piece, which historically wasn't a big part, which is why Matt didn't talk about it historically in data center, but it's started to become fairly important this year, and really becomes a much bigger contributor as we get into next year.

Yes. I wanted -- yes, I definitely wanted...

Yes, I'm glad you teed that up. I figured there was going to be the whole -- the whole discussion was going to be about [indiscernible]...

[indiscernible]

Sort of weight it out there, but yes, that's...

We'll get to it, but 90% of your question was [indiscernible]...

Yes, that's really where it's not a lot today, but certainly for next year, it's going to be significant for us and it's worth talking about.

So why don't we start with the optics side, then we can go into the custom [indiscernible]. And I think, one, you're clearly a part of a broader platform that's being deployed right now with NVIDIA, and you're clearly well positioned there, just looking at what's been deployed in the market but numbers in your optical business. But right now, it's so captive, InfiniBand is so captive, NVIDIA in a lot of these deployments. What changes if the world moves more to standard Ethernet? Does that help you? And then if you look at the market, do you think that your customers will push for a more open ecosystem to what they're facing kind of today?

Yes. We -- that's a great question. We look at it a little bit differently. I think the way that we would frame it is -- and this goes all the way back. I mean, I remember when we were doing due diligence on Inphi, okay, in 2020, basically in the summer. The big theme of that, of sort of discussions was, hey, there's going to be this PAM transition from -- NRZ to PAM transition. There's going to be an upgrade in DCI, and that's the order for sort of traditional cloud. And then, oh, by the way, we're designed into every AI cluster in the world. And here's what they look like, but the volumes are fairly -- and then we said and that's sort of a -- and here's the product set that goes there, we've been working with those customers. So from a deployment standpoint, Tom, I mean the 1 partnership you mentioned is super important. But we're kind of broadly used within those clusters today across the market. And from a -- and we're agnostic. I mean the technology is agnostic, whether it is in InfiniBand or Ethernet. We also service the higher layers of the Ethernet of the AI. Like a cluster-to-cluster, for example, connection would be also optically interconnected, that would use our products. So for us, it really -- that whole debate doesn't really matter. It's going to drive a kind of optical connectivity one way or the other. And in general, when you kind of blend all of the different AI architectures out there, we generally have, on average, more than a 1:1 ratio of the AI processor itself to optics. So we're kind of okay and our market share is still very, very high. So we're kind of across all of them, and it's a little bit of a picks and shovel type of situation. You supply into the market. You do a good job. And we're not too worried about that mix per se.

Okay. We officially made it halfway through before I mentioned the ASIC [indiscernible]. So that's a win, but...

Are we doing questions during, or will we do it at the end?

We're going to do at the end. So yes, if you guys have any questions, we'll save the last 2 minutes to just get out into the crowd. But just on the custom ASIC side, I think there's a lot of confusion in the market. You're guiding to some revenue growth sequentially into the first fiscal quarter. Can you talk about, one, you've announced some bigger programs, can you just explain the difference? I think this question comes up a lot. When you look at your efforts versus some of the smaller Asian ASIC makers, why do you guys win? Are these different solutions you're going after? And when people compare the 2 of you, what would you bring up as why you guys are superior in a given design win at a cloud [ guy ] in particular?

Sure. I think I'll break it into 2 pieces. I think the first one is important to address and kind of clarify where we're at on this. So we've articulated for some time, even if you look back to our 2021 Investor Day, that we had won a number of very important cloud optimized silicon custom programs if you think about. That's all the way back a couple of years back. As we've moved forward since then, those designs have now -- many of them have completed new product development, they've taped out, they're in kind of preproduction and so -- and that's across a wide suite of things. A few of them were targeted for AI applications. And there's 2 in particular for next year that are going to drive very strong revenue growth for Marvell. And we -- and by the way, just to frame it for everybody, we had sized back at the 2021 Investor Day, somewhere between FY '25 and '26, that being kind of an $800 million a year revenue contributor, in that time frame. I'm not sure the exact order. We were a little off on this year in terms of when the timing happened, but it still looks good in that time frame. So that's all on track. What's happened within that is from a couple of years back, more of it's going to come from AI than we thought, and the numbers certainly could be larger. I mean, quite frankly, we just -- with how fast the GenAI contribution to our revenue has happened, I mean, we've been upping that number every quarter if you just look at our optics business. So there was a little confusion after the call. I just wanted to clarify it. Our ramp is very much on track for next year in this area. We're very excited about these programs. There's a hotbed of activity, and I'll get to your second question in this area because of just the sheer amount of CapEx and kind of, quite frankly, disruptive opportunity this has got, AI globally, right, just to improve productivity and improve businesses. So there's a need and a desire for our customers to have a blend of merchant products that they're going to go buy, right, for their certain use cases, their certain customers. And they're also going to have and probably need more of differentiated custom designs that they do themselves. So then you say, well, who's going to benefit from that, right? Who would win and who would lose and who would do well? I would characterize us as one of a couple of companies that really operates at the very highest end of capability. And so what differentiates us versus our peers is one, our best-in-class I/O, particularly in SerDes. This is something that Marvell was not necessarily known for 5 or 6 years ago. Our introduction in 5-nanometer with our full 5-nanometer process technology platform and I/O offerings was best-in-class. It is best-in-class. And that's going to continue in 3-nanometer, it's going to continue beyond. So that's been very well received by our customers. The second is your ability to actually tape these things out first pass designed right. I mean some of these designs could be upwards of 100 billion transistors. These are no small feat to pull them off. It's one thing to say you've sort of -- you can sort of do something. It's another to actually tape it out and have a path to either a, 0, or just a minor spend. And then you have all the other aspects of it, sourcing the advanced packaging, the substrates, the co-loss. Being able to yield it and being able to deliver with flexible models. So when you add all that up, it's quite a significant barrier to entry. I think there's going to be a -- to your question about the other peers at the other end of the spectrum, I think there's going to be different business models, right, that ultimately are going to play themselves out. I think some of that's going to be desire for a certain business model and does it works or not, we're going to have to see. But I just think with -- from our lens, what it really takes to design one of these chips is the sheer human power required, the know-how, and also the capital and the capacity to go invest in this area. As I look out especially at 3-nanometer and beyond, I think the world is going to need companies like Marvell and a select few group of people who can really afford to invest at this scale and actually deliver what's required. So we'll see how it plays out, but we don't play at the low end. We don't do things that are in the commodity area. And if someone else can do it for cheaper or better, if we can't add value, then we're probably not going to pursue it. So some of those companies really aren't our competitor, per se. And that's not to say anything that we're better and they're not. It's really just we're in a different segment. So those -- kind of some of those folks you mentioned don't really show up when we're bidding, per se on something.

Helpful. Very helpful. Yes. So let's just switch sides away from this really good data center business that's become more of the focus. So your other businesses are clearly still going through a cyclical downturn. And at some point, you're going to see that recovery. Can you just update us when do you think that recovery may come in your best -- to the best of your abilities right now? And then I also want to give you the opportunity just on the carrier side. There was obviously news out this week on AT&T switching from 1 provider to another. I know historically, you guys have had some contraction with Nokia. Any comments you guys had there?

Okay. Yes, maybe I'll break them both out. So let's start with carrier since that's what you -- So that one, look, it's interesting to -- it's a little early to call the exact when on the recovery. And one reason is, we just had our best quarter ever in the history of the company in Q3. We did $317 million of revenue. It was up 17% year-over-year. For the last probably 3-plus years, our wireless business is just completely cranked, and we basically got it to the level or even more where we indicated back when we bought Cavium and we talked about the Marvell 5G opportunity. So that actually is a great success story for the company. It's played out. But -- and we started signaling, I think anyone that paid attention in the last 2 quarters, we were pretty specific in, including in our earnings call, directly saying Q4, we believe, would be down significantly from Q3 just because we had visibility to win some of those NPIs we're going to finish ramping and also starting to see where that market probably was going to take some level of pause. So that's played out, Tom, and that's going to take a few quarters. It's carrier, it's lumpy. It's a little bit of anybody's guess. But high-level numbers, if you look in calendar -- or fiscal '24, this current year, if you take our Q4 guidance, it's about $1.1 billion, we'll do in carrier. It was about $1 billion or so the year before. And I just think mental model through cycle, get through some of the inventory stuff and correction, that's probably not a bad place for it to return to, right? And then you'll get a little growth off of that because we've got some additional content gains coming in the wireless area as well as in the wired area, where we have a nice optical DSP franchise and coherent DSPs for long haul and metro that we acquired from Inphi. So we've achieved pretty substantial market share in this area, it's in decent shape, but it's going to kind of grow at market or kind of plus once it recovers. With respect to the announcements on Nokia, I think kind of high-level way to think about it is, they've called it out as kind of being mid-single digit, 5%, maybe 8%, something in that range, percent of their business that over the next 2 to 3 years was going to trend down. And I would say for us, you should also think of it as kind of a mid-single digit type percent customer for us over whenever they sort of ramp back up. Just think of it as a normalized run rate. So you kind of take a single-digit times a single digit. You can do the math, it's not a huge number. And we also have content at other companies as well. So that's a little offset too. So we view this as very -- very much not an issue at all actually. I mean, and we'll have to see how it plays out because there's market share stuff that can happen at other places. But single digit times single digit equals not much.

Could I offer something on the other side? And I think that some people may not think about this as well. But obviously, if you're looking at networks that are more centralized, you need more interconnect. Do you see yourselves playing in that area of the world? And could you potentially offset some of what you're losing there with more interconnect on the back haul side or even within a data center that gets built during a ramp?

Well, I think if you look at carrier overall, that scenario, it seems like on the wire side has to play out at that point. I know CapEx is tight and everybody is sort of managing around that, and that makes sense. But at some point, and I think because of all the GenAI stuff that's happening, plus this continued movement to cloud-based computing versus on-prem, that it's just going to have to drive some upgrade at some point for sure. So that's why we're not -- on a specific customer announcement, you just kind of times those 2. It's not a big number. But that's why over the long term, I mean, carrier's actually a good market to be in. It's just we've always said it's got a high beta. And part of that was why we did what we did when we were -- really had a head of steam on us in 5G is we went off and also diversified into the cloud, which was really the Inphi purchase and then Innovium and then plus the Avera stuff. So we've always tried to have diversification in mind, Tom. And I think this 1 case where it's serving us well. 5G, by the way, earlier this year, when data center was down for everybody, everybody corrected hard, right, about a year ago in data center and cloud. And we had -- carrier was kind of carrying the day at that point. So I think it's going to be a fine market for us.

A quick one before we go to questions. With the mix of business that you're describing for the next couple of quarters, you've always talked about the optical business being a gross margin-accretive business for the entire company. As you see that business ramp and some of these other businesses not recover, what's holding back the margin profile from continuing to accelerate? Not saying that it hasn't already. I think [indiscernible] did a great job and you called them out on the call saying how quickly you guys got to the mid-60s range. Can you just talk about where you can go from here with that mix continuing to kind of go in that direction?

Sure. Yes. And I think there's a lot of moving pieces. Mix is obviously the biggest part of it. So you're seeing some of the reason why our fourth quarter is going up like 300 basis points, right? And it's a lot in 1 quarter. But we had signaled that nominally because we believed even a few quarters back, that the mix would go in our favor. Now it probably didn't go in our favor as much as we thought, but we also did a lot of self-help, a lot of self-help. And our operations team did an excellent job to kind of take the opportunity with the ramp in other parts of our business to really improve our cost structure, both from a sort of supplier negotiation and partnership, we've also reduced our MOH and we've really streamlined our operations around kind of the sizing of it. So we took a lot of action there to get it to the guide we gave. And I think the way to think about it over the next year is it will still be very mix-dependent. And while we have a great head of steam on us in some parts of our business like the optics area, we also have custom programs coming in and we've got other mix dynamics. So I think the good news is we did a lot on our own that sort of wasn't baked in before. That's great. But I continue to just sort of comment that we will be -- it really depends for next year, honestly, how big this custom business gets for us. Now the good thing about that, and you could look at it as a negative, well, jeez, if custom's bigger and it grows at a faster rate than the rest of the higher-margin business, that would be bad for Marvell potentially. Well, it really wouldn't because the fall through would be significant. Right? We actually want more revenue next year because all the development effort for these chips is largely behind us. And so now, of course, we'll work on the next generation. Hopefully, we can even expand our footprint in this area. But we'll just have to manage it. But look, more revenue is a good thing. And I think no one in this room will be upset if custom does phenomenally well and grows faster than the rest of the business, say optics, I think it will be a win for every shareholder.

Understand. I want to be fair here in terms of giving the audience a chance to ask any questions. I had seen one earlier. Do we have a microphone back there that we could just bring up? Thank you.

Actually, I had 2 questions around your SerDes and your acquisitions of Innovium. They used to be using -- they used to -- I believe Cadence is SerDes and that caused a lot of problems. How is owning them and owning your SerDes going to help your business, one? And then number two is you mentioned your DSPs. I mean Credo's built a good roughly $200 million a year business with that, and your DSPs are arguably better. So how do you feel about having both the SerDes to increase your switching business with Innovium? And then bundling that, with some of the DSP that you can add to optics, AEC cables, et cetera, and being able to generate maybe like 20 -- $200 million like Credo?

Yes, great questions. On Innovium, when we acquired it, and even during diligence, they had been working on their next-generation product, which was at 25.6 terabits per second. They were production on 12.8, we made the decision, based on market reasons, to kill that program. And we basically said, look, we got to double down on 51.2. So if we try to do this serially, it's just going to take forever and we'll be even later. And we didn't believe that that particular node was going to be as big a node and transformation was quadrupling to 51.2. So we did that. And the way we designed that product -- and by the way, it's looking great. We completed product development came out of the fab, I don't know, 4 or 5 months ago. We're sampling customers. It looks great. That was done with Marvell SerDes. That's on the Marvell 5-nanometer technology platform. So we effectively went back and replanned everything using our technology flow, but it was still the same Innovium architecture team and so on and so forth. And I'm so glad that we did that because we're not relying on third-party SerDes for this product. We're controlling our destiny there. And then we've got a lot of know-how too because we had the Inphi team in place as well. So that -- that's a great first start. We want to be even more competitive in the next generation in switching. But just so you know, the first product coming out the door is actually Marvell SerDes [ in IP ], it looks fantastic. On the AEC side, we were very pleased. At the earnings call, we actually had in the script, it may have gotten lost a little bit, but we did say we have now design wins confirmed in this area, and they're going to be ramping into production next calendar year. And we do see a big opportunity for AECs. And I think it's going to be -- it's a real market that's going to develop over time. We like our position there, because as the next-generation AECs are coming out, they are kind of going through the same thing the optical modules went through, which was the old ones that are kind of in production now are based on NRZ modulation. They're all moving to PAM. And so the designs we have are all PAM-based that are going to ramp up next year. And then, of course, it's going to go through the same technology treadmill there in terms of wanting to improve speed and capability and throughput per lambda. So we're in great shape of that market is going to go through a -- it's going through an NRZ to PAM transition. We're in a very strong position.

Yes, maybe just 2 quick additional comments. One is, yes, what we are launching now is 100 gig per [ lane ] product. But as Matt mentioned, this market will keep accelerating, and we've already actually demoed at OCP a 200 gig [ lane ] electrical product, right, which will end up in the AEC market. So that's a very key point in terms of our ability to lead the market. And the second is the go-to-market model on your revenue comment. Just to be clear, I think some of the existing players sell entire cables, right? Well, obviously, the margin would technically be lower, higher revenue. Our go-to-market is like an optic market. We actually enable -- we sell DSPs, and we work with multiple cable partners, right? So from a revenue perspective, of course, our margin is going to be a lot higher. But the revenue, we're not going to collect at the cable level. So just kind of keep that in mind as you kind of look at the revenue.

Yes, that's a great clarification. I think the 2 companies have taken different approaches. I think both are valid, and customers are going to want to have flexibility on what to choose. But we're -- we've sort of...

It seems like it's priced better.

Well, I think -- yes, I mean, we'll see. I think the economics should be pretty good for the customer because we partnered with all the Tier 1 cable suppliers, right, who are all very aggressive and they're going to go pursuing that business pretty hard. And they have all the scale, the background in this area. And so together, I think we're very competitive in terms of what these customers want.

Exciting times ahead. I think we're over already ready, guys. Thank you so much for being here. Have a great rest of the week.

All right. Sounds great. Thanks, everybody. Bye.

Thank you so much. Thank you.