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

Welcome, and thank you for standing by. I would like to inform all participants that this conference call is being recorded and parts of this call may be reproduced in JPMorgan Research. If you have any objections, you may disconnect at this time. I would now like to turn the call over to Harlan Sur.

Yes. Thank you, Drew. Happy New Year, everyone. Thank you for attending JPMorgan's Virtual Fireside Chat Series. We normally host the Marvell team at CES, which is next week, but thought it would be a good idea to get in front of what will be, I think, a pretty busy week. My name is Harlan Sur. I'm the semiconductor capital equipment analyst for the firm. Very pleased to have Matt Murphy, Chief Executive Officer of Marvell. We also have Ashish Saran, Vice President of Investor Relations, here with me today as well. Marvell's stock, as you know, is one of our top picks in the semiconductor sector for this calendar year, leadership in cloud data center and 5G infrastructure with their networking, compute, storage and custom ASIC solutions, currently seeing a very strong tailwind from AI and accelerated compute and an emerging pipeline in automotive, networking and compute products as well. So gentlemen, happy New Year, and thank you for joining us today.

Yes, Happy New year, Harlan. Thank you.

Yes, absolutely. Yes. Thank you. So your data center business has seen a strong sequential and year-over-year inflection in growth in parallel, right, with the strong adoption of GenAI. Here in the fourth quarter, for example, your data center business is growing 50% year-over-year. It represents more than 50% of your total revenues. And by our estimates, the strong double digits year-over-year growth will continue through this calendar year. But before we address the strong demand trends here, I just wanted to touch upon the other half of your business, which has seen some cyclical headwinds, namely enterprise networking, carrier and your storage businesses. And so if I may, starting with your enterprise networking business, the team has been proactive all of 2023, right, under shipping demand over the last few quarters to flush out excess inventories. That business is roughly down about 30% year-over-year this quarter. It's going to be down more like 35% year-over-year in the April quarter by our estimates. Can you guys just give us a sense of the inventory situation at your customers? And does the team believe the business will find the bottom in the April quarter?

Yes. I agree. Harlan, thanks. And let's kick it off, as you said, with enterprise. So that business, if you just take a step back, has done extremely well for Marvell and the whole team. I mean if you look at sort of where that was 2 or 3 years ago, it was well below $1 billion of revenue, kind of peak pandemic we got it to about [ $1.4 billion ] run rate, which was a little frothy, and I think everyone knew it, it was just how do you sort of manage it through the pandemic crunch. To your point, we started saying in December last year that we believe enterprise would slow down. We were going to take proactive steps to manage inventory with our customers and through the channel. And so we did that actually throughout calendar '23 in a very, I think, thoughtful way. And what's happened is by the end of the year kind of exiting and then as we look into early part of this year, the inventory that we wanted to burn down is we've done a pretty good job of that. But the demand at the same time has weakened. And so given the -- given high interest rates and sort of the macro and the overall setup plus China weakness in there that business, we said was, as you pointed out, was going to be down year-over-year in the fourth quarter and be soft in the first part of this year. But the way to think about it, I think, for investors is if you ignore kind of the quarters where there was some level of bubble, $275 million to $300 million a quarter is probably a good number kind of through cycle. And then from there, once inventories normalize and that's the run rate of the business, we've always said that enterprise for Marvell as a market is kind of a low to mid-single-digit grower as a market, and then we can grow a little bit faster right through content gains and some share gains still in front of us. So it's a nice business. It's a foundational business for us. It's performed extremely well, but despite our efforts to control inventory, the demand environment has proven to be a little bit softer than we would have thought, say, 6 or 9 months ago when we projected out.

Perfect. And then maybe moving to the carrier networking part of your business, kind of a similar question. But with respect to your 5G infrastructure and metro long-haul franchises, by our estimates, this segment is going to be down 40% year-over-year this quarter, down more than 50% year-over-year next quarter. Any signs that April quarter will be the bottom? And more specifically, how big is Nokia for the team as a percent of your overall revenues, right? Investors have been concerned about the recent headwinds on the AT&T ORAN loss and some of Nokia's other sort of near-term challenges?

Yes. Great. Great questions, Harlan. So maybe take them in order. So again, as a backdrop, similar to enterprise the business in carrier has ramped significantly for Marvell if you just go back a few years, both on the back of the 5G ramp, which our team executed extremely well on. And we probably grew that business for, I don't know, 8 or 10 quarters in a row, maybe more. I mean it just performed extremely well and in line with what we signaled actually when we acquired Cavium and size the opportunity. So that we're pretty pleased with. We picked up a nice franchise in long-haul optics through Inphi, and that's also performed very well through this cycle. And I would note that while some of the year-over-year numbers are down quite a bit in Q4 and even signaling out to the first quarter, Q3 was a record, the quarter we just completed. It was $317 million, it grew 17% year-over-year, did extremely well. So if you normalize it, and again, this has always been a lumpy business for semiconductor companies, the carrier telco market. But if you kind of smooth it out, in 2023 or fiscal '24, we'll do over $1 billion in that business based on Q4 Street and it was about $1 billion in our prior fiscal year in fiscal '23. So think of it as a $1 billion-ish type of business, clearly down in the fourth quarter and in the first part of next year. But we do expect, based on the design win position we have and the quality of the carrier business that we have that, that should come back again up to that run rate once we clear inventory and the spending environment improves and actually goes back to normal. And then from there, we have a nice product cycle in front of us on the wired side, on the coherent DSP portfolio. We have our new 800-gig product out. It's higher ASP, it's higher content report. So that should help us. And then in 5G, we still have content gains in front of us that we've already won several years ago, but those platforms haven't gone into production. With respect to Nokia, there was a lot of questions about them, who is one of our key strategic partners when there was some news about their situation with respect to some of their operators in the United States with AT&T. And what we said at that time is -- what our customer has said publicly is that it was a mid-single-digit type of impact, mid- to high single-digit impact for them. and that, that was going to take 2 or 3 years for that business to sort of transition down. And now what we have said and when we look at it again at kind of normal run rate, it's a mid-single-digit percent type customer of ours. So if you take a mid-single type times of mid-single, just take 5 and 5 as an example, you're talking about 25 basis points. So it's very de minimis. And on top of that, we do have content at the other supplier. So it's not -- it's -- we can manage it. I think in the scheme of the lumpiness of that business, Harlan, I think this is not something that we're concerned about.

Yes. And I think to your point, I think the team has a pretty strong portfolio of design wins with all of the remaining 5G infrastructure players, right? Samsung, Ericsson, ZTE in Asia as well. So very, very strong position overall in that space. So it ends up probably being a zero-sum game.

Yes. Yes, strong and diversified. And we've -- because we didn't have a lot of 4G legacy, we really bucked cycle on kind of telecom spending for several years, right, relative to some of the other semiconductor companies that had a lot more kind of 4G and 5G together. So that drove some of our outperformance. But it's a business we're managing cyclically right now. We're just focused on the long term and the design win position and driving the road map.

Perfect. And then just the last segment, which is you're still seeing some, I think, cyclical headwinds, right? Your data center HDD, SSD storage controller business, shipments have inflected, right? They grew slightly sequentially last quarter. I think they're going to grow slightly sequentially this quarter, but it's still trending about 40% below your normalized historical kind of revenue run rate. On flash fundamentals, we cover Micron. We cover Western Digital. Flash fundamentals are starting to improve. And more importantly, it looks like your HDD customers are getting more confidence on nearline cloud HDD sequential growth going forward. Are you starting to see signs of a more pronounced and sustained recovery within storage?

Yes. We are very pleased to see the end market data points have started flowing through at the end of last year. We're hopeful that those continue in terms of the end customers of ours bottoming out and then resuming growth in exabyte shipments and unit shipments and so forth. So that's encouraging. I think we're -- we don't have any other update for us at this time. What we had said was we had thought when we went back again, we tried to call the ball earlier this year in March. For the full year, we sort of said, look, we think probably by Q4, that business kind of comes back to some -- maybe not the full way, but pretty much clears inventory by then, and then we've got growth. That didn't happen. We said it's slid right, and we've continued to -- and we've not attempted to call the ball on that one again. We're going to just let that play out, Harlan. As the end market recovers, we'll eventually whatever inventory was out there of our components and their supply chain will clear. And eventually, this will resume. We'll get into when we talk about data center, but that was within our data center segment, total storage was about an $800 million a year business. And at some point, it was well below $100 million a quarter. It's come up off of that. But to your point, it's still down as we talked about Q4 and even into the first quarter.

But Harlan, to your point, we have also seen on a sequential basis. We have also seen our revenue from storage and data center pick up, right? So for us, Q1 was the bottom, which was well under $100 million. It has ticked up in the next few quarters. So we are seeing the same thing. But I think to the point we've all made collectively, it hasn't come back anywhere close to where the normal run rate. And I think that's a combination of excess inventory still being consumed at the large cloud players as well as I think we've all heard some level of probably they call a little storage capacity, do some level of recovery as they need to manage their CapEx, but that's again a onetime temporary, you can only do at one time, right? So I think as that plays out, sometime next year sometime, I guess, now this year, you're going to start to see a snapback, right? And I think that's what we're all looking for. And I think in the meantime, the other good news is the inventories and supply chain over time have come up, right, this inevitably. We've been undershipping, our customers have been under shipping. So I think once that inventory overhang is really started to get a lot smaller and as the demand starts to come back, I think that's what happens very quickly once it starts to happen.

Yes. And the good thing is based on our research efforts, and I know you guys have talked about it, but the design win pipeline on storage is quite strong, right? As the industry moves on the flat side to PCIe Gen5 controllers on the HDD side, moving to 20-terabyte plus type storage platforms, I think you guys have a very strong design win portfolio. So when it does come back, I think it's going to come back quite strong as you mentioned. And like I said, the team is extremely well positioned there.

Yes. Storage is a franchise for Marvell. We have leadership technology there, leadership market share. And it's a fundamental endemic part of our data infrastructure strategy in terms of having storage as a key leg to the stool. We've always said that we don't like the volatility of that business. This goes back to even the first day I became CEO, and we were just way over-indexed in this area. And a lot of the M&A work we even did and the diversification of Marvell wasn't to say let's deemphasize storage, it was let's get the whole company bigger so that, that portion of it becomes a smaller part of the total, if you will. But if you talk to the team that's driving the new products there and the design wins, to your point, there's a very robust design win funnel and new products and technology are going to be required at storage for sure. It's just not growing at the same rate as others, and it's got more volatility to it, but it's an important business for us, for sure.

Appreciate the insights there. Okay. So let's move on to the strong growth vector, right? That is your data center business. Again, more than half of your revenues, strong sequential and year-over-year inflection over the past 2 quarters on AI and cloud spending growth, expected to continue through this calendar year by our estimates. So Matt, maybe you can just help us with the rough sizing of the different products you sell in the data center market, how that's evolving with the larger role of AI? And then can you just also update us on what you're seeing more broadly for your AI and your custom silicon revenue outlook for this year?

Yes. Yes. Great set of questions. Maybe a couple of points upfront. So we're very pleased to see this business achieve the revenue concentration that it has. We've always targeted this business, even if you go back to our 2021 Investor Day, right, when we laid out kind of the design win opportunity, the cloud-optimized leg to it, Inphi coming in and just the market growth rate and size of the TAM driving this to half the company revenue was always the goal. And in fact, at the end of calendar '21 before the '22 kind of reset started to happen the -- that business was like 42%, 43% of revenue or something and then we have -- we got some transition. So that's good. That's actually by design, if you will. That's not -- I mean, sometimes you get there the way you don't want to, like the other business go down and your mix shifts. But the 50% is actually a good number. And we'll talk about the AI portion of that, which is super exciting. But if you just kind of normalize -- and then just in the short term, as you said, the business is on fire. I mean, in Q3, it was up over 20% sequentially. We guided the fourth quarter up kind of mid-30s in the cloud data center segment sequentially, right? So huge sort of strength heading into this next -- to calendar '24, which is great. So if you take Street and you look at this past year, let's call it our fiscal '24, total data center is about $2.2 billion. The way to think about that is that the largest portion of that is optics, okay? And that's even a little bit more than half of that. And that -- most of that's -- a lot of that is driven by AI, but also the traditional PAM stuff. So I'm thinking about buckets, you've got the optics that over half the business. Then we talked about storage. And while that was an $800 million a year run rate, it went down, we had that whole discussion. So that's the other kind of foundational layer of our data center business. But the third one to think about is think about this as kind of connectivity that's not optical. So these would be like management switches that sit on NIC or PHYs, retimers, gearboxes, NICs and SmartNICS and then also the Innovium switch products in that bucket. I think of it as connectivity that enables data movement in the data centers. And that -- and within that bucket, the biggest one is the switch portion of it, okay? And that's done extremely well for us. We're very pleased with that acquisition. We're driving a very aggressive road map in that area. We had said prior to the break that business was going to see strong growth this year we're in now, from last year. And our 5-nanometer product is doing really well. So that's actually a pretty -- it's the category people don't talk about as much, and I think there's going to be more to come this year in that area, Harlan. But I think that's one that we're very bullish on. And then the fourth group, which has a lot of kind of current investor interest. And certainly, we're completely laser-focused on is the cloud optimized bucket, the custom silicon piece. And maybe just to contextualize a little bit of that. So on that one, the big driver there is obviously AI that we've talked about for the cloud and custom silicon portion. And if you go back to kind of where we sized that opportunity a few years ago, we said that's about $800 million a year run rate, sometime between fiscal '25 and '26. That was our 2021 Investor Day sizing of the custom opportunity. We expect that our -- with the current wins we have and the production plans from our customers and our forecast that we will significantly exceed that number. Okay. So that's super positive in terms of where that business is headed from where we thought just a few years ago. Now what we didn't anticipate a few years ago was the AI portion would be so big. So that's kind of the overshoot, if you will. And we don't even know how to cap it at this point, but it looks very encouraging to us. And I think at some point, if you kind of roll out a few years from now, I think the custom silicon versus the optics contribution, probably is similar or certainly -- I think the custom group is going to challenge our optics group would be my point in the data center area. So that's all looking really well. Now maybe just a couple more points and then we can kind of go back and forth on a little more Q&A. On the AI piece, just to kind of, again, recap where we were and where we are, in the March investor earnings call, we talked about kind of baseline in the AI revenue now for Marvell. So let's talk about the biggest piece of our data center, which is AI at about $400 million this year and they -- or sorry, in fiscal '20 -- fiscal '24 and then in fiscal '25 $800 million. And that was mostly -- the $400 million was mostly driven by optics, okay? That was what we said then, just to kind of baseline. And then what we said is, hey, the next fiscal year when it goes to $800 million, the optics was also going to have good growth. And so just to kind of sift through it all investors and what we signaled was you should assume there was probably a few hundred million dollars of custom in there. That's kind of what -- that's the inference, right? If you said $400 million is mostly optics that grows and then the rest of it is custom. So I'm just kind of now baselining on what we said and where we were at that time. So since then, okay, both in the subsequent to earnings calls and as times elapsed, that opportunity for AI overall has substantially surpassed our prior projections, okay, both for this year and for next year and in both the optics area and in custom silicon. Optics this year and next year and then custom silicon, obviously, for next year. As far as the kind of what's underneath it. So yes, like on the optics side for this year now, we're basically blowing through that $400 million, right? We're at -- we said we're $200 million plus next quarter, I'm sorry in Q4 with that being pretty much all AI optics in the 800-gig platform that we have. So that's doing very well. And we expect overall optics to grow again next year, AI optics. On the cloud optimized side, we have 2 key chips that are really going to drive the revenue in fiscal '25. Both have taped out, a huge customer pull to get these products into production, okay? We've had teams working kind of nonstop depending on where the chip is at, but basically -- both of them are out of the fab. They are at different stages of qualification, which we can get into, but one is a little bit earlier and one is going to be a little bit later through the second half of this year. But both of those are on track. They look really good. We have strong forecasts from our customers for those. We have build plans that we're executing to. We're working the whole supply chain to make sure we have what we need. And so when you kind of add it all up and you look at it from that perspective, the overall $800 million that we were sizing for AI just a few quarters back from fiscal '25, we're just going to completely blow through that. Now how big can it be and where is it going to land, we're still finalizing that, but it looks very, very positive, both on customer forecast, pull from sort of their end customers. And by the way, also and even over the break, really continued positive sort of milestone achievement on the NPI to ramp these to production. So we're very bullish. And I guess the final point I'd make is that's all great for fiscal '25. But depending on when they exactly go under production, we're working on that. But fiscal '26, you actually get almost a full year then of full revenue, which is actually going to be even higher, right, than it would be for '25. And those programs only continue, right, in the out years plus there's next-generation design activity we're working on. And so it's just a very exciting time right now for Marvell, overall AI, cloud silicon, our optics and then all the other pieces to underneath, it's -- I think we're very, very well positioned in this area.

Perfect. Yes. I apologize, I dropped off for a bit there. So if I ask some of the follow-up questions that are repetitive just let me know. But so -- as we enter calendar '24 and just summing up everything that you've said, right, talking about the growth tailwinds in data center, some of the cyclical headwinds in the business, overall design win pipeline remains strong. I think if I look at the consensus estimates for Marvell, right, they're modeling the business to decline sequentially -- 3% to 5% sequentially in the April quarter, but drive sequential growth thereafter with calendar '24 revenues expected to grow sort of high single digits year-over-year. I'm not asking you to endorse the consensus numbers, but directionally, is this how you see the business trending this year? And what are the programs where you have the highest level of confidence on growth in calendar '24.

Yes, got you. Yes, you missed some great stuff. That's too bad you drop, but I think everyone else heard it. So don't worry about it. Yes, I think the way to think about it is, yes, we see data center year-over-year driven by AI, but also just the traditional cloud infrastructure stuff growing very strongly [indiscernible] very strongly. In particular, in the back half because of some of these cloud optimized programs kicking in. And that sort of then kind of correlates to the overall Marvell picture, right? Just because if you took overall Marvell for a second, right, you've got this first half with some of the other markets we talked about at the beginning being down, but kind of overall -- so that will -- whatever -- that's going to do wherever that's going to do. But from a full year perspective, yes, we see data center up huge year-over-year and driven by AI. And again, the buckets being the AI optics and custom silicon and then also at some point, probably later this year and certainly into fiscal '26, you've also got switching opportunities coming in, AECs, even out beyond that, you've got things like CXL. So kind of a very nice setup for '25 and '26 and then beyond.

Perfect. And then for calendar '24, can you just give us a sense on the AI revenue mix. I think you're going to bucket it as you've got your optics business, right, 800 gig, 1.6T, you've got your data center interconnects within that are tied to AI build-outs, right? And then you also have your custom AI ASIC business. So I'm assuming that a majority of your AI revenues in calendar '24 are still going to be optics versus ASICs, but I don't know if you can give us a rough sizing of that mix.

Yes. Yes, you want to -- yes, go ahead, Ashish, I'll add on....

Yes, I think -- Harlan, I think quite, frankly, I think when we gave our original estimates of 400 and 800 at that point in time, clearly, the assumption was that the majority of 800 would still come from OpEx. But as Matt said, and you probably missed a little bit of that is what we anticipated for custom silicon revenue, a couple of quarters back versus what we are looking at now is a very different picture. We're anticipating a lot bigger from custom silicon, right? So while I suspect optics will still be the majority, right, of revenue in fiscal '25 within AI, it's not as imbalanced as what we probably thought it was a few quarters back because I think our level of confidence, the orders we have from customers on custom silicon is significantly higher, right? So I think one point is from a mix perspective, our optics remained steady, that's a high-volume business and flow today, still would be the bigger part of it. I would say I wouldn't underestimate the amount of opportunity we have from driving custom silicon even within fiscal '25, right? So that's one point. I think in terms of the mix within optics, I would say the majority will still remain 800-gig PAM4. We've seen very nice traction on DCI, right, which is connecting data centers together. I think that continues. But remember, our PAM products are tied literally more than 1:1 with accelerated units. And as accelerated units keep driving higher volumes into next year whereby very linearly into that model, right? So that's why PAM really will be the majority. And then later in the year, we'll also see some uplift from 1.6T, which obviously has a nice impact on [ prices ]. So that's the way I would think about our AI revenue as you think about this in '25.

Perfect. And then again, I think you might have mentioned some of this, but I'm going to ask it again. You guys have been talking about 2 AI compute ASIC programs contributing to the growth, right, you're actually ramping wafer starts now for the first program. I think Matt, you talked about some of that coming out of the fab, different stages of qualification. That's for the first program, I assume, when does the next AI compute ASIC program start to ramp for the team?

Yes. The way I would kind of frame this one, Harlan, is the design win and design pipeline activity is off the charts right now. And I think what's happened really in the last year I mean -- well, certainly with the GenAI sort of somebody lighting the fuse a year ago to -- but really in the last 6 months, I think every major company in the ecosystem, the cloud guys themselves, the server companies, the people that are also making their own GPUs. I mean there's just been a flurry of activity, right, in terms of where we can participate. And I think a couple of themes have emerged. The first is that the old cadence of what was sort of the AI cadence, it's due in every couple of years and do one versus -- one after the other. There's going to be a much faster beat rate is our view in the industry. Now the biggest company there, NVIDIA is already doing that. I mean we've talked about that publicly. There's just such demand for the product and the diversity of options. So you're going to see more SKUs is our view. There's more interest there. We're -- it's actually something we don't talk about as much. We have clearly, a huge revenue driver this coming year and the year after on the current programs we have. We're also engaged very broadly across the ecosystem. I mean, remember, we're not -- with the custom piece, which is we can make somebody else's AI for them or own compute for them. But also we can participate in other platforms that are being developed from a networking perspective, from an optics perspective. And I'm talking about other chip companies, other server manufacturers or people that are making AI boxes, things like that. So it's much broader than just, hey, can you win one SKU at one more cloud company. I mean we're clearly going to go do that and the opportunity is very large. But I would just say, when we look at kind of our AI task force and kind of our AI opportunity, it's not just a couple of big companies in the U.S. that are -- we're doing their own chip for them, if you know what I mean. I think there's a whole AI ecosystem that's going to get built out. And that's where kind of our connectivity portfolio really comes in. So going back to it, strong design win pipeline and opportunity set at really 3-nanometer now for the custom side. And then on top of that, trying to couple our full solution in terms of networking products, connectivity products and all those other things like AECs, as an example, that really help the whole system come alive. And that's what we've been talking about is accelerated infrastructure, right, is all the chips that go around it and the solutions to make to kind of unleash the power of AI. So that I think it's going to be a very busy year. Those design decisions are all full bore right now, and everybody is trying to figure out how to accelerate their NPI, right, to really meet the needs of the market.