2023-05-31 12:51:08 ET
Marvell Technology, Inc. (MRVL)
Goldman Sachs Global Semiconductor Conference Call
May 31, 2023 08:20 ET
Company Participants
Willem Meintjes - Chief Financial Officer
Ashish Saran - Senior Vice President, Investor Relations
Conference Call Participants
Toshiya Hari - Goldman Sachs
Presentation
Toshiya Hari
Okay, great. Welcome, back everyone. Thank you so much for joining. My name is Toshiya Hari. I cover the semiconductor and cap equipment space at Goldman Sachs. We are very pleased, very excited to host the team from Marvell this morning. We have Willem Meintjes, CFO; and Ashish Saran, Senior VP of Investor Relations. As always, I will kick off with a list of questions, but I will certainly open it up to the crowd. So please have your questions ready. Gentlemen, good morning and thank you for joining the conference this morning.
Question-and-Answer Session
Q - Toshiya Hari
Before we dive into what you guys had to report and guide last week, Willem, I just wanted to kick off with sort of an icebreaker type of question. It’s been several months since your appointment as CFO. You were obviously the Chief Accounting Officer and Treasurer since 2018. So I am sure there is good continuity in terms of how you operate and run the business. But curious what you have been focused on as CFO since your appointment, what have been the key learnings so far, if any? And what changes have you introduced to the company?
Willem Meintjes
Yes. Thanks, Toshi. So just as a reminder, I’ve been with Marvell about 7 years. I joined pretty much a couple of weeks within when Matt joined and so have been part of all of our strategic work that we have done, pivoting the company to data infrastructure, all the M&A and integration that we did. And so I really setup and worked with the team on all of our sort of internal processes. I think what’s changed really in the last couple of months – quarters, is just how dynamic the macro has been, obviously. We went into a very sort of significant inventory correction and then the sort of inflection on AI and just having to move really quickly to stay ahead of those. In terms of just changes, we have been through this up cycle last couple of years with supply chain and really investing in our working capital. And so we are on the other side of that now and so they’ve been very focused on free cash flow and just really optimizing our working capital, optimizing inventory, our DSO, DPO, all of those and so really focused on that.
Toshiya Hari
Got it. Any surprises or key learnings, again, you’ve been with the company for a long time, so I wouldn’t think so, but…
Willem Meintjes
Yes. Really, no surprises.
Toshiya Hari
That will be a problem.
Willem Meintjes
Yes.
Toshiya Hari
Okay. And I guess shifting to what you guys have reported last week and I guess, guided to solid results, very solid outlook. I think many of us were positively surprised by the resiliency in your outlook. I guess maybe give you the opportunity to talk about some of the key highlights in the quarter, perhaps what surprised you? And in terms of the outlook, to the extent there were any end markets or product lines that improved in terms of the outlook. Maybe touch on those?
Willem Meintjes
Yes, sure. So, maybe just starting with the outlook, clearly, on data center, we guided flat with the cloud actually resuming growth, in a nice 10% growth. And so we’re really seeing that inflection and a lot of strength coming from connectivity product on driven by AI. So an inflection on storage, right? For Q1, we were sub $100 million. And if you go back pre-pandemic, that was really a $200 million run-rate business. And so that’s really inflected back up to, let’s call it, $100 million here for Q2, so starting to see some good growth on the data center cloud side.
And then when we look at the rest of the business, we did indicate enterprise softening in Q1. That’s taken a little bit longer to start, but certainly, we are seeing that inventory correction in Q2 and we expect that sort of to continue just to be soft through the rest of the year. Wire is still very strong – sorry, wireless and then we expect that to continue to be strong through Q3 and then we said sort of take a step down. Automotive keeps on jogging along a nice year-over-year growth. And so yes, I think definitely good to have the bottom in on Q1. And then we have a lot of visibility into our orders, driving sort of the AI upside on the back half, which gives us confidence on sort of accelerated growth going into the second half.
Toshiya Hari
Got it. And I guess on that point on AI, I think this was the first time you disclosed AI revenue and sort of framed it for us. Just to level set everyone here and on the webcast, what is included in AI in terms of products? I think you sized it. I think last year was $200 million, this year more than doubling. So $400 million plus this year, what’s included in that? What’s – how did you define what’s included and what’s not included? And to the extent there is overlap with cloud optimized silicon, which was the previous and still the current definition that you guys speak to, what are kind of the...
Willem Meintjes
Sure. Sure. A couple of pieces there. Let me unpack that. So we decided to go through a very robust process to classify what’s AI and really looking at it in two main buckets. The one is on the networking side and then the other one on the fund custom cloud optimized. And so when you looked at networking, I won’t go through everything, but sort of two of the main things is really on the optical interconnect. That’s the PEM for 800-gig today going to 1.60. And really today, the primary application for that product is in these AI clusters. It’s not being rolled out widely. And so it’s a fairly straightforward classification. And so we do it in our system by part, by customer. And then something like DCI, the 400 ZR product, we look at – we sort of had a run rate business there. And then that’s just upsided very significantly. And so we had a conversation with the customer saying, what’s the end application? It was very clear there was being driven by the AI rollout to their different data centers. And so able to very cleanly sort of classify what percentage of that is going to AI.
And so in our system, we have tagged these things and have gone through many, many reviews and actually had our audit team review our process and all of our rule sets just to get like external validation on it. And so that we had a [indiscernible] into and so today, I can just log in and I can see that breakdown at any time of all of our revenue of all of our forecasts. So it’s very systematic. It’s not just sort of – and then the key point we make is there is some areas where – we know that there is some impact from AI, but it’s really early and it’s not very – so for example, storage, we just decided not to include in this bucket. So I think that was the first part of your question. Remind me what was the second question?
Toshiya Hari
I guess to the – well, I guess you touched on this, but to the extent there is overlap of the silicon, how should – because I think it led to some confusion.
Willem Meintjes
Yes, absolutely, yes. And so we are not giving exact numbers. But I think broadly, the way we framed it is originally, when we went back to our Investor Day we scoped the size of the cloud optimized opportunity is like 400 going to 800. And so when we looked at the lifetime revenue driving that revenue, we said originally when we scoped at about 20% of the lifetime revenue had AI application. And that’s grown so significantly that now 50% or more than 50% of it is actually from a lifetime revenue standpoint related to AI. And so that’s sort of a way to think about when you look at cloud optimized, what’s that overlap. And to be clear, on the cloud optimized side, it doesn’t include the optical interconnect. It’s the custom product.
Ashish Saran
Yes, maybe Toshi, I can add just a little bit more. So on the $200 million we said last year, it’s almost entirely optical. It more than doubling this year is also mostly optical, right. These customer opportunities start to go into volume production next year. So optic will grow again next year. We did say even after we more than doubled this year, we are going to more than double again next year. And that will have a combination of the optical product continuing to grow with 1.60 in particular. And layering on top of that would be our custom silicon products, which go into volume production. And we’ve got a few programs, some have already taped out. One is going to tape out fairly soon sample by the end of the year. So that’s how I would think about it.
Toshiya Hari
Got it. Got it. And I guess – and that was sort of my next question, but how should we think about your visibility there? Because the one sort of question or pushback that we get is, well, 3 months ago, you guys have lowered your opportunity for optimized silicon this year from $400 million to $200 million. What gives you the confidence to guide out to calendar ‘24 fiscal?
Ashish Saran
Yes, let me kick it off. So I think first is, just to be very clear, when we size these opportunities at $400 million, that was about 3 years back. And yes, I think we tried to put them a little too accurately, quite frankly. I think our confidence on that has not changed at all. Just to be very clear, right. Those are going into production volume this year. It got pushed out maybe a quarter or two, right. But I don’t think the magnitude really changes. What’s changed is that the overall magnitude has become a lot bigger because of the AI inflection, which Willem talked about. I think in terms of our AI revenue confidence, I would say for this year, you should imagine those orders are already booked at this point. Customers are choosing also parts at this point as this is very clear from us and our peers you have seen a very significant growth in AI demand. So I think for this, you should assume those orders are not just in, we are in the process of basically scheduling this as soon as we can. I think as we look at next year, we certainly feel like on optics, the trend will continue. We get an ASP kicker, because we go from 800 gig to 1.60. So it’s a 2x bandwidth. We get a pretty nice premium for that. And on top of that, we have got multiple programs, as I just mentioned, which are very close to either – have either taped out and already in customers’ hands for qualification or will be within the next few months. So I think it’s a combination of both those things, which give us the ability to talk now about very significant revenue growth in the near future.
Toshiya Hari
Got it. And maybe this is a little too granular, but in terms of contribution to growth next year, is it roughly 50-50 between optical and custom or is it skewed one way or the other or?
Ashish Saran
I tried. I would say, you should imagine it’s both. But certainly from a percentage basis, right, you have got these custom silicon going from almost nothing this year to a meaningful number next year. So I would say you should expect strong growth from both the product lines.
Willem Meintjes
Yes. And I would just add just more broadly, right, when we look at next year, I think there is a couple of additional drivers. When we look at storage, we don’t expect that to come back all the way this year. And so that should be a nice contributor next year as well in data center as that sort of comes back.
Toshiya Hari
Got it. Okay. And maybe a follow-up on the optical business, you obviously have a very dominant position here through Inphi. And I guess you talked about this a little bit, but the 800-gig transition, where are you? Where are your customers at in that transition? And the 1.60, which you announced, I think, several months ago, couple of months ago, what’s been the early feedback from?
Ashish Saran
Yes. I think this is another example of us being significantly ahead. I mean, this is a market which Inphi and now Marvell have been typically at least 2 plus years ahead of pretty much everybody else. So we introduced our 800-gig part almost 1.5 years, 2 years back. It was shipping in production volume last year right versus alternatives are still in the process of qualifying as we speak. And I think because of AI, as I mentioned on our call, the rate of growth is significantly higher, not just in terms of units, but in terms of adoption of new technology. Typically, AI is running at call it 18 or 24 months from one transition to the other. So we were the first and the only as far as I, who have announced a 1.60 product that was at OFC early this year. Basically, it’s already in customers’ hands as we speak and it’s going to be in volume production next year. So I think we will be far ahead of almost everybody else in the market. And I think AI, in particular, is one of the reasons why we feel this is going to be one of the bigger growth drivers for us going forward.
Toshiya Hari
Yes. And maybe it’s a good place to talk about this optical application in AI and sort of what we are seeing. And maybe as you can expand a little bit on from architecture standpoint and why it’s such a critical part of...
Ashish Saran
Yes. I think one of the questions we were asked last quarter, right, on AI is, look, as some of the spending shifts towards AI at the cost probably of standard cloud infrastructure, is that go to bad for Marvell. And I think this optical example is a perfect one of looking at the total optical density of connections within an AI network is significantly higher. Just to give you an idea, in a standard cloud infrastructure, a server typically runs 50 to 200 gigabits per second which doesn’t even need an optical connection. That’s the copper-based connection going to the server top of rack, right, versus in a cloud, in an AI system, you basically have each individual accelerating multiple terabits and the total system is driving somewhere between 20 and 30 terabits. That’s multiple optical connections essentially. And we see that the bandwidth will continue to grow, the number of connections will grow and the speed will increase. So, that’s one perfect example. And the other one we talked about, certainly, which we can touch later is, we see a much bigger compute TAM available to Marvell in AI versus standard cloud infrastructure and we can certainly talk about that later today.
Toshiya Hari
Right. Right. I guess before we go there, just on linear drive, quite a bit of buzz at OFC, I think in terms of incoming, it’s calmed down from immediately after OFC, but how should we frame sort of the credible threat from linear drive?
Ashish Saran
Yes. Look, we – this is – I mean, the reality is this market is moving so quickly. At this point in time, I think people are not waiting for an older technology, which is an analog technology to be proven. I think linear drive is a very interesting idea, in terms of lowering total bill of material, right? But from a practical perspective, tuning every single port in a cloud application in the field, is just not very feasible. And that technology is still in the demo stage at 800 gigs, which we’ve been shipping in volume. And the reality is by the time they can probably qualify it. The customers moved on to 1.6T, so I think there is just a massive gap in terms of timing, and there is a number of practical limitations, which is why you really haven’t heard much more beyond – it’s a really interesting idea. And I’m sure there will be some niche application that always is, but we don’t see that as something our customer is asking us for.
Toshiya Hari
Got it. Okay. In terms of Innovium and the opportunity in cloud optimized switch silicon, it’s been – I forget how long since the acquisition. But how has the integration gone? What’s been the customer feedback? I think you had thrown out like a 12-month forward estimate in terms of revenue contribution when you made the acquisition but how have things expressed and what’s the outlook?
Ashish Saran
Yes. So that grew – so it’s a little bit more than a year ago, right? So last year, it grew really nicely. I think we had about $150 million. I didn’t get all the way there, but it grew really nicely. And then we expect it again to grow this year. We’re really focused on our next 51.2T product and so working very closely with our customers on that. But I think it’s...
Willem Meintjes
We announced the product. And again, not want to keep saying AI, but it’s probably not a bad idea. So I think certainly, as you go towards these applications, that’s going to be one of key drivers, right, as you see much higher interconnect speeds and if you want to be able to go to 1.6T on the optics side, the most efficient way to take advantage of a switching layer is to go to a 51.2T switch. So products announced, we should basically be sampling soon. And it’s a product which we look forward to ramping in the next few years.
Toshiya Hari
And I guess, the competitive differentiation relative to some of the incumbents in switch silicon, anything you can speak to?
Willem Meintjes
Yes, I think this is a market where, quite frankly, there is been one key player for a very long time. There is been a number of start-ups, including Innovium, which have been trying to go after that particular socket. Like every other large market, customers want choices. And I think the very simple to think about this market is now you actually essentially have someone with a product which is as good, the same low latency architecture, high bandwidth. That’s essentially what we offer. We’ve got a very key large cloud customer who we’ve been shipping in volume to our existing 12.8T product. You should imagine that 51.2T, there is significant interest from the rest of the cloud ecosystem. So we’re very excited to get this product out in the marketplace.
Toshiya Hari
Great. Maybe transitioning to the custom compute business, very exciting area. Maybe talk a little bit about the design win funnel in the business. Are the big projects mostly DPUs for offload acceleration security or are you likely to participate in sort of CPU obviously, if you say as [indiscernible]?
Ashish Saran
Yes. We’ve been fairly consistent on – like we can’t comment too specifically on the application, right? But certainly, there is a mix there and it includes compute, right? And so – when we look at the design win funnel that’s ahead of us, it’s extremely strong. Probably – I think the number is like 50% plus that’s AI related. And so clearly, a huge opportunity. And as you sort of alluded to it, right, when you look at this architecture shift from sort of the CPU-centric with some fraction of acceleration, when we see that move towards where acceleration is really the core and then there is some CPU component, that creates a massive opportunity for us. And the way we see it is, is that, that pie is growing very significantly. And so we don’t look at it in terms of, hey, we’re competing with NVIDIA or anything like that. But I think there is so much opportunity in that market and really being able to complement and having offerings that allow some of our customers to really optimize what they are doing. And so we see that trend continuing. And so yes, very, very excited about that opportunity.
Willem Meintjes
Yes. And I think what I’d add is we enter this market call it, about 3 years back post the Avera acquisition, which was the old ASIC arm of IBM one of a time, done lots of very large chips for customers. We’ve taken that capability. We’ve accelerated going to our 5-nanometer platform. We’ve added all the IP which we have from the other parts of the business. So if you stand back and think about the three main things you would want in a cloud data center, which is compute, networking and storage. We basically can combine all those three capabilities with some very strong in-house security abilities as well. And I think the – we can provide that as a standard IP, which we do to certain customers, but then we have the ability to basically build your custom part. And you can pick and choose different parts of the IP blocks we provide and combine them with your own call it internal secret sauce for lack of a better word. I think that’s one of the big differentiators we have in the market. And we can do this totally five [indiscernible]. We’re going to 3 nanometers going forward. We have now world-class industry-leading SerDes capabilities. So I think we basically are a one-stop shop, right? And that’s what some of the large cloud customers like that they can come to us to one single place and get a variety of different IP products in a custom package tailored to their specific application.
Toshiya Hari
Got it. Yes. I guess that was my next question, but that differentiates you from the rest of the pack in terms of the ASIC and IP...
Willem Meintjes
Yes, we can always do a plain vanilla ASIC, which was the old Avera business. We’ve done that very successfully. But I think we have a number of cases. In fact, if you remember, a few years back, 5G was one of the new things we talked about. And it’s been very successful. We’ve grown revenue very rapidly and one of the keys to success there was our ability to provide essentially a custom baseband tailored to two large customers, unique applications, but a lot of the underlying IP was essentially provided by Marvell on the core processing side. So it’s the same formula now apply to a much bigger, much faster growing market.
Ashish Saran
I would add, Toshi, that when you say the pack, there is really two people that doing leading-edge ASIC at this point.
Toshiya Hari
Good point. Maybe one last question on data center, and then I’ll certainly open it up to the crowd. On your storage business and you gave great context in your prior comments. But I think pre-pandemic you were doing $200 millionish in storage revenue within data center. I think at the peak, you were closer to $300 million?
Ashish Saran
Higher – it’s a lot higher.
Toshiya Hari
And now you’re sub $100 million. And I think you talked about ultimately getting back to $200 millionish. Is that sort of the steady state if there is such a thing in this business?
Willem Meintjes
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 three quarters 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 is 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 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.
Ashish Saran
We do expect there is going to be growth in data center storage, right? Both on the hard disk side and the airline 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 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.
Toshiya Hari
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...
Willem Meintjes
That’s exactly right. Even like this that they have, we are 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.
Toshiya Hari
Okay, great. Maybe I’ll pause here and see if anyone has any questions. Okay. We will 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?
Willem Meintjes
Yes. I mean demand is 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 – and once that gross returns, we will be part of that. I don’t know if you want to add any.
Ashish Saran
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 is 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.
Toshiya Hari
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?
Willem Meintjes
Yes. I mean we continue to invest in these products, right? And so I think we have very competitive product offerings. I think we will 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 is 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.
Ashish Saran
Yes, I think the end market once the – 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 will 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 will continue to outdo kind of what the end market does. It’s just a couple of quarters to get through essentially.
Toshiya Hari
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 over transparent, that’s super helpful. How should we think about the medium-term in this business, it’s very lumpy?
Ashish Saran
That’s right.
Toshiya Hari
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?
Ashish Saran
Yes. So when you look back at like 8, 9, 10 quarters, maybe there is 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 is some pauses. And so it will probably be weak for a couple of quarters. And then long-term, I think there is 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.
Toshiya Hari
Okay. Okay. And beyond India, which geos are you guys sort of focused on as you look out?
Ashish Saran
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 is certainly a big phase of initial building in the first year, and there is typically a pause, you typically can’t upgrade an entire large countries network in 1 year, typically it takes about 3 years to 4 years, right. So, initially, you do what’s called population coverage, where everybody gets the 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 am talking about, where your throughput isn’t actually as good as you think, your battery doesn’t last as long. And the reason it keeps hunting for an active open channel, so you need more capacity. So, I would say once you are past this first stage of deployment, which is, hey, I want to make sure all of my subscribers get a 5G signal, then you start adding capacity, which typically is in year three and year four, right. So, you are 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 this 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 years, 6 years back was basically sub-hundred million dollars. It’s done extremely well for us, and we still see pretty nice growth in front of us here.
Toshiya Hari
Got it. Perfect. Transitioning to automotive, again, it’s been a really nice grower for you guys. Is it 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 are tied to secular growth, i.e., Internet adoption, you are good?
Willem Meintjes
Yes. No, it’s a great question. So, because we don’t have a legacy business there, like all of our ends are sort of product into new – 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 are less exposed to sort of the unit story on, okay, units might be up or down. We are sort of agnostic as we sort of ramp into these new platforms. And we have 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 are seeing today is sort of work that’s been done over multiple years. And when we look out the head, we have 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.
Ashish Saran
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 years to 4 years back, those tend to be singular in nature, meaning sort of 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 has proven. That’s not a question of if, it’s more a question of when, when do I adopt it connect. 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’s the beauty of automotive is once you win something, it’s a 7-year design cycle, there is multiple years 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 have 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.
Toshiya Hari
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?
Ashish Saran
Yes. It’s exactly the same model. I mean we started down this custom model essentially on the compute side in 5G, right, and we talked about two key customers. They are ramping in high volume. We took the exact same idea, and now it’s playing out on the cloud side, right. We have discussed our cloud optimized platform, where essentially we are 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 years 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 have seen this play out in other ecosystems like a phone is a perfect example of that. So, you can imagine if you are 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 one or two 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 is 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 will keep you updated. It is early days, but it can be quite exciting going forward.
Toshiya Hari
Got it. Okay. And I guess given everything we have 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?
Willem Meintjes
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. And 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 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?
Ashish Saran
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 could almost argue we overshot it. And – but even if you normalize it, I would 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 have already won are very imminent to ramping that all in front of us. So, you are obviously very confident about that kind of growth rate going forward.
Willem Meintjes
Yes. And then we haven’t touched on it yet today, but there is other opportunities out there like CXL that we do think is very promising. We are 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.
Toshiya Hari
Got it. Yes, that’s helpful. I guess we have five minutes left. I want to pause here again to see if anyone has any questions. Maybe on gross margins, three 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 60.5%?
Willem Meintjes
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 are 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 have now come through that, we are in a much stronger position to negotiate our pricing and then really drive very, very hard internally on efficiency around any test 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 are 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 are driving from a cost standpoint will benefit us not through – not only through Q4, but we see that continuing through next year.
Toshiya Hari
Got it. Okay. Maybe in the last couple of minutes, I wanted to focus on capital allocation. Historically, you guys have been – or have been quite acquisitive and very successfully. So, on the call, you talked about using cash on your 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.
Willem Meintjes
Sure. Yes. So, a couple of questions there. So on M&A, we have 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 are actually very happy with what we have. I think we are 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 is 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 are very comfortable with our leverage at that point. And so we have a term loan that’s due April next year. And so we will 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 we are very excited to start our buyback program in the third quarter, and then we will be opportunistic if we can do more than 50%.
Toshiya Hari
Got it. I guess in the last minute or so, any aspects of the business or the broader industry that we collectively under-appreciate or overlook? I know Marvell is a well-covered stock, but anything that you feel like we are missing?
Ashish Saran
No, I don’t – I mean I think as you said, we are 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 have 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.
Toshiya Hari
Great. On that high note, we will close the session. Thank you very much.
Willem Meintjes
Appreciate it. Thank you.
Ashish Saran
Thank you.
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Marvell Technology, Inc. (MRVL) Goldman Sachs Global Semiconductor Conference (Transcript)