2023-12-06 17:51:10 ET
Marvell Technology, Inc. (MRVL)
Barclays Global Technology Conference
December 06, 2023 11:40 AM ET
Company Participants
Matt Murphy - Chairman and CEO
Ashish Saran - Head of IR
Conference Call Participants
Thomas O'Malley - Barclays
Presentation
Thomas O'Malley
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. I really appreciated.
As just [indiscernible] last week, I think a good [indiscernible] to those who been missing the call. Can you just give us the biggest [indiscernible] from the call? And just in, how this next quarter you see playing out?
Matt Murphy
Sure. Yes. I think maybe just, start at the top and 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 transitioning that was happening. We decided to take control of our own [indiscernible] at that time and kind of adjust the new [indiscernible]. So things happened throughout the year.
First is as we sort of reset and kind of framed our outlook for the whole year. We actually ended up delivering pretty well to what we saw. If you went back all the way, let me 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 just had a recognition that things had changed.
So, I'm very proud of our team. I mean, originally, I think we took care of what we could control ourselves, but 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 accelerated computing opportunities, also focusing our OpEx down and actually lowering.
Those things we executed on as we were from basically 450 million quarter in OpEx. We're going to exit at 430 million. We've got good margin, back up [indiscernible] at the midpoint. And net-net, we're where we thought we would be on top-line for the year back to where we were back in March.
Now what happened is, one, we had just in the beginning signs of generative AI, and we were beside the impact we have, which basically we thought would be about $400 million this year and $800 million next year [indiscernible]. At the end of this year, you have sort of the core markets recovering, inventory correction, and so on and so forth, and that we'd be off to the races.
And I think what's happened is now going to the quarter, we had excellent results in our data center business in the third quarter. We overachieved what we thought. We actually [indiscernible] 21% sequentially from Q2 to Q3, and 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. 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 was going to recover still going through a [indiscernible] correction. And that's going to take a couple of quarters, but those markets are very, very important, and revenue and profit contributing markets from what normalized back. But in the meantime, we've got our business firing on all cylinders, and it's providing some, some buffer against weakness in other parts of the business.
Question-and-Answer Session
Q - Thomas O'Malley
Super helpful. So why don't we dive into the area of the business that's doing quite well [indiscernible]. So I've lost track over the years. I think it's helpful to reset. So the way I kind of thought about that business is you've got this optical portion that's clearly going very quickly. You've got support 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 us the relative sizes of the business is because I think the optics portion has been growing so quickly, people have lost track of the [indiscernible].
Matt Murphy
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 have pivoted storage business over the last few years from a consumer kind of footprint to data center.
And then I think to call it a run rate that was about $200 million per quarter. It's 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 got you think consumption is. It's now trended back up, so it's back up at $100 million this quarter.
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 I think was mentioned more in the basket of other things we did actually call it out 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've thought it could do. And that's actually growth happening now in that business is 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 the Retimers. You got gearboxes, those types of things. We have the size that exactly, but it would probably would be the smallest maybe those the other two, so a little smaller. And then really the balance of it is our optics business, okay?
So then the optics, there's really two pieces. There's a sort of inside data center piece, which would be the optical DSPs, TIAs and drivers. That sourced both traditional cloud infrastructure applications. That's sort of the 200, 400 gig PAM products. And then you have 800 gigs 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 PCI or data center interconnect that connects data centers.
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.
Thomas O'Malley
Yes. So let's dive into that biggest portion of the bucket there...
Ashish Saran
Just one more. I think the other one is, which is becoming more relevant, is custom silicon. The custom silicon in the scheme of things [indiscernible] ramping only this year, right? So last year, that really was a big contributor to our data center revenue. 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. So that's the other piece, which historically wasn't hit hard, which, Matt, did talk about historically in data center, but it's started to become fairly important this year, really becomes a much bigger contributor as we get into next year.
Matt Murphy
Yes, hard to team that up. I figured there was going to be the whole discussion was going to be about [Multiple Speakers]
Ashish Saran
[indiscernible] 90% of your question [indiscernible]
Matt Murphy
That's really where it's not a lot today, but certainly for next year, it's going to be significant, worth talking about.
Thomas O'Malley
Why don't we start with a topic go into I think, one, you're clearly a part of a broader platform being deployed right now with NVIDIA, and you're clearly well positioned there. Just looking at the, what's been deployed in the marketing and the 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 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?
Matt Murphy
Yes, that's a great question. We look at it a little bit differently. I think the way that we would, I would frame it is, and this goes all the way back. I mean, I remember when we were doing due diligence on Inphi in 2020, basically in the summer. The big theme of that sort of discussion was, hey, it's going to be this transition from NRZ to PAM transition. There's going to be an upgrade in DCI, and that's sort of a traditional cloud.
And then either way, we're designed in every AI cluster more. And here's what they look like, but the volumes are fairly amazing. And that's sort of a, here's the product set that goes there, we've been working with those customers. So from a deployment standpoint, Tom, I mean that the one 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 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 one-to-one ratio of the AI processor itself to the optics. So, we're kind of, our market share is still a bit high. So, we're kind of okay with all that, and it's a little bit of using shovel in the situation. You supply into the market. You do a good job. And we're not too worried about that mix, I would say.
Ashish Saran
Okay. We officially made it halfway through before I mentioned in the last. So that's a win. But are we doing questions during, or are we doing it...
Thomas O'Malley
We're going to do at the end. So yes, if you guys have any questions, we'll save the last two minutes so just get up. 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 consumer. Can you talk about, one, you 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 are going after? I mean people compare the two of you, what would you bring up as why you guys are superior in a given design win that guide in particular?
Matt Murphy
Sure. I think I'll break it to two 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 back to our 2021 Investor Day, that we had won a number of very important cloud optimized silicon customer programs. That's all the way back, a couple of years back. As we move forward since then, those designs have now, many of the new product development, they take out and kind of preproduction. So that's across a lot of things.
A few of them were targeted for AI applications. And there's two in particular for next year that are going to drive very strong revenue growth for Marvell. And we, and tomorrow we just plan for everybody, we had sized back to 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 when a couple of years back, more of it's going to come from AI that we saw, 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 hot bit 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 by. For certain use cases, there are certain customers. And it's also going to have and probably need more of differentiated custom designs that they did 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 really known for five or six years ago. Our introduction in 5-nanometer with our full 5-nanometer process technology platform and I/O offer 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 take these things out first now designed right. Design could be upwards of 100 billion transistors. We will know small feat to pull them off, it's one thing that say, you can sort of do something. It's another to actually tape it out and have a path to either a, zero, or just a minor spend.
And then you have all the other aspects of it, sourcing the advanced packaging, the substrates the cost. Being able to yield it and be able to deliver with flexible models. So you add all that up, it's quite a significant area of 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 because 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 that the sheer, human power required, the know-how, and also the capital and the capacity to go invest in this area.
If 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, we can add value, then we're probably not going to pursue it.
So, some of those companies really aren't our competitor, per se. That's not anything that we're better and they're not. It's really just we're in a different, in a different segment. So those, some of those folks you mentioned don't really show up when we're bidding, per se on something.
Thomas O'Malley
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 going through a cyclical downturn. And at some point, you're going to see that recovery. Can you just update us and 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, from the carrier side, there was obviously news out this week on AT&T switching from one provider to another. I know historically, you have some contraction out there. Any comments you guys have there?
Matt Murphy
Yes, maybe I'll break both out. So let's start with the [indiscernible]. So that one, look, it's interesting to, it's a little early to call the exact plan on the recovery. And one reason is, we just had our best quarter ever in the history of the Company. It feels great. Because $317 million of revenue. It was up 17% year-over-year. For the last probably three-plus years, our wireless business is completely cranked, and we basically got it to the level or even more where we indicated back when we bought Cavium when we got opportunities. 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 two 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.
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, fiscal '24, this current year, if you take our Q4 guidance, about $1.1 billion, we'll do in carrier. It was about $1 billion or so in the year. And I just think mental model through cycle, get through some of the inventory stuff and correction. That's probably not a bad place to return to, right?
And then you'll get a little growth out 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 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, 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 that over the next two to three years is going to trend down. And I would say for us, you also think of it as kind of a 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 single-digit times a single-digit. If you do the math, it's not a huge number. And we also have content at other companies as well. So that's [indiscernible] too. So, we view this as very, very much not [indiscernible] at all actually. I mean, we have to see how move out market share [indiscernible]. But in the times single-digit equals how much.
Thomas O'Malley
Can 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 yourself playing in that area of the world? And could you potentially offset with more kind of whole side or even within data center like [indiscernible]?
Matt Murphy
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 is happening, plus this continued movement to cloud-based computer [indiscernible]. But 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 two, it's not a big number. But probably over the long-term, I mean, carriers actually are a good market to be in. It's just, we've always said it's gone 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 as we an option also diversified into the cloud, which is really the Inphi purchase in Innovium and then plus the [indiscernible].
So, we've always tried to have diversification in mind, Tom, and this one 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.
Thomas O'Malley
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 the other leases not recover, what's holding back the margin profile from continuing to accelerate? Not saying that it hasn't already. I think one did a great job and you called it out on the call saying how quickly you guys got to the [indiscernible]. Can you just talk about where you can go from here with that continue to kind of go in that direction?
Matt Murphy
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 first quarter. But we had singled that nominally because we believe even a few quarters back, the mix would go in our favor.
Now probably it 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, kind of take the opportunity with the ramp in other parts of our business to improve our cost structure, both from us with a supplier negotiation and partnership, but we've also reduced our MOH and we've really streamlined our operations around 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, we had a steam on it, the business like the optics area. We also have custom programs coming in. I mean, 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 bake in more, 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.
Now the good thing about that is if you could look at it as a negative [indiscernible] the customer is bigger, it grows at a faster rate than the rest of the higher margin that would add for Marvell potentially. Well, it really wouldn't be, a fall through would be significant. We actually want more global 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 have to manage it. But look, more revenue is a good thing. And I think no one will be in this room will be upset, if custom does phenomenally well and grows faster than the rest of the business, the optics. I think it will be a win for everyone.
Thomas O'Malley
I want to be fair here in terms of giving the audience a chance to ask any questions. I have seen [indiscernible]. Do we have a microphone back there that we can spare? Thank you.
Unidentified Analyst
Actually, I had two questions around your studies and your acquisitions of Innovium. They used to be using, the used to, I believe cadence is SerDes and that caused a lot of problems. How is owning them and only your SerDes help your business, one? And then number two, as you mentioned your DSPs, I mean agree those built a good roughly $200 million of 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, it's, or that DSP you can add to optics for optical phase cables, et cetera, and being able to generate maybe like $200 like accretive?
Matt Murphy
On Innovium, when we acquired it, and even during difference, they had been working on their next-generation product, which was at 25.6 terabits. So our 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 too. So if we try to do this serially, it's just going to take forever. It will be even later. And we didn't believe that that particular node was going to be as big a node and transformation was [indiscernible].
So we did that. And the way we designed that product, and by the way, it's looking great. Product development came out of the fab, I don't know, four or five months ago with a couple of customers that looks great. That was done with Marvell SerDes. That's on the Marvell 5-nanometer technology platform. So we actively went back and re-planned everything in our technology flow, but it was still the same Innovium architecture team.
And I'm so glad that we did that because we're not relying on third-party SerDes for this product. We're fulfilling 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 and 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, with 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 some capability and throughput program. We're in great shape of that market is going to go through an NRZ. We're in a very strong position.
Ashish Saran
Yes, maybe just two quick additional comments. One is, 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 per lane electrical product, 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 resell DSPs, and we work with multiple cable volumes, 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 volume. So just kind of keep that in mind as you kind of look at the revenue.
Matt Murphy
Yes, that's a great clarification. I think the two 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...
Unidentified Analyst
[indiscernible]
Matt Murphy
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, who are all very aggressive and they're going to go put in 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.
Thomas O'Malley
Exciting times ahead, I think we're overall ready, guys. Thank you so much for being here. Have a great rest of the week.
Matt Murphy
All right. Thanks, everybody. Bye.
Ashish Saran
Thank you so much.
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Marvell Technology, Inc. (MRVL) Presents at Barclays Global Technology Conference (Transcript)