Marvell Technology, Inc. (NASDAQ:MRVL) Q2 2024 Earnings Call Transcript

Marvell Technology, Inc. (NASDAQ:MRVL) Q2 2024 Earnings Call Transcript August 24, 2023

Marvell Technology, Inc. beats earnings expectations. Reported EPS is $0.33, expectations were $0.32.

Operator: Good afternoon, and welcome to the Marvell Technology Incorporated Second Quarter of Fiscal Year 2024 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. Please note, this event is being recorded. I would now like to turn this conference over to Mr. Ashish Saran, Senior Vice President of Investor Relations. Please go ahead.

Ashish Saran: Thank you, and good afternoon, everyone. Welcome to Marvell’s second fiscal quarter 2024 earnings call. Joining me today are Matt Murphy, Marvell’s Chairman and CEO; and Willem Meintjes, our CFO. Let me remind everyone that certain comments made today include forward-looking statements which are subject to significant risks and uncertainties that could cause our actual results to differ materially from management’s current expectations. Please review the cautionary statements and risk factors contained in our earnings press release, which we filed with the SEC today and posted on our website, as well as our most recent 10-K and 10-Q filings. We do not intend to update our forward-looking statements. During our call today, we will refer to certain non-GAAP financial measures.

A reconciliation between our GAAP and non-GAAP financial measures is available in the Investor Relations section of our website. Before I turn the call over to Matt for his comments on our performance, let me highlight several new product announcements, starting with our electro-optics portfolio. First, we announced the release of Orion, the industry’s first 800-gig coherent optical DSP for pluggable modules. Orion is our fifth generation of coherent DSPs and is produced in 5-nanometer technology incorporating our 112-gig SerDes, enabling 800-gigabits per second of throughput within the tight power and space constraints of small form factor pluggable optical modules. Orion enables high-performance probabilistic traffic shaping in addition to supporting standards-compliant transmission modes.

We expect that Orion is well-positioned to continue to drive Marvell’s leadership in coherent technology in both the carrier optical transport market as well as data center interconnects, or DCI, in the cloud market. In parallel with Orion, we launched the industry’s first 800-gig DCI ZR module, our COLORZ 800 platform. We will be demonstrating our 800ZR module at the ECOC Conference in October. Marvell pioneered DCI technology at 100-gig, followed by a 400ZR platform, which has been shipping in volume since last year. COLORZ 800 will be our third generation of DCI modules. Powered by our new Orion DSP, COLORZ 800 incorporates Marvell’s innovative silicon photonics technology, which integrates multiple discrete components on a single die. Marvell’s 800ZR modules provide twice the bandwidth of current solutions while lowering power and cost per bit by 30%.

Our 800ZR modules will enable the deployment of next-generation 51.2T switches and routers by cloud operators to support the massive increase in traffic between data centers, driven by continuing growth from Generative AI. Moving to our copper connectivity portfolio, we announced the industry’s first 5-nanometer multi-gigabit PHY platform. This platform represents a significant leap in performance compared to products on the market today and is a key milestone in Marvell’s journey to physical layer technology leadership. It is based on an innovative architecture that includes optimized circuit design, custom digital logic, and enhanced DSP algorithms. This PHY platform will deliver 10-gig performance at half the power of previous generation Marvell devices and will become the building blocks for multiple standalone PHY products, integrated SoCs, and custom ASICs optimized for specific markets and applications.

We expect the adoption of multi-gig PHY will continue to grow in enterprise networking. In our automotive end market, we announced the industry’s highest capacity automotive central Ethernet switch to support the zonal networking architectures of next-generation vehicles. This addition to our Brightlane family of auto Ethernet switches delivers 90-gigabits per second of bandwidth, nearly 2 times higher than current commercially available solutions. The new switch family also includes a combination of advanced security features not found together in any other automotive switch product. These features include MACsec link security on every port, deep packet inspection for heightened intrusion detection, and an embedded hardware security module for encryption.

This product has started sampling to multiple leading automotive customers and partners. Let me now turn the call over to Matt for his comments on the quarter. Matt?

Matt Murphy: Thanks, Ashish, and good afternoon, everyone. For the second quarter of fiscal 2024, the Marvell team continued to execute, delivering revenue of $1.34 billion. These results were above the midpoint of our guidance, primarily driven by demand from AI applications growing faster than our prior forecast. Our non-GAAP operating expenses were better than guidance due to an acceleration of the cost reduction plan we outlined last quarter. As a result, our non-GAAP earnings per share was $0.33, $0.01 above the midpoint of our guidance. We are pleased with our performance for the quarter in a challenging macro environment. Let me now move on to reviewing our results and expectations by end market, starting with data center.

In our data center end market, revenue for the second quarter was $460 million, growing 6% sequentially, well above our guidance for a flat outlook. We were able to outperform our guidance in this end market because of accelerating demand for optical products to meet the continuing expansion of cloud AI deployments. Our overall revenue from cloud grew over 20% sequentially. Notably, revenue from both cloud AI and standard cloud infrastructure grew sequentially, with AI growing faster. As expected, revenue from the enterprise on-premise portion of our data center end market declined significantly on a sequential basis in the second quarter, reflecting a weakening enterprise market. As you heard in detail last quarter, AI infrastructure requires a staggering amount of high-bandwidth connectivity, best provided by an optically connected infrastructure operating at the highest available speeds.

Marvell is enabling AI with a broad range of solutions, which include: PAM4-based optical DSPs and AECs for connecting accelerator clusters inside AI data centers; DCI products for connectivity between regional data centers; low-latency high-capacity Ethernet switches for fabric connectivity inside data centers; and custom silicon for compute acceleration. We are confident that the breadth of Marvell’s technology positions us as one of a scarce few semiconductor companies that can enable the industry to capitalize on the rapid growth in AI. Marvell’s market-leading PAM4 optical DSPs are indispensable for the pluggable optical module ecosystem that cloud customers rely upon to build their massively scalable networks. Our DSPs enable full interoperability and backward and forward compatibility.

They also provide the advanced telemetry and diagnostics, critical to maintaining an extremely resilient and serviceable network. We’ve been shipping the industry’s highest-speed 800-gig PAM4 DSPs in high volume for several quarters and have begun sampling our next-generation 1.6T platform. We’re seeing demand for connectivity between regional data centers accelerate as inference is deployed across multiple locations. As Ashish told you, Marvell has been a key enabler of this application with our DCI products, and we just announced our plan to demonstrate the industry’s first 800ZR modules in October based on our new Orion coherent DSP. Looking at the future of optical connectivity, we are uniquely positioned in the industry with a leadership position in both PAM and coherent technology.

We are also excited about the opportunity for our next generation of Ethernet switches, our 51.2T Teralynx 10 platform, which we announced earlier this year. We have begun sampling this product and we are seeing strong interest from customers. Last quarter, we told you how cloud customers are enhancing their AI offerings by building custom accelerators of their own. Trend is leading to a larger and faster-growing opportunity for Marvell’s custom compute portfolio. We have won a number of custom silicon programs tied to AI and these are well underway to start ramping into volume production next year. Let me now talk about what we’re seeing in storage in data center. As we expected, from a low base in the first quarter, we saw sequential storage data center revenue growth in the second quarter, and we are expecting modest sequential growth in the third quarter.

However, storage end market demand remains significantly depressed and customer inventory remains high. As a result, the industry’s expectations for a data center storage recovery have pushed out meaningfully. Looking ahead to the third quarter, we expect sequential revenue growth from overall cloud to accelerate above last quarter’s performance, driven by continued strong growth from cloud AI, as well as standard cloud infrastructure. Demand for our AI products continues to grow at an extraordinary rate and we are working very closely with our customers to meet the rapidly evolving needs. On the other hand, enterprise on-premise is expected to continue to trend down. As a result, we are projecting overall data center revenue in the third quarter to grow in the mid-teens sequentially on a percentage basis.

Turning to our carrier infrastructure end market. Revenue for the second quarter was in line with our guidance at $276 million, declining 3% year-over-year and 5% sequentially. Sequential and year-over-year decline were driven entirely by the wired portion of our carrier end market, reflecting ongoing demand weakness and inventory digestion at wired customers. In contrast, our wireless revenue continued to grow in the second quarter, building upon the 25% sequential growth we saw in the first quarter, and we are expecting additional growth in the third quarter. As a result of significant share and content gains for Marvell products in conjunction with the 5G upgrade cycle, we have grown our wireless revenue significantly over a multiyear period.

While the full conversion to 5G in the world’s installed base of wireless infrastructure will take many years, a number of regions are completing their initial phase of 5G deployments and are taking a pause in a challenging macroeconomic environment before they upgrade the balance of their networks. As a result, following an extended period of strong growth, we are expecting a significant sequential reduction in our wireless revenue in the fourth quarter. However, we expect that once customer and operator inventories normalize and carrier CapEx returns to more healthy levels, we can resume growth in our overall carrier end market and start to realize additional share gains. These will come from 5-nanometer base station designs we have won, but which are not yet in production.

In addition, we expect the launch of our next-generation 800-gig Orion coherent DSP platform will drive long-term growth from the wired optical transport market. Moving to our outlook for the third quarter, we expect revenue from our overall carrier end market to grow in the low-single-digit sequentially on a percentage basis driven by wireless. Turning to our enterprise networking end market. Revenue for the second quarter was $328 million, declining 4% year-over-year and 10% sequentially. As we have been signaling for the last few quarters, we continue to see inventory corrections impact customer demand in this end market. We expect this inventory re-normalization to take a few quarters to resolve as customer balance sheets get worked down over time.

While we deal with these market dynamics in the near term, I would note that enterprise networking has been an important contributor to Marvell’s successful transformation to a leader in data infrastructure. The Marvell team has driven an extended multi-year period of exceptional revenue growth, with enterprise networking revenue essentially doubling over the last few years. This was enabled by a significant share in content gains, a testament to the consistent investment we’ve made in refreshing our enterprise networking product portfolio. As Ashish told you, we continue to introduce new products such as the industry’s first 5-nanometer multi-gig Ethernet PHY transceiver. Looking ahead to the third quarter of fiscal 2024, we project our enterprise networking revenue to decline in the low teens sequentially on a percentage basis due to the market dynamics outlined earlier.

Turning to our automotive and industrial end market. Revenue in the second quarter was $110 million above guidance, growing 32% year-over-year and 23% sequentially. Year-over-year growth was led by our automotive business, which continued to benefit from the growing adoption of Ethernet in cars. We also closed on a number of new automotive Ethernet design wins with multiple top 10 automotive OEMs during the quarter. Looking to the third quarter of fiscal 2024, we project revenue from our auto and industrial end market to be flattish sequentially and to continue growing year-over-year in the 30% range. Moving on to our consumer end market, revenue for the second quarter was $168 million, growing 2% year-over-year and 18% sequentially. Revenue was below guidance as deliveries for an end-of-life program were rescheduled to the third quarter.

As a result, we are forecasting consumer end-market revenue to grow sequentially in the low teens on a percentage basis in the third quarter. In summary, we delivered revenue and earnings above the midpoint of guidance for the fiscal second quarter. We are forecasting revenue growth to accelerate in the third quarter, accompanied by gross margin expansion. We intend to remain disciplined on operating expenses to help us deliver strong operating leverage. Looking ahead, while inventory digestion in some end markets is taking longer to resolve, demand from AI applications continues to strengthen and Marvell is well-positioned to benefit from that trend. Based on our latest demand outlook for our electro-optics products, we now expect revenue from AI to exit this year at over a $200 million quarterly revenue run rate or $800 million annualized.

This is well above what we had outlined last quarter. Put this in perspective, this would put us at the run rate we had previously communicated for all of next year. Looking forward between the ongoing strength from electro-optics and the expected ramp of multiple custom compute programs, we are expecting continued outsized growth from AI. Our results and outlook continue to validate our strategy to focus on developing the most advanced silicon for data infrastructure. The diversification in our end markets is serving us well, with strong growth from AI and cloud carrying us through the softening macro environment. With that, I will turn the call over to Willem for more detail on our recent results and outlook.

Willem Meintjes: Thanks, Matt, and good afternoon, everyone. Let me start with a summary of our financial results for the second quarter of fiscal 2024. Revenue in the second quarter was $1.341 billion, exceeding the midpoint of our guidance, declining 12% year-over-year and growing 1% sequentially. Data center was our largest end market, driving 34% of total revenue. Enterprise networking was the next largest end market with 24% of total revenue, followed by carrier infrastructure at 21%, consumer at 13%, and auto/industrial at 8%. GAAP gross margin was 38.9%. Non-GAAP gross margin was 60.3%, growing 30 basis points sequentially, driven by cost improvements, partially offset by a weaker revenue mix. Looking ahead, we expect gross margins to continue to improve in the third quarter and then to increase significantly in the fourth quarter.

As Matt told you, the recovery in storage continues to push out, which is negatively impacting our product mix. However, in the fourth quarter, we project a significant improvement in our overall product mix to lead to stronger gross margin. We expect this improvement will be driven by our continuing growth in data center, while wireless carrier and consumer revenue declines on a relative basis. In addition, the Marvell team continues to execute well on our efforts to reduce costs. As a result, we continue to target non-GAAP gross margin returning to the bottom end of our long-term model of 64% to 66% in the fourth quarter. Moving on to operating expenses. GAAP operating expenses were $727 million, including share-based compensation, amortization of acquired intangible assets, restructuring costs, and acquired — and acquisition-related costs.

Non-GAAP operating expenses were $448 million, $7 million below guidance. We are pleased to report that we accelerated our cost reduction plan we outlined last quarter. We remain on track to execute the remainder of our cost reduction plan by the end of this fiscal year, as we communicated last quarter. Moving on to the rest of the income statement. GAAP operating margin was negative 15.7%. Non-GAAP operating margin was 26.9%. For the second quarter, GAAP loss per diluted share was $0.24. Non-GAAP income per diluted share was $0.33, $0.01 above the midpoint of guidance. Now, turning to our cash flow and balance sheet. During the quarter, cash flow from operations was $113 million. Operating cash flow was negatively impacted by an increase in DSO as well as severance-related cash restructuring charges.

Our DSO increased [13] (ph) days from the prior quarter, primarily due to worse linearity as we ramp shipments on orders that were received well within lead time. CapEx was $111 million, which included a large number of leading node tape-outs that we expect to drive our future growth. As a reminder, our CapEx can be lumpy in any given quarter. We expect CapEx on average to be approximately mid-single-digits of revenue on a percentage basis. Inventory at the end of the first quarter was $1.02 billion, decreasing by $10 million sequentially. We returned $52 million to shareholders through cash dividends. Our total debt was $4.15 billion. Our gross debt to EBITDA ratio was 2.04 times, and net debt to EBITDA ratio was 1.83 times. During the quarter, we paid down $500 million of our total debt.

Looking ahead, we will opportunistically explore accessing the debt capital markets to refinance our upcoming debt maturities. As of the end of the second fiscal quarter, our cash and cash equivalents were $423 million. Turning to our guidance for the third quarter of fiscal 2024. We are forecasting revenue to be in the range of $1.4 billion, plus or minus 5%. We expect our GAAP gross margin will be in the range of 45.6% to 48%. We project our non-GAAP gross margin will be in the range of 60.3% to 61.3%. We project our GAAP operating expenses to be in the range of $666 million to $671 million. We anticipate our non-GAAP operating expenses will be in the range of $435 million to $440 million. We expect other income and expense, including interest on our debt, to be approximately $48 million.

For the third quarter, we expect a non-GAAP tax rate of 6%. We expect our basic weighted-average shares outstanding to be 863 million and our diluted weighted-average shares outstanding to be 869 million. As a result, we anticipate GAAP loss per diluted share in a range of a loss of $0.02 to $0.12 per share. We expect non-GAAP income per diluted share in the range of $0.35 to $0.45. In summary, for the third quarter, we are guiding for solid sequential revenue growth, further expansion in non-GAAP gross margin, and additional reductions in non-GAAP OpEx, all of which positions Marvell for strong operating leverage and earnings growth. In addition, following the paydown of $500 million in debt in the second quarter, we resumed buybacks in the third quarter.

Operator, please open the line and announce Q&A instructions. Thank you.

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Q&A Session

Operator: We will now begin the question-and-answer session. [Operator Instructions] Our first question today is from Tore Svanberg with Stifel. Please go ahead.

Tore Svanberg: Yes, thank you. Matt, could you just elaborate a little bit more on the storage business. I am just trying to understand all the dynamics there. So, it sounds like there is a delay in the recovery, obviously, because there’s still some inventories out there. But I’m also trying to understand the growth in storage associated with AI. I know these are different architectures, right? But if you could give us any more color on the digestion of the inventory on the compute side, coupled with how storage could benefit more on the AI side?

Matt Murphy: Yeah, sure. Hey, thanks, Tore, for the question. Yeah, on storage, I would say the best guide post is to look at the end customer commentary and both what the hard drive companies are saying as well as the flash industry, and just relative to the sort of extended time it’s taking for inventory to work down at their level. That being said, eventually, it’s going to come back. It’s a little bit longer than we had modeled, but at this point, we’re following the market and following our customers, and hopefully that’s sometime at the beginning of next year, in the first half, but we’ll see how that goes. But eventually, it will come back. On the AI question, it’s kind of interesting. We continue to make attempts to model that.

We don’t have a great model for storage at this point. We’ve got I think an excellent view now of where we sit in the block diagrams relative to our optical products, our custom silicon, networking, but the storage impact, in our view, at a high level is net positive, but we don’t have a particularly helpful model to how to think about that. Certainly, AI should be an overall tailwind for storage. But I think there is — that’s all caught up in the inventory that’s being worked out at the CSPs.

Tore Svanberg: Sounds good. Thank you.

Matt Murphy: Yeah.

Operator: The next question is from Timothy Arcuri with UBS. Please go ahead.

Timothy Arcuri: Thanks a lot. Matt, so AI revenue was supposed to be I think $400 million this year, it’s actually going to exit at $200 million a quarter. So, it’s going to — it’s, obviously, going to be higher than $400 million for the year. Can you talk about how much of whatever the number will be for the year? Probably $500 million or $550 million something like that I would think. How much of that is going to be custom ASIC? And then next year, you said that AI would be greater than $800 million. Obviously, it’s going to be quite a bit greater than $800 million. Can you maybe update that number and give us an idea of how much of that’s going to be custom ASIC? I’m guessing $150 million, something like that, but I’m wondering if you can give us some more milepost there. Thanks.

Matt Murphy: Yeah. Hey, thanks, Tim. Yes. So I think, very encouraged by the demand trajectory upwards on the AI segment for us. Exiting the year at $200 million run rate, that is still mostly driven by the electro-optics platform, the DSPs, TIAs, and drivers at 800-gig. There is probably going to be a little contribution even in the fourth quarter from custom silicon. But that really ramps up more meaningfully next year. But we look at this as just a very positive sign that a quarter ago when we did our — made our best estimates as to the opportunity in front of us, the fact that exiting the year will be at next year’s run rate is very positive. So think of it as this year mostly electro-optics, that’s going grow again next year, obviously.

And then you need to layer on top a more meaningful ramp in custom silicon. But at this point, demand is so far up into the right, it’s actually hard for us to put an exact number or give you a refined number on next year, other than it’s going to be obviously bigger than we said the last time around.

Timothy Arcuri: Right. I guess, just — but is the — so there’s obviously this big surge happening during the back half of the year. But if you took the AI piece, does it continue at that sort of linear rates through the year, or does it sort of flatten off as you kind of go out through next year? Just trying to shape that. Thanks.

Matt Murphy: Yeah. I think it’s — well, I think the way you should think about it is, in Q4, we’re already at $200 million. It’s going to be at a higher run rate throughout fiscal ’25 each quarter. So, it’s going to keep growing on the optics side, and then you’re going to layer in custom silicon on top. So, we’re not — we’re certainly not saying it’s going to flatline at that level. We’re just saying it’s coming a lot faster, demand has been a lot better, supply chain team in Marvell is doing a great job to source the components and the capability that we need. So, I think it’s a great setup for next year relative to the AI revenue.

Timothy Arcuri: Great, Matt. Thank you so much.

Matt Murphy: Thanks, Tim.

Operator: Your next question is from Blayne Curtis with Barclays. Please go ahead.

Blayne Curtis: Hey, guys, thanks for letting me ask the question. I wanted to ask, it’s either Matt or Willem, I guess, on the gross margin. Can you just remind us what the headwinds are that you expect to resolve in Q4? Because I guess storage is taking longer, but I think the gross margin in electro-optics are quite good, so you would think that would be a tailwind. So, could you just walk us through the puts and takes on the gross margin guide, that would be helpful.

Willem Meintjes: Yeah, thanks, Blayne. Yes, certainly the optics is a tailwind. And then in addition to that, we’ve signaled that wireless carrier is really stepping down in the fourth quarter and consumer is also really stepping down. So, the combination of those things. And then in addition, our cost structure for our products is really improved. And the overhead on manufacturing and we see that benefit, it’s really starting to flow through more significantly in the fourth quarter. So, storage certainly is a headwind for us as that recovery is pushed out.

Blayne Curtis: Okay. Thank you.

Operator: The next question is from Matt Ramsay with TD Cowen. Please go ahead.