Marvell Technology, Inc. (NASDAQ:MRVL) Q4 2023 Earnings Call Transcript

Marvell Technology, Inc. (NASDAQ:MRVL) Q4 2023 Earnings Call Transcript March 2, 2023

Operator: Good afternoon, and welcome to Marvell Technology’s Fourth Quarter and Fiscal Year 2023 Earnings Conference Call. All participants will be in listen-only mode. After today’s presentation, there will be an opportunity to ask questions. And please note that this event is being recorded today. I would now like to turn the conference over to Mr. Ashish Saran, Senior Vice President of Investor Relations. Please, go ahead, sir.

Ashish Saran: Thank you, and good afternoon, everyone. Welcome to Marvell’s fourth quarter and fiscal year 2023 earnings call. Joining me today are Matt Murphy, Marvell’s President and CEO; and Willem Meintjes, our new 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 measure is available in the Investor Relations section of our website. With that, I’ll turn the call over to Matt for his comments on our performance. Matt?

Matt Murphy: Thanks, Ashish, and good afternoon, everyone. Let me start by welcoming Willem, who is participating today in his first Marvell earnings call since being named CFO in January. Having previously served as Marvell’s Chief Accounting Officer and Treasurer since 2018, Willem has deep institutional knowledge of our company and our end markets, which has helped him seamlessly transition into his new role. I look forward to partnering with him, as we continue to execute on the many opportunities in front of us. Turning to our business results for the fourth quarter of fiscal 2023. Revenue was $1.42 billion, growing 6% year-over-year, above the midpoint of guidance, with better-than-expected results from our data center end market.

Sequentially, as our customers dealt with a broad-based inventory correction, revenue declined by 8%, with the majority of the reduction coming from storage products within our data center end market. The rest of our end markets held up relatively well in a worsening macroeconomic environment. Revenue grew sequentially in carrier, consumer and auto industrial and declined slightly in enterprise networking. Looking ahead to the first quarter, the inventory correction that we described last quarter has continued to impact near-term demand, along with typical seasonality for some of our products. As a result, at the midpoint of guidance, we are expecting consolidated revenue to decline by 8% sequentially and 10% year-over-year. In addition, coming out of the supply crunch, broadening inventory corrections are creating an unusual revenue mix.

In the first quarter, we expect storage to decline further and inventory correction to spread to a number of additional areas I will discuss later. At the same time, we are forecasting very strong sequential growth in revenue from 5G and a number of custom ASICs, but these have gross margins well below Marvell’s corporate average. As a result, we expect a challenging gross margin outlook for the next few quarters. However, we are confident that once we emerge from the inventory digestion phase into a more normalized environment, we will be well positioned for our gross margins to recover. Willem will discuss our expectations in his prepared remarks. Let me move on now to discussing our end markets, starting with data center. In our data center end market, revenue for the fourth quarter was $498 million, declining 13% year-over-year and 21% sequentially.

Revenue was higher than anticipated, driven by better-than-expected results, primarily from our PAM DSPs and data center switches. As expected, our storage business was responsible for the bulk of the overall sequential decline in our data center revenue. Our results reflect the deceleration in the data center end market and the beginning of efforts by our customers to adjust their inventory to respond to a more challenging market conditions. We are expecting this trend to continue and are projecting lower demand to impact multiple data center products. As a result, we expect revenue in the first quarter from our data center end market to decline in the mid-teens sequentially on a percentage basis. We project data center storage to decline again sequentially in the first quarter across HDD, SSD and fiber channel and also expect to see inventory adjustments to a lesser degree, broadly impact the rest of our data center products.

Slowdown in spending signaled this year by multiple large data center customers is also impacting the timing of the ramp of our cloud optimized design wins. Our key design win projects remain intact, but the start of production for some of these programs is being delayed. As a result, the revenue ramp has shifted out by a couple of quarters compared to prior projections. Our lifetime revenue expectations from these design wins remain in the same range as previously communicated. While we work through the near-term dynamics in the data center, we remain confident in the growth outlook for this end market. We are seeing data center customers prioritizing key growth areas such as AI and ML with potentially much larger investment over the next few years.

Our relationship with Tier 1 cloud customers has continued to deepen as we engage with their architects on helping solve their most pressing challenges in their next-generation data centers with optimized customer specific solutions. One key example is the collaboration we announced with Amazon Web Services intended to enable cloud-first silicon design, extending the long-standing relationship between our companies. Marvell is a strategic supplier to AWS, delivering cloud optimized silicon that helps meet the infrastructure needs of AWS customers, including the delivery of electro-optics, networking, security, storage and custom design solutions addressing multiple critical applications. We believe Marvell’s leadership in essential silicon technologies helps AWS push the boundaries of data center performance essential for driving their long-term growth.

Earlier today, we announced our new Nova optical DSPs and Teralynx 10 switches for next-generation data center networks. Nova is the first commercially available PAM4 optical DSP to provide 200 gig per wavelength, twice the throughput of existing solutions over the same physical fiber. This breakthrough made possible by a significant improvement in electro-optics technology enables the industry’s first 1.6 terabits per second pluggable optical modules. These modules provide twice the bandwidth in a physical package similar to existing solutions and are essential for the full deployment of 51.2T switches within the size and thermal density constraints of data centers. The higher performance enabled by this new 200 gig, 5-nanometer PAM DSP helps to extend the lead in electro-optics Inphi established and driving the market from 25-gig NRZ, 50-gig PAM to 100-gig PAM.

The Nova platform provides a complete 1.6T solution, including DSPs, TIAs and drivers to the optical module ecosystem, reinforcing our expectations that pluggables will continue to remain the backbone of high-speed optical networking within data centers for the foreseeable future. Teralynx 10, a 5-nanometer programmable 51.2 terabit per second solution marks the latest in a series of cloud-optimized, low-latency, high bandwidth switches designed for use in leaf-and-spine architectures. The switch was designing close collaboration with leading cloud customers and Teralynx 10 together with Nova, creates a full platform to enable the next leap in bandwidth for cloud data centers. This is a tangible realization of the benefit of combining Marvell, Inphi and Innovium into a single entity focused on data infrastructure.

This combination of 51.2T switches with 1.6T optics enables a quadrupling in bandwidth versus existing solutions. This significant breakthrough in capacity at a lower power and cost per bit will be a compelling TCO driver for customers to viably upgrade their networks to support the large increase in bandwidth they need for AI and other applications. For customers, the co-deployment of Nova-based pluggable modules and Teralynx 10 switches should reduce their risk and accelerate time-to-market. And when combined with Marvell’s extensive verification and interoperability testing should also minimize their work in transitioning to a new technology. Turning to our carrier infrastructure end market. Revenue for the fourth quarter was $275 million, growing 14% year-over-year and 1% sequentially.

Marvell’s wireless and wired businesses drove strong year-on-year growth. We saw a strong demand for our wireless products as 5G adoption continue to expand. Our wired business benefited from carrier backbone bandwidth upgrades that accelerated during the pandemic. At Mobile World Congress, we announced our next-generation 5-nanometer OCTEON Fusion 10 baseband processor. This customizable wireless platform has been adopted by leading base station OEMs to provide comprehensive, in-line layer 1 acceleration. This new processor, along with our previously announced OCTEON 10 DPU provides a complete processing platform for 5G baseband, transport, and massive MIMO. At MWC, we continue to see strong interest from multiple customers and partners for our latest generation of 5G products for both conventional and cloud-based architectures.

Moving on to our outlook for the next quarter. For the first quarter of fiscal 2024, we are expecting significant growth in our wireless business with revenue projected to increase by approximately 25% sequentially driven by 5 G deployments in multiple geographies and our customer-specific product ramps. On the other hand, after an extended period of strong growth in our wired business, we are expecting revenue to decline in the double digits sequentially on a percentage basis. As a result, for the first quarter of fiscal 2024, we expect revenue from our overall carrier end market to grow in the mid-single digits sequentially in the mid-teens year-over-year on a percentage basis. Moving on to our enterprise networking end market. Revenue for the fourth quarter was $366 million, with a strong 39% year-over-year growth, driven primarily by higher content and growing share of our merchant products, which drove the vast majority of our revenue in this end market in fiscal 2023.

Sequentially, our revenue declined by 3% as we started to decrease channel inventory of our run rate merchant products, including further reductions in China. This was partially offset by growth in custom ASICs. Looking ahead to the first quarter of fiscal 2024, we are planning for additional reduction in channel and customer inventory of our merchant products and enterprise networking. However, we expect a strong ramp in custom ASICs to partially offset this decline. As a result, we project our overall enterprise networking revenue to decline in the high single-digits sequentially, while year-over-year growth is projected to remain strong in the high teens on a percentage basis. Turning to our automotive and industrial end markets. Revenue in the fourth quarter grew 25% year-over-year to $99 million.

Sequential revenue growth accelerated to 18% as supply improved. Looking to the first quarter of fiscal 2024, we project continued sequential growth from our auto business to be more than offset by a decline in our industrial business. Year-over-year, we expect our auto business to continue strong growth of over 30%, offset by a decline from our industrial business. As a result for our overall auto and industrial end market, we expect revenue to decline approximately 10% sequentially and be up €“ flat to up slightly year-over-year. Moving on to our consumer end market. Revenue for the fourth quarter was $180 million, declining 3% year-over-year and growing 1% sequentially. Revenue from our consumer SSD controllers continue to grow, while we saw declines in legacy printer ASICs and HDD controllers.

Looking ahead to the first quarter, which tends to be seasonally softer in the consumer end market, we are forecasting revenue to decline sequentially by approximately 10%. In summary, fiscal 2023 was a very strong year for Marvell, with revenue growing 33% year-over-year to $5.9 billion, well above the industry and our long-term target model. Revenue from cloud grew approximately 50% year-over-year. Annual revenue from 5G crossed over $600 million and auto crossed over $200 million, important milestones for both end markets. During fiscal 2023, the first full year following the acquisition of Innovium, we drove a significant ramp in our data center switch revenue as a combined team. The Inphi portfolio continued to fire on all cylinders, with a strong ramp of our 800-gig PAM4 DSPs and 400ZR data center interconnect products.

We completed the acquisition of Tanzanite to accelerate our organic CXL development. Our enterprise networking business had a tremendous year with revenue growing 51% year-over-year, reflecting the significant share and content gains we have driven over the last two years. Through this period of rapid growth, we scaled the company in a thoughtful manner with non-GAAP OpEx growing 20% year-over-year, well below the 33% growth in revenue. Following another strong year for design wins, our opportunity funnel continues to expand with many large sockets that we believe Marvell is well positioned to win. While the broader semiconductor industry, including Marvell, is dealing with near-term headwinds, we are confident in our ability to weather this cycle and continue to execute over the long-term.

We remain laser focused on capital allocation and improving efficiency. We are evaluating our customers’ latest plans, assessing our level of investment across the portfolio and redirecting resources to our best opportunities. As a result, we expect to reduce our OpEx in the second half of fiscal 2024. Over the long-term, our prospects remain compelling. We have conviction in our plan, and we will continue to invest to support our strategy. As fiscal 2024 progresses, we expect the headwinds from inventory digestion will begin to subside, and mix will improve as demand patterns normalize. While storage has been impacted the most from inventory digestion, we are encouraged to see that customers have started to reduce their finished goods stock, clearing the path for a recovery.

Revenue from OEM customers in China has declined to less than 10% of total company revenue. But as China reopens, we expect demand will recover and become a tailwind. In fiscal 2024, we expect data center switching and 400ZR will continue to grow, and revenue from our cloud optimized silicon programs start to layer in. In addition, we project our 5G and auto end markets will continue to grow in fiscal 2024. As a result, for overall Marvell, we expect revenue to start growing in the second quarter and gather momentum in the second half of the fiscal year. Longer-term, we are confident that our focus on data infrastructure and exposure to diversified end markets with secular growth position us well for the future. In our wireless end market, we expect content gains to layer in as 5G adoption continues worldwide.

Our automotive opportunity continues to grow, and we see a path to growing revenue to over $500 million annually over the next few years. In data center, we expect to open up new revenue streams from emerging CXL and AEC opportunities. We expect generative AI to drive a massive transformation in data center architecture. We see a bigger opportunity for cloud optimized silicon for custom compute, trend we had extensively discussed over the last couple of years. In addition to compute, the level of scaling in these generative models requires a significant innovation and technology leadership in networking infrastructure to interconnect AI supercomputers. This requires ultra-high bandwidth links with low latency and sufficient reach, minimizing energy expended to move the massive amounts of data in these platforms is another important criteria.

We believe these requirements are best met by high-speed optical connections. Last year, we launched the industry’s first 800 gig PAM DSP and saw a huge ramp driven almost exclusively by AI applications. Our PAM DSP revenue from AI in fiscal 2023, more than quadrupled from the prior year. As AI models continue to grow in complexity, we expect that they will require more and more low-latency bandwidth. Earlier today, we announced the industry’s first 1.6 terabit per second PAM platform, enabling a further doubling of bandwidth within the AI cluster. As investment in AI accelerates, we see this as a new growth engine for our electro-optics portfolio. As you’ve often heard me say, our employees are Marvell’s greatest resource, the culture they have built is the foundation of our ongoing success.

In January, Glassdoor named Marvell as one of the top 100 Best Places to Work in the US for 2023. We are in the second highest ranking among semiconductor companies. In February, we were honored to receive the Great Place to Work certification. These awards are a testament to our culture and dedication to creating a collaborative, compassionate and respectful workplace, while remaining focused on growth and execution. Thank our entire team for their contributions to Marvell to enable us to develop leading-edge essential technology that helps power the world’s data infrastructure. With that, I’ll 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 fiscal year 2023 results. Marvell’s revenue grew significantly by 33% year-on-year to a record $5.92 billion. GAAP gross margin was 50.5% and GAAP loss per diluted share was $0.19. Our non-GAAP gross margin was 64.5%. Our GAAP operating margin was 4%. Non-GAAP operating margin expanded to 35.5%. Non-GAAP earnings per diluted share grew 35% year-on-year to $2.12. We returned $319 million to shareholders through dividends and buybacks. Moving on to our financial results for the fourth quarter. Revenue in the fourth quarter was $1.419 billion, exceeding the midpoint of our guidance, growing 6% year-over-year and declining 8% sequentially.

Data center was our largest end market driving 35% of our total revenue. Enterprise networking was the next largest, with 26% of total revenue, followed by carrier infrastructure at 19%, consumer at 13% and auto industrial at 7%. GAAP gross margin was 47.5%. Non-GAAP gross margin was 63.5%, 50 basis points below forecast, primarily due to a change in revenue mix within certain end markets compared to our guidance. GAAP operating expenses were $650 million, including share-based compensation, amortization of acquired intangible assets, legal settlements and acquisition related costs. Non-GAAP operating expenses were $431 million. GAAP operating margin was 1.6%. Non-GAAP operating margin was 33.1%. For the fourth quarter, GAAP loss per diluted share was $0.02.

Non-GAAP income per diluted share was $0.46 at the midpoint of guidance. Now turning to our balance sheet and cash flow. During the quarter, cash flow from operations was $352 million. This included $56 million in payments for long-term capacity agreements. In fiscal 2023, payments for long-term capacity totaled $252 million. Looking ahead to fiscal 2024, we are currently anticipating significantly lower payments for capacity and a much reduced headwind to operating cash flow. Inventory at the end of the fourth quarter was $1.07 billion, growing by $111 million sequentially. As we indicated in our prior call, we expected inventory to grow in the fourth quarter to support upcoming product ramps. Looking ahead to the first quarter, we expect inventory to start to come down and be a tailwind to operating cash flow over the year.

We returned $51 million to shareholders through cash dividends. As of the end of the fourth fiscal quarter, our cash and cash equivalents were $911 million, growing by $188 million from the prior quarter. Our total debt was $4.5 billion. Our gross debt-to-EBITDA ratio was 1.87 times and net debt-to-EBITDA ratio was 1.49 times. $500 million of our total debt is due in June 2023. We are currently planning on paying this off using our cash balance and free cash flow, which we expect to improve our gross leverage. Turning to our guidance for the first quarter of fiscal 2024. We are forecasting revenue to be in the range of $1 3 billion, plus or minus 5%. We expect our GAAP gross margin will be in the range of 44.1% to 46.1%. We project our non-GAAP gross margin will be approximately 60%.

This guidance takes into account the adverse revenue mix we are expecting in the first quarter, and we currently expect mix will remain challenging for a few quarters. Once we get through this period of inventory correction, combined with cost improvement actions underway, we expect non-GAAP gross margin to get closer to the low end of our target range by the fourth quarter. We project our GAAP operating expenses to be approximately $687 million. We anticipate our non-GAAP operating expenses to be approximately $460 million. This forecast includes a step-up from the prior quarter due to typical seasonality in payroll taxes and employee salary merit increases. As Matt discussed, we intend to continue to invest prudently in our long-term growth initiatives while further improving efficiency and optimizing capital deployment.

Altogether, we expect to reduce our non-GAAP operating expense run rate by approximately $15 million a quarter in the second half of the year. We expect the full reduction to be achieved in the fourth quarter. Other income and expense, including interest on our debt is expected to be approximately $49 million. For the first quarter, we expect a non-GAAP tax rate of 7%. We expect our basic weighted average shares outstanding will be 858 million, and our diluted weighted average shares outstanding will be 863 million. As a result, we anticipate GAAP loss per share in the range of $0.12 to $0.20 per share. We expect non-GAAP income per diluted share in the range of $0.24 to $0.34. 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. And our first question will come from Ross Seymore with Deutsche Bank. Please go ahead.

Ross Seymore: Hi guys. Thanks for letting me ask a question. Matt, I just wanted to ask about the general business conditions. In the last quarter, you talked about — in the October quarter, you said that things were weakening towards the end of the quarter and then throughout the January quarter. Can you talk about the linearity of demand, whether it be by end markets and/or geographies as you go through the end of the January quarter and thus far into the April quarter?

Matt Murphy: Yes. Thanks Ross for the question. We’ve seen the business conditions continue to weaken, I’d say, in the last couple of months, the I’d say the breadth and some of the steepness of the decline. We’ve continued to see — we had thought that storage was going to kind of bottom out. Last quarter, it’s down again. There are some green shoots there just given what we see in terms of end customer stock levels coming down, and we believe that throughout the year, that’s going to improve. But I’d say just, generally, in the storage area broadly and then in the data center, as you can see from our guidance. not only in storage, but a little bit broader. The inventory correction is still going on. At the same time, I think what’s happened in the wireless business in 5G, that’s continued to be very resilient and growing, which is a positive as automotive as well continues to be very strong for us, and we see that as a growing business again this year.

That’s on a great upward trajectory. So, a lot of moving pieces, Ross, but I’d say the things that were weaker a quarter ago have continued to weaken a little bit more. And then the areas where we had some optimism, those have continued to do better. It’s really interesting how these various end markets are kind of moving at different times. But when you add it all up, basically, and you look out over the next few quarters, we do see growth in the second quarter and then as a result of really what we believe will be the inventory digestion and the normalization in the back half plus continued strength in things like 5G and automotive and then also our cloud optimized ramp. And in theory, some of the China business should come back, we’re starting to be optimistic about the second half relative to the recovery.

So that’s some of the moving pieces, and I agree, it’s — in the infrastructure business, this doesn’t move up and down typically as much as, say, a consumer business. So it started in October. We’re still going through the journey here in the January and April quarters, and then we see a recovery in the second half.

Ross Seymore: Thank you.

Operator: And our next question will come from Vivek Arya with Bank of America. Please go ahead.

Vivek Arya: Thanks for taking my question. Matt, I’m curious what second half recovery looks like? Is there the potential to get back to this kind of $1.5-ish billion quarterly run rate, you guys were at. And then as part of that, I’m also curious to know what should be the updated view $400 million and $800 million in cloud-optimized silicon. And the one thing that I think Willem mentioned that you will only be able to get to the lower end of the gross margin range. I’m a little confused that if there is the recovery, then why would you be at the lower end of the gross margin range. So kind of related questions. Thank you.