Ladies and gentlemen, and welcome to the call to discuss Marvell's acquisition of Afrancia. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session and instructions on how to participate will follow at that time. As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Mr.
Ashish Saran, Vice President of Investor Relations. Sir, you may begin.
Good morning, everyone, and thank you for joining
by Matt Murphy, President and CEO of Marvell Gene Hu, our CFO and Rangi Bhushan, our Chief Strategy Officer. Our press release and supplemental information on the transaction are available in the Investor Relations section of our website at www.marvell.com. This conference call is being webcast live and a recording will be available via telephone playback and also archived in the Investors section of our website. As a reminder, today's call will include forward looking statements regarding our future business performance and the expected timing and completion of the proposed transaction as well as the financial impact of Marvell. These statements include risks and uncertainties that could cause our actual results to differ materially from the statements made on this call.
Please refer to our press releases today and our recent filings with the SEC for information on specific risk factors. Comments made during today's call are primarily referred to non GAAP financial measures. With that, I will now turn the call over to Matt for his comments on our acquisition of Aquantia.
Great. Thank you, Ashish, and good morning, everyone, and thanks for joining us today. I'm pleased to announce that Marvell and Aquantia have signed a definitive agreement under which Marvell will acquire all outstanding shares of Aquantia in an all cash transaction. As we outlined in last October's Investor Day, the data economy is putting huge demands on network infrastructure, creating a tremendous market opportunity. And as a company that develops semiconductor solutions that move, store, process and secure the world's data faster and more reliably than anyone else, Marvell aims to be a leading supplier in the growing infrastructure market.
So whether we are transforming in car networks to support ADAS and autonomous driving or upgrading enterprise data centers and campuses to handle gigabits of data traffic, this complementary and highly synergistic transaction will broaden our Ethernet PHY portfolio and increase the scale and breadth of Marvell's networking business. In the automotive market, this acquisition accelerates Marvell's vision for the future of in car networking. Marvell and Aquantia have both been first to market with high speed Ethernet solutions for in car networks. Marvell was first to market with 1 gigabit Ethernet PHYs and secure switches, which have already secured multiple design wins with Tier 1 worldwide OEMs and OEMs. Aquantia was first to market with multi gig PHYs ranging from 2.5 gigabit to 10 gigabit speeds over copper.
This combination will extend Marvell's automotive portfolio enabling us to deliver an end to end connectivity solution for end car networks. As an example, both Marvell and Aquantia's Ethernet solutions are integrated into NVIDIA's Pegasus compute platform for self driving cars. This market is just starting to take off with demand for automotive Ethernet ports expected to grow dramatically at a 62% compounded annual growth rate to over 350,000,000 ports by 2022. As cars adopt Ethernet today to reflect legacy communication lengths, high end models will have Ethernet switch and PHY content in the low tens of dollars. But as the automotive industry introduces level 4 and 5 autonomous drive features, we expect the total content to exceed $100 per car.
Moving on to networking infrastructure. As I mentioned, the 5 product lines for both companies are highly complementary with very limited overlap. Marvell has been highly successful in 1 gigabit speeds and below with our copper PHY products and at higher speeds in the data center with our optical solutions. Combined with Aquantia's multi gig PHY, we will have a comprehensive portfolio. And with our Ethernet switch and processor products, customers across the infrastructure market will benefit from our full Ethernet platform.
From a
go to market perspective, Marvell possesses a much broader customer base and deeper resources to bring Aquantia's products to market. This is enabled by our global sales force, operational scale and customer support, making this a winning combination for our customers. Let me close by saying we have deep respect for Aquantia's engineering team and the progress they've made in advancing state of the art copper PHY technology. They were a pioneer in driving the adoption of multi gig copper PHYs, which can support multiple speeds in a single device. They have earned a reputation for excellence in collaboration and strong execution, all of which are a great fit with Marvell's culture.
We expect our combined organizations to create an even stronger mixed signal design team with highly differentiated skills and proven capabilities. I look forward to us joining forces and welcoming the Aquantia team into Marvell. With that, I'll now turn the call over to Jean.
Thanks, Matt. Under the terms of definitive agreement, Marvell will pay Aquantia's shareholders $13.25 per share in cash. This represents approximately $452,000,000 in enterprise value after adjusting for net cash on Aquantia's balance sheet. Barbell intends to finance the transaction with cash on hand and draws from existing credit facility. The transaction is now subject to any financing condition and is expected to close by the end of calendar 2019, subject to regulatory approval as well as to the customary closing conditions, including approval by our franchise shareholders.
The transaction presents significant cost synergies of approximately $40,000,000 which we expect to complete within 12 months of closing the transaction. We expect this deal to be immediately accretive to Marvell's non GAAP earnings per share after closing. To summarize, Aquantia represents a compelling addition to our networking portfolio and accelerating our vision to become an
Our first question comes from Ross Seymore with Deutsche Bank. Your line is now open.
Hi, guys. Thanks for letting me ask a question. I guess the first question, Matt and Jean, is I cover Aquantia as well. And the revenue has been relatively volatile.
Some of that's very much
end market related, but nonetheless volatile and you saw that in their results this morning. Can you talk a little bit about that volatility? What your assumptions are for the sustainable revenue growth rate, especially within that accretive assertion that you're making for this company?
Sure. Yes. Hey, Ross, it's Matt. I'll start and then I'll hand it to Gene. So certainly, they've seen volatility.
I mean, obviously, it's a smaller company. So their movements are going
to be exacerbated just based on
their size. But I think what they're seeing is what we've been seeing, right, which is just overall volatility in the market relative to the trends that we've discussed as Marvell. Jean, maybe you want to give your view on that as well?
Yes. Ross, as you are probably aware, right, it's their revenue has been impacted by excess inventory at their customers. And also in addition, just consistent with all the industry commentary, the market demand has been really soft. So they do get impacted by both currently. So we do think the kind of position will continue to persist in next quarter.
Any recovery just consistent with the overall market, is likely to be the second half of the year. Actually, this is really we view it as very temporary condition. We think once we get through the period of inventory adjustment, their revenue should be go back to more like a normalized $100,000,000 a year run rate. And going beyond that, we do expect this business to continue to drive double digit growth going forward. So as Matt mentioned earlier, right, it's very strategic and also there's long term growth.
In addition, we also drive about $40,000,000 annualized synergy within 12 months of the closing. So when you add all those together, it's strategically financially both are very compelling to us.
And one quick one on the synergies, maybe for Eugene, is could you just give us a rough idea of how that's splitting? By my math Aquantia only has, at least on a pro form a basis, roughly $80,000,000 in OpEx that they're running at. So I assume there's cost coming out of maybe COGS, but any color there would be helpful.
Yes. The primary synergy driver is really operating spend because it's a very small company, right? The COGS side is very small. We will drive the synergy there, but relatively small. I think the number one driver is really SG and A cost, the redundant duplication between 2 companies, the facility, the public company cost, those are quite significant.
Secondly, on the R and D side, even though our portfolio is really complementary, but both companies do spend similar spending in like process technology, packaging technology development. So we do see cost synergy there too. But the primary driver will be SG and A, supporting function, all those public company costs.
Got it. Thank you and congrats.
Thanks. Thank you. And our next question comes from Karl Ackerman with Cowen. Your line is now open.
Hi, Manoj, thanks for letting me ask the question.
I wanted to focus
on Vismet. I think just last quarter you announced being designed with 16 different car manufacturers for multi gigabit Ethernet under Vivid PHY and switch. So perhaps you could discuss what Aquantia complements your own offering in automotive Ethernet and how you can leverage their portfolio to further address connectivity challenges and requirements as higher levels of ADAS are adopted over the next few years?
Sure. Carlo, it's Matt. So I'll start off on this one. If you look going back over the last few years, we started off in 2017, talking about it, our analysts say, hey, we thought that there would be strong potential in the automotive market to apply our Ethernet technology. And as we've made a lot of progress there, including as you mentioned last quarter, we updated the financial community.
We have now secured design wins across 16 different car manufacturers for our gigabit solutions. Clearly, this market has got a lot of momentum and we've got a very strong position. I think what we've found is we've engaged very deeply with these customers on our current solutions and looking at their overall architecture and roadmap, it was clear that the multi gig links in the vehicle were also accelerating at a very significant rate. And so we think both of these are going to coexist, especially when you move up to level 4 and level 5 autonomous driving. And so there's an end to end solution that we're now going to be able to provide.
Maybe I'll let Raju comment a little bit more on how you see that developing.
Yes. So as the networking architecture of the cars are changing, it is going to be not only the 100 megabit and gigabit connectivity going towards the components in the ECU side, but also the high bandwidth connectivity needed especially in the cameras and in the backbone. So we Marvell has a very good position and when it comes to 100 megabit and gigabit connectivity in the PHY side and then we have switches which goes to multi gig all the way to 10 gigabit connectivity. So, Accenture has a good position in the automotive file, which is T1, 2.5 gig, 5 gig and 10 gig. And with the combination of these things, we think it's very complementary and it gives us a very good position all the way from 100 megabit to 10 gigabit, not only the PHY, but the switches as well.
So it's very complementary solution there.
I appreciate that. Perhaps just as a quick follow-up question, just more of a housekeeping item. Was there a competitive bid process for Aquantia? Thank you.
Well, as everybody always anxiously awaits, there's always going to be a proxy filing. So when that comes out, you can see
the what
went on. But basically, we've been interested in the company for some time. We've known them. We've respected them. And over the last few months, we've been able to put together this transaction, which we're very excited about.
But the details behind the process will be disclosed in a timely manner as soon as we get those filings done.
Next question, please.
Thank you. Our next question comes from John Pitzer with Credit Suisse. Your line is now open.
Yes. Good morning guys. Thanks for letting me ask the question. Matt, I wonder if you can talk a little bit about how the automotive Ethernet plays into the long term CAGR target for the company. If my memory is certainly correct, I think the 6 to 8 excluded Auto Ethernet and that's kind of been viewed as icing on the cake.
And I know Aquant is still a relatively small acquisition. As you're putting more of these pieces together, I'd be kind of curious as to how you think that might impact the overall long term growth rate of the company. Yes.
Hey, John. No, so I think what we've said is, if you go back, your memory is pretty good here. So in 2017, we excluded automotive Ethernet from our SAM at our Analyst Day. By last fall, when we had our update in 2018, we included automotive either that in the SAM, albeit it was a small number today growing at a very fast rate off a small base. So it is in the number.
What I would say though is that to the extent that this market really develops and we're successful on our own products and monetizing these design wins we've got, plus putting together this total solution. I would say that this would give us the ability to push our growth rate to the upper end of the range, if you will, But it's not incremental new market that's on top of anything we've communicated so far. So we continue to be bullish on automotive as evidenced by the fact that we have conviction in doing this deal with Aquantia.
Appreciate it. And then I guess as my follow-up, notwithstanding this being an all cash deal, you guys still have a pretty solid cash position. More importantly, you've got a business model that generates a lot of cut cash. How do we think about sort of the buyback and use of the cash outside of this deal?
Yes. Hi, John. As you know, this deal is very consistent with our capital allocation approach. We want to focus on investing in the area we can drive a future longer term profitable growth. So in addition, we certainly generated excess cash, we'll return cash to shareholders.
We think it will draw very minimum from our credit facility and we'll set a priority to reduce our debt, but additional cash, if we have excess cash, we'll continue to do the buyback. So it's in that order of investing, then return cash to shareholders.
Thanks, guys.
Thank you.
Thank you. And our next question comes from Srini Pajjuri with Macquarie. Your line is now open.
Thank you. Good morning, guys. Matt, maybe it will be helpful to give us a little bit of a perspective on where we are in terms of the e commet adaption. I keep hearing about serial link as well as the competitor. And then also, if you could touch upon the competitive landscape within Ethernet and given the combination looks like you're going to be pretty solidly positioned, but just want to hear your thoughts on your development pipeline and the competitive landscape.
Sure, Srini. Great questions. So I think on the first one, the today Ethernet and serial link are actually very complementary. They're addressing 2 different solutions with inside the vehicle. And by the way, over time, both of those are going to grow, okay?
However,
I think as
multi gig Ethernet
becomes available and we can show our solutions. I think over time, probably some of that serial link SAM converges with multi gig. So I would think of it as the lower frequency links, the historical CAN, LIN, FlexRay are we're really replacing today with 100 meg and 1 gig going up to multi gig. It's a different story. Ragget, why don't you add a few cents on it?
Yes. So We'll get to the competition.
Yes. So one of the things key thing in the automotive connected car is the security, right? And the standard of the security, which is already established in Ethernet, which is MACsec, it is required in connecting devices within the car. And it's established well known, well established, well tested standard. On top of that, the T1 standard, which is being developed, I mean, which is a newer standard, which will bring this make the Ethernet very competitive inside car and LVDS will actually accelerate the adoption of Ethernet even higher than historically.
So as the data movement requirements are increasing and the security requirement increasing and the Q1 standard is being rolled out, it will do the more adoption of Ethernet within the car.
And I think just on the competitive landscape, there's you should assume this is a potential potentially large market as evidenced by the SAM that we gave you. So there are going to be traditional Ethernet companies that are going to try to get their fair share. Obviously, we're very confident in our position, but it is going to be a competitive and large market with a number of players.
Thanks, Matt. Just one other quick follow-up. On the regulatory approvals, could you give us an idea where all do you need the approvals for the deal to go through?
Sure. So the answer is we need to go through HSR as well as through CFIUS. And that's comprehended in our projected closing of this transaction by the end of calendar 2019.
Got it. Thank you. Good luck.
Thank you.
Thank you. And our next question comes from Harlan Sur with JPMorgan. Your line is now open.
Good morning and congratulations on the acquisition. I don't know the Aquantia team in detail, I apologize. But following them at a high level, it seems that many of the areas that you were focused on, right, part of the Intel server platform, multi gig PHY technology and enterprise and automotive Ethernet were all areas that Marvell team was really focused on and then seem to be doing well. So is there something on the technology and IP portfolio side that Aquantia brings to the table that Marvell doesn't have? It seems like the multi gig technology was a clear differentiator.
But again, even here, Marvell, I think, was also working on multi gig. So help us understand the differences between the two companies, especially on this multi gig PHY technology.
Sure. Yes. It's a great question, Harlan. So I think the first high level comment I would make is, if you just step back, although a lot of the coverage on Marvell as of late has been on 5 gs and our prospects there, and we're extremely excited about that in our processor business. Our networking business, right, which was really Marvell organic switches and flies has been doing extremely well, We've been growing that business double digits year over year on a multi quarter basis, notwithstanding the current overall macroeconomic slowdown.
So that business has done really well for us. And when you look at what comprises that business, it's a very broad product line of a number of Ethernet switches, 5 all the way from 100 megabit going up into the 10 gigabit range. So number of solutions in there. So we're number 2 in that market and one of the broadest suppliers. Aquantia really complements what we're doing specifically in the PHY area and specifically in multi gig.
And so when you look at their team and their technology and what they have and then you look at how that can work with our switches and for example in the enterprise and campus market fits very well there. And then in automotive, as we mentioned, we've been very strong in the 100 meg to gigabit range, plus we have switches there and we have switches actually that we can apply all the way up to 10 gig. And then again, they fit a very specific area for us in multi gig. So when you look at it, it's very complementary in both of those markets. And it really bolsters our position, quite frankly, in a very fast growing large business for us today, which is networking as well as a very promising emerging business, which is automotive.
Got it. Thank you for the insights there. And then as you mentioned, Marvell one of the key bright spots with the Marvell thesis has been that the networking technology, your business has been going at actually a very strong double digits year over year growth rate even with the slowdown here. Aquantia's revenues are down 40% year over year in the March quarter. I haven't seen their guidance, but looking at be down 20%, 30% year over year, maybe next couple of quarters.
I think, Jean, you talked about confidence in them getting back to sort of $100,000,000 type run rate. When do you expect this for the Quanta team? And what's going to be driving this snap back up as automotive is still a very small part of the overall business today?
Hi, Helen. I think when you look at their current revenue level, as I said earlier, there are 2 fundamental factors. The first is the excess inventory at large customers. Those things are going to correct itself in the next few quarters. Secondly, the soft end market demand.
I think that just consistent with all the other companies' commentary is that will take a while. It's not a near term correction. It's going to be second half or later this year. So we do feel confident when we look at the design, when they have the portfolio and the customer base. We know those customers really well.
So we think when it's normalized in the longer term, the $100,000,000 run rate should be very much consistent with the design win pipeline. Of course, excluding automotive, right? Automotive is very much a longer term play. So that's what we're looking at in the next year also. And going forward, the business has a strong momentum and the design win pipeline to drive double digit growth beyond that.
Thank you.
Thank you. And our next question comes from Timothy Arcuri with UBS. Your line is now open.
Thanks. I guess, Matt, the first question is sort of why now? Was there an impetus to do this now? Was the company coming for sale? Was there some kind of competitive process?
I know there's obviously, there'll be some details in the proxy, but I'm just kind of wondering if you can give us a sense of why now? Thanks.
Sure. I think it's 2 things. I think one is we ended the year feeling very good about Cavium and how that integration had gone and the stability on the team from that point of view and that operationally we were ready. I think we updated everybody. We actually did our ERP cut over and it was done.
So I think that gave us a lot of confidence that it was time to continue to look around. And then the second is, again, as I mentioned, I think it's been very clear as we've made progress in automotive that there's a huge opportunity there. And we kept getting customers asking us for these types of solutions and then we're looking at next generation roadmaps and it just became very clear that they had a very strong position there. So I think the combination of those two things, we've always said we're going to have a balance, right, as Gene mentioned, in investing in our own business, looking at complementary M and A to drive our growth. And we like this one because as I mentioned in an earlier question, it really it it was clear that this was a very important technology for us to have.
And as we got to know the team better, it's an outstanding team. Their engineering team is 1st rate. I think they'll fit in extremely well under the Marvell culture. And I think joining forces with these guys is going to create a very, very strong physical layer business for the company.
Great. Thanks. And then this is obviously not that large of a deal. So there's not much that can really go wrong. But was there something that you learned in the diligence of Cavium and things didn't at least initially sort
of end up the way
that you thought they would? So was there something that you learned in that process that maybe you brought to this one?
Yes, sure. I think, look, I think companies go through a lot of lessons learned M and A. We actually on our side, we really on a number of fronts documented those things and really put them in our playbook. So what went well, what didn't go well, what we did differently. And so yes, all those lessons learned, I think, have been comprehended as we have gone through this process.
And we'll obviously strive to get better at each and every one of these. And but as you mentioned, this one from just a size perspective is very manageable and relatively small. And since we know this business quite well. So we feel very confident in everything we've gone through to get to this point.
Perfect, Matt. Thanks so much.
Thank you. And our last question comes from Quinn Bolton with Needham and Company. Your line is now open.
Hi, guys. Thanks for taking my question. First, Matt, just on the transaction. Can you tell us, is there a no shop clause in the agreement and is there a breakup fee? And then on the business side, it seems like there's a pretty clear complementary fit between your Wi Fi 6 solutions and the multi gig PHYs from Aquantia.
And similarly, your multi gig switches in the enterprise and their multi gig PHYs. Is there any rework that would need to be done to pair up their PHYs with your Wi Fi or enterprise switch chips? Or can those be paired up immediately upon close?
Yes. So I'll answer the question about the breakup fees. Yes, there's a breakup fee. It's quite standard, and you will see from the filing of the merger agreement about it. I'll let Rajiv answer the other question.
So from the product interoperability point of view, it's all standard based products. So there is nothing special work needs to be done for kind of combining with our Wi Fi or any other technologies. We have seen some places already them in the design. And on the automotive side, it's very complementary. As you said, we have pretty strong position on 100 megabit, 1 gigabit type of connectivity, and they have a good position in 2.5 multi gig all the way to 10 gig on the PHY side.
And then our switches, as I said earlier, goes all the way to 10 gigabit in automotive, and they already have the interoperability with that.
Thank you. Thank you. Ladies and gentlemen, this does conclude our question and answer session for today and our conference for today. Thank you for your participation and you may all disconnect. Everyone have a great day.