Welcome, everyone, to this session. We're really delighted to have the team from Marvell, Willem Meintjes, the CFO, and Ashish Saran, Head of Investor Relations. I'm Vivek Arya from BofA Securities Semiconductor team, and, like in most sessions, I'll go through a list of my prepared questions, but if you have anything you'd like to bring up, please feel free to raise your hand, and a mic will be given, and, you know, you're more than welcome to ask your question. But with that, a very warm welcome to you, Willem and Ashish. Really appreciate you could join us at our conference. So maybe let's, you know, get things started at the top. Marvell recently reported the earnings, right?
Maybe, Willem, just give us kind of a state of the union. We have seen this sort of, you know, as people describe it, this tale of two cities. AI is awesome, legacy, not, not as much. So how are these crosscurrents playing out for Marvell now? And then how do you see them kind of trend through the rest of the year?
Maybe just baselining on the actual quarter. You know, we guided $1.15 billion.
Mm-hmm.
- and reported just slightly above $1.16. And that beat was really driven by data center and, and more particularly, optics. When we look at some of those other markets in enterprise and carrier, they were actually slightly below what we had contemplated in the guide and more than offset and strengthened data center and optics. So we've continued to see strength in data center and optics. And then looking ahead to the guide, you know, we guided slightly above where expectations were.
And again, that was really driven by, you know, the ramp in our custom program, that starting continued healthy demand for optics, and then a snapback in consumer where we had worked with our big customer there to really get through the inventory digestion that's sort of well understood in the gaming environment. But the bottom line is that, you know, more broadly, we indicated for the year, you know, we spoke about $1.5 billion of AI revenue for the full year.
You know, that was only a couple of months ago, and we've seen progress and actually expect that now to be higher, both on custom and on optics for the full year.
Yeah, maybe just to add a couple more things, just kind of to your comment on forward-looking. I mean, when we look at the growth we guided for Q2, it was call it 8% revenue growth at the midpoint. You know, we see that accelerating significantly in the back half of the year, both in Q3 and Q4 on a sequential basis, so we see a lot more growth. Again, primarily data center, but we do expect to see some recovery start in some of the businesses, enterprise and carrier as well, so, and as our automotive business, right? And as we go through that whole process, you will see us drive very strong operating leverage. You'll see some pretty nice expansion of margins as well as on EPS.
Excellent. So I'm sure we will come to everyone's favorite topic of AI soon enough, but, let's maybe get the other segments discussed first. So enterprise plus carrier plus auto industrial, right? I think you kind of guided them flattish going in, into Q2. What are the puts and takes in these different segments, and where do you see the recovery sort of, you know, happening first and then others maybe staying a little muted till next year?
Yeah. I'll start, and then, Ashish, you can jump in. But maybe let's just start with carrier. I think, you know, the end market clearly is going through a very significant correction on top of an inventory digestion period. So counterintuitively, what we're seeing there is that we've actually got a new design that we've actually started seeing orders for that we expect to ramp pretty in Q4. And so that gives us more confidence in that end market in terms of, you know, the first half being the bottom end and having visibility into the second half. The second one is enterprise.
And when we look at the commentary in the broader ecosystem, I think very encouraged by commentary where the end customer demand has started to return and that there's inventory being worked down. However, our customers are still sitting on quite a bit of inventory, and so, you know, we're being very conservative in terms of calling that recovery. And so clearly have seen the bottom and being in the first half and that sort of informed our guide, and then see a modest recovery. On auto industrial, really driven by automotive. I think, you know, our design wins initially was really towards the EV side, and we've seen that a very healthy ramp there.
But I think it's well understood that EV went through a little bit of a pause. But as we look into the back half, you know, we see that growth re-accelerating and more broader design wins that we have even in ICE vehicles, driving a nice set up for us to start growing again in the second half.
Yeah, I think it just comes down to the inventory, right? I think the demand signals are positive now, and that's what we've been waiting for. 'Cause the last few quarters, the demand's been coming down. So that stable is starting to grow. Now it's just a question of inventory. I mean, a perfect example is, you know, the consumer market, where it was confined to one customer. You clean it up, and the demand, the revenue snap back.
Yeah.
I think we just have to wait and see how that happens in these other markets.
Yeah.
But it, it will. I mean, at some point, you're gonna see switches and routers and base stations start to ship again at, you know, meaningful levels, and we will see that recovery in our revenue as well.
I think one thing is just pretty important to state is that we haven't seen any change in our market share or anything like that. I think we have good visibility, and there hasn't been any significant structural changes. It's really an inventory digestion period.
Yeah, in fact, if anything, in our wireless business, our market share is gonna go up with the 5G products. As you know, it's not just replacing with 5 nanometer our current generational product, which obviously is good, but we have a very large socket replacing an alternative solution, which starts ramping this year and becomes a lot more meaningful next year. So our market share is actually gonna be higher going forward.
Just one last thing on enterprise. So not a surprise, right, that some of your large customers still have a lot of inventory on their balance sheet. Are there any Marvell-specific drivers, any specific product catalysts that you think can help you get out of this? Because where I'm coming at this is, I think Matt had suggested that a normal carrier, a normal enterprise, you know, looks like a billion-dollar type segment.
Mm-hmm.
When should investors start to kind of broadly, you know, if I just put them together, like $2 billion-
Yeah.
When should we look forward to that, that sort of zip code?
Yeah. No, I think, you know, we outlined the design win on carrier. If you look at enterprise, you know, over the last couple of years, we believe we've taken quite good amount of market share. But looking forward, I think, you know, maybe slightly growth, you know, faster than the market, but fairly in line with that. I mean, I think that your specific question around when do we see that come back to the $2 billion run rate, we're being a little bit conservative, right?
Mm-hmm.
So we're saying, you know, probably at some point next year, you can start approaching that. But for the full year next year, certainly we don't see that right now.
Yeah, I think on a run rate basis, possibly. I think it's really come down to inventory reduction. I think once you start to see that in - and by the way, the inventories are never gonna go back to pre-pandemic. That was a different world. Just in time, no one's gonna do that anymore. I think you just need to see - and by the way, the inventories have come down. I think we had another large enterprise customer report overnight yesterday, right? And I think they were, again, similar to the other large customer, they were very positive on, on what they're seeing out here. So I think the moment you see the inventory start to move down meaningfully, and that's obviously tough for us to gauge whether it's one quarter, but it's probably not six or seven quarters. It's probably in the next few quarters.
I think you'll start to see, as you've probably seen, Vivek, in your past cycles, you know, when things go down, your instinct is to moderate when they'll come back.
Right.
But what actually happens is, at some point, the inventory is normal, and then thing just, just snaps back. It's just tough to model that. But that's probably what's gonna happen. We just... It's tough to call it sitting kind of where we are.
Got it. No, absolutely. Well, the good or bad thing is that those two segments keep on becoming a smaller part of sales, so maybe they have less of an effect than they used to.
Not, not by design, but yes.
Not by design. So let's talk about the data center business. Maybe just double-click on that and help us walk through, you know, what is the AI portion, what is the non-AI portion, and then what are the trends in each, and then we can, you know, go through the specific AI dynamics.
Yeah. Maybe I'll start, and you can jump in. So, you know, our AI portion is really there's two, the connectivity piece, and that's, you know, mostly optics today, both DCI and PAM, and driven by the 800G PAM today. And then we've got custom that we're really in the very early stages of ramping. And so, you know, what we outlined at AI Day is in data center, about $1.5 billion this year, relating to AI. And what we've said is both—we said about two-thirds was optics, so call it $1 billion, and $500 million on custom. And we actually see both of those being stronger today, even just, you know, a couple of months.
We were pretty clear about that being the floor, the $1.5, and that we actually expected that to continue to go up, and that's what we've seen. On the non-AI side, it's a broad range of products. You know, it includes switch on data center storage, Fiber Channel product, fairly broad range of product. And so for the data center infrastructure portion, you know, we've really seen that bottom as well, and-
Mm-hmm
... and we've seen growth continue. On-prem has actually been fairly challenged. And, you know, even in Q1, I believe it was actually-
Yeah, I think enterprise on-premise, I mean, that's, by the way, it's the smallest part of a data center now, right? I think cloud, which includes AI, would be the vast majority. I'm talking something probably north of 80% of revenue. Enterprise on-prem, smaller, and has the same trends we talked about in enterprise networking. For reasons we all understand, enterprise is still on the suppressed side. That has also bottomed in Q1, as far as we can tell, and you'll start to see a recovery there as well. But to Willem's point, I mean, AI clearly is, and it should be, and it's growing fantastically for us. I think this is a reference. Last year, it was 10% of company revenue, like something north of $500 million, and with the $1.5 billion floor, probably do better.
If you just look at street estimates, that assumes AI is probably somewhere around 30% of the company, right? So you're basically tripling over this, you know, one-year period. But what's also been very nice is that the standard cloud infrastructure, which clearly had gone through an inventory correction in the first half of last year, you're seeing renewed investment there as well. And we've seen that in our optics business outside of AI. We've seen this in our switching business. Storage has been coming back, and it sounds even more positive, and that's feeding into our second half kind of growth assumptions as well. So I think it's been very nice to see standard cloud investment also start to grow again, and we have certainly seen the benefits from that.
Got it. You know, I find Marvell's optics business fascinating just because there is such a strong, you know, growth rate and correlation with just the build-out of accelerators. You know, we just see these cluster sizes grow exponentially. What used to be 20,000-30,000, you know, now NVIDIA is saying 100,000. I think your friends at Broadcom said even 1,000,000 at some point. I imagine that has, you know, very positive implications. So talk to us about how you are seeing the attach rate of optical transceivers, right, today, and where do you see it going as the size of these clusters continues to grow?
Yeah, so I think where we see the... I mean, this impacts both our DCI business. I'll talk about that a little bit separately, but the biggest impact is on the interconnect inside a data center. And there's two levels where you will see this impact. The first and foremost, of course, is you've got a connection going from the GPU cluster or the accelerator cluster to the first level of switches. That is not—doesn't change with the size of the cluster itself, right? What changes is, as you go to these much bigger overall cluster sizes, right, where you go from 30,000 to 100,000 or 1 million, the number of switch layers expands dramatically, right? Because you have to connect these multiple clusters together, and each switch layer means you add another entire, you know, new set of connections, right?
So instead of 2-3 x, you know, a ratio between a DSP versus an accelerator, as you go to these higher cluster sizes, that ratio can go significantly higher. And we are seeing that, by the way, right? So we've, we're seeing that impact. The other impact you're also seeing, again, in a positive way, is that the connections within these clusters inside them historically have all been passive copper, essentially, right? The market leader is still staying on passive copper for at least one more generation, but a number of the other hyperscalers with their custom solutions, and some of them we are part of, so we are very intimately aware of the architecture. Those are switching from passive copper to an active connection, either an AEC, which we are also participating in now, and that becomes a much bigger market next year.
Some of them are also looking at going optical because of the size of even the connections between the accelerator inside a cluster. So we're certainly seeing that, and I think that's what gives us confidence that we'll probably keep outgrowing the market in terms of overall optical attach. The other consequence is, as you build these very large data centers, and you need to connect them to each other, we're seeing a lot of growth even in our DCI business, data center interconnect, where historically there was one large customer who kind of created the business with us. But today it's spreading to pretty much every hyperscaler. So we've actually won designs now with pretty much most of that community, and we've been shipping our 400 gig product in high volume.
We actually pulled in our 800G product because of higher demand, and very recently, a number of customers were looking for this data center interconnect to stretch beyond the historical 50-mile, 80-kilometer connections. So we introduced a product which can go 1,000 kilometers, which really helps some of the other broader architectures, especially for AI connectivity, as you go from taking your training models and now you need to inference across multiple data centers-
Right.
The DCI product is actually a big part of it. So yeah, 100% of the optics is super exciting and kind of we see a lot of growth there.
Yeah, and one piece that I would add is just that we're very excited that we're actually ready with 1.6 T. You know, we're set to sort of enable that next generation of accelerators going into next year, and we sort of start seeing the beginning of that at the end of this year, and then much more significantly next year. But yeah, the team has continued to execute really well on our technology roadmap and really being the leader there.
Got it. You know, one thing we have noticed in optics over long periods of time is that there is just rapid price compression, right? We especially see that among the optical transceiver makers, whose margins are much lower, right, than the kind of profitability. So how do you look at just the pricing dynamics of your specific, you know, DSP, TIA, driver? You think it follows kind of a similar price compression as we see in the overall optical transceiver market? Do you think you are able to kind of hold the pricing better because of the, you know, market share that you have or uniqueness?
Yeah, I think our differentiation in terms of being first and then enabling it really gives us the pricing power, and so that's why we're so focused on actually enabling that next generation. And then you have these sort of follow-on where we can really optimize the product, right? And sort of maintain, from our perspective, a margin profile while enabling cost reductions in the ecosystem. And so you sort of have this tick-tock, where you're first to market, have you know the best product, and then you're able to optimize that product for more broader use. So certainly, we're able to sustain very healthy margins for us, while enabling cost reduction in the ecosystem.
Yeah, I mean, we're basically able to offer huge value to customers, right? If you're doubling the bandwidth-
Yeah.
Right, then obviously you don't double the price. That's a significant advantage, right? And I think since we acquired Inphi, as you know, your own model would show you, we've massively increased the revenue-
Right
... from that business, and the margins have been actually fantastic. So yeah, we don't. I think as long as you are the technology leader, you're driving innovation, and we continue to intend to do that. We've. It's not just the DSP, it's the TIA, it's the driver, it's the entire optical platform. You know, we are now also bringing out our internal silicon photonics technology, which we historically use only internally, as something more broadly available. So I think our total value in that ecosystem is going up, and I think it really improves power yield for our customers, and yeah, we get paid for that.
Right. Do you see the competitive landscape changing in DSPs? You know, off and on, we hear just. And by the way, this is not just, you know, with Marvell. We always see whenever there's a market leader, like very strong, 70%-80% share, there's just a lot of talk of more competition, right? So it's not unique to Marvell. But we do hear talk of, you know, even whether it's NVIDIA, you know, Credo has spoken about a DSP, right? Others, right, have spoken about DSP. So how do you see the competitive landscape evolving over the next 12-24 months?
... Yeah, I think, you know, our focus is really to have the base technology, right? And so we've got this track record of executing, right? And you can go back, right, where, you know, even when we acquired Inphi, you know, there was assumption around like that market share not staying at that level and really getting watered down over time. Certainly, you know, when we looked at it, you know, that was part of the discussion, but it's simply not happened. And the reason for that is that these relationships that we have with the broader ecosystem, it's not just about bringing a product to market.
We actually work with them over many generations and really have these tie-ins and telemetry and all this sort of special sauce that's enabling us to be there, you know, as they roll out the first generation of these technology. And our product is we've got a track record of actually being, you know, highly reliable, right? And so I think there's this much broader sort of tie-in that people miss, where it's like, okay, well, if you just bring out a piece of silicon, that's really... It's hard to penetrate those relationships and markets.
Yeah, I think the other reason, I mean, the reason you're seeing a lot more competitive dynamics is the fact that the market's just massively growing, right? So it's not just in optics. Any market which used to be a market which was somewhat niche, limited to hyperscalers, was, you know, growing very nicely, but was a relatively small market. That market's absolutely exploded, right? And it's spreading beyond just the U.S. hyperscalers. So part of it, the way I look at it, is actually it's a very positive sign. The market size is incredibly large.
Right.
It's growing very quickly. It's not a zero-sum game, and it's fairly natural that, you know, a market which is gonna end up many times bigger than people thought it would, is not gonna be reliant on one single supplier. We, we kinda get that, but to me, it's actually a very positive sign, is kinda why you're seeing. The, I think, the biggest reason is the value of interconnect in AI systems is significantly higher. If you think about standard cloud infrastructure, you know, the server CPU does most of the compute, and when you're doing compute, there's no interconnect involved. The interconnect just feeds information in and out. In AI, as you know, one single chip can't solve the problem, right?
Right.
It's the connectivity in the middle is equally important, which is why I think you're seeing all of this activity in the ecosystem, is the value of interconnect is absolutely integral to how you build these AI data centers, and I think that's why you're seeing all this competitive excitement.
All right. On the custom, ASIC, side, so I think you have suggested over $500 million, you know, this year, going to over $1 billion, right? Next year, hopefully, you know, a lot more beyond that. How's the visibility over this next two- or three-year period? You think you are able to hold on to sockets that you're winning this year? Because there's, again, a lot of noise from your Taiwanese competitors about regaining, right, sockets that you might have won. So just what's your level of,
Sure.
Confidence and visibility?
Yeah, we've had this question about 25 x at this point. But yeah, so I think, you know, just focusing on a first run, right, in terms of visibility, you know, clearly, you know, we need very good visibility to be able to get the allocation on the supply chain. You know, you can't wake up tomorrow and go get CoWoS assigned to you. It's just, it's just not possible. And so because these are all multi-year sort of lockups if you look out. And so, you know, clearly we have sort of a three-way dialogue with our supply chain and the customer around, you know, what supply is required. And so that...
You know, plus, you know, in the near terms, we obviously have orders and backlog, right? And so, the combination of that really gives us very strong visibility in what I would say the near term. And then more broadly, if you look at the longer term, we really have, you know, these relationships that, you know, is multigenerational, right? And so I, you know, I understand sort of the commentary from, you know, some of the companies in Taiwan and, you know, we don't control what they say. We can just sort of look at what we see, and we can go and execute on our product ramp, and so we're very confident on that.
You know, I, I'll limit my comments on Taiwan.
Yeah, I think just at a high level, just think about market dynamics, where the reason why some of these designs came our way in the first place is because when you went from 14 to 10 to 7 to 5 nanometers, it's more complex. You're going from 50 gig SoCs to 112 to 224, 448 in the future. Chiplet architecture is much higher density compute cores. You're looking for someone who has done compute on Arm, which is us, essentially, in this ecosystem. So that's the reason why this stuff came in our direction. So now you have to think fast forward. So what's gonna happen in the next generation? Is it gonna get easier, or it's gonna get more difficult? Well, the answer is pretty obvious. It's gonna get more difficult.
I would say, you know, in the same time period, we've actually increased our design win success, and we've added another customer, and as the revenue from that third customer, when we look at the cumulative revenue, is actually even bigger than what we're gonna get from the first two customers, right? I think if you just look at the traction we are seeing, the revenue expectations we have, we have visibility to revenue growth for many, many years at this point in time.
Got it. The one other aspect... Oh, one question, to just close that, and I think, Ashish, you addressed some of it, but, what is the difference between what Marvell can do that some of your Taiwan competitors cannot do?
I think it comes down to IP. It comes down to having, like, the best SoCs in the market. It comes down to the execution we've done on very large compute chips. I mean, this is when we acquired Cavium. This was one of the core things. I mean, multi-core Arm is essentially the core of those products. I think that's the biggest differentiation. If you look at the team we acquired, which helped us do custom, which is Avera, this is the old IBM team, which has done, you know, thousands of high-complexity designs, and done them right the first time.
So I think that's the biggest differentiation, is if you're looking for someone who's done reticle-sized chips, running at the highest frequencies, where high-speed I/O is a critical part of the architecture, has done compute, the reality is there's literally not even a handful of places to go to. It's literally basically one or two. That's what it comes down to, and has the ability to continue to invest in going not just to 3 nanometers, but we're already having 2-nanometer architecture discussions, right? We're in advance of the technology coming out. I think when you put all of that together, I think the proof is in the pudding, like I said, I mean, we would not have one out of the 4, essentially 3 hyperscalers, if those things weren't important, right? Otherwise, they would have kept doing what they've historically done.
I think that's, that's what the differentiation comes down to.
Yeah, I mean, the other thing I would add is just our supply chain relationships. I think we're very strategic about that. I think when we went into the pandemic, I think a lot of people realized that as long as there's excess supply, no problem, everybody gets allocated. But when you go into a situation where allocation is key, having a supply chain partner with those deep relationships, multi-year relationships, very strategic relationships, it's a critical differentiator.
Makes sense. There's two questions, Willem, on the financial model. Obviously, custom ASICs bring about their own, right, different kind of financial metrics in terms of gross margin.
Yeah.
Do you think overall, Marvell can hold this 60% plus gross margin, or do you think it can ASICs become so big-
Yeah
... that it will change that—it can change that financial model?
Yeah, I mean, I think the way to think about that, Vivek, is that, you know, we're, you know, everybody's very focused on the gross margin, I understand that, right? But if you look at the flow-through in terms of operating margin and EPS, right? Whether it's a dollar of our merchant product or a dollar of our ASIC product, both of them drives the same pull-through on operating margin and, and EPS, right? When we do these programs, you know, there's our long-term target is, let's say, 38%-40% in terms of operating margin. And, and so when we do these projects, we're, we're targeting to be in, in that, in that same zip code, right? If not somewhat accretive over time with the scale of these programs.
I understand the discussion around gross margin, and if you go do your math, you're gonna get an answer and everybody will have sort of their view. Over time, you know, when you look at a dollar of ASIC revenue, it's just as accretive to our EPS and our operating margin. You know, we're really focused on growing that top line. So we outlined this market opportunity in custom, right, at our AI Day, where we think, you know, the market is gonna grow very significantly, and we could be wrong or right in the market, but-
Right
... you know, I think we have a view, and some people are even more aggressive than us. And then we don't see a reason why we can't take a very significant market share with sort of this dynamic where, you know, it's sort of us and one other player that are able to do chips in this zip code. So yeah, certainly, you know, I you know, acknowledge that when you do the math, you know, you're gonna get an answer there in terms of gross margin and everybody's will be a little bit different, maybe, you know, slightly above 60% or slightly below, but let's see how it plays out, of course.
Yeah, I mean, it comes down to mix size. I mean, so it's what we know is that these merchant products, especially in enterprise, are gonna grow at some point, so you're gonna get that uplift, right? But to your point, yeah, we could be widely successful in custom, which would be pretty cool. You're gonna get a ton more revenue, and it's gonna have a very nice fall-through. So it's kind of difficult given kind of where some of the merchant markets are, it's kind of they're all at the bottom right now, so we have to kind of figure out, okay, do they all the way come back in Q2 next year or Q4, and what does custom look like?
So, we're gonna need a little bit of time on the printed gross margin, but the reality is when op margin and EPS, which I suspect is the key focus, that's gonna just keep growing, gonna drive a ton of operating leverage.
I see. And as you scale these ASIC programs, is there more OpEx leverage? Like, how should we think about just the OpEx intensity? Is it? So let's say, conceptually, if I say gross margins of these are, I don't know, 10-15 points below corporate average, should I assume OpEx intensity is also kind of 10 or 15 points? That's how you get that offsetting impact.
Yeah, I think I would, I would disconnect a little bit back in terms of the OpEx intensity. I think if you, if you think about the investment that we're making on, on a custom program, you know, call it X minus whatever NRE we're, we're getting, right? And so if you, if you look at, you know, a merchant model, right? Then, you know, maybe that's, you know, OpEx of like, what, 20%, right? But, but the scale of that is, you know, is, is, is sort of finite, right? If you look at a custom model, the OpEx intensity is probably half or, you know, something-
Right
... in that ballpark. But then, you know, you can scale that program, you know, and depending on the market absorption, these programs can be much more significant, right?
Right.
And at that point, you get significantly more accretion. However, you have to overlay the fact that, you know, we're investing for the next generation, right? And so, you know, when you hit this run rate, we're investing in, you know, at the moment, we're already looking at the 2-nanometer platform, right?
Right.
Our OpEx is really driven at this point by not these programs that's ramping, because those investments have been made, but these upcoming programs that we outline, that's, you know, out in 2026, 2027, where we have to have the 2-nanometer platform in place.
But that long-term, the 38%-40% EBIT margin-
It is
... you think that's kind of line of sight in the next 12-18 months? Is that a reasonable...
I think from a run rate standpoint, sure, I think we can drive the business. You know, I think the faster that custom grows, the-- it'll accelerate us getting towards-
That's right
... to that, to that level, right.
But yeah, the 38-40, just to be very clear, that's very much the target. And, you know, we certainly see as revenue re-accelerates, which it is doing as we speak-
Right
... is certainly very much in line of sight.
Yeah. And you'll see this, the accretion in our model here in the second half, right? We outlined that we see growth accelerating in the second half, and you'll see that acceleration in our operating Margin.
Terrific. On that optimistic note... thank you, Willem. Thank you, Ashish.
Thanks.
Thanks, Vivek. Thank you.