Good morning, everyone. Welcome to this morning session. I'm Vivek Arya, Head of U.S. Semiconductor Equipment of Research. I'm absolutely delighted to have the team from Marvell joining us, Matt Murphy, President and CEO, and Willem Meintjes, CFO of the company. I'll go through my prepared questions, but if you have anything you would like to bring up, please feel free to raise your hand, and I'll be sure to get to you. It looks like we should have had a much bigger room at.
Well, it's 'cause of you.
Right.
I mean, it's.
I wish.
I've never seen standing room only before, Vivek.
I wish.
'Cause of you.
I wish.
Thank you. Welcome, Matt.
Willem. Really appreciate you guys being here. Maybe, Matt, let's just start with just a high level state of the union. You know, a lot of kind of mixed currents in the semiconductor industry, you know, consumer enterprise not doing well, you know, other areas starting to improve. Give us a sense of how you see demand now versus, you know, what you thought it would be at the start of the year.
Sure. If I can frame it a little higher level for a second. I think this cycle we've just gone through has been very unusual, right? Different than anyone I can remember over the last 30 years, in that it seems very staged in terms of when companies, based on their end market exposure, were coming out of the cycle, if you will, right? Last summer, last year, you know, some folks started showing demand weakness. They were resetting. You know, everyone's kind of got their own path. Over the last couple of quarters, you know, we, you know, our peak quarter was in our third quarter, and basically, in that sort of 6-month period, we did see changes in the demand, right? We saw data center slow down.
A lot of us got surprised last year on cloud, right, kind of how fast that turned. Yeah, with the overall macro, interest rate environment, inflation, et cetera, things slowed down. The reason I say all that is we took action, okay? If you look at our first quarter, while our owners at the time were disappointed with the guide for Q1, that's it. You know, we actually overachieved a little bit, right? We had a beat on our Q1 revenue and earnings. We guided up Q2. We basically said, "Look, storage is coming off the bottom." Huge positive, 'cause that'll be a tailwind for us. Cloud is growing again, you know, double digits, you know, from Q1 to Q2.
5G, which was up 25%, you know, in Q1 sequentially, that's still hanging in there and going to do that at least through the third quarter. Even in the enterprise area, Vivek, which we proactively took some measures with our customers and channel to get the inventory down, because just in anticipation of that slowing, that business on a run rate basis is still so much higher than we sort of ever projected, if you go back to, like, our Analyst Day from a couple years ago, that it's very healthy.
While there's a lot of mixed messages on the macro and a lot of end market, you know, differences going on, for Marvell and where we're at in our cycle, we sort of cleaned it up, and now from here on out, it's really a, I think, a very positive trajectory. Of course, we've got the AI contribution, which a lot of companies don't. We're gonna see that this year, especially in the back half and even into next year. We've got a lot of tailwinds in the company now. I know it was tough for some investors to go through. Unfortunately, I think every company's got to go through their own.
Right.
other side of the cycle, and that's what we've done.
Excellent. Matt, since you opened the AI box, let me open it further.
Can we close it real quick? Actually, I don't mind talking about it. Why not?
It's a much bigger box.
We might as well. It's a big old box. Yeah, sure.
I think Marvell is kind of unique in that you have multiple shots at goal, right, from an AI perspective.
Right? You have the compute side, right? You have the networking, the electro-optic side, and parts of the storage business that are also exposed to that trend.
Yeah.
On the call, you mentioned you had about $200 million last year, doubling this year to $400 million. Could you just give us a sense of what is the networking aspect of, and what is the networking plus compute aspect as we go through it? You know, because we heard many numbers on the call, I just wanna make sure we have a way of differentiating between the networking electro optic side and the compute-
Sure
silicon side.
Gotcha. No, great question, just to frame it from the very beginning, this is not a new thing for us, that we suddenly just said, "Oh, wow, we... Let's go do something in AI," okay? I mean, I remember when we were doing diligence on Inphi in the summer or fall of 2020, they basically laid out their roadmap and all their opportunities.
I very vividly remember that team and Loi and Ford talking to me and saying, "Look, basically, here's a block diagram of all these AI clusters being built, and here's the optical interconnect, and we think that basically at 800G, this is really where it can inflect." That was assuming AI was a small part of the total cloud spend, right? That was something where that team, and then following on with Marvell, we worked very closely with our customers, and we're already on the next generation roadmap to really line up the networking side or the optical connectivity. That's been a multiyear investment, right? This isn't just something that's brand-new. That basically generated around $200 million of revenue last year. That's the number we gave on the call.
That was almost all of our AI exposure in Marvell. In parallel... Well, just to finish that, we said that our AI revenue for Marvell was going to at least double this year, okay? $200 million last year, so at least doubling this year. Hopefully, it can be more. We'll see how that goes. The bulk of that is driven by the 800G ramp, right, which continues.
Right.
because of the, you know, truly, you know, explosion in network traffic products that have, which is the 400ZR stuff.
Right.
that's also levered to that trend as well, and we've got some way that we can allocate and break that out. That's a little bit of it, but the bulk of it is still the networking and 800G PAM4. You asked a question about, well, then beyond that, when you have sort of networking and compute, then how does that play out? That's also been a multi-year journey. We acquired, as some of you remember, an asset called Avera from GlobalFoundries in 2019, which was really the intact, you know, IBM microelectronics ASIC design team that had been around for 25 years together. I mean, they've done 1,000 ASICs as a team over their history, so very experienced team. We acquired it at the end of 2019.
We pivoted from the GF roadmap, which was no longer sort of on the advanced node. We got them on our TSMC platform and got engaged in a number of custom silicon areas, one of them being in hyperscale, and some of those being for AI, as it turns out.
Right.
That design win funnel we had kind of built up during 2020, when we bought Inphi, the reception was so positive by our customers about that acquisition and how we were going to integrate it and fund it, that that led to us actually closing and winning a number of cloud-optimized custom silicon designs. When we look at those, and we articulated those in the fall of 2021, that we had won these designs, and kind of long term, the revenue would be like $800 million in total for those. What we've said, and it's really, really gonna hit next year, is the lifetime revenue of those same designs, that same basket of designs, has increased, right, from when we won them several years ago, which is good.
The second is that the percentage kind of allocation between AI and non-AI has gone up dramatically. Like, we just sort of ballparked it at 20% of the total back when we announced them. It's the majority. It's well over half. Some of those are kicking in next year as well. We've got another at least double from this year to next year. The networking and optics is gonna continue to grow, but also then we start layering in some of the custom silicon opportunities as well.
There are other things that we haven't quite put in the whole model because we don't want, you know, some of them are sort of futuristic, but we have a very, very strong switching platform at 51.2T that came from a lot of the IP from Innovium, which is a company we acquired. Shots on goal analogy that I think as you get a 100G per lane with the PAM4 technology from Inphi, that plays well to us, and then even longer-term CXL. I think there's a rich set of things we can do, both in the custom compute side and the networking, optics, and beyond. Finally, on storage, because of our leading position, both in flash and HDD controllers, over time. We're not putting any outsized growth numbers on that.
That'll just continue to kind of grow, because exabytes are only gonna sort of expand from here, not shrink, given the amount of data being generated and the value of that data probably increasing a lot more with AI being a key driver in the industry. I think that's a little bit of a unique thing about Marvell that's not well understood. We're actually pretty broad in kind of what we sell in there.
Right.
I think, over the long term, that should serve us well.
Matt, just to clarify some of that, if I look at the electro-optic side, so $200 million last year, the bulk of the $400 million this year, is some of that $400 million part of the custom silicon that, you know, you used to suggest, was a certain number, $200 million this year? You know-
Yeah, no.
None of that. That custom silicon is very small this year.
Correct.
Overall.
Correct.
Okay.
Yes. Yeah.
Then-
Apologies to everybody for, in the spirit of transparency, trying to give numbers.
Yeah.
It turns out everything ends up looking like an optical roadmap.
Right.
$200 million. AI, custom... I mean, I know it's confusing. We tried.
Decoding.
We tried, but it'll get simpler over time, you know, assuming we deliver and the revenue comes in, then everybody will be happy.
Got it.
Not worried about the decoder.
400 this year, mostly electro optics, little custom silicon.
Yeah. Yep.
next year, as it potentially doubles-
Yeah.
The optics parts continues to grow, and then you layer on the custom silicon.
Exactly.
All right.
Exactly.
Perfect.
We don't have that quite.
That makes-
We don't want to, we don't know the. Quite frankly, it's early, Vivek. I mean.
Right
things are very dynamic. If you even look at the electro optics stuff, if you went back to last quarter, even on the call and afterwards, people were, the quarter before, you know, "Well, why aren't you guys seeing more in AI?" You know, and then it sort of hit between last quarter and this quarter.
Right.
We continue to see the backlog building and demand increasing in this electro optics area. Just to say, we feel very good about the overall aggregate business, at least doubling, and where it all lands, you know, I think we're still early, quite frankly.
Understood. Would it be fair to describe, Matt, that you're now more optimistic about the custom silicon business for next year? You know, there were some media reports earlier today about Marvell winning something with a, you know, well-known hyperscaler. Any... I know you don't want to be customer-specific-
Right
What is giving you that incremental confidence about custom silicon for next year? Is it better customer commitments, or what?
Yeah.
What's changed?
I think a couple things. One is, as it's become clear that the mix has shifted between traditional cloud infrastructure and AI, and everybody in the room understanding the criticality of these AI projects.
Right
you should assume that the importance of those has just cranked up in the last six months, right? The other thing that gives us confidence is we started these, like, two, three years ago, right? It's not like you can't get the product out that fast, given the level of complexity for these customized silicon things. I think a combination of time elapsing, the importance of AI, and probably our customers also going through their process over the last six to nine months of figuring out their priority, right? What's their roadmap? What do they really care about? Where are they gonna spend the money?
Right.
That's firmed up quite a bit, and just given us a lot more confidence. By the way, you know, the products are also farther along, right? Like, we gave two examples, there are more, but, you know, one where the product is already bad, the other one's taping out this quarter. Time helps with this, and also the shift in sentiment and firming of our customers' plans, I think gives us confidence in the numbers for next year.
Got it. How broad is this overall ASIC opportunity? You know, because there's one very large incumbent.
Yeah
on the ASIC side. What's your value proposition when you go and talk with the hyperscalers, like, you know, you should engage with us, you know, because of these reasons. You know, do you see these projects extending over multiple years, or is this a stopgap because, you know, there are shortages of GPUs and whatnot?
Mm.
Just what's your kind of go-to-market value prop, and then what is kind of the sustainability of some of these opportunities?
Yeah. Maybe I'll start with the sustainability-
Mm
first. You know, because these projects are literally multiyear, right, to go execute, you can't really blow with the wind, if you will, you know.
Right.
I think that's what's been a really helpful thing is, as our customers have gone through their roadmap alignment, we've got a pretty clear view, and they have a clearer view of what they want, okay? We also need to think about when you engage, it has to be kind of multigenerational as the mindset, because otherwise, you know, you're recreating the wheels. You need to sort of on our end, have the commitment to the next node, to the next package technology, to the next interconnect, right? All those need to be there. I don't think this is there's plans adjusting because now there's a shortage of GPUs. They would've had to have started a couple years ago on that.
These are very strategic projects and commitments that, in our view, complement and augment what the top merchant supplier provides, which is, like, incredible technology, right? This is not a zero-sum game, where if Marvell wins an accelerator or our large competitor wins an accelerator, then somehow NVIDIA goes down. Like, the whole pie is growing for this, right? We view this as every company's gonna have their own strategic priorities within that step. The second. Your first part of your question was the value prop.
I think what's happened in the industry is everything's consolidated, and there's, and quite frankly, the cost and the complexity to really be able to engage in the type of technology we're talking about at 5 and 3 nanometer, you know, reticle busting designs, you know, multi-chip module, custom interconnect. You know, this, I mean, you're talking about thermals and power dissipation on some of these products, probably being, you know, kilowatt. You know, I mean, some of these are big, complex chips, and they're for critical infrastructure applications, right? If you sort of say, "Well, who can do that?" By the way, where I don't have to worry about geopolitical risk or, 'cause that's another factor, right? Where am I gonna source my future from.
Right
relative to the design capability. I think it's really us and a large incumbent, I think both companies have very strong technology. Both you know, we both compete vigorously and aggressively for these sockets. I do think in the end, the pie is growing so much, I think there's clearly room for two strong companies, plus a strong merchant company, to really make our cloud customers' ambitions happen.
Right.
We could get into speeds and feeds.
Right
and, you know, what they have and what we have and how. There's a lot of, I think, very legitimate, kind of technical and business arguments we make and they make. There's other things, too, relationship and how you treat and what else do you sell the company? There's a lot at play, but I just say at a high level, I think, both companies. I think the whole pie is gonna grow. I think the large incumbents probably just end up doing well together.
Got it. You mentioned one important aspect, right, which is that process roadmap, right? It seems like that as we go down the complexity curve, it's possible that, you know, semi companies with this IP will actually be more at the forefront of doing this, as opposed to the internal teams, right, within the hyperscaler. Because this looks like it's gonna get more difficult over time.
Right.
Right? It's not getting, easier. You know, what is the role of process in this? Like, are all these designs on 5, and then you have a roadmap to 3 as well, or how is that relationship?
Yeah. For the revenue that we sort of called out a couple of years ago that we had won, that was all on 5 nanometer, right? We see our 5 nanometer technology platform extending for a quite a long time. I think it's gonna have a lot of legs, just because I think each of these steps now, as you've gone kind of sub-10, to really make the lift to do the next one-
Right
you know, it's hundreds of, you know, millions of dollars of investment, right? Maybe it's not a billion, but it's significant, right, to go make that next step. you know, the cost curve isn't helping anybody, right? The kind of cost per transistor area really isn't. You're not getting that Moore's Law benefit on cost anymore. You're getting it on power and performance. I think applications tend to get more selective. If you don't have the next roadmap, you're not gonna win the current one.
Right.
You have to invest, and we do see a strong pipeline of 3 nanometer opportunities. It's also not just the node, right? I mean, we do a lot of work. We're much more quiet, I think, than the other companies in terms of our sort of chiplet and die-to-die interconnect capability and how we package these things up. That's a critical part of the equation as well, because I think especially even if you go down to 3 nanometer, you're probably gonna have a hybrid type of approach. You know, core silicon in 3, the core logic, and then you're gonna have a lot of IO, probably at 5. I think that's an area where you go back to how can you help your customer and how can we help co-architect?
To your point about internal, like, fully internal, I think it's just the economics just don't ever pencil out. I don't know how, if you're a CFO at one of these very large companies, you sit there and say, "Yeah, I know you need to hire 2,000 people and build your own semiconductor company inside our company." Do you really need to do that?
Right.
Can you just have, like, a really good front-end design team and then find the key partner who can get you the right cost, yield, supply? I mean, think about the supply, too. People have not forgotten what we just went through. You know, for us to be able to ramp these products, we did multiple long-term agreements for substrate capacity, as an example. That was, like, a year or two ago.
Right.
That's for, like, next year and the year after, right? If you just sort of wake up one day and say, "I wanna go build my own 3-nanometer kilowatt power dissipation monster ASIC.
Right.
How are you gonna do that?
Right.
I think the role of key ASIC partners like us is gonna be more and more important, and I think we'll be there to, again, help these large companies do the chips they want, but do it in a probably, for them, a more economical fashion and kind of carve out a place so they can also control their own destiny, too, right? 'Cause they know their workloads and their own internal needs better than anybody.
Matt, one thing on the economics of becoming more exposed to ASICs, right? Typically, these are lower gross margin products. How does that, well, relationship work? I know that they also fund you on the NRE side, which, from, if I'm right, you reflect more on the OpEx side.
Right.
Ultimately, you get the EBIT dollars. It's just that it reflects in a different mix of kind of gross margin, right, versus EBIT. Talk to us about, you know, like, you mentioned that exiting the year, you know, that 64%-66%. As these ASIC opportunities get bigger, you know, what happens to gross margins and EBIT margins?
Yeah, I'll say a few words, and I'll ask you to chime in after.
Yeah.
I think the first is, you're absolutely right. There's a different business model for custom ASICs, if you will, than merchant products. I mean, that's kind of been, I think, understood since the dawn of man, okay? Right. That's, there's. In fact, you know, when we bought Avera, you know, we outlined that, right. We said, "Here's the gross margins. Here's what it looks like." To your point for Marvell, which is different than some of the companies, we don't recognize the NRE as revenue. We recognize it as contra OpEx, okay. The customers are funding the programs. We're doing that for them.
I'd say if I go back to even when we acquired Avera, the whole custom effort for us, the custom business, has grown pretty significantly, okay? In fact, I think it was as of last quarter, we looked, the custom stuff had actually grown faster in top line than the merchant. The gross margins for Marvell, if you just sort of step back-
Right
actually have kind of crept up a little bit, and that's because we have a lot of other shots on goal, right? We have. Set the volatility aside for a minute on the storage business, right? We've been able to grow the storage business. We've been able to grow our networking business. We've done things that are accretive to gross margin, like acquire Inphi. We've managed that portfolio. Some of this got exposed and is getting exposed now because as we've had this correction we're going through, some of our ASICs are still doing well and some of our merchants lower, and so now our gross margins come down. Manage that without making it anybody's problem, right?
As to your question about, well, what does this look like if this really, you know, ramps up, as we look through the end of the year, I'll let Willem comment in a moment, for a number of reasons, we're confident that gross margin can come back up. We're confident, looking into next year, that gross margins will be higher. That being said, just as had turns into a monster next year, okay? There's a whole bunch of upside to these numbers I gave you. It's got a gross margin with a five handle on it.
Right.
Okay? Remember, that engineering work's all done. The chip's done.
Right.
It's shipping, the fall through would be enormous in theory, 'cause there's no incremental cost to support it. It really works for us. Even if we got all this great upside and the blended gross margin was lower, the operating income and EBITDA would be so much higher, it would just nobody would care. That's my view.
Right.
Maybe at some point, we need to, if, depending on the size of it, we need to start giving some more view on that, how that would sort of work for our model. We think that net-net, that's very positive for us. At the same time, though, we're not giving up because we have businesses like automotive, like networking...
Right.
like switching, like optics, right, that are all very strong gross margin businesses for us, right? We're not changing the range, but if the worst thing that happened was we had a little bit lower gross margin and a ton more top line and a ton more earnings, I think probably every investor in the room would say, "Hey, thanks, I appreciate that extra EPS.
Right.
Not, "Hey, you lost half a point of gross margin." I think the key, just the last point is, we really think about, we manage those as different businesses, right? The one thing I want to ensure investors is the non-custom part of the business, that's continued to maintain and had expanding and very strong gross margins. Very strong. We manage the portfolio.
Right.
Yeah. There's a longer answer, but I think it's, like, pretty much, you know, it's kind of top of mind for folks. Did you want to add?
Yeah, sure. Just to, you know, maybe bridge to Q4, right? Exactly to Matt's point, you know, when we look ahead here, you know, the wireless business continues to be really strong through Q3. We do expect that to step down significantly in the fourth quarter. That's a big tailwind for us. We're talking about the storage business and how that's bottomed in Q1. Expect that to sort of continue to come back and grow through the rest of the year. We don't expect it to come all the way back to sort of our pre-pandemic level, but certainly, show nice growth through the rest of this year. This optical product that's really being driven by AI has really nice margin.
If you go back to sort of what the Inphi margin was, and as we see that growing. That combination is all very accretive to gross margin. In addition, you know, we're taking all these steps internally, right? Our supply chain, you know, our operations team, we have sized that for this year to be a much bigger revenue year, right? All the actions we're taking to optimize that, working with our supply chain, you know, on where we've got dual source products, all these actions really have to flow through our inventory as that turns.
Right.
It'll take a couple of quarters, but we really start seeing that benefit in the fourth quarter. We're very confident to be back there in next year. Matt really summarized our view for next year, but very confident going into the back half here.
Got it. Even, just to summarize that, Matt, even if, let's say, you kind of have, you know, the expected trajectory on the custom silicon side, it is still EBITDA accretive, right?
Oh, yeah.
for next year?
Yeah.
It can be far more if it's.
100%.
Potentially big one.
I mean, there's a massive leverage in front of us, quite frankly, in that custom area, because like I said, we spent the last 2, 3 years developing these products, right. There's more, there's pipeline, there's big design win funnel. You know, as those flow through and they actually inflect up, it's at a, it's at a much higher run rate than that business has ever been at, you know.
Right.
Where would you spend it? You know what I mean? We could decide to spend more if we wanted to win more projects, but that, we haven't signaled that in our kind of OpEx trajectory. We think we got a very healthy size team. Just as a side note, you know, we had the original Avera team, right, which came out of IBM, but who's our president, and he was the founder of Cavium and runs that whole business for us. He actually just recently combined our kind of core processor team and the custom ASIC team. It's actually one big monolithic organization now. Instead of, you know, you had a group over here doing processors and a group. It's actually a lot of common skill sets.
Our engineering capacity and our ability to go scale and go do these is we're in a really good place, and so then it's basically a lot of leverage from here.
Got it.
That's the exciting thing about that business, is it's got a lot of operating leverage in front of it.
Got it. Just the last one, you know, better margins obviously mean better free cash flow also. As you look at the portfolio, Matt, do you think it is, you know, rightly aligned, like it has all the building blocks, you know, that you need to execute? You know, at your Analyst Day, you laid out a 15%-20% growth trajectory, right?
Mm-hmm.
Which, you know, which was executed on very well, but then we obviously got into the downturn.
Mm-hmm.
As you look over the next 2, 3 years, is that still the kind of growth rate that Marvell is capable of? Or do you think that you have opportunity to augment it with M&A?
Sure. I'd say on the do we have what we need, I would actually stick to exactly what I said in October 2021, which is: we did what we needed to do to build the portfolio that was needed for this data infrastructure massive opportunity. We got it. Now we gotta go execute like crazy. I still feel that way. You know, M&A is hard. It's not easy, it's risky, you know, all the things. It's not like we love doing it, although I think it's been hugely value-creating, how we've been able to take some of these assets and do it. We're very focused on the organic trajectory of Marvell. All the benefits you get from that over time, by the way, when you do organic.
Right
... like, you got a bunch of free cash flow, and you can just go buy back your stock, or you can go-
Right.
You get tons of flexibility when you do that. There may be other things that we do that are smaller. Who knows? I mean, there's, we've found really nice teams. I think in this environment, probably more pop up. You should just assume this is us cranking forward the organic plan. As far as the growth rate goes, you know, we haven't sort of decided on when the next analyst day is, so it'll be interesting, whenever that is, to benchmark. We basically took. The growth rate we sized at 15%-20%, I believe, was based on our Q3, calendar 21, fiscal 22 run rate, which was the first quarter when we had Inphi.
Right.
That was, like, $1,076, I think, was the revenue that quarter. Just call it 4 point-
Right.
Little under $4.4 billion, something like that. It was combined.
Yep.
Look, we overachieved last year, right? We did five nine. We'll see where we end up this year.
Right
... we've outlined a pretty compelling growth story for the company, next year, and that only continues, in our belief. We'll see, May off the table, right? If you kind of look, if we have a strong fiscal 25, 26, and we've got some investor day sometime next year, and we lay it out-
Right.
compounded, it may be okay, right?
Right.
You know, how do you look from there? We still believe, I'll just kind of end on this, one of our theses has been, and our beliefs in how we sort of constructed this company, was the end markets that you're a part of really matter. Probably matter almost the most of anything else you gotta go do, right? You need technology. When you look at our SAM, we don't have negative SAM grower things in our opportunity set. We think our SAM is still growing at probably 10%-15% a year.
Right.
'Cause we don't have PCs.
Right.
Right? We don't have smartphones. We don't have things that are X unit growth.
All infrastructure.
That's the infrastructure. SAM is going to be the highest grower.
Right.
if you're pure infrastructure.
Right.
Marvell lost the plot. What's gonna happen? Our view, and my view, even in the last couple of quarters, was nothing's changed. It shifted. It's more AI, it's less traditional server. We gotta do an enterprise, you know, but the same-
You have the building blocks.
The same principles are there. We are so flexible to go hit all the shots on goal for the data infrastructure opportunity. We're the best, you know, pure play kind of position company for that doesn't have the other things.
Right.
So.
Terrific.
Okay.
Thank you so much, Matt.
Thanks, Vivek.
Really appreciate it.
Appreciate it.
Thank you, Willem.
Yeah, thank you.
Appreciate it. Pleasure. Thank you. Thank you.