Marvell Technology, Inc. (NASDAQ:MRVL) Q4 2024 Earnings Call Transcript

Marvell Technology, Inc. (NASDAQ:MRVL) Q4 2024 Earnings Call Transcript March 7, 2024

Marvell Technology, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good afternoon, and welcome to the Marvell Technology Incorporated Fourth Quarter and Fiscal Year 2024 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] Please note, this event is being recorded. 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 2024 earnings call. Joining me today are Matt Murphy, Marvell’s Chairman and CEO; and Willem Maintjes, our CFO. Let me remind everyone that certain comments made today include forward-looking statements, which are subject to significant risks and uncertainties that could cause our actual results to differ materially from management’s current expectations. Please review the cautionary statements and risk factors contained in our earnings press release, which we filed with the SEC today and posted on our website as well as our most recent 10-K and 10-Q filings. We do not intend to update our forward-looking statements. During our call today, we will refer to certain non-GAAP financial measures.

A reconciliation between our GAAP and non-GAAP financial measures is available in the Investor Relations section of our website. Earlier today, we announced our accelerated infrastructure for the AI ERA Investor event, which will be held in New York on April 11. Please refer to our press release for more details. We look forward to updating investors on the exciting opportunities we see in front of us from the growth in accelerated infrastructure. Let me now turn the call over to Matt for his comments on the quarter. Matt?

Matt Murphy : Thanks, Ashish, and good afternoon, everyone. For the fourth quarter of fiscal 2024, Marvell delivered revenue of $1.43 billion, growing 1% sequentially above the midpoint of guidance. In addition, on a non-GAAP basis, the Marvell team drove a substantial 330 basis point sequential increase in gross margin, completed execution on the OpEx reduction plan we outlined earlier in the year and delivered earnings per share of $0.46, growing 12% sequentially. As Willem will tell you in greater detail, we also drove another strong quarter of operating cash and increased share repurchases. We are pleased to report these results to you and remains a challenging macro environment. In our data center end market for the fourth quarter, we drove record revenue of $765 million, above our guidance, growing 54% year-over-year and 38% sequentially.

The strong revenue growth in the quarter was driven by the cloud portion of our data center end markets. While AI has been a key growth driver, I am pleased that our standard cloud infrastructure revenue has also grown every quarter, and we see that continuing next year. Our 800-gig PAM solutions led our growth in the fourth quarter. We also benefited from higher sequential demand for our storage products as that portion of our data center end market continues its recovery. Revenue from our Teralynx Ethernet switches also grew sequentially in the quarter. Turning to the first quarter of fiscal 2025. We expect our overall data center revenue to grow in the low single-digits sequentially on a percentage basis. We expect revenue from both AI and standard cloud data centers to continue to grow sequentially.

We project our electro-optics revenue to continue to be strong, and we also expect to benefit from the initial shipments of our cloud optimized AI silicon programs. Partially offsetting this growth, we are projecting a more than seasonal sequential decline in revenue from enterprise on-premise data centers. Over the past several years, Marvell has strategically invested in technology, both organically and through acquisitions to become a critical enabler of accelerated infrastructure. The seismic shift driven by AI in the data center market is creating new opportunities, and we are actively investing to lead the next wave of innovation. We have in place a full suite of solutions across data center interconnect, switching and compute, and the ability to uniquely stitch these together into a unified platform, a true one-stop shop for our data center customers.

While our 100-gig per lane 800-gig PAM products are currently the workhorse for interconnect inside AI data centers, customers have begun qualifying our next-generation 200-gig per Lane 1.6T PAM solutions. We expect first deployments to start towards the end of this year. Complementing our optical interconnect solutions, we expect to start ramping our PAM DSPs for active electrical cables. This is a new and completely additive market for Marvell and we expect to be shipping products to multiple Tier 1 cloud customers this year. Our DCI products, which provide connectivity between data centers are critical to our customers’ success and continue to do very well. We see exciting new opportunities ahead of us from growth in generative AI applications, driving cloud customers to build new data centers.

We also expect a positive uplift from increased investment in inferencing, which will drive more bandwidth between data centers. We are shipping our 400-gig DCI products in high volume today and are seeing strong interest for our next-generation 800-gig products. I’m also very pleased to report to you that in fiscal 2024, we significantly expanded our DCI customer base with design wins at multiple data center customers. We expect these design wins to begin ramping next year. As you will remember from prior calls, Marvell silicon photonics technology has been a critical enabler of our DCI modules. You will hear more at OFC and our upcoming AI event about how we plan to deploy our field-proven silicon photonics technology to enable next-generation higher density, lower power interconnects.

In data center switching, our Teralynx 12.8T products continue to ship in high volume and we are on track for production shipments of our next-generation 51.2T switch later this year. The Teralynx product line, you will recall, came from our Innovium acquisition. Combine the Innovium team with Marvell’s very successful enterprise and carrier switching organization. This larger scale now enables Marvell to accelerate our development to address new cloud opportunities, particularly in switching for AI deployments. We are encouraged by the traction we are seeing with both existing and new customers, which has expanded our opportunity funnel for cloud switching dramatically over the past year. Turning to our cloud optimized silicon platform. We’re seeing significant progress with the first set of design wins outlined during our last Investor Day.

We expect initial shipments for our two AI compute programs to start in the first quarter and are on track for a very substantial ramp in the second half of the fiscal year. Customer bring up of these programs is going extremely well, and we are tightly aligned with them on volume expectations and working in lockstep to enable the production. We now have a clear view of demand for both this fiscal year as well as fiscal 2026. We have been working closely with our suppliers and are confident that we have secured capacity for the ramp. With the visibility we now have for these programs, along with many new opportunities, we are very excited about the potential scale of long-term revenue for Marvell from this business. As the initial set of design wins reach its full run rate, we expect annual revenue from cloud optimized silicon has the potential to rival our fast-growing data center optics business, which, for reference, grew to over $1 billion in fiscal 2024.

With the exploding investment in AI and accelerated computing, the demand for cloud optimized silicon has grown significantly. We have successfully executed multiple 5-nanometer designs in the last two years and are deeply engaged with cloud customers on many new 3-nanometer opportunities. These engagements are driving a substantial increase in the size of our design funnel. AI is increasing the cadence of new chip releases and this plays well to Marvell’s strength as a key partner for our cloud customers with a proven ASIC platform. We have a broad suite of differentiated IP, including ultra high-speed SerDes, armed compute, security, storage and advanced packaging, including die-to-die interconnects and chiplets. We are well positioned to act as a force multiplier for our cloud customers, enabling them to scale multiple custom programs in quick succession.

Now let me turn to Marvell’s carrier and enterprise end markets together. As we have been communicating, these end markets have been dealing with a period of soft industry demand. As a result, both were down sequentially in the fourth quarter and we expect them to decline again in the first quarter. On a sequential basis, we expect revenue in the first quarter from carrier to decline by approximately 50% and enterprise networking to decline by approximately 40%. Looking ahead, we expect revenue declines in these end markets to be behind us after the first quarter and forecast a recovery in the second half of the fiscal year. Longer term, these are large and enduring end markets, which are critical to the global economy. As a result, we expect both of these end markets to eventually return to contributing over $1 billion each in revenue on an annual basis once demand normalizes, and we begin to realize the benefits of upcoming Marvell-specific product cycles.

Turning to the consumer end market. Revenue declined in the fourth quarter as expected and is projected to decline approximately 70% sequentially in the first quarter. This forecast reflects the completion of deliveries for an end-of-life program in the prior quarter as well as significantly weaker demand from the game console market. Turning to our automotive and industrial end market. Revenue in the fourth quarter was $82 million, declining 17% year-over-year and 22% sequentially. As expected, the sequential weakness was primarily driven by a sharp decline in the industrial portion of this end market, where order patterns can be lumpy in any given quarter. Fiscal 2024, our automotive business delivered another strong year, with revenue growing in the double-digits year-over-year on a percentage basis.

We are benefiting from growth in Marvell content driven by an increase in the number of Ethernet connected endpoints in cars, coupled with the need for more bandwidth. We’ve continued to accumulate new Ethernet design wins across a broad swath of automotive OEMs. While the initial wave of our automotive revenue was driven primarily by EVs and hybrids, we now have also on high-volume internal combustion vehicles with major auto OEMs. These wins tend to be multi-platform in nature, covering numerous models simultaneously. Turning now to our forecast for the first quarter of fiscal 2025, we expect revenue from our overall auto and industrial end market to be flat sequentially. In summary, in fiscal 2024, we delivered total revenue of $5.5 billion.

Our data center revenue accelerated throughout the year, growing from about a third of total company revenue in the first quarter to more than half exiting the fourth quarter. As customers continue to shift investment from traditional to accelerated infrastructure, we expect data center to drive the majority of our revenue growth going forward. This transition underscores Marvell’s transformation into a leading data center company. AI was a key driver of our data center growth in fiscal 2024, contributing over 10% of total company revenue, well above our initial forecast. This was a substantial increase from approximately 3% in the prior year. Our momentum accelerated throughout the fiscal year with AI revenue well over $200 million in the fourth quarter, driven mostly from Optics.

In fiscal 2025, we expect this trend to continue driving another strong year for our data center end market. We expect a substantial base of electro-optics revenue from AI should remain correlated to accelerator shipments. And as those continue to grow, we expect to benefit accordingly. In addition, we project significant revenue contributions from our AI cloud optimized programs, well in excess of our prior estimate of a couple of hundred million dollars in fiscal 2025. In fact, as our cloud optimized AI silicon programs reach high-volume production, we expect our overall cloud optimized revenue to exceed $200 million exiting the fourth quarter. As a result, on a run rate basis, this momentum would put our overall cloud optimized silicon revenue above the annual $800 million target we had provided at our last Investor Day.

And with the full year of contributions in fiscal 2026, we expect to be way ahead of the prior target. In aggregate, we see a favorable setup for the second half of this fiscal year, driven by continued growth from our data center end market, ongoing growth from automotive, and a recovery in carrier, enterprise and consumer. As we continue to drive revenue growth, we remain focused on strong cash flow generation and returning capital to investors. As you saw earlier today, Marvell’s Board has approved the largest repurchase authorization in our history. We view the emergence of accelerated infrastructure as one of the most significant technology inflections of our time. I thank all our dedicated employees and leaders for executing on our strategy to fully capitalize on this remarkable opportunity.

During a tumultuous period for the semiconductor industry, we have taken control of our destiny and are strategically investing to win. Earlier today, we announced the extension of our long-standing collaboration with TSMC to develop the industry’s first technology platform to produce 2-nanometer semiconductors optimized for accelerated infrastructure. This new platform will enable Marvell to deliver substantial advancements in performance, power and area critical for next-generation accelerated workloads. We are very optimistic about our growth prospects and our role in enabling accelerated infrastructure. We look forward to updating investors on the massive opportunity in front of us at our accelerated infrastructure for the AI ERA event on April 11 in New York City.

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 2024 results. Marvell delivered $5.5 billion in revenue with a strong second half performance from our data center end market. Driven by AI applications, our data center revenue in the second half grew by approximately 50% over the first half. GAAP gross margin was 41.6%, GAAP operating margin was negative 10.3% and GAAP loss per diluted share was $1.08. Our non-GAAP gross margin was 61.2%. Non-GAAP operating margin was 29%. And our non-GAAP earnings per diluted share was $1.51. We returned $357 million to shareholders through dividends and buybacks. Moving on to our financial results for the fourth quarter. Revenue in the fourth quarter was $1.427 billion, exceeding the midpoint of our guidance, growing 1% on a year-over-year and sequential basis.

Data center was our largest end market, driving 54% of total revenue. The next largest was enterprise networking with 19%, followed by carrier infrastructure at 12%, consumer at 10% and auto industrial at 5%. GAAP gross margin was 46.6%. Non-GAAP gross margin was 63.9%, growing 330 basis points sequentially, driven by a significantly better product mix as we had expected. Moving on to operating expenses. GAAP operating expenses were $697 million, including stock-based compensation, amortization of acquired intangible assets, restructuring costs and acquisition-related costs. Non-GAAP operating expenses were $429 million, in line with our guidance. These results reflect the successful completion of our fiscal 2024 cost reduction plan we had outlined at the beginning of the year.

GAAP operating margin was negative 2.3%, while non-GAAP operating margin was 33.8%. For the fourth quarter, GAAP loss per diluted share was $0.45, non-GAAP income per diluted share was $0.46, growing 12% sequentially. Now turning to our cash flow and balance sheet. Cash flow from operations in the fourth quarter was $547 million. I’m pleased to report to you our second straight quarter, delivering robust operating cash flow of over $500 million. Our inventory at the end of the fourth quarter was $864 million, decreasing by $77 million from the prior quarter. Our DSO was 77 days, decreasing by a day from the prior quarter. We returned $52 million to shareholders through cash dividends. In addition, we repurchased $100 million of our stock during the fourth quarter, doubling from the prior quarter.

We expect to further increase repurchases in the first quarter of fiscal 2025. As you saw earlier today, Marvel’s Board has approved the largest repurchase authorization in our history, increasing our current plan by $3 billion, which brings our total available authorization to $3.3 billion. Our total debt was $4.17 billion. Our gross debt-to-EBITDA ratio was 2.19x and net debt-to-EBITDA ratio was 1.69x. As of the end of the fourth fiscal quarter, our cash and cash equivalents were $951 million, increasing by $225 million from the prior quarter. Turning to our guidance for the first quarter of fiscal 2025. We are forecasting revenue to be in the range of $1.15 billion, plus or minus 5%. We expect our GAAP gross margin to be in the range of 44.5% to 47.2%.

We expect our non-GAAP gross margin to be in the range of 62% to 63%. We are forecasting a sequential decrease in non-GAAP gross margin due to lower revenue impacting fixed cost absorption. Looking forward, we expect that the overall level of revenue and product mix will remain key determinants of our gross margin in any given quarter. For the first quarter, we project our GAAP operating expenses to be approximately $676 million. We anticipate our non-GAAP operating expenses to be approximately $455 million. This forecast includes a step-up from the prior quarter due to typical seasonality in payroll taxes and employee salary merit increases. For the first quarter, we expect other income and expense including interest on our debt to be approximately $48 million.

We expect our non-GAAP tax rate of 7% for the first quarter. We expect our basic weighted average shares outstanding to be $866 million and our diluted weighted average shares outstanding to be $875 million. We anticipate GAAP earnings per diluted share in the range of a loss of $0.18 to a loss of $0.28. We expect non-GAAP income per diluted share in the range of $0.18 to $0.28. Operator, please open the line and announce Q&A instructions. Thank you.

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Q&A Session

Operator: [Operator Instructions] Our first question will come from Ross Seymore with Deutsche Bank.

Ross Seymore: Clearly, it’s kind of a tale of two cities, the data center and AI side is going to be really strong, the rest of it not so much. So why don’t we just get the bad news out of the way first. The magnitude of the drops ex your data center are kind of shocking. Can you just walk us through how much of that is something that is not going to come back, some of the stuff in 5G, et cetera, versus what do you view as just taking the cyclical medicine and then a snapback should it ensue soon thereafter?

Matt Murphy: Yes, definitely a tale of two cities. On the carrier enterprise and consumer side, the way to think about it is, sure, the drops are pretty steep in Q4 and Q1. We’re definitely going through a cyclical downturn in the industry, you’ve been doing this a long time, so have I, we’ve seen that happen, and that’s what we’re going through. The way to think about both of those businesses is at their peak, together, they were about $2.5 billion in revenue, and this would sort of be during the pandemic and some of the supply chain issues that went on. You can now see we’re shipping well below that. And so I said in my prepared remarks, both of these are very solid businesses, Ross, for Marvell. Both will recover to greater than $1 billion in revenue, over time, the question is when.

And remember as well, within these businesses, these are very long product life cycles, typically like seven years in production. So these are designs. In some cases, we won 3 or 4, 5 years ago, some of them we just won a year or two ago. So we feel good about these businesses, but they are going through some demand softness and some inventory correction, but we expect to see that behind us. And to be very specific, none of this is due to any business that’s not “coming back or share loss”. And in fact, when things recover back to a normalized run rate, we do have Marvell product growth drivers in both of those segments, carrier and enterprise to drive growth going forward. So we’re just managing through it in the short term.

Operator: The next question will come from Matt Ramsey with TD Cowen.

Matt Ramsay: I guess kind of a two-part question on the custom silicon business. The first part of it, Matt, you gave us some good color in your script as to how you see $200 million exiting the year and exceeding the $800 million for next. You kind of referenced the billion dollars at scale. And I just wonder if you could maybe square the rest of that, circle with that just for business you’ve won today for fiscal ’26 or is there more to come? And I guess the second part of the question, my observation is you guys probably have, A, more shots on goal for custom silicon, and B, each one of the shots on goal could be potentially a very large or larger than expected piece of business given what’s happening in the AI trend. But I guess my concern is as you evaluate those opportunities when those programs will be shipping 2, 3, 4 years in advance and trying to figure out how those programs would sort of align with the dominant player in the space’s road map 2 or 3 years out and the pace of that innovation.

Like how do you guys evaluate the potential for the size of the business when lots of shots on goal, but the probability of each of those shots ongoing being successful might be hard to gauge given how quickly the industry is moving. Hopefully, that makes sense. I’m just trying to get an idea of how you’re scaling the business and taking on orders given all the volatility and rapid technology advancements in this space.

Matt Murphy: Okay. Let me just tackle them both. On the first one, yes, super excited about the ramp we’re seeing now on the custom silicon programs we won a couple of years back. So we’re shipping in Q1 on both programs. It’s fantastic. We gave some color in the prepared remarks on the exit rate being $200 million plus. I don’t want to cap that at this point, but certainly, that’s sort of the way to think about it as the floor, and then we go from there. So that would imply, obviously, in fiscal ’26, a much larger number than the $800 million we had called out. And again, I think it’s still dynamic and still early but we’re very excited from the bullish forecast we’re seeing from our customers. So ’26 looks very strong from the programs that we’ve won, and we should be way ahead of the plan that we had articulated a ways back.

On the second question, yes, I don’t think I’ve ever seen more design win activity in my career as right now, in AI, custom silicon, networking, optics, you name it, this whole transformation that’s going on and data center architectures is creating this massive opportunity for Marvell specifically on the custom portion of it. I mean, we’re talking about a TAM creation that’s going to be in the tens of billions of dollars range. And we’ll talk more about that at our AI Day. But very significant sort of opportunity that’s emerging in front of us. And that being said, I view that as very complementary to the merchant leader in this space. I think both have a place given the workloads that are required, given the scale of computing that’s needed.