Q4 2021 Marvell Technology Group Ltd Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to the Marvell Technology Group fourth quarter 2021 earnings Conference call. At this time all participants are in listen only mode. After the speaker's presentation. There will be a question and answer session. The ask a question during the session you'll need the press star one on your telephone as a reminder.
Today's program is being recorded I would now like to introduce your host for today's program as he's sorry on Vice President Investor Relations. Please go ahead.
Thank you and good afternoon, everyone welcome to Marvell fourth quarter and fiscal year 2021 earnings call joining.
Joining me today on Matt Murphy, Marvell, President and CEO and Jean Hu our CFO.
I would like to remind everyone that certain comments made today may include forward looking statements, which are subject to the significant risks and uncertainties that could cause our actual results to differ materially from management's current expectations. Please review of the cost of these statements and risk factors contained in our earnings press release, which we filed with the SEC today and posted on the website.
That is our most recent 10-K and 10-Q filings, we do not intend to update on forward looking statements. During our call today, we will refer to certain non-GAAP financial measures a reconciliation between non-GAAP and non-GAAP financial measures is available on our website in the Investor Relations section with that I'll turn the call of what the map for his comments on the map.
Okay.
Thanks, Ashish and good afternoon, everyone. Let me start with the recap of Marvell highlights for fiscal year 2021 are.
Our GAAP revenue was $2 97 billion GAAP gross margin was 51% and GAAP loss per diluted share was <unk> 41.
On the non-GAAP basis, our gross margin was 63, 3% and non-GAAP earnings per diluted share was <unk> 92.
Our consolidated revenue grew 10% year on year led by our networking business, which grew 22% year on year revenue growth combined with strong operating leverage from our business model enabled non-GAAP EPS to grow 39% year on year.
I am very pleased with our outstanding performance during what has been an otherwise challenging year.
Our growth initiatives and <unk> cloud and automotive drove results in these key end markets, which collectively more than doubled in revenue from the prior year to represent more than 25% of fiscal year 2021 revenue.
We're really pleased with the performance of Avera and the Quant share who both delivered revenue above our expectations. We successfully completed the integration of both businesses and over achieved on our synergy targets.
We also made great strides with our technology platform announcing the jumped to five nanometer and along with it the industry's first 112 gig cities for cloud datacenter infrastructure.
This move was the direct result of our multi year strategic shift to focus on data and its infrastructure and brings our process node cadence to the cutting edge.
The power of our five nanometer platform and the benefits. It provides for customers is evident in our opportunity funnel, which has grown significantly since we adopted this new node.
The activity level on five nanometer continues to accelerate and we have already secured multiple leading edge design wins, each meaningful from a revenue perspective.
Our advanced technology is also a key enabler of our customize the offering which has continued to gain momentum, particularly in cloud.
Following on from the design win we announced last quarter activity levels continued to increase and we are now involved in advanced discussions with multiple Hyperscale data center customers.
Our ability to offer customization, coupled with marvell, leading standard product that he has proven to be highly compelling the cloud customers.
Given its strategic importance, let me provide some more detail on the evolution of the customer stick model, bringing to light some of the key trends that make the opportunity so compelling.
Traditionally the primary customer base for custom Asics has been large system Oems, whose core business is developing hardware to sell as a product.
These customers design their own system hardware and build unique technology into the hardware itself to custom chip development to differentiate their products.
Much of the chip design directly and work with the semiconductor partner the license IP and manage the physical layout and for.
Front and backend manufacturing.
Today. In addition to the system customers Hyperscale data center operators are also designing their own silicon and I'm often asked of this trend is good or bad for Marvell.
We believe this trend is very good for us as we believe we are ideally positioned to help them solve their unique challenges their core business as the cloud service. They provide not the hardware itself. They are building custom hardware because they need the incredibly efficient and optimize the infrastructure.
As a result, they are looking for of semiconductor collaboration that goes well beyond the traditional custom ASIC model and allows them to leverage IP that the silicon partner already has available.
The design is typically done in true partnership with the customer focusing on the portions of proprietary to their use cases, and marvell, bringing our own unique compute security networking and storage IP to the table. Therefore.
Therefore, the end solution is the semi custom design, which represents the best of both worlds and provides the faster time to market.
Because these engagements use of our IP. We believe this leads to a more strategic and valuable relationship with these key customers.
In addition, computed becoming increasingly important in this market as hyperscale or sort of looking to move beyond the standard <unk> six servers and integrate custom arm based compute solutions into their architecture.
As this trend accelerates marvell should be an even more important partner.
Our long history of successfully developing and delivering multiple generations of highly complex multi core arm based processors, including server processors is unique in the industry.
Marvell is emerging as an ideal partner for these customers and our recent cloud engagements involve deep engineering collaboration on all key aspects of design, including Chip architecture memory density high speed <unk> integration advanced packaging power optimization and flexible processor.
<unk>.
Now, let me move on to our quarterly results and expectations.
Revenue for the fourth quarter of fiscal 2021 was $798 million 13 million of above the midpoint of guidance growing 6% sequentially and 11% year over year.
Adjusted for the divestiture of Wi Fi year on year revenue growth was even greater at 15%.
Our GAAP income per diluted share was two sets of our non-GAAP earnings per diluted share was 29 growing.
Growing 16% sequentially and 71% year over year.
As expected supply constraints limited our ability to fully meet the growing demand for our networking products.
Also saw strong demand for our storage products, which drove the upside in revenue relative to the midpoint of our guidance.
Although these industry wide supply shortages are now well known I expect that they may still be a topic of particular interest during our Q&A session.
So in anticipation of your questions. Let me provide as much details I can for you now.
You're aware despite for perhaps more accurately due to the impact from COVID-19 demand has grown significantly across a range of semiconductor end markets is data infrastructure has become even more critical to the world's economy.
However, the supply chain was not completely prepared for the surge in demand needs time to increase capacity.
We are confident that the industry will respond to these challenges we anticipate of supply GAAP for at least through fiscal 2022.
Lead times of extended across the board, we are seeing shortages for multilayer complex substrates, IC packaging capacity and fab constraints in certain technology nodes important for our products.
From our vantage point the increase in demand we are experiencing for our <unk> cloud and auto products appears closely tied to the long term secular growth drivers present in these end markets. This combined with the sole source nature of most of our design wins would suggest that most of the demand we are not able to satisfy in the near term is not perishable.
Marvell is collaborating even more closely with our customers to manage demand forecast over an extended time horizon and our operations team is continuing to drive our suppliers to match supply appropriately to mitigate impacts and minimize disruptions.
In addition, we are taking extraordinary measures, including securing capacity in the advanced over much longer the and typical time periods and we are working with customers to get their assistance in helping absorbs some of the incremental costs associated with prioritizing their continuity of supply.
Let's now discuss our two businesses in more detail.
First in our networking business revenue during the fourth quarter was $439 million consistent with our outlook of being flattish to the prior quarter.
Year on year growth remained robust with revenue growing 24% compared to the fourth quarter of fiscal 2020 results adjusted for the divestiture of Wi Fi.
The year on year growth of networking was led by our <unk> and cloud businesses. In addition revenue from our Ethernet switch and Phy portfolio grew significantly as new design wins that started to ramp.
Let me provide some color on sequential revenue movements in networking.
In <unk>, we delivered our sixth straight quarter of sequential revenue growth. This growth was driven by standard and semi custom product shipments to Samsung and Nokia, partially offset by a decline in <unk> as deployments in China take a pause.
Looking past the typical lumpy nature of individual regional Rollouts of <unk> infrastructure deployments are expected to continue to strength in the worldwide.
As an example of the U S. Recently concluded the first phase of the C band spectrum auction.
This was the highest grossing spectrum auction ever held in the U S with gross proceeds exceeding $80 billion.
Our record level of interest is a clear indicator of the potential revenue opportunities carriers expect from five day technology of the regions around the World are also opening up spectrum for <unk> services, and the wired and wireless industry experts expect deployments to gather strength later this year.
We launched our open ran platform in December 2020, and are gaining traction in the marketplace. For example, we recently announced that we are joining the even star program and we'll be working with Facebook connectivity to provide of <unk> open ran distributed unit design.
This design will be based on our leading.
The <unk> fusion baseband processors and arm based off the on multi core Gpus.
The even start the you design will enable a new generation of Rand suppliers to deliver high performance cost optimized interoperable du products to the rapidly expanding open ran ecosystem.
Yes.
We recently announced that Fujitsu will be using our industry, leading off the on fusion baseband processors in its new <unk> base stations and also plan to engage with US on open ran distributed unit products.
For the second <unk> regional customer I referenced last quarter.
And cloud networking, we benefited from strong customer demand in the fourth quarter for our smart Nic Gpus, while the cloud a sick declined as expected looking.
Looking forward, we expect to continue benefiting from the secular growth in cloud Capex on semiconductor solutions for data processing.
Turning to our automotive business quarterly revenues crossed into the double digit million dollars run rate driven by the ramp of multiple Ethernet design winds in model year 2021 vehicles.
Engagements are expanding at additional large Oems and bookings have continued to strengthen.
We believe that fiscal 2022 shaping up.
To be a breakout year for this business.
The fourth quarter was robust for our Ethernet switch and phy business with product ramps at multiple customers. The design wins, we won over the last couple of years are now starting to ramp and we expect these will contribute higher levels of revenue as we progress into fiscal 2022.
Let me now discuss the outlook for the first quarter of fiscal 2022 for our networking business.
Reflecting strong demand. Despite continued supply constraints, we project revenues to grow close to 10% on a sequential basis and continues strong year on year growth exceeding 20%.
We expect this growth to be broad based led by our cloud Gpus standard and semi custom <unk> solutions automotive products and Ethernet networking solutions, partially offset by softness in <unk> six.
Turning now to our storage business.
Storage revenue for the fourth quarter was better than expected across all product lines growing 18% sequentially to $326 million.
This was a very strong quarter for our storage business with 10% year on year growth driven by our custom SSD controller and cloud HDD products on.
Very pleased with the tremendous progress we have made over the last few years in the enabling high capacity near line Hdds, which are critical for cloud customers.
We've extended our long standing relationship with Toshiba and we recently announced that our controllers and pre amps are powering their new 18 terabyte cloud scale hdds.
The cheapest 18 terabyte products deliver industry, leading data storage capacity by utilizing Mammer technology and advanced signal processing developed in close partnership with Marvell.
The close coupling of Marvell re channel Preamplifier IP enables leading edge features and HDD capacity to extend toshiba's position in the cloud data center market.
Let me now provide some additional color on storage revenue on a sequential basis.
In the fourth quarter, our custom SSD controller revenue benefited from the ongoing ramp at a tier one OEM as well as the initial ramp at a major cloud customer.
In Hdds demand was strong across multiple end markets, including enterprise Smart video retail and client and our business benefited from aggregate HDD.
Unit Tam growth of about 10% sequentially.
Our revenue from cloud Hdds also grew on strong customer demand for our products.
And our fiber channel business demand recovered significantly from the COVID-19 impacts earlier in the year.
Our operations team was able to increase supply to help our Oems restock and deliver more product to their customers.
Looking to the first quarter of fiscal 2022, we project the seasonal decline in storage controller demand.
In addition, after last quarter's inventory replenishment by customers, we expect the more more than seasonal decline in fiber channel spend.
As a result after a very strong fourth quarter, we expect our storage revenue the decline in the low teens sequentially on a percentage basis. However, we expect the continued year on year growth of over 10% in the first quarter.
In closing Needless to say last year. It was a very challenging period as we adjusted the operating in the presence of the pandemic.
It was almost exactly a year ago today when shelter in place policies were coming into effect and we are in the midst of taking action to protect our 5000 plus employees and an extended support team of contractors and suppliers.
None of us really knew how the year with evolve for how the pandemic would impact our productivity or the demand for our products and technology.
I can now look back and applaud the strong performance by the Marvell team in the face of adversity incredible program execution record design win achievement stronger customer relationships double digit revenue growth and significant margin expansion.
I am very proud of our employees and I would like to thank them for their collective efforts and positioning marvell to emerge even stronger from the pandemic.
We ended fiscal 2021 on the strong note and we are kicking off fiscal 2022 solid growth expectations guiding revenue at the midpoint for the first quarter to grow 15% year on year. Despite ongoing supply challenges, we expect strong year on year of growth from both our networking and storage businesses in the first quarter non.
Non-GAAP EPS of the midpoint for the first quarter is now is projected to grow by 50% year on year, demonstrating the operating leverage in our business model.
In fiscal 2022, we expect revenue growth from custom SSD controllers free amplifiers automotive Ethernet.
In enterprise networking in addition to our expanding <unk> and cloud businesses, which is still early in their growth cycles. Our team is also focused on closing key design wins from the large funnel of five nanometer and cloud engagements I discussed earlier.
We're getting closer to completing the <unk> transaction and as part of integration planning. We recently concluded a series of joint strategic planning sessions. The conclusion of these meetings our teams walked away more excited than ever about the depth of technology and the level of talent across the combined company.
The addition of <unk> broadens the opportunity set for the combined company and this will be a key factor in setting future investment priorities.
As a reminder of the closing of the <unk> transaction remains subject to obtaining shareholder and regulatory approvals and satisfying other closing conditions.
With that I'll turn the call over to gene for more detail on our recent results and outlook.
Thanks, Nate and good afternoon, everyone I will start with the review of our financial results for the flipped the quarter and then for line to our current actuals for the first quarter of fiscal 2020 true.
Revenue in the flick on here with the 790 day and the $98 million 13 million of by the middle of trying to for guidance.
Networking represented 55% newfound revenue at the start contributing 41%.
Revenue from other kind of at the full full percentage of that revenue.
GAAP across snacking with the safety true, 0.8% non-GAAP gross non came with the 63, 9% of dragging your OS consists tend to meet our guidance.
GAAP operating expenses for <unk> and <unk> and the include the cost of share based compensation expenses.
Amortization of acquired intangible assets legal settlement and acquisition and the divestiture related costs.
Non-GAAP operating expense were 283 day, just about the need of point of due to slightly higher project costs.
GAAP operating loss was 2 million net non-GAAP operating profit was 226 <unk> of 28, 4% of for revenue.
For the Swift quantity of at the income put that on the share it with <unk>.
Non-GAAP income for that of this year with 2009.
Now turning to our balance sheet.
During the pace of cash flow from operations with the 100 and the 58.
Let me turn to 40 meter Andrew Schaffel against the two dividend payment.
During the quality of it we paid down one can be the end 15 need out of our terminal and exited the quantity of the 7000 feet on the <unk> 8 million in cash and the cash equivalents and the total debt outstanding of $1 2 billion on.
Net debt to EBITDA ratio with the point of five times trailing 12 months of basis.
We have temporarily suspended our share repurchase program due to the pending acquisition of the impact.
For the full fiscal year of 2021, we've returned a total of 186 million interest Champeau day, two of 161 million in dividend and the 25 million in share repurchases.
In addition, we paid down 200, and the 15 million of our term loan.
So in fiscal 2021, we also generated strong cash flow from operations of 800, and the $17 million.
Turning to our guidance for the first quarter fiscal 2020 true.
We are forecasting revenue to be in the range of 800 million plus or minus of 5%.
We expect our GAAP loss of <unk> will be approximately 52 point of 5%.
The Jack I would now on kind of across 19 will be approximately 63, 5%.
We project, our GAAP operating expense to be approximately 300, and the $91 million, we anticipate our non-GAAP operating expenses to be approximately 300 million the.
We expect our non-GAAP of tax in April 5%.
We expect our basic of we'd hit the <unk> outstanding will be six countries and the 77 and our diluted weighted average shares outstanding will be 619 EBIT.
At the week out we anticipate that GAAP earnings per share in the range of allows for over five per share on the low end to on the income of five cents per diluted share on the high end.
We expect announced that the income per diluted share in the range of the 23 to 31.
Finally, two housekeeping Colin SUV Monday, our GAAP EPS calculated the using basic weighted average shares outstanding when the GAAP net loss and the calculated the using diluted weighted average shares outstanding when there is the GAAP net income non-GAAP EPS.
These are calculated using diluted weighted average shares outstanding.
In terms of the expenses you should expect us to continue to invest in our long term growth weighted disciplined resource allocation.
We expect our operating expense growth to be well below our revenue growth.
Ill opex of the increase year over year will be primarily due to the employee merit increase and the normal inflation on items such as the EPA true.
I'm looking for operating expense in the first quarter reflects the seasonal increase in payroll taxes net.
In fact, <unk> exited to dissipate in the second the quality and offset by a partial quarter of merit increase.
The full impact of our merit increase that will be price into in the state of the quality by the time, we exit the fiscal year.
That's to me our non-GAAP operating expense in the fourth quarter share will increase in the range of three 4% on a year over year basis.
Operator, please open the line and announced to any questions. Thank you.
For Ya.
Certainly the ladies and gentlemen, if you have a question at this time. Please press Star then one on your Touchtone telephone if for your question has been answered and you'd like to remove yourself from the queue. Please press the pound key.
So ask in the interest of time that you. Please limit yourself to one question. Each of you may get back in the queue. As time allows our first question comes from the line of Harlan sur from Jpmorgan. Your question. Please.
Good afternoon. Thanks for taking my question I appreciate the commentary on the supply constraints and I'm not asking the team to endorse higher revenues in the second half of the year, but.
I would expect kind of five G spend to come back in the second half <unk> outside of China remained strong Sony is going to double their PSY of shipments. This year and then you have continued momentum in cloud, but but if the backlog supported higher revenues in the second half, let's say, 10% higher versus the $800 million in April is the team.
Confident that it can support quarter on quarter of revenue growth through the second half or do you think debt that will be of challenge just given the tight wafer substrate and assembly and test the capacity constraints.
Sure. Thanks, Harlan Yeah, No I think you highlighted.
Highlighted some of the growth drivers. So just just a few comments I think the first is we are we have been planning for growth in our FY 'twenty. Two I think we're off to a good start for the year. If you look at our Q1 guidance alone. It's it's going to be up 15% year over year versus a year ago.
We've got some very strong secular growth drivers you mentioned <unk> and there is certainly some positive.
Signs, especially for the second half there we of our cloud business, which is also growing.
On the secular basis as well as are the product ramps that actually we also have automotive.
Which is really on.
After a good start this year and we see that continuing so we've got that as a tailwind behind us.
I'd say, we've been able to drive growth, even if you look at FY 'twenty, one pretty pretty consistently we've been growing each quarter for quarter over quarter and year over year.
Q4, we were able to add.
Actually exceed guidance and makeup.
Service some of the demand that was there. So that was that was the positive side I think so I think the messages we've been <unk>.
Delivering well, there's been a new sort of increased surge and that's really where we're focused is working with our supply chain partners.
To be able to capture that upside above and beyond the growth rate that we've already been achieving so bottom line answer to your question is I'm very confident that we can grow revenue in the second half based on the capacity that we've.
Secured and worked hard with our supply chain partners to put in place.
And we're also going to look to see if there is if there is upside opportunity to pursue that as well.
And that's not only for this year, but as I look even into our FY 'twenty three we're starting to work with our supply chain partners, there as well to really give them advanced notice.
Because we see those trends like <unk> cloud and automotive being even stronger.
On the out years with new products ramping new customers coming online.
And we're pretty excited about our future. There. So yeah I think we'll be in the we're working hard on the on all fronts.
Great. Thank you Matt.
Thank you. Our next question comes from the line of Vivek Arya from Bank of America. Your question. Please.
Thanks for taking my question Matthew Lanai.
Look back at this earning season.
Most of most semiconductor companies.
Reported and guided the trends well ahead of expectation so much so that investors often complained about over shipments on the bulletin of orders, but when I compare your Q4 and Q1 against the expectation it's been more measured on.
Curious how much of this would you attribute to a different end market mix how much of this is due to supply constraints and then more importantly, what changes or gets better the rest of the year. So you can sort.
Like do we accelerate sales growth. Thank you.
Sure, Yes, I think for that gets a couple of things I think first it it has a lot to do with the end markets that we're in I mean fundamentally remember we're one of the only pure play infrastructure company. So we don't have.
Consumer demand that sort.
The very volatile maybe maybe good one quarter, maybe not so good in two quarters, we don't have.
A lot of.
A lot of.
The demand that sort of comes and goes we tend to and this is sort of by design by the way of the business model that we've put together.
Is to bring together the various end applications and drive consistent.
Ideally predictable growth so while we may not be as flashy and some quarters as certain companies that really have.
Some explosive demand, but then maybe maybe at the base later, we're focused on.
Slow and steady wins, the day, and continuing to execute and grow our company quarter over quarter and year over year.
Certainly theres opportunities out there to secure.
Some upside and we're working on that but I think even if you saw on Q4 for.
For US we were quite pleased with the.
The over achievement on revenue and we're very comfortable with the first quarter guide as well so I think it's more more around.
<unk>.
<unk> been one of the faster growers in the last few quarters and also our end market dynamics.
Daily will deliver more repeatable and sustainable long term growth with maybe less quarter to quarter variation that's been the strategy.
And anything changed in the second half of vs. What do you have seen on the last two quarters, what gets better from here.
In terms of the demand of the supply yeah on the demand and the Mark end market mix sure Yeah, well I think of couple of things are going on.
Yes.
Indicated in my comments earlier with Heartland.
With Harlan.
We certainly have <unk> in the second half will continue to accelerate.
We have there are new geographies coming online we believe that.
The U S will.
As shows very good prospects for the second half, we believe that China is well will go through the digestion phase and then you have Japan.
Japan and the of new countries, even even in the.
He is talking about potentially pulling on their spectrum options. So that's all positive. So we expect that to continue on.
All of our cloud business continues to grow and we see that continuing both on the secular basis as well as new products, including our ASIC storage and our Gpus, which are doing quite well in terms of smart mix.
Automotive the same thing we've got a good ramp going with our calendar.
Our model years, sorry, 21 ramps, we've got more to come in model year, 'twenty, two with additional Oems coming online as well as expanded content and even some of the new automotive I'd call. It the new breed of automotive Oems the EV only focused companies really aggressively adopting our solution. So.
We're positive there and then we've got.
Custom.
SSD controllers, both for the cloud as well as for our system OEM and finally on top of that our enterprise business has done extremely well if you look at which was surprising but if you look at even our results in <unk>.
Last year that business with our switch and Phy products grew significantly primarily on our own product cycle and we also are very optimistic about that as well so theres a number of good things.
Of that are happening in our business for that both from an end market as well as the product cycle standpoint, and so.
Our low pointed out.
You've got to we've got to go just continue to make sure we've got the right supply.
Profile of the beat that but we're we're we're working hard on that.
Thank you.
Thank you. Our next question comes from the line of Timothy Arcuri from UBS. Your question. Please.
Hi, Thanks, Matt I'm kind of question on the storage business.
It was well above seasonal for Q4, and a little bit worse for fiscal Q1.
Im little surprised the there will be below seasonal for fiscal Q1 of the way that all your customers are talking about controllers being on allocation. So I guess I wanted to just talk about that.
I was wondering maybe you can talk about what sort of UC as normal seasonal.
I think typically it sounds like mid singles to also on fibre channel.
Happenings will also.
Talk about those two factors thanks.
Sure maybe.
I'll have you answer the first first part of on storage and then Tim will have you repeat your question you broke up a little bit on the second part of it but Jim why don't you give some comments around storage.
Yeah, Hey on.
Sorry, just side the in Q4, we didn't have really strong quality and the performance of the BD is a combination of all for our own product cycle and also.
And the market the demand across the board.
In HDD end of fibre channel of certainly we see the demand.
The airline which.
The business performed really well and also.
The broad the demand therefore on the clay outside the true on fiber Chine now we do see the demand the bouncing back and also of the customer are restocking.
Because of the supply challenges in the last year has the.
Cost of lots of problem loans in type of channel. So fibre channel is a little bit of lumpy.
And then if you look at the Q1.
The frankly, the storage controller business.
When you look at the HDD and SSD Theyre actually quite seasonal it's the declining quarter on quarter by consistent of the broad market.
The fiber technology.
It becomes really lumpy the queue for performing pretty good that in the strong but the customers. The also a restocking. So we do see Q1 type of channel again.
Declining much more than seasonal but yeah.
If you look at the overall in the longer term kind of business actually supply the staple.
The quarter over quarter Lumpiness, if that for me on it.
Saturated for the last two year by the supply chain constraint.
I think of you need to repeat your second question, because we tend not to hear the clear Nate.
Thanks for that okay.
Can you hear me now so I guess the question was just given all of that moving.
Think about what normal seasonal is for fiscal.
Q2 of like it's typically up sort of the singles is that the right way to think about it into fiscal Q2.
Yes, I think.
Yes, I think.
I think Tim So first of all I think we are.
We haven't I.
I don't even know what the new normal is in storage anywhere any more of a there is certainly is the seasonality effect of that but we're not really guiding out that far at this point.
What I want to emphasize though is that even on the sort of lumpiness of fibre channel, which has definitely started I think with the shelter in place orders that went into effect earlier in 2020, there's just been a.
It's been a lumpier business the normal and so it had a very good Q4, and then obviously we've guided it down for Q1, but if you just sort of step back storage overall for Marvell is up 10% year over year.
In Q1 is what we're guiding so.
Despite some of the Lumpiness in this is the higher sort of beta business than the rest of our businesses, we're still pretty pleased with the trajectory of this business and.
And.
We do expect the fibre channel portion to normalize throughout this year, assuming that there's no more supply chain surprises.
Okay.
Thanks, so much.
Sure.
Thank you our next question coming from the line of John Pitzer from Credit Suisse. Your question. Please.
Yes, good afternoon, guys glad to see the 10% sequential growth expected the networking.
The April quarter, but I'm kind of curious when you look back at the January quarter, I'm, a little surprised that networking was down sequentially and it was essentially flat in line with your guide, but just given the level of delinquencies of the supply problem get worse or is this maybe a function that when you look at the networking business. There's portions that are just tied to campus and enterprise and then there is.
Sort of the growth parts of your businesses I guess of the grocery parts gross sequentially and there was an enterprise overhang and as you look out throughout the balance of the year. How do you think about just of reopening trade around enterprise and the impact it's going to have on your networking business.
Yeah, No I think.
As we've said the.
On the supply impacts we have seen a bit more pronounced in the networking business of that has limited our ability to deliver.
The liver upside.
We would want to.
Even then.
You got to remember too our the compare is a little bit tough because we did have a very strong Q3, I mean, you got to now go back to sort of what are you comparing it to if you remember Q3 was up very significantly from our Q2, and then year over year was up of Todd.
So the.
The flat compare.
<unk>.
While we while we wish we could've done a little better it's still on an annual basis still growing really well.
Yes, I wouldn't really breakout there was sort of weakness in one of the other I think we're coming off a big Q3, and then also the.
<unk> was up an enterprise has continued to be up and we've actually seen.
From a year ago everything everything growing so I think it's more of a more of a sequential issue and certainly we're pleased with the Q1, 10% up and.
And the business continues to do very well for us.
And then Matt just on the cost side, how much are you absorbing versus being able to pass on is it material to gross margins and is that something that sticks around for most of this fiscal year or is that something that could reverse itself in the second half.
Hey, John This is Jim Yeah, I'll take this question so.
Definitely you know as Matt mentioned earlier, we are working with the customers.
To share of the increase of the cost cash and the way we're looking at of the EC.
First the priority is to really meet the customer demand, especially me.
The increase of demand for our product as far as the gross margin.
We're very pleased with our Q4 performance to the end of Q1 Guide and then Q1 guide if you look at it it's primarily driven by mix and.
We will continue to improve our gross margin to our target of lateral we discuss scheduling of our investor day, which.
Is the 65%.
The pace of the offer that the improvement.
It's probably at the French into date, the supply constrained environment versus the <unk>.
Non mall environment.
Because we do want to make sure we meet the customers' demand increases the demand on this.
Kind of supply constraint situation. So the pace of it will be a little bit of different cash not at the we expect that the doing of our Alaska Investor day.
Thank you.
Thank you. Our next question comes from the line of Blayne Curtis from Barclays. Your question. Please.
Hey, good afternoon. Thanks for taking my question just wanted to ask I know you answered a lot of on the shortages instead of it would be short all year you did miss some shipments in January and I thought at the time of Youre thinking of catching up in April So as you look the.
The guidance of 10% for networking wanted just wanted to know your.
You're catching up on some of those January shipments within that 10% and then I think I heard you say basically everything but <unk> will be up I was wondering if you could give us any more color on what the primary drivers of that growth.
Well, yes on the second part of Youre right the.
Other than.
The <unk>, which were.
Mostly tied to the the China deployments and <unk>, which were extremely strong in calendar 'twenty and where we're seeing that digestion now yes.
Yes, the rest of it is up but there is there is not necessarily of catch up per se in Q1, I mean, we are seeing demand.
The increase and.
Think of it.
We see revenue going up and we see.
So I'd say, it's more demand driven than just low we've caught up and out of the demand flat we actually have.
Pretty robust demand picture.
For that particular business both year on year on sequentially.
And the overall to just add to what Matt said overall, we continue to have a.
The same large delinquency right. So it sits in the supply chain constraint.
Thanks.
Thank you. Our next question comes from the line of C. J Muse from Evercore. Your question. Please.
Good afternoon, and thank you for taking the question I guess to clarify gene or are you implying opex in fiscal 'twenty two is growing roughly two 5%.
And then I guess for the primary question, Matt can you discuss your engagement with Hyperscale customers can you kind of walk us through the initial work on perhaps discrete asics and how that kind of relationship is evolving to perhaps more custom solutions across.
The increased areas of processing. Thanks, so much.
Yeah, it's true.
Opex the year over year, you can think about it it's around the 3% to the typical inflation year over year, we are managing our resource allocation to ensure we continue to invest in all of the call as the platforms that we have so that's how you can model it.
Yes C J I'll take your other question so.
I think the.
And if you even go back to our purchase of of ore. There was really two we had the thesis there on two fronts, one was to be more relevant in the <unk> market.
And be able to offer full custom design capability, along with the semi custom that we had developed with or with our lead customer.
And indeed, you've seen that has gone really well the second was the recognition that in the cloud hyperscale market that more and more of the particularly compute based solutions, we're going to go to full custom or even semi custom, but the need to really have a full ASIC capability.
And these are there is a range of applications by the way these things could be anything from AI or ml chips to server class Cpus to networking products Smart next.
There's a variety of applications and as I said in my prepared remarks.
Of this trend is here to stay and we think it's good for us.
I think there is a world thats.
That's post the X 86, or certainly the co exist with the where more and more of the compute and more and more of these solutions are moving to very very customized products.
We have all of the ideal pieces too to support that in terms of our process technology, our in house Ips like our <unk> both for.
Short reach in medium and long range at the at the highest frequencies, including 112 gig.
And in our ability to really partner closely and deeply and be flexible on our business model as well on what I mean by that is we can do standard Asics that are the traditional model you can think of but increasingly what I'm seeing is the engagements with the cloud companies are really.
Really more partnership oriented where its solutions together and it's proposing architectures and proposing for different ways to do something.
And then coming up with the model that really suits their needs and so I think sort of our go to market plus our technology roadmap and then having all of these key pieces, whether it's networking IP very very strong compute portfolio with all of our history from from the <unk> side and arm based processors to to secure.
Alrighty to storage and then within Fi coming in obviously the optical connectivity. So I think we're going to we can be an ideal partner here and we think this is going to be a very big opportunity and it's going to be one that's here to stay.
Thank you.
Thank you. Our next question comes from the line of Ross Seymore from Deutsche Bank. Your question. Please.
Hey, guys. Thanks for letting me ask the question just a clarification and then a question of the clarification just gene usually you get the little color on what the other segment is going to do but the main question for Matt is on the <unk> side of things I think everybody knows the digestion period, that's going on in China now some of the transitions going on geographically and the optimism people have in the second half but.
You're really outperforming that during that transition period that we have right now and it sounds like Youll continue to in the back half. So I guess, what I'm getting at is when you think about your company specific drivers separated from the market as a whole improving in the back half do you think that outperformance for delivering now accelerates or decelerates and what are the drive.
<unk> of that performance above and beyond what the end market itself is going to do.
Sure why don't I take the <unk> question that Jean you can comment on on other.
So so yeah, Ross I think you're right I mean, we.
We've.
We performed really well on the cycle.
Had.
Six quarters of.
Sequential revenue growth in <unk>, and we were able to power through.
As new products ramp.
The new customers came on line when when when some others may be felt different phases of the digestion. So I think we're pleased with that outperformance in that run.
No.
On the China in particular deployments last year were very large and so as you pointed out I think the number of companies are going through.
Similar digestion, but we do expect this business to accelerate.
And it continues to outperform for a couple of reasons I think one is our lead customer.
Certainly gained momentum in some of the markets that will be ramping in the second half plus and in calendar 'twenty two so thats a positive sign.
And Theres also within them, there's programs, where we have new sockets, where content is also.
The new content for US and then we of our second customer Nokia, which.
This will this year will be our first full year net.
The full year, it's ramping this year into production with our baseband product it'll be a full year in 'twenty. Two and then we have additional content with that customer, which was all publicly announced last year that will start to phase in after that.
Oh I think there's yes, there's the theres a number of marvell very specific marvell drivers with some of the most important companies in the space and then even looking beyond that horizon, We've got really good traction with our with our <unk> initiatives and we are in the mix on a number of very important sockets across all the Oems that will keep driving growth here. So we're.
We feel very good about our <unk> position that it can continue to outperform.
<unk>.
And accelerate going forward.
Yeah Ross on the other question.
Just to remind you of other is largely of our clean trip isn't it for today and debt.
Quarter over quantity of it's actually going to be just the app a couple of million dollars of sequentially.
Thank you.
Thank you. Our next question comes from the line of tourist Lundberg from Stifel. Your question. Please.
Yes, thanks, and I'll keep it to the one question.
So.
You referenced some strategic meetings within fire I know the deal is not going to close for a few more months, but from those meetings could you perhaps give us a few examples on how the two companies combining the IP.
To go out and talk to some newer opportunities.
Yes, so so.
Yeah, Let me give you a little background on.
On what we did how we're thinking about it and maybe some broad brush strokes on the on the opportunity is certainly we're not we're still two separate companies. So I think more to come on that story.
And some of the some of the opportunities as well as some of our pronounced and some are nuanced, but but the the bottom line is for.
First of all Ford and Loy, the founder of <unk> put together just an incredible team I mean, we've now gotten exposure to there.
Through this process, which was great.
Their key engineering leadership their key product marketing people their business unit leaders and also same on our side. So it was the really are very very powerful I'd say joint meeting, where we reviewed all of our various businesses and we were able to identify a number of exciting areas, where we certainly can work together and.
Generally the technology is obviously very complementary, but we do sit on the same systems and.
And certainly there is things like process roadmap.
And.
And customers, where we can go in together.
I'd say, the net and the <unk>.
We the reason we did this is we're really approaching this as a merger with the <unk> team and so we're going to bring them in and we're going to look at the really the combined company.
Spending and identify jointly the best opportunities to get the highest ROI and drive the <unk>.
Best topline growth and so what we found is as we believe this is going to give us an opportunity to allocate.
Some some additional spending in some very targeted areas within the <unk> team to actually accelerate some of their ambitions and growth.
And I can tell you from our side of my entire management team multiple layers down is very excited about the team coming over and their product lines and the prospects.
And I look forward in future.
The meetings to actually start articulating some of these in a lot more detail.
But I just ended by saying somatic Lee.
The combined I think we become much more important and much more relevant in the cloud hyperscale market.
Than either company would of been independently and I think together given the system level of complexity that these companies are dealing with.
Of the cutting edge performance, they need the deep sort of real technical and strategic.
Partnerships, they're looking for.
We believe that this can be as important and strategic of market and probably larger market combined than five G.
And so I think we're.
Of our strategy, we laid out at the Investor day, which was a little bit before and five but certainly was on our mind, which was really think about <unk> is this wave of growth that we're seeing right now the <unk>.
<unk> been following that.
And certainly in Fi layering and will accelerate our opportunity there and then we have a lot more of share at a later date as well on our automotive opportunities, which is starting with Ethernet, but it's now branching out in the other aspects of marvell, including storage and security compute.
The six and some other additional networking type of solutions. So all in all of I think the combined company is going to be.
Thank you for that context.
Thank you. Our next question comes from the line of Christopher Rolland from Susquehanna. Your question. Please.
Thanks for the question.
Going to the ASIC side of the business, maybe piggybacking on some that have already been asked.
But maybe you can talk about where this new design pipeline is coming from is it storage networking is of compute.
Where are you getting the most traction there and then as we look out let's say.
Five years, Matt what percent of your business do you think sort of expect or would like.
<unk> to be.
Yes, I think let me give you the backdrop. So I think the exciting part of our of our ASIC opportunity and I would even broaden that to say our broader call. It advanced technology opportunity of which <unk> is certainly an important piece this would be what I would call of <unk>.
Think about our five nanometer platform has its own.
Is it potential growth opportunity.
We publicly announced this.
In August of 2020, but we have been carrying designs in this technology as early as.
End of 2019 type of timeframe early 2020.
So since that timeframe.
We've grown this design opportunity funnel to be very significant in size relative to anything we've seen before on the single sort of process node and its very broad Chris I think thats sort of of the point I want to make the I think there are if you go by market certainly there are.
There are <unk> design that we've already won and secured as an example, there and there is a large pipeline in front of us as people move from sort of 12, 14, 16 nanometer type of products and they want to go all the way down there are significant cloud hyperscale opportunity some of those I mentioned earlier, but also of.
The enterprise.
We have we've had good success in promoting our arty on base Cpus into that market that would be more of a standard product by the way.
The other custom.
And then even in storage.
We've seen some very important customers in the storage market take a leadership role and work directly with us too.
To develop state of the art Flash controllers for things like data center and enterprise applications using our five nanometer technology. So it's this is much broader Chris then just Oh, well Marvell has got a five nanometer thing and they can go off of Asics with the.
The standard sort of model and that will generate some revenue, it's really a transformational platform for us, which where we could use for a.
Traditional asics, but increasingly we're finding that these custom opportunities that people come and ask us for several of them have now converted into marvell products, where we're designing the entire product based on the spec.
And designing the products for them rather than and then of course, there is more value that can be captured there its a more stickier engagement.
And these are all very significant type of opportunities in particular in the cloud market. So I hope that's helpful helpful context to sort of broaden it because certainly we had a view of maybe going back to when we bought of era. Hey, This will be great. We can have a nice big ASIC business, but its turned into much more than that and.
And.
Yes, and we're excited to talk about that in the coming quarters as we close designs and we liked we take advantage of the pipeline that our sales team on our business units have developed which is which is extremely strong.
And what percentage do you think it could be in five years.
That's hard to say and I think it depends on what you mean like is it how much is <unk> versus how much is semi custom versus how much is of <unk>. But this is this is clearly a miss.
This is the future growth of the company. So you should assume these things are multibillion type of opportunities for the <unk>.
<unk> platform going forward right I mean, this is where we're going to be the growth engine of the company. So it's very significant these are not niche.
One off designs that we're winning that will kind of be of nice sort of headline news product. This is this is going to be really the driver of the company's revenue growth. So so in aggregate all of this becomes a very significant portion of our future of company revenue.
Thanks, Matt.
Yeah.
Thank you. Our next question comes from the line of Joe Moore from Morgan Stanley. Your question. Please.
Great. Thank you in terms of the constraints I Wonder if you could talk to you mentioned substrates as being maybe the biggest factor and then certain geometry, wafers, which geometries of those and then just as a bigger picture aspect of this it seems like from our checks the networking chips in general are tighter than the other things.
Even though there is.
There is tightness in graphics and then we've got the table to grow quite a bit is there something different with substrates and things like that where this is affecting the infrastructure business has more than its affecting other areas.
Yes, I think on the for on the first question.
It's hard to say I mean, this is such a dynamic environment right we've been reviewing.
Every part of the supply chain as of.
The team for for months right.
We're finding that.
We saw we saw a one issue and then another one it seems to appear in for even go back to our last earnings call.
I remember there were some questions there like tell me about the supply chain issue in the fast forward three months in the U S automotive industries in disarray, because they can't get chips right. So things things are moving out of at a very rapid pace.
I'll note that we're supplying quite well actually on our automotive products. So don't don't make that comment with marvell thats more of a general one.
But we do see.
Capacity stress with complex substrates for sure we see some of the quote older nodes on what I would mean by that is this isn't sort of $5 seven nanometer type of things. These are more going back to colors.
Call, It 2008 and above right that have different pain points.
The companies are working with and that's where a lot of the automotive I think tends to set so.
There's not a silver bullet, it's just going to take a lot of hard work and even things like I think I noted in the last call things like wire Bonder.
Have those lead times of stretched so our <unk> are just having a hard time, keeping up now they're spending money and they are certainly adding capacity and we're engaged in the planning process to make sure were okay, but that's that's maybe a little bit more detail.
On the on that side and then what was your second question.
Yeah, No that was basically the question is just if there is something different.
Well I think networking.
Yes, I mean graphics chips are in short supply, but people are kind of growing 20% faster than they thought and then constrained at that level, where it seems like the the networking shortages or just the severe we're hearing about it from your customers, but demand doesn't seem to be on that kind of crazy trajectory.
Yeah, it's hard for me to benchmarks since we're not in the graphics business.
That's a little bit of of different scale, but but certainly the complexity level of these products. When you look at just the complexity of the substrates alone I mean, I think the the number of layers. If you go to these advanced products and call. It 14, 16 nanometer and below of probably doubled in terms of the the complexity of the substrates.
And Theyre just extremely large die these are the thousands of <unk>.
Some of these die.
Look the virtually the size of of credit card. So.
You've just got very low die per wafer.
<unk> got a lot of demand and it's been difficult for people to keep up there is also test constraints that the test times on these things are.
Very long because of the complexity of the products. So theres just maybe that's the reason, but now run.
The run on analog business and I'll run Marvell, but I've never run of the graphics business.
I'm just trying to ask for asking about that.
Just comparing and contrasting the that's very helpful. Thank you so.
Youre welcome.
Thank you and our final question for today comes from the line of sort of any pressure from SMB seen the cool your question. Please.
Thanks for squeezing me in.
The question on the Opex on also on the margins.
I guess as you ramp some of this five nanometer designs and as you engage more in five nanometer I'm just wondering how you're thinking about opex, if theres going to be more volatility as the go forward and also I guess as we go to the second half of the season and beyond and five G. On the Essex become bigger portion of your <unk>.
Revenue do you see any further opportunity to improve your gross margins from these levels. Thank you.
Yeah.
The right our team has done an excellent job there to manage the operating expense at the tail Youre right. There is some variability of quarter over quarter due to the project cost debt and.
Also you know we are working with our customer to get there.
Sometimes the.
The customer of partial for the Mi Mi ex salaried.
Push out so there are variations, but I feel quite comfortable and look at the overall for fiscal 'twenty. Two we can manage the opex at the same time investing.
So.
For instance.
Our Q4 of our Opex is the slightly higher because of project cost of that will manage the overall.
On the margin side I think.
Our number one objective is the.
Really to meet the demand that we have significant opportunities for them for the company and then we have increase in the demand across all of the growth of platforms as Matt mentioned, the five key quality and also automotive so that's actually our number one objective and debt.
We certainly will continue to improve gross margin and to make sure we get the most of the margin dollars out of our business.
Got it.
Thanks, Jim.
Thank you. This does conclude the question and answer session as well as today's program. Thank you, ladies and gentlemen for your participation in today's conference you May now disconnect. Good day.
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