Q1 2023 Marvell Technology Inc Earnings Call
[music].
Good afternoon, and welcome to Marvell technologies fiscal first quarter 2023 earnings conference call. All participants will be in listen only mode should you need assistance. Please signal a conference specialist by pressing the star key followed by zero.
After today's presentation there'll be an opportunity to ask questions.
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.
Thank you and good afternoon, everyone welcome to Marvell first quarter fiscal year 2023 earnings call.
And me today are Matt Murphy, <unk>, President and CEO and Jean Hu our CFO .
Let me remind everyone that certain comments made today may 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.
Neither of you 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 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.
Website with that I'll turn the call over to Matt.
Matt.
Thank you Ashish and good afternoon, everyone.
In the first quarter of fiscal 2023, the Marvell team drove another record level of revenue at 1.45 billion exceeding the midpoint of guidance growing 8% sequentially and 74% year over year.
We saw continued strength in bookings and all our data infrastructure end markets.
Higher revenue achievement was primarily driven by our data center market with additional strength from carrier infrastructure and automotive results both of which were also above forecast.
Due to supply chain related impacts results from our enterprise networking market were below our guidance. However growth was still very strong with revenue growing a robust 64% year over year and 9% sequentially.
The Marvell operations team did a great job in navigating a tight supply environment that was further compounded by COVID-19 related manufacturing challenges at our suppliers in certain geographies.
Our team's efforts were a key enabler of our first quarter revenue exceeding the midpoint of our forecast we continue to make progress in securing additional capacity with our strategic partners to enable sustained revenue growth.
Let me now move on to discussing our five end markets starting with data center.
In our data center end market revenue for the first quarter was $640 5 million.
Eating our guidance, having grown 12% sequentially and 131% year over year.
This strong performance was broad based with multiple product lines contributing to excellent results.
Cloud continues to be a source of marvell strength in the data center.
We are enabling our hyperscale customers to add new use cases, bringing the benefits of AI and machine learning to businesses increased process automation and productivity and drive deeper relationships with their customers.
I'll now discuss a number of marvell product cycles, driving strong growth in cloud starting with electro optics.
We're seeing strong demand for our Pam solution inside data centers and <unk> between data centers.
<unk> cloud data centers lead tier one customers are currently driving volume deployment of our Pam based 200 gig 400 gig solutions.
The rest of the market has plans for starting deployments later this year and next year.
As bandwidth requirements continue to grow we expect the role of Pam based electro optics to expand replacing legacy solutions and as a result to grow our opportunity.
We believe that the next generation of more powerful server Cpus will accelerate the need for Pam technology.
In addition to this expansion we are also increasing our content per module with our next generation of higher speed solutions that we are now starting to ship.
Driven by the growth in AI deployments, our first quarter results benefited from a ramp in volume shipments of our 800 gig Pam solutions at two large customers.
The bandwidth expansion inside data centers is also driving a significant increase in connectivity between data centers, creating a growing opportunity for our 400 ZR plug a hole optics. Our team is achieving great success by driving the adoption of these solutions at multiple customers and we are projecting strong revenue growth from these products.
Moving on to compute our cloud optimized design win momentum continued in the first quarter and we want accustom smart and they've got a hyperscale customer.
We are seeing more adoption of GPU based architectures inside data centers a trend that we are ideally positioned to address with our <unk> platform, which is now in its 10th generation.
This design win is one more example of the growing demand for cloud optimized silicon, which we see as the largest incremental growth opportunity for marvell inside data centers. We are confident that we are uniquely positioned to win these opportunities with our leading portfolio of compute networking security storage and high speed electro optics IP.
Delivered on our five nanometer platform.
Moving on to storage within the cloud.
In the first quarter cloud demand for high capacity storage continued to increase driving solid growth for our near line HDD controllers for amplifiers.
Our SSD controllers also contributed to strong year over year revenue growth.
We are now reaping the benefits from our datacenter SSD business, which we built from the ground up starting in 2016, we increased investment in critical IP development accelerated our process technology cadence and quadrupled our firm working.
Working closely with the leading cloud companies, we optimized our SSD controllers to address their quality of service and security requirements.
We developed state of the art error correction for the most advanced NAND Flash technologies, coupled them with our in house low power fives and accelerated our pcie roadmap.
While the leading SSD devices today are shipping Pcie Gen. Four solutions Marvell has already won gen. Five datacenters sockets at three key NAND Oems.
Additionally, we started investing in pcie Gen six in 2019.
This development coupled with our five nanometer technology platform has enabled us to win a key NAND Oems for their Gen six ssds.
Our data center storage business has been built on a long and sustained period of technology investment deep system knowledge.
Extensive customer relationships and very sticky custom firmware delivered on our advanced process technology platform.
We expect our position to continue to strengthen based on our proven technology platform and multiple secured design wins in the next generation of data Center Ssds.
We anticipate that the next big evolution in cloud data centers will be the adoption of <unk> or compute expressly an industry standard for connecting processors accelerators in memory and we are planning to enable that trend.
Last week, we held a tech talk and which we explained the fundamentals of CX cell technology.
And its role in bringing new levels of performance to next generation cloud data centers.
If you were unable to attend I would encourage you to watch the recording posted in the Investor Relations section of our website.
We described how silicon components based on CSL will facilitate new cloud architectures by addressing the multiple memory scaling challenges and current data centers.
Put simply CSL will finally allow DRAM memory to escape the constraints of being tied down to a single compute device such as the CPU and become a shared important resource utilizing the well established pcie fabric as the interconnect.
Marvell is uniquely positioned to address the <unk> opportunity given our deep relationships with memory Oems are growing position within hyperscale customers.
And our advanced Pcie roadmap.
We recently bolstered our efforts in this area with the acquisition of Tanzanite, a leading developer of advanced EXL technologies, Theyre complimentary IP and world class team at more resources to Marvell accelerating our <unk> roadmap to address opportunities in closed design wins, which are right in front of us at multiple customers.
Yeah.
We see opportunities for a host of new products, including <unk> standards cooling devices switches and accelerators.
In addition, we see the potential to embed <unk> IP and a broad range of our data center products, including <unk> six custom compute engines D. P use electro optics re timers, smart <unk> and SSD controllers.
We see a multibillion dollar Sam expansion opportunity driven by CSL over time, and I look forward to updating you on our progress.
Moving on to our expectations for the second quarter of fiscal 2023.
Our data center end market, we are projecting continued growth to layer on top of the strong first quarter results. We project our datacenter revenue in the second quarter to grow sequentially in the low single digits on a percentage basis.
Year over year grow approximately 50%.
We expect revenue from cloud to grow significantly faster than the on premise market, both sequentially and year over year in the second quarter.
As we progress into the second half of this fiscal year and beyond.
We are looking forward to additional incremental contributions from our cloud Ethernet switches and ramping our large set of cloud optimized custom design wins.
Marvell has a unique ability to offer all the critical data center IP under one roof designed to work seamlessly together in a custom solution is proving very attractive to customers.
As a result, our engagements with Hyperscale is have moved well beyond pure ASIC programs to include various combinations of Marvell IP delivered in solutions tailored to each clouds unique requirements.
Okay.
Turning to our carrier infrastructure end market revenue for the first quarter was $252 million above our forecast growing 5% sequentially and 50% year over year.
We previously reported a substantial sequential step up of over 30% in our <unk> business in the fourth quarter of fiscal 2022.
From this strong base it was great to see both sequential and year over year revenue growth for carrier continue in the first quarter.
The growth in <unk> deployment, combined with Marvell product ramps at multiple base station customers continued to fuel strong growth in this end market.
In wired, we are seeing strong demand for our 400 gig coherent electro optics portfolio driven by rapid adoption in the metro and long haul carrier markets coherent.
Acknowledging is critical to enabling high speed data transmission across long distances to meet the ever increasing demand for bandwidth from operators.
Earlier this week, we announced that we've shipped over 100004 hundred gig coherent DSP.
Positioning us as the leading merchant provider of these products. We are also aggressively focused on developing and launching our next generation of coherent products.
This is a very key piece from the <unk> acquisition as the same technology powers. The 400, ZR ZR Dci cloud market you heard about earlier.
Looking ahead to the second quarter, we expect revenue from the overall carrier end market to grow in the high single digits sequentially on a percentage basis, while year over year growth is expected to remain strong at approximately 40%.
Moving onto our enterprise networking end market revenue for the first quarter was $286 6 million growing 9% sequentially and 64% year over year as demand remained strong in this end market.
While this end market represents our highest delinquency relative to the size of the business. We remain strongly focused on improving our ability to supply more products to our enterprise networking customers to help them meet their growing demands.
Our our growth has been driven by share gains and our increase in content starting to materialize as our customers began shipping their new platforms to address enterprise network modernization.
We have seen a large increase in the adoption of our multi gigabit fives, which have a significantly higher selling price compared to our gigabit products.
We expect the penetration to multi gigabit ports will continue to increase a tailwind to our business.
Our strong growth in enterprise networking is primarily the result of our own unique product Cyprus.
Looking beyond this quarter, we expect growth to continue leveraging our refreshed switch and phy portfolio and incremental revenue from the ramp of custom silicon and are arty on arm based Gpus displacing alternative architectures.
In the second quarter of fiscal 2023, we expect a continuation of strong demand for our products from the enterprise networking end market and further improvements in supply.
As a result, we are projected revenue to be up sequentially in the mid teens on a percentage basis and year over year growth of approximately 45%.
Yes.
Turning to our automotive and industrial end market revenue for the first quarter was $89 3 million growing 12% sequentially and 94% year over year.
All of the sequential growth came from our automotive business, which drove over 50% of the total revenue from this end market.
Although we are still unable to fully satisfy the growing demand for a bright line auto Ethernet solutions. The results supported by incrementally better supply solutions exceeded our guidance.
Our auto revenue growth is being driven primarily by our new product cycles. The adoption of Marvell Ethernet technology in cars is continuing to increase.
As Oems design and higher speed solutions to address the increase in bandwidth or dollar content per car is continuing to grow.
We are also winning new customers and growing our content at existing customers. We now have Ethernet design wins that eight of the 10 largest auto Oems worldwide and 36 Oems in total.
Looking ahead to the second quarter of fiscal 2023 for the combined auto and industrial end market. We are projecting sequential revenue growth in the mid single digits on a percentage basis, while year over year growth is expected to be over 60%.
We expect strong growth to continue from our automotive business with revenue projected to more than double year over year.
Moving onto our consumer end market revenue for the first quarter was $178 5 million growing 7% year over year.
The growth in this end market is being driven by our SSD controllers, partially offset by declines in our PC HDD business.
On a sequential basis revenue declined by 4% in our consumer end market below our forecast for a flattish outlook due to a reduction in demand from the PC HDD market.
We are not the bellwether of global PC demand as it represents a relatively small amount of our revenue we did see a rapid change in tone from the PC market and we expect the weakness to continue.
From our perspective, the shift from hdds to ssds in the notebook PC market is almost complete and our revenue from notebook hdds in the first quarter of fiscal 2023 was less than 1% of consolidated Marvel realm.
Looking ahead to the second quarter of fiscal 2023, and our consumer end market. We expect revenue to sequentially decline in the mid single digits on a percentage basis and be flattish year over year.
In closing we delivered record results for the first quarter and are guiding for continued strong growth in the second quarter.
We are seeing robust demand for our products and our design win momentum remains strong.
With 88% of our revenue coming from data infrastructure, we are confident that marvell favorable end market exposure makes us one of the best positioned semiconductor companies to benefit from strong secular growth trends.
In the second quarter at the midpoint of the range, we're guiding our revenue to grow by 41% year over year, which is almost entirely an organic comparison.
We expect the strong operating leverage in our business model to drive non-GAAP EPS at the midpoint of guidance to grow by 65% year over year significantly faster than our projected growth in revenue.
As you've heard throughout this call are unique product cycles had been a big part of our above market revenue growth as.
As we look into the second half of this year and beyond.
We are confident that our unique growth drivers in our cloud <unk>.
Auto and enterprise networking end markets and our strong track record of execution through economic cycles will continue to be a source of strength.
You will remember from our prior calls and our Investor day presentation that we have already won a significant number of design wins, which we are projecting will add a substantial amount of incremental revenue to marvell going forward.
While the external environment is challenging marvell business continues to be strong, including strong bookings in our core data infrastructure end markets.
As we move forward, we intend to continue to act as we always have a diligent about changes react promptly and manage our business and costs aggressively.
On behalf of Marveled leadership team I, Thank our employees for their dedication and driving stellar results. Our employees are the backbone of the company and we're excited that Marvell recently ranked third overall on the list of best places to work in the Bay area by the San Francisco business Times, and Silicon Valley business Journal.
Receiving this award is so special because it is the employees who decided the winners we have an outstanding team and this award reflects our culture values and dedication to creating a collaborative workplace, which fosters creativity and innovation.
With that I'll turn the call over to Jean for more detail on our recent results and outlook.
Thanks, Matt and good afternoon, everyone I will start immediately deal final financial results for the first quarter and then provide our outlook for the second quarter of fiscal 2023.
Revenue in the first content with one to $4 7 billion.
<unk> growing 8% sequentially and 74% year over year.
Data center with our largest end demand keeping driving 44% of consolidated revenue.
Enterprise networking with Max launch it didn't meet the 20% of total revenue followed by carrier infrastructure at 18%.
At 12% and auto industrial and 6%.
Gross margin was 51, 9% now.
non-GAAP gross profit was 900, and the <unk> 7 million or 65, 5% of revenue and now the Iraq currently paid by reach product mix.
Operating expenses were $681 million and include the cost of share based compensation expenses.
And the transition of acquired intangible asset <unk>, secondly, an application and divestiture related costs.
non-GAAP operating expenses were 430 <unk>.
19, the increase in R&D headcount and project expenses to execute the design wins across all our aging infrastructure in the market.
As we outlined at our Investor Day last year, we plan to continue to invest in R&D given the tremendous opportunities that we have in front of us while keeping opex growth well below topline revenue growth to drive to our long term target model.
And operating income was $70 million.
We achieved record non-GAAP operating profit of 500, and they tell me up 123% from a year ago.
And our non-GAAP operating margin was 35, 4%.
During the first quarter in our GAAP income tax expense was 200 and defining this included the impact from a onetime noncash tax charge of 200, and <unk> offset by other tax benefit in the quarter.
200, and the <unk> <unk> and noncash tax charge was due to a remeasurement of our net deferred tax asset as a readout for obtaining an extension of our lower our intuit HP packaging.
For the first quarter GAAP loss per diluted share was <unk> 10.
non-GAAP income per diluted share with <unk> up 17, 9% year over year exceeding the middle point of our guidance.
Now turning to our balance sheet and the cash flow during the call to your cash flow from operations was $195 million as we increased our working capital investment to support the topline revenue growth very tight supply chain environment.
The increase in working capital was primarily driven by increased inventory, especially raw materials and working process grants helped us navigate through ongoing supply chain disruption. We also made 86 million in payments during the quarter to secure long term capacity with our suppliers.
And so will the endo for first fiscal quarter, our cash and cash equivalents were $465 million and now long term debt with a $4 5 billion.
Ah graph added to EBITDA ratio was two three times and net debt to EBITDA ratio was two times levered.
We returned $66 million to shareholders through $51 million in cash dividends and $15 million to share repurchase during the first quarter.
Subsequent to the end of the first quarter of fiscal 2023 or the first three weeks. So for the second quarter, we repurchased an additional $50 million of op shares through our <unk> program.
We have maybe started a share repurchase program as we believe it is in the past and trade show for the company and our long term shareholders.
In summary, and my myeloid team executed exceptionally well delivering accelerated top line growth <unk> growth and strong earnings expansion significantly faster than revenue growth.
Turning to our guidance for the second quarter of fiscal 2023, we expect the following results.
Revenue in the range of one calling to find one 5 billion plus or minus 3%.
GAAP gross margin in the range of 49, 6% to 51, 9%.
non-GAAP gross margin in the range of 65% to 65, 5%.
GAAP operating expenses to be approximately 669 million now.
non-GAAP operating expenses to be approximately $435 million, which assumes that we will complete the acquisition of <unk> in the second quarter.
For the second the content, we expect non-GAAP tax rate of 6% leased.
We expect our basic weighted average shares outstanding will be $853 million and now a diluted weighted average shares outstanding will be 862 million.
We expect GAAP earnings per share in the range of <unk> <unk> to <unk>, we expect non-GAAP income per diluted share in the range of <unk> 53 to 59.
Operator, please open the line and announce Q&A instructions. Thank you.
We will now begin the question and answer session.
To ask a question you May Press Star then one on your Touchtone phone.
If you are using a speakerphone. Please pick up your handset before pressing the keys to withdraw your question. Please press Star then two in.
In the interest of time, please restrict yourself to one question only if you have additional questions. Please rejoin the queue.
Our first question is from Toshi Hari with Goldman Sachs. Please go ahead.
Good afternoon. Thank you so much for taking the question and congrats on the strong execution.
Matt I was hoping you could speak to your expectations for the second half both from a demand perspective, and a supply perspective.
I think last quarter, there was a little bit of confusion as it pertains to the full year outlook. So if you can kind of confirm how youre thinking about your overall business, but particularly data center into the second half that would be super helpful. And then again, if you have the supply to support.
The strong outlook. Thank you.
Yes, thanks to share and great to hear from you.
Yes, so we're pleased with the results and execution.
In Q2.
Oh I'm.
I'm sorry in Q1, and as you saw we had a very strong quarter, and datacenter, which I'll come back to in a minute but.
Just to kind of reframe from from the demand side.
And all of our end markets, except consumer we see very strong demand trends, especially here.
Bookings have been very strong in the last two quarters.
Demand our demand outlook for the year continues to be strong.
And.
With respect to data center, specifically, we did have a strong Q1.
Better than expected.
We still have pent up demand.
Lack of supply there for the second quarter, but we expect actually a reacceleration in the data center in terms of our growth in Q3, and Q4 I E. The second half and on top of that we have incremental new design wins that we've secured over the last two.
12 to 18 months, which we've sized roughly at call it $400 million incremental next year in 800 the year after that is actually going to start layering in as well in the second half so.
From our perspective ex consumer demand continues to be very strong datacenter in particular.
It's going to have a great first half and a great second half and then relative to supply.
We really first of all credit to our operations team doing a great job in the first quarter navigating all of the different impacts going on in particular in China, and delivering a strong quarter.
Looking forward we.
<unk>.
We're starting to see the benefit of all the investment we've put in over the last year into our supply chain, whether that be the improvement in systems and tools the relationships and the capacity that we've secured and so we believe that that's going to continue and we do see a much improved supply.
Outlook.
Not only in the short term as you can see from our results both beat.
Beating in our Q1, and then guiding strongly for Q2, but also in the second half Toshi.
And again I think Thats. The result of a lot of hard work and transformation and our supply chain to meet our growth plans. So.
In summary, we have very strong demand.
Driven by data center, but also in <unk> in automotive and the other things we've talked about and we've seen real improvements in our visibility into the supply we're going to get to go meet that customer demand.
Great. Thank you for all the detail.
Yes.
The next question is from Chris Caso with Raymond James. Please go ahead.
Yes. Thank you.
I'm wondering if you could talk a little bit about the enterprise networking business.
And I guess it came in a little below your expectations, but yet you're still speaking about supply constraints in that area.
Is that a situation where.
Youre customers are supply constrained elsewhere, and you're waiting for them, maybe just give some explanation of dynamics in that part of the business.
Yes, Thanks, Chris Yeah. This was definitely a quarter, where the mix wasn't exactly where we thought it was going to be from when we guided.
As you can see we over achieved in data center, and we Underachieved on enterprise, but as I pointed out in my comments.
The delinquency and kind of the unfulfilled backlog.
Relative to the size of the business is actually still the highest in enterprise. So this was really a case of just us being unable to execute our supply plan for the quarter.
Nothing to do with demand in fact, the demand from our enterprise customers continues to be very robust.
Looking into the second quarter and throughout the year. So it was nothing to do with with with them. They they want more of our product and you can see somewhat of a catch up in.
In Q2 with a very strong guide.
Sequentially and into the second quarter, but we see that continuing Chris so.
I know theres been a lot of noise out there.
Around around enterprise, but.
From our perspective in talking to our customers.
Demand remains very strong and in fact were.
We're behind in terms of our supply to catch up, but but I think consistent with what she was asking we are.
We are looking to improve that in the second quarter and also through the second half.
Got it thank you.
Yes.
The next question is from Gary Mobley with Wells Fargo Securities. Please go ahead.
Hey, everybody. Thanks for taking my question and congratulations on the good results.
Wanted to ask about.
The supply situation and you just articulated improving supply coming online for the balance of the year.
To what extent is that being driven by you, perhaps giving your foundry partners at better forecast how much of it is being driven by maybe you.
Drawing some more money their way in.
Payments and to what extent is it being influenced by some shifting of fungible capacity is the semiconductor market is no longer universally strong so maybe you're benefiting person redistribution of supply.
Yeah excellent question and I think there's probably a piece of all of that.
Thank you.
When I look back over what we've accomplished.
One is we had to do a fairly significant education process across the supply chain of <unk>.
Marvell prospects, how all the different pieces have come together from the different M&A, we've done our end market focus et cetera, and so I think we did a good job of that of getting getting the.
The broader supply chain ecosystem to understand the marvell opportunity and so to a large extent, they're betting on us and their supporting our growth and you can see that right just in terms of the.
Year over year growth, we're achieving which by the way is off of a pretty strong year. We had last year. So that's clearly a factor.
We have also signed.
Agreements relative to securing capacity and you can see some of those that have shown up in our Q or eight case, we've issued strategic partnerships. We've entered into so some of that has been down payments and supply agreements to ensure that we have the right capacity I think that some part of it.
Then.
It's hard to say, but on the last part of it the sort of Fungibility.
It may be coming into play a little bit, but it's too it's too early to say and quite frankly the <unk>.
Supply we're seeing today is we can really mostly attribute that to sort of our own effort.
I will say and just to be very clear for everybody on the call.
Not out of the woods here are unfulfilled backlog has continued to grow each quarter.
We're definitely working that down we're we're focused very much on the end demand and shipping to the right people and we feel like we've done a good job of that in terms of keeping our customers' lines, moving and not causing impacts and being very agile.
But I think to the extent that on that third point, the fungibility side, if there were to be.
True.
Reduction or capitulation, let's call it of the PC and consumer end market and not meeting all the supply they've consumed that certainly could be an incremental thing we could look at it in the second half, but that that's not quite there yet, but maybe some of it is we do see pockets of things opening up but it's really hard when you sort of drill into it to figure out.
Where it exactly came from.
That's helpful kind of a combination because you sort of nailed it in terms of.
Thanks Pat.
The next question is from Timothy Arcuri with UBS. Please go ahead.
Hi, Thanks, I have just a broad question kind of on demand signals.
To some degree because.
Supply has been so tight it does create the potential that some of the orders and I'm not saying for you, but I'm just saying you know broadly are being placed just to secure their spot in line and not really backed by.
Underlying sell through at the customer or even the customers customer level and it sort of creates the risk that the chip companies are going to see more of a delay in sort of the demand cycle at this time I.
I think it's less of a risk for you, but but I guess my question is how do you assess that as a risk and really the question I guess is on the tenor of your discussions with your customers do you get the sense that there are some examples of customers, placing bookings just to get in the queue. Because you have such long lead times I ask because some of the big large cloud customers are beginning to slow some of their higher.
And things like that so I'm just wondering what the tenor of your of your talks with them. Thanks.
Sure Tim Yeah, no it's not unlike other cycles, where certainly the phenomenon of you pointed out and this is the investor concern right more broadly in <unk>.
Have customers over indexed on their order placements.
And what happens when demand stops or slows down. So we've taken this very seriously I mean I just did.
Pretty much half a day a review in the last few weeks with my entire team.
Going through each of our product lines going through to the customers and really kind of working through at an individual level.
<unk>.
Where we still see the demand do we see any inventory building up if so what does it look like in that type of an exercise and what I can tell you is there's no real.
Real examples I can point to or anything thematic I guess in some ways.
They have the benefit that we've been we've been somewhat behind.
Although I think we've done a good job of keeping everybody's lines moving but certainly we haven't been a company thats been swimming in capacity. So I think as we look out now, especially we are.
The kind of global economy is beginning to moderate we're able to kind of take a look now and do a refresh, especially with our improved supply situation and really make sure. We're allocating it to the right people. So it's a very active process, Tim but I can't give you any nuggets of specific examples where I think somatic Lee.
Inventory, maybe building, but I guess I would conclude by saying we did we were pretty transparent in the prepared remarks about what we saw in the consumer segment, which albeit.
It's 12% of the business.
And of that.
A smaller portion of it is really exposed to what I would call kind of.
True consumer like Pcs and things like that but that did very much slowdown there definitely was a change in demand.
And as a result, some some supply that had there some inventory that had built up.
But we've got other moving pieces, even with consumer that's sort of offsetting it so long way of answering it I don't have any great examples, but we're on it we're watching it.
But I'd say the bulk of the meeting to be honest when I had it was.
Was.
The demand signals being very strong right across the cloud companies across our five business enterprise Wired Theres a lot of great opportunities for us and a lot of this Tim is driven on marvell product cycles, it's not really a necessarily an end market phenomenon, we're dealing with here.
It's really the new product ramps that you are very aware of across these different.
Segments, and those seem very much intact and aggregate.
Thanks, Matt Yeah, I mean, I think in the continuum of companies that have riskier youre at the bottom of the list, but thanks for the thanks for the questions early on interesting.
Yes.
The next question is from Vivek Arya with Bank of America Securities. Please go ahead.
Thank you for taking my question just wanted to clarify Matt. If you have seen already or are baking in any supply or demand effects of the China Lockdowns Europe turmoil, but.
My bigger question is how do we conceptually align this notion of rising delinquency or unmet demand with rising inventory at both on semiconductor company balance sheet and even at some of the large networking Oems.
At what point does this rising inventory across the supply chain start to become a concern.
Great. Thanks, Vivek, yeah on the first question.
Again, we were.
As you know based on the timing of our reporting we're like we're like everybody else is going right. Now we had the we had the month of April to comprehend in there relative to the China Lockdown.
And we.
We navigated it really well I think one of the reasons for us is that when when Covid first happened.
When the pandemic first began there was.
The major Lockdowns everywhere.
China, including and also southeast Asia.
Our operations team did a really good job of building up supply chain redundancy and resiliency over the last two years, so effectively dual sourced almost everything we can coming in and out of China and even even some of the other regions over there. So there was some impact there was there was a little bit of product revenue were.
Could we have gotten supply out of China, we could have fulfilled but it was very small vivek to be honest with you. So we're able to be fairly agile in terms of moving things around so that.
That was a positive on the.
On the war in Ukraine, and the impact on.
In the EU again, I think youre hearing the data points right, we don't see it directly but certainly on the slowdown in the consumer segment.
People's budgets being patch things like that I think thats part of the issue with some of the consumer end market commentary again, we're not really in there so and we don't have operations.
And in Ukraine, or Russia. So we didn't really have any impact on that so I think we we're okay. There on the commentary on rising inventory look I'm very aware of this you can pull everybody skus out and look at.
And one simple thing we will do is look at.
OEM companies revenue growth in our OEM companies inventory growth and you can see across a wide range of companies and industries.
And inventory far exceeding.
<unk>.
Revenue growth. So that is something we're paying attention to where we're using that to dive in deep with our customers.
But I would say that.
Our view tends to be like a lot of our customers, which is the end demand, especially in enterprise and cloud and.
And our product cycle in <unk>.
The demand looks looks pretty strong, but there is there is there are missing pieces. There is the golden screw issue.
For sure that some of our customers have we're just trying not to be the golden screw and also be very kind of clear eyed about where the inventory is and what does that mean for marvell and so all I can tell you is we're digging into it it apart level detail and making sure that we're being prudent about where we allocate the supply but it is something we got we got to keep watching for for sure.
Thank you, yeah and to add to what Matt said is that we actually chose to increase our inventory to support the revenue growth in the second half.
We have a lot of promise at the product lines and we see strong demand. So the flexibility we needed to have raw materials and a way to support the revenue growth is really critical so we need the truth the data to make sure we can support the customers and the future revenue growth.
Do you have a target gene on days of inventory.
At the current level you said, what we're comfortable we think we can help and the magnitude of the supplies for the second half I think if the environment is normalized that we definitely will have a lower inventory like 120 basis. That's what do we think we should keep at it right now we definitely chose to incur.
<unk> to provide more flexibility.
Thanks, very much yeah, Vivek I just.
Chime in on Gene's comment.
Fully agree and if you look at just the steepness of the revenue ramp we're dealing with clearly the web has to go up right just to sort of support the growth. So that part we're comfortable with and given the given the lockdowns and all the volatility I think having that that extra inventory carry for us is very prudent.
We watch it and we will certainly work it down but I don't think youre going to see many companies go back to the good old days of <unk>.
80 days or something like that unless they truly.
Get into trouble I, just think for for a while we're all going to have to be mindful that there is a lot of volatility in the world.
But we're sort of in the range now and where we're very we're very conscious in terms of what we're doing here.
Understood. Thank you.
The next question is from Matt Ramsay with Cowen. Please go ahead.
Yes. Thank you very much good afternoon.
Matt It and part of your script you had talked about the upcoming server launches that include a couple of new technologies right.
Pcie Gen five in and then some <unk> support for shared memory and I think you guys have done a great job of articulating what that might mean for your accelerator business and given us some outlook. There I was curious if you might expand a little bit about what what pcie five might drive for for your support of that technology and have the storage and networking.
Is that material to the growth in the back half and how much visibility do you have there just and then just a quick follow up by question I get all the time, it's visibility on cloud Capex.
If you guys look out in your cloud business is it quarters years like how long are we talking that you feel like you have visibility because there's definitely some concerns there I appreciate it. Thank you.
Yeah, Hey, Matt Good here for me and good questions. Yes. Thank you.
You did nail it on one of the one of the more important aspects of the upcoming CPU cycles is the is the Io right and the release of Pcie Gen. Five and we've certainly been preparing for that that is a key part of the equation for us, particularly as you can imagine in our storage business and our.
Data center storage business, which one of the key things we have to align to on our product roadmap is obviously nailing the.
Nailing the pcie.
Yeah.
I'll roadmap and it's not a trivial thing.
Not only the controller, but obviously the Fi and getting everything qualified and working and so our team has done a great job. There, we're very well positioned in storage on Pcie Gen. Five I actually said in my remarks, we've we've already got.
Wins lined up on Gen. Six that's still a ways out, but that's going to be another leg of growth and youre right. The pcie.
Standard is really going to be the fabric and the interconnect that <unk> runs on top of and so a lot of the effort we put in on both Gen. Five and then the future Gen. Six is going to give us tremendous leverage as we think about.
Disaggregation particular memory and these different solutions that are going to emerge around <unk>. So it's very strategic.
We do we always make make or buy decisions on things in terms of make versus buy sorry on technologies, but this is one particularly on the phy layer four for pcie that we've we've we do ourselves and we have we're best in class in what we do here and then we leverage that into our larger Soc. So.
But I think the biggest impact for marvell will be just.
Driving broader adoption of our data center.
Flash controllers, which which again are well positioned across a number of NAND Oems and.
Our products defined directly with the cloud Oems going back several years right to get all this lined up so it's it's going to be a good cycle for us.
And then sorry on cloud Capex I don't have any insight.
We certainly look at all of the publicly available data.
The most recent update certainly look promising but I would say for for Marvell, Matt and for the rest of the investors on the call.
Sure.
Of course, the overall capex environment and cloud.
Certainly be a tailwind and that could be a headwind for anybody that supplies into there but <unk>.
You got to remember.
Most of our revenue coming from the cloud is really in new product cycles.
That are very marvell specific in some cases.
I mean, let's take let's take Pam for example.
If you went back a year ago, you really had a couple of companies deploying it.
Versus older NRC based solutions.
You get into this year there are now.
Additional companies as well that are going to be driving that cycle on 200, 400 gig we have new applications like even 800 gig as an example for for AI clusters, and things like that where we started ramping our 800 gig product.
So whether the Capex goes up or down there is there's new applications and new replacement cycles that are going on.
And then there is just.
Other things like for example, in our cloud Ethernet switch area right. There was new wins, we got through the <unk> team that joined US last year, we expect.
Continued strong growth from from that product area.
We have new cloud optimized silicon and Asics and <unk> that were designed in over the last couple of years those are going to be ramping up. So we are very we're paying attention to it Matt, but I would say that.
It's a little bit like our <unk> business, you can see things go up and down and Lumpiness in the market, but when you have a strong product cycle with with either content or share gain and new customers coming on you can power through and that's our full expectation in the cloud we have very strong conviction on our on our.
Our business there today, particularly in the second half of next year relative to the cloud Hyperscale and we'll watch the capex trend, but most of our products are.
Our independent of that trend. Thanks.
Thanks, Matt I appreciate all the color.
Yes.
The next question is from Ross Seymore with Deutsche Bank. Please go ahead.
Hey, guys. Thanks for let me ask a question.
I wanted to ask you.
You won on the margin side of the equation you guys always run a very tight ship in this but theres lots of moving parts, Matt talked a lot about more supply coming on the back half of this year.
Sometimes that can come at a higher price these days and not even the opex side of things wage inflation et cetera, and some acquisition integration that you talked about so generally speaking can you walk us through the puts and takes on the gross margin and the opex side of things for the rest of the year.
Yeah Ross.
Thanks for the question I think our team has been very disciplined to manage opex to make sure. We follow our business model to grow revenue significantly faster than opex growth and keep that gross margin right in the middle argument about the needle for our long term target model.
We can drive with the earnings expansion much faster than top line revenue growth. When you look at the Opex. The Q1 as I said earlier, we increased head count and the project expense to really execute on all the design wins, we have won a cure.
Q2.
We keep it flat in second half of it is going to go a little bit the higher slightly higher but it's largely because they were going to grow revenue in second half of two supported revenue growth figures you have certain variable expenses that will increase slightly in second half or in the longer term issue. The continue to expect us.
To drive topline revenue growth and Opex.
Around the 50% slower than top line revenue growth. So we can continue to get the earnings expansion.
So in Q2, if you look at the Middle point of our guide our operating margin is already about 36%.
We are very very driven to get our operating model through the 38% to 40% of wrenching.
Thank you.
The next question is from tourists Svanberg with Stifel. Please go ahead.
Yes, Thank you and congratulations on the strong results.
Just had a follow up on the storage.
<unk>, but this time on Gen six Gen five.
So just.
Can you maybe frame a little bit marvell positioning here I mean I think.
About.
The Pam four IP you have obviously you talked about <unk> I know, it's still early days, but if you could just frame a little bit.
Layman's terms your position for PCI Gen six that'd be great. Thank you.
Sure Tory yes.
Gen six as it relates to storage.
You're absolutely right.
Given the increase in.
I O throughput and data rate.
You had to move to a Pam based architecture. So that's played right into our strengths we've coupled that.
With our and we were early to do this by the way with our with our five nanometer technology platform and so there's just a whole lot of goodness and reuse there as you can imagine and it really put us in a strong position.
To get there early and I give our storage business unit a lot of credit for for really haven't thought leadership here I mean, they probably jumped like two nodes on everybody not that its a whole node game, but in terms of just the power and the performance that we're getting out of these solutions and then of course the benefit we get to take to.
Take the I O down to five nanometer and leveraging Pam is actually a huge help right just given the given the complexity and you saw that you saw that in our optical business right and kind of how in Fi drove performance over time as they've they've driven Pam on new process nodes same thing over here. So.
I think thats going to be very strategic.
And.
Sure.
Yes, I think that that platform now and again, we're early right. We're just talking about our gen. Five launch today, but we do like to give cover on our color on our future leaning roadmap, but it definitely plays to our strengths and I think as you think about also.
Whats going to be required in <unk>, I think I think even things like closing the linq and the need for re timers and re drivers.
Accelerators.
Pooling applications, they're all going to require.
Robust Gen six IP, and then be able to integrate those into various different soc.
And I would just say even today the CSL activity we're seeing.
In terms of our design opportunities is pretty broad and it's almost all it really is all in our in our five nanometer platform. So it all kind of hangs together Tory and maybe I think.
You sort of see this but I think others are as well the combination of all of the IP that we brought together through the different acquisitions plus the Marvell technology platform has really created a an opportunity for us to.
<unk>.
Go to market with these semi custom solutions and be very successful in this next next wave of cloud optimized silicon.
Excellent. Thank you.
Yes.
The next question is from Harlan sur with Jpmorgan. Please go ahead.
Good afternoon, and great job on the quarterly execution.
I saw the announcement on and you mentioned the snap on shipping 100, Dot 100400 gig coherent DSP chipsets.
You're pretty early days in this transition but.
You guys have already shipped like according to my calculations, almost $200 million plus worth of products. The great thing about this family of products is that they've got the same underlying architecture and you've taken that and you're going after different markets like data center interconnect with 400, ZR long haul metro with your conjugate.
Solutions the adoption the option of faster curve is this is this.
What's the driver of the upside in your data center and carrier Franchisers in and then I believe that our deployment with GCI is being driven by just one cloud Titan are you guys anticipating other cloud Titans, starting for fire as the year unfolds.
Yes, Thanks, Harlan for the question and maybe just to.
Start at the top on coherent DSP.
Im not sure everybody quite understood even the in Fi.
People that followed <unk> closely how strategic this technology is.
Little bit of background, they had at their own effort and coherent and <unk> and they ended up acquiring a company called clarify.
Few years before we acquired <unk> and ultimately they chose the clarify coherent DSP roadmap.
It's this is very very difficult stuff to do Harlan and.
And once you get it right and get it get it designed in these are very very long product life cycles, particularly in the metro long haul.
The type of markets, the telco type market and Thats really whats driving that is really where the revenue is showing up today for this.
The added benefit is obviously the same the same technology in.
And chips are used in the ZR 400, ZR market as well for Dci.
So there's a there's a double benefit here and so on the merchant side. We are a strong leader we have a roadmap obviously beyond this to 800 gig that's going to play well to our next generation.
Dci products as well and then even longer term.
There is discussions longer term about the modulation technology eventually inside data center moving to coherent so it's very strategic technology.
For Marvell and to answer your question on the ZR.
Dci side.
We and I said in my prepared remarks, but it might have gotten lost but we do we do have multiple customers for this not just one.
And those will be ramping up over the next year or so.
The additional customers were already shipping and putting out record results on.
On the Dci products as it is were really driven by one customer, but there's more coming so we're pretty excited about this and we have a we have a whole ecosystem lined up right. We have a number of module partner or for different applications and so anyway, yes, it's something we'll be talking about more maybe we'll do a tech talk on that one to Ireland, but it's it's acts.
Really important technology that we got from <unk>.
From <unk> and it's obviously an outstanding team that really feeds a lot of the other things that we do inside the company.
We have great insight thank you Matt.
And just one final thing I would say remember too. This is a chipset as well so it's not just the DSP. It's the driver it's the TIAA and Theres. Even other components you are looking at to really optimize the solution and so when you when you hang all of that together and you can deliver it as a platform.
It's very very powerful.
Perfect. Thank you.
Welcome.
The final question today will be from C. J Muse with Evercore. Please go ahead.
Yes. Good afternoon. Thank you for taking my question and squeezing me in.
I guess a question on gross margins you guided down 25 bps sequentially, obviously, it's a very small amount, but just curious if theres anything mix was <unk>.
Higher input costs, so we should be thinking about there and then just as.
A quick follow up to Jim.
Are we at the net leverage level now where you plan to return.
Free cash flow via buybacks or is that still.
And more of the opportunistic phase thank you.
Yeah. So C. J. Thanks for the question first Jeff on the net leverage if you look at the our Q2 guidance at the Middle point of our guidance.
Our net leverage ratio will be below two graph that debt to EBITDA ratio will be around the two but the net leverage will be below two <unk>.
I said earlier, we have restarted our share repurchase program. Even after end of Q1 and subsequently we did purchase an additional $15 million through our <unk> program. So.
Our capital allocation principles still the same right we want to in my script that we are also committed to return.
50% of free cash flow to shareholders, primarily through share repurchase on the gross margin. Our gross margin. We're very pleased with our Q1 gross margin, which is a record in the Q2 guide.
Theyre, both above the middle point until for our long term target. So the Q2 why is it really just the mix.
We have so many different product lines quarter over quarter, you will see that makes a change up and down off of our motto point I would not yet predict it that closely but in general it should it be around the 65% sometimes higher.
Yes, that's helpful detail.
Yes, I'll just add C J.
Totally agree with Jean obviously, and just to remind everybody we set a range of.
Gross margins as our target model of 64 to 66.
We had a record $65 three.
In Q4 than we had another record of $65 5 million.
Q1, and then we're guiding 65 to five if you look at the midpoint in Q2, so it's kind of in.
In the range. If you know what I mean, I wouldn't read too much into it and I think running the company around that 65 ish is a really good place to be if we can continue to grow the company. The way, we're growing it and drive leverage and drive design wins and stay competitive. So I think it's I think we're in pretty good shape I think obviously a reasonable to ask the question, but I think as Jean said were.
To have little movements here and there on mix.
We're ultimately just focused on.
Keeping it in the right range and the right strike zone, and then just driving really strong topline growth and driving operating leverage.
Through the cycle we're in here.
Thank you.
Yeah.
This concludes our question and answer session and the conference is also now concluded. Thank you for attending today's presentation. You may now disconnect.
Yes.
Okay.
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Okay.
Uh huh.
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