Q3 2023 Marvell Technology Inc Earnings Call
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Good afternoon, and welcome to you all technologies fiscal third quarter 2023 earnings Conference call.
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After today's presentation there'll be an opportunity to ask questions.
Please note. This event is being recorded I would now.
I'd like to turn the conference over to MS. They're actually they're on senior Vice President of Investor Relations. Please go ahead. Thank you and good afternoon, everyone. Welcome to Marvell third quarter fiscal year 2023 earnings call joining.
Joining 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.
Please review the cautionary statements and risk factors contained in our earnings press release, which we filed with the SEC today and posted on our website as well as our most recent 10-K and 10-Q filings, we do not intend to update our forward looking statements during our call today, we will refer to certain non-GAAP financial measures a reconciliation between.
GAAP and non-GAAP financial measures is available in the Investor Relations section of our website.
With that I'll turn the call over to Matt for his comments on our performance Matt.
Thanks, Ashish and good afternoon, everyone in the third quarter of fiscal 2023, the Marvell team drove revenue to 1.54 billion a record for the company growing 27% year over year and 1% sequentially.
This year over year growth was driven by our cloud five G and auto business as well as share and content gains in our enterprise networking end market.
Our third quarter revenue came in towards the lower end of our guidance range and we are forecasting a sequential decline in our fourth quarter.
Early in the third quarter, we were still dealing with supply Escalations are late in the quarter customers started to question the pushout of shipments and reschedule orders to manage their inventory in a changing demand environment in.
In the third quarter. These inventory reductions started to manifest, but we were expecting an even greater impact in the fourth quarter.
The largest impact was from our storage customers as it has.
It's been widely communicated by that set of Oems.
In addition, as our Chinese customers deal with the changing macroeconomic situation their demand for our products has come down significantly just.
Just to give you a sense of the magnitude of that change we estimate that our revenue in the fourth quarter from our OEM customers based in China will decrease by over one third compared to the second quarter.
We expect revenue from China Oems will account for less than 10% of our total company revenue in the fourth quarter.
I'd note that to date the restrictions of the U S Department of Commerce announced in October on shipments of U S. Chip technology to China is not meaningfully impacted our revenue.
Well the inventory correction at our customers is challenging in the near term. We believe it is prudent to work closely with them to manage the change in an orderly fashion and clear the path to a resumption of growth.
Let me now move on to discussing our end markets starting with data center.
In our data center end market revenue for the third quarter was 627 million exceeding guidance with better than expected results from our cloud business.
On a year on year basis, our datacenter revenue grew 26% with our cloud business driving all the growth with multiple product lines contributing to strong results.
On a sequential basis, our data center revenue declined by 3% due to softness in our on premise business, our storage products, including fiber channel HDD and SSD all saw demand declined during the quarter. However, our cloud business continued to grow sequentially driven by strength in our electro optics and switch products.
We're seeing the growth rates of the data center end market decelerate and customers have started adjusting their inventory to address the changing demand picture.
As a result for the fourth quarter of fiscal 2023, we are expecting our data center revenue to decline year over year approximately in the mid to high teens on a percentage basis and sequentially decline in the mid 20% range.
The biggest change in demand is in product lines, where we are one step removed from the end customer. So when demand changes quickly we are more exposed to the supply chain bullwhip effect as a result, we expect the impact to be the most pronounced in our storage business, which we project will be responsible for the bulk of the overall sequential decline in our data center revenue.
In particular, we are projecting a very large reduction in shipments of our HDD controllers and free apps as HDD Oems deal with a broad based inventory correction.
The rest of our datacenter business is also expected to deal with inventory adjustments by our customers, but to a much lesser extent compared to our storage business.
While we work through the near term situation in the data center end market, we remain confident in our multiple long term growth drivers in the third quarter, we started ramping our cloud optimized silicon design wins into production and are planning to launch multiple additional products in fiscal year 2024 and 2025.
Our successful execution on the first group of projects, coupled with our ongoing investments in data infrastructure Silicon IP and advanced process and packaging technologies is opening up an even larger set of opportunities with cloud customers in the third quarter. We launched our next generation cloud security solution Barbells liquid security too.
S M adapter, the industry's most advanced solution for enabling encryption key management and authentication in the cloud.
Howard by Marvell cloud optimized arty on deep U S. Two is a converged security platform for payment privacy compliance and general purpose applications.
We are also making progress on two of our longer term growth initiatives in the cloud <unk> and AUC.
In the third quarter, we announced availability of our <unk> development platform for cloud data center operators and server Oems, enabling two key use cases memory expansion and memory pooling.
That form pairs marvell is advancing cell technology with the latest EXL cable will cpus, including the new fourth Gen AMD epic processors, demonstrating multi host memory Poland.
With this platform cloud operators can begin to advance.
There are infrastructure and enable their applications to take advantage of this cutting edge technology.
I'm very excited to announce that we've recently won a significant design at a tier one hyperscale are projected to drive a substantial amount of revenue in aggregate over the programs lifestyle.
Product development activities are in full swing and our team is driving a large and growing pipeline of <unk> opportunities.
And the AC market multiple cable manufacturers have started sampling 100 gig per lane active electrical cables powered by Marvell, Pam four DSP to cloud data center operators, which we expect will pave the way to broader adoption and expand our addressable market.
Turning to our carrier infrastructure end market revenue was $271 million growing 26% year over year and declining 5% sequentially.
On a year on year basis, the vast majority of our growth was driven by our wireless business, which continued to benefit from the growth in <unk> adoption.
As you recall the annualized revenue run rate for our wireless business across $600 million.
In the second quarter of this fiscal year.
We are excited to see growth continue from that milestone our.
Our wired business also grew year on year in the third quarter, driven by solid demand for metro and long haul carrier for our market, leading coherent DSP and accompanying tiaa's drivers honestly.
Sequential basis, our wired business came down as expected from a very strong second quarter and more than offset growth from our wireless business.
We are excited to see our <unk> business continuing to flourish and are looking forward to broader deployment of <unk> in multiple geographies, including the U S Europe and India.
In addition, we anticipate significant share and content growth ahead, and new opportunities in Oran and BRAF architectures.
As you will recall in March 2020, Nokia and Marvell announced that are companies that started working together.
<unk>, leading <unk> silicon, including multiple generations of custom silicon and infrastructure processors to further expand the range of Nokia's reached sharp chipsets.
Earlier this week, we announced an extension of our collaboration with Nokia to further advance their five G chipset portfolio Nokia will be using our new off be on 10, GPU the industry's leading <unk> transport processor built on Marvell is cutting edge five nanometer platform and hardware acceleration technology.
These high performance and highly efficient processors will allow operators to scale rapidly and manage the dramatic increase in data traffic and performance demanded by <unk> innovated innovative service based architecture, while reducing cost and energy consumption.
We continue to expand our collaboration with Nokia and look forward to enabling their next generation <unk> platforms.
There are also two key announcements from the open ran ecosystem.
Vodafone and Nokia announced that they have agreed to work on a fully compliant open ran solution with marvell developed in cooperation with Us Nokia's reef shark SLC, both boost layer one.
Processing capability to enable open ran systems to reach full functionality and performance parity with traditional mobile radio networks.
In another development, Vodafone and Samsung recently announced that they are jointly cooperating with marvell to accelerate their performance and adoption of five G. Open ran across Europe . They plan on incorporating barbells of bands RTI fusion processor, specifically designed for open ran into the latest off the shelf servers.
Specialized accelerator chip also enables massive mimo technology developed to serve many subscribers in dense urban areas.
Moving onto our outlook for next quarter.
For the fourth quarter of fiscal 2023, we are expecting revenue from our carrier end market to grow slightly on a sequential basis and grow year over year approximately in the mid teens on a percentage basis.
Moving onto our enterprise networking end market.
Revenue for the third quarter was $376 million growing 52% year over year and 10% sequentially as.
As the quarter progressed, our Chinese customers starting to deterrent cautious due to an evolving macroeconomic environment. In response, we worked with customers realigning shipments to reflect our reduced demand.
As a result, despite the strong sequential and year over year growth revenue was lower than our guidance.
In the fourth quarter of fiscal 2023, we're expecting revenue from the enterprise networking end market to decline sequentially in the low single digits on a percentage basis. However, we expect growth to continue year over year at close to 40%, reflecting a higher content and growing share.
Turning to our automotive and industrial end market revenue for the third quarter was 84 million growing 26% year over year, and 1% sequentially revenue was lower than our forecast in industrial as.
As well as automotive, where we continue to experience supply challenges in certain legacy notes. We expect these supply challenges to start to improve in our fourth quarter.
On a sequential basis, our auto business continued to grow partially offset by a decline in our industrial business.
On a year over year basis in this end market barbells growth was primarily from our auto business driven by continuing adoption of our Ethernet technology.
Our auto business achieved another milestone in the third quarter with annualized revenues exceeding $200 million.
As you recall, we have been accumulating platform design wins across a broad spectrum of auto Oems, we have generated a substantial pipeline of lifetime revenue that will benefit us over many years looking.
Looking to the fourth quarter of fiscal 2023, we are projecting strong growth for our overall auto and industrial end market expecting revenue to grow approximately 30% year over year and in the mid 20% range sequentially.
Moving to our consumer end market revenue for the third quarter was 178 million declining 2% year over year and growing 9% sequentially.
Looking ahead to the fourth quarter of fiscal 2023, we're forecasting revenue to be flat sequentially.
And decline in the low to mid single digits year over year on a percentage basis.
In summary, Marvell delivered record results in the third quarter. Despite the macroeconomic uncertainty in the world and inventory corrections in some of our end markets taking stock of our progress this fiscal year at the midpoint of our fourth quarter guidance. We are projecting full fiscal year revenue growth in the low 30% range, while we are not immune to the global <unk>.
Slowdown impacting the semiconductor sector, we expect to finish this year growing revenue well above the industry and our long term model, reflecting our continued focus on data infrastructure.
Looking forward to the next fiscal year, we remain confident in our key growth drivers of cloud five G and audit.
We expect that our cloud optimized silicon programs will build from the initial ramp that started in the second half of this fiscal year.
To grow approximately 400 million in aggregate revenue in fiscal 2024 and $800 million in fiscal 2025.
Our cloud customers are relying on these chips to build an incredibly efficient and optimized custom art where to enable their key growth drivers.
In addition to our cloud optimized programs, we expect that our <unk> products and our automotive business will drive strong year over year revenue growth in fiscal 2024.
Offsetting this growth to an extent, we expect a few quarters of inventory adjustments in some of our businesses as customers realigned their demand.
We continue to be disciplined on operating expenses, we have tightened spending and slowed our pace of hiring focusing on critical hires for future success at the same time, we continue to invest in our long term growth initiatives, including our three nanometer silicon platform, which is now available for new product designs. In addition, we are committed to exit.
<unk> got a number of new products, which our customers are designed into their mission critical applications.
Over the last few years, we have significantly transformed the company, creating a diversified business with growing exposure to multiple infrastructure end markets with strong secular growth drivers. Our business is at scale, we have a growing design win funnel leadership products and strong customer engagement.
We built an extraordinary team of Marvell with a track record of execution excellence. We believe we are well positioned to navigate the current environment to continue to deliver strong top and bottom line results over the long term.
With that I'll turn the call over to Jim for more detail on our recent results and outlook.
Thanks, Matt and good afternoon, everyone I'll start with me to review our financial results for the third quarter.
And then provide our current accident by the fourth quarter of fiscal 2023.
Revenue in the third quarter analyst at one point, a bias to eight 7 billion, beating our guidance range growing 1% sequentially and up 27% year driven by growth from our data infrastructure and the market.
HSN to accommodate its looks like your 1% revenue enterprise networking with a 24% of revenue.
Infrastructure at 18% consumer and a 12% and also industrial and 5%.
GAAP gross margin was 56%.
Now that the cross matching which is 64% of revenue below our guidance range, primarily due to product mix.
Underpriced and also industrial any market impact and you don't know why banks vaccine and consumer revenue was higher than our forecast.
GAAP operating expenses were 672 meeting.
non-GAAP operating expenses were 420, Mimi declining by 3% sequentially.
Yeah, Opex to increase by 13% growing at less than half the rate of top line revenue growth.
I'll pack with a lower than guidance due to lower bonus accrual and the better than expected.
Our GAAP operating income was 100 and mistakes meeting.
non-GAAP operating profit was 564 meeting of 36.7% revenue and.
Another all time record demonstrating the strong leveraging our operating model.
Other income expense, including interest out that once it's lucky one meeting.
And then guidance, primarily due to higher interest rate.
Yes.
For the third quarter GAAP income per diluted share with <unk>.
non-GAAP income per diluted share, which is 57 cents within our guidance range.
Earnings per share growth of 33% year over year faster than top line revenue growth.
Now turning to our balance sheet and the cash flow.
During the call tier we generated 411 million in cash from operations, reflecting our strong earnings offset by continued working capital investments to support our top line revenue growth.
Including 94 million teammates for lung chairman backend and substrate capacity agreements each.
These agreements are crazy culture ranking our complex products in data infrastructure market, including the cloud optimized silicon solutions and Matt discussed earlier.
In the third project, we increased our inventory by 44 million or 5% accretion.
Looking at a change in demand that we're forecasting in the fourth quarter and we expect our inventory level to continue to be elevated.
We are focused on prioritizing new product ramp to support our customers.
She is in most of our products have long product cycles after three to five years or even longer.
We're comfortable carrying higher inventory dynamic supply chain environment.
We plan on reducing inventory stacking next fiscal year.
So at the end of the third fiscal quarter here, our cash and cash equivalents were 723 million increasing by 106 million from the prior pontoon.
Our total debt was $4 5 billion, our gross debt to EBITDA ratio was one nine times and net debt to EBITDA ratio was one six times.
During the third quarter at least 10 countries and then one maybe interesting.
It grew 51 media in cash dividends and 15 million for share repurchases.
In summary in uncertain macroeconomic environment and my old team executed very well.
Top line revenue growth and earnings expansion notch faster than revenue growth.
Now turning to our guidance for the fourth quarter sales is based on 2023.
We are forecasting revenue to be in the range of $1 4 billion milestone minus 5%.
We expect our GAAP gross margin in the range of 48, 2% to 52%.
We project, our NASDAQ what gross margin will be approximately 64%.
We project, our GAAP operating expenses should be approximately 646 media.
We anticipate our non-GAAP operating expenses to be approximately 430 meetings.
As Matt mentioned earlier, we have proactively slowed down our pace of Ohio, and the tightening of discretionary spending to manage our operating expenses.
We have a proven track record of executing through economic and market cycles to maintain strong profitability, while we continue to invest in long term growth initiatives.
I should remind garrett lucchino habits through their first Facebook watch out for 2024.
Due to the typical seasonality in payroll taxes and employee married to increase Opex. It tends to increase from the fourth fiscal quarter in the high single digits sequentially on a percentage basis.
Following the step up in the first physical part here.
We're currently planning on holding our Opex approximately flat at that level for the next if you podcasts.
Other income and expense, including interest on our debt is expected to be approximately 44 Mimi.
We expect our non-GAAP tax rate was 6% for the fourth quarter and are currently expected to increase slightly to 7% next fiscal year.
We expect basic weighted average shares outstanding will be 855 <unk>.
Our diluted weighted average share outstanding will be 861 media.
As you read out we anticipated guidance for earnings per share in the range of breakeven to five cents per diluted share.
We expect non-GAAP income per diluted share in the range of 46% plus or minus <unk> 10.
Operator, please open the line and announced June eight instructions. Thank you.
Thank you.
We will now begin the question and answer session.
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To withdraw your question. Please press Star then two.
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Our first question comes from Blayne Curtis with Barclays. Please go ahead.
Hey, Thanks for taking my question, Matt maybe just on the data center I wanted to understand the moving pieces a little bit better I think storage has been weak for a bit I think in your line I think <unk> been pretty open that that was weak I guess, it's implied a big move in storage and I guess, what I'm struggling with is I'm trying to figure out how to put that the comment on.
The Chinese weakness as well because that's a that's a big number and I guess, maybe that overlap. So can you just parse those two pieces a little bit more for me.
What when you say, China is weak what kind of products are we talking about is the way you kind of give any better color on that within the data center for January .
Yeah got you blame yeah. So on the first one on near line.
As you mentioned you know there's been a lot of reports out there about the weakness there we we really.
I hadn't seen that when we guided the quarter in Q3, we started to see some weakness, but the the impact is very pronounced in the fourth quarter and that near line weakness obviously flows into the.
Data center end market into that bucket.
When you go to China, and the weakness we've seen there that's really in the enterprise area. So while overall enterprise is hanging in there it was slightly below in Q3.
We've had some offsets to that from from strike elsewhere, but the main impact of the Chinese customers has really been an enterprise.
But the most part.
And then if I could just follow up you mentioned in terms of the.
The cloud you said it was actually strong in October both optical.
You know as well as switching I'm kind of but you also made the comment that I think data centers decelerating. So can you just put those two together are you still seeing strength in U S cloud and weakness elsewhere. There's a comment on data center weakening just on Prem what did you mean by that.
Yes, great Great question, So let me take it from the top so.
First point would be that.
If you look over the last few years cloud Capex has been on fire, it's been growing 30% plus for the last few years.
This year. If you look at you know reports and kind of what we see is probably something in the 15% range for 'twenty two and then it depends on who you talk to but.
Probably down in the.
Low to mid single digits or maybe mid single digits for next year. So that's the deceleration that we're talking about and as you know the macro has started to catch up even with these large cloud companies you see them very publicly tightening their capex tightening their opex.
And.
You know they've had this supply chain built in the data center, which was geared up for a lot of growth and so as they as they reset those expectations, it's not a real smooth process.
Storage as the most pronounced as I mentioned earlier, that's the majority reason code for the sequential decline, but we are seeing inventory adjustment as well.
To a much lesser extent and I'd say the broader set of product lines outside of storage that we sell into the data center and so that is not a China specific thing that is a a global comment including U S cloud.
<unk> inventory adjustment.
A bit more broadly and that's a change certainly from where we were say a quarter ago. When we were mired in supply Escalations and Expedites too.
An environment, where it's now how do we work together to manage the inventory and manage the new reality and so that's what you see in the guide for Q4.
Hopefully that was helpful to give you the perspective, you're looking for thanks for the color.
Yes.
Our next question comes from.
Vivek Arya.
Bank of America. Please go ahead.
Thanks for taking my question I'm trying to see what is the range of kind of scenarios for fiscal 'twenty four status quo I understand youre, not giving a specific number but it would be helpful. If you give us at least kind of a range you know Ken Marvell grow next year, because when I look at the three areas.
Cloud and five G in autos I believe.
About 35, 40% of business and those three areas collectively grow fast enough to offset the inventory correction and other areas like so should we be thinking about flat or you know mid single digit what what's the kind of a range of scenarios of growth that we should be thinking about for fiscal 'twenty four.
Yes, great question, Vivek, and certainly I'd frame all of this by saying, it's still a very dynamic environment. So we'll give you. The best view, we can I'd say the first point is we feel very good about the new products that are ramping up and the growth drivers that we've articulated whether it's <unk>.
Cloud optimized silicon.
Switching electro optics things like that in the in the datacenter five G. Obviously continued momentum there with additional regions like India ramping next year plus.
Content gains rolling through and then automotive continuing to grow. So so those are all the positives what we don't know completely but I'll give you. The best color I can is on the base business and how much.
Of the inventory correction, we're going to be dealing with.
And the magnitude of that we anticipate first of all but that's like typical cycles, it's probably a couple of quarters to work its way through.
And the three areas I would call out that probably are some offsets next year are one.
One would be in consumer that's an area, where we just.
Haven't put a lot of investment we've been typically running that business for cash you'll probably see some decline there I think on premise data center.
Another area of the on Prem stuff, probably has work to do next year, and then maybe a little bit in our wired infrastructure business.
If you look actually it's kind of interesting if you go back to our fiscal 'twenty, two and you look at those three areas.
They all grew pretty dramatically in fiscal 'twenty three the current year, we're in and so at a high level I think some of those are probably going to trend back to where they were before this big up cycle and.
And again from a sort of a timing perspective think of it is.
A lot of that headwind or weakness more than the first half inventory works itself through and then you have growth back off of that plus you have the growth drivers kicking in so I think it's a very different story most likely.
First half versus second half, but those are some of the moving pieces.
In terms of how you think about the growth drivers versus some of the offsets but.
We do see.
We still believe we can that we can drive positive year over year growth. It just certainly isn't going to be as high as we can.
Had been hoping for if you went back even three months ago, just given the given the magnitude of some of the inventory adjustments.
Thank you Matt.
Our next question comes from Timothy <unk>.
Curious with UBS. Please go ahead.
Thanks, a lot Matt just along the same lines of that question I'm just kind of wondering.
If you can help us figure out what a reasonable baseline is in the datacenter business headed into next year. If you look at storage I mean, it must be it must be down about 50% sequentially in January .
And you were obviously over shipping the past few quarters and you really under shipping now, but it seems like if you net all that out maybe it's kind of a $600 million per quarter baseline in data Center and then you can add.
For 100 million for the cloud optimized Silicon next year can you sort of help us handicap, what a normalized run rate might be in that business. Thanks.
Yes.
I think you're in the ballpark on on storage and just for a little little context.
<unk> of that decline, we can't find the.
A data point that shows it.
You know declining that quickly even when we look back to the reset in 2019.
This is down you know a lot more than that in the same timeframe. So you're right a lot has come out.
And so that needs to that needs to normalize I think you've probably got the math about right. If you think about sort of where's the whereas the base business at but just to be clear, where we're still in a little bit of a.
A dynamic environment figuring out.
But.
If you look at how fast it's coming down and that's kind of what we're doing by the way we are.
Effectively working with our customers to make sure we deal with this quickly and efficiently and minimize any risk of building excess inventory and that's the path. We're on so sometime in the Q4 Q1 timeframe, we think that works itself through.
And then you start to you start to kind of grow from there, but that's probably.
<unk>.
That's probably reasonable probably.
Yeah.
As an annualized type of run rate, maybe a little bit lower in the first half and certainly higher in the second half as.
The new designs.
Really ramp up.
Yeah got it I guess, just maybe trying to I was just trying to get to hold People's hand, a little bit on the non storage stuff because people will say well you know the issues not just storage. The issue is the other stuff too, but it sounds like it's not.
It's there is some I mean, it used to be very very clear right that the major reason code for the sequential decline from Q3 to Q4 in the datacenter line as storage, but there is inventory adjustment going on in digestion given that slope of the Capex curve has just come.
Down there is there is some realignment, but that that is not as pronounced and it's very manageable, but I just don't want to be very clear, it's not a 100% of storage issue, there's just a broader digestion.
Of course, yeah. Thank you Matt.
Yep.
Our next question comes from Tunisia, Hari with Goldman Sachs. Please go ahead.
Hi, good afternoon. Thanks, so much for taking the question.
Matt if we take your guidance for the carrier infrastructure business in Q4.
I think you'll be doing about $1 1 billion in revenue.
Full year, maybe a little bit below that.
Sure.
To level set us how much of that is wireless how much of that is wired in as you look forward into fiscal year 'twenty four.
How are you thinking about the <unk> business I think the market overall, you're seeing some spots of softness potentially but obviously you've got it.
Socratic design wins. So so how are you thinking about your business there on the on the wired side, just given the cyclical dynamics, what sort of declines should we be.
<unk> into fiscal 'twenty four thank you.
Hey, guys. She has got a gene I'll start to answer. This question and then Matt can add so first you're on the carrier infrastructure wireless if you already more than half or we talk about here in wireless revenue was already running at more than 600 million annualized the wrangler U S wireless.
They use them on at half or going into next year.
As Matt mentioned earlier, we continue to see strong <unk> adoption in our customer continue to do very well in the market places. So we do expect the wireless part of the business that will continue to have a very strong growth into next year of course in the wireline side easier what Matt discussed.
We're going to see some headwinds on wireline side about the overhaul where do we expect to carry out new construction to continue to grow.
Matt anything you want to add.
No I think that was perfect I mean, I'd just put a pin on it that the.
The wireless opportunity continues to be very exciting and I think it's gonna be a be a very good year for wireless next year.
Thank you.
Our next question comes from Karl Ackerman with.
D M. P. Terribad. Please go ahead.
Yes. Thank you.
Two questions if I may on Matt or gene I wanted to first discuss enterprise networking.
You spoke about how China impacts that a little bit, but ex China are you still seeing growth and I know some of your networking Oems have spoken about some moderating orders, but I think last quarter. You said that this segment was an area that was most constrained and so I wanted to get you know clarify.
Clarify, whether that's still true and if you could kind of tie in.
The amount of inventory that some of those customers have to get a better sense of.
The demand dynamics enterprise networking going into 'twenty fiscal 'twenty four.
Sure I'll make a few comments and then Jim why don't you add as well.
Yeah, a couple of things are going on.
One is the the supply environment has definitely improved now some of that is <unk>.
Because of the weakness and in the China.
Market, that's opened up supply, we can give to other customers because generally outside of a few select cases, our enterprise business is mostly merchant products. These would be Ethernet switches gigabit and multi gigabit phys embedded processors Carl things like that so when you would have a demand softness in one region.
It helps them so that so the supply situation has has improved which is which is a good thing.
We do have some of our own growth drivers as well we've highlighted this over the last few quarters, we have some new custom silicon wins that are ramping up.
That's offsetting some of that weakness as well but in general.
You know the the non China piece has done okay.
Probably we're being cautious about how we think about it for next year or so.
I think the run rate that we've guided to in Q4 as probably you know.
A safe run rate to think about for next year, even if there's a little bit of weakness or there is some inventory.
Inventory digestion that goes on we do have content gains still rolling through.
So those are some of the moving pieces you know, you're basically left China going down U S customers, where we've got either new design wins are a share gainer content gain in them and so.
Is it sort of all aligns to the numbers, where we've guided for Q4.
Jean anything you want to add.
Oh no.
Yeah.
Got it no that's helpful. Matt maybe just as a quick follow up.
You know I was I was wondering as you think about some of the inventory digestion that that needs to occur across some end markets.
As you as you contemplate that and in plan, which will foundry suppliers for next year is there. If you could just maybe just talk about some of the discussions you're having in terms of the ability to perhaps limits you know some of the cost inflation from the foundry side and whether you know that.
Whether that you can do they.
They can share that cost with you going forward such that.
Perhaps is less the less onerous task for you to pass it along to your end customers.
Yeah.
Yeah, I would say if you without getting into the specifics of each of the input costs that we deal with I would say that you know.
In general with supply loosening up that's going to be a positive I would say that being said we have there are areas that are still constrained theres still inflationary aspects inside our supply chain that sort of are coming towards us. We're doing what we can to mitigate those and to the extent.
We can't mitigate those we're going to continue to do what we've been doing for the last few years, which is which.
Which is basically pass it on in a in a generally margin neutral type of manner and we found we found a way to do that and we'll continue to do that but certainly the marvell team and the operations team has worked aggressively over the last few years, particularly on the packaging back and et cetera to enable.
More sources to set up more strategic agreements and so we're kind of working it on both sides. One is to just do our job as a good supplier and manage the cost base.
The extent, we can well there will be probably a little bit of inflation still on the system, that's sort of how we're looking at it we formed really strategic partnerships with these companies we have a very transparent.
Communication with them on the demand environment, and I'd say that we're counting on them to work with us as partners.
As we manage through.
What looks like an overall semiconductor downcycle.
Okay.
Thank you.
Okay.
Our next question comes from Gary Mobley with Wells Fargo. Please go ahead.
Hey, guys. Thanks for taking my question.
I had a question that kind of picks up on the last topic and that is your purchase obligations. I know you haven't filed your 10-Q, yet, but as I looked at the last two years.
Purchase obligations are expected to be about 25% of your cost of goods sold next year and so given the current market softness do you anticipate being able to utilize all that do you anticipate the possibility of any sort of inventory write down. Thank you.
Hey, Gary Thank.
Thank you for the question. So yeah. The purchasing obligation we have in this quarter you will know that changed dramatically from the last 10-Q, we filed with it its about a tier three upon 2 billion, but just remember those purchasing agreement, it's really for long term.
Richard it's between four to 10 years and also our product are very complex and a lot of that and I have a very long manufacturing cycle. So we actually need a dedicated the capacity for those are complex product to support our customers at a single cell the customer large volume.
Last year, you know a long time, regardless of economic environment, we needed those dedicated capacity and frankly, our team has been very thoughtful we only secure the capacity largely in back end and the SAP Street for portion of what we need and so we feel quite comfortable.
We don't have a date and shows on this purchase.
We met our obligations to all of you now have to write off any capacity, that's not something we anticipate that at all.
Thank you Jay.
Gary I would just add I'd say that.
If you look at the bundle of the.
The different.
Obligations, we have so some of them are in the shorter term, which are in the form of things like Prepays and others, where as we take the capacity, we we actually get it back that the LTA you know take or pay portion is actually not very large relative to the total.
And as gene said, the most strategic aspect of this is really.
In the most advanced technologies, especially in complex substrates and high end packaging, which we absolutely need to secure.
Because of the volume that we're going to be ramping in the next few years I mean, just take the cause of it.
As one example, the $800 million of incremental cloud optimized silicon when that all as five nanometer technology using.
Advanced ABF substrates very customized packaging those agreements to get that capacity from really the best vendors you need to put that in place literally years in advance and so we've done those types of things that we feel good about that because they are tied.
Directly to the committed programs.
And so as gene said overall, while we have some we have.
Obligations, we think there actually is a benefit to us and it certainly helps us underwrite our future success.
We're able to send a strong message to our customers about how we're able to to provide the necessary capacity and supply chain for them for the future.
Thanks, Matt.
Our next question comes from Ross Seymore with Deutsche Bank. Please go ahead.
Hi, guys. Thanks for letting me ask a question I guess kind of a two part of going back to the data center side, Matt could you just level set us what percentage of the third quarter datacenter business with storage and then looking forward on the more constructive side of things, what's your confidence level on that 400 million in incremental cloud optimized revenue growth.
Next year, given the fact that you talked about a deceleration in what's happening at the cloud customers themselves or are you at all worried about that 400 being something less than that or being pushed out is that at all a level of conservatism that we should consider.
Sure Yeah, let me answer the second one first.
Answer is we feel very good about that revenue stream part of it is if you remember us.
We we went from you know.
Talking about the 408 hundred to actually talking about call. It 400, plus 800, plus because we had gotten additional design wins.
That created a little bit of a buffer as well because I think even if even if we hedge it for next year and the volumes don't quite achieve.
What we would've thought we actually had one additional business that gives us some comfort around that so but I would say all of the programs are on track we are fortunate that.
Despite the changing environment.
I would say we are absolutely head down.
In trying to tape out multiple new products right now that need to ramp up and very significant volume next year and I'm personally involved in these with our customers to ensure we're meeting their schedule and we're doing everything possible to get there. So.
That's the good news that the programs are still on track.
And I think I think that's a good thing.
The.
The percentage I think your other question was what was the percentage of datacenter revenue that's in storage.
Other way around if storage falling as the headwind for data center just to level set people yet.
Roughly of your business in storage or in a data center.
Yeah, Ralph maybe I can help you yeah I can help you with that issue.
The in general the way to think about it he said our storage business. Yeah, It's probably about one third Oh for that data Center total data center business.
Average right now that particular quarter, but of course, when we go through the inventory correction I shouldn't matter mentioned earlier, that's going to be the largest drop the pieces for the inventory correction.
Thank you Jade.
Our next question comes from Harlan sur with Jpmorgan. Please go ahead.
Yeah.
Good afternoon, Thanks for taking my question.
You talked about the impact on a more muted cloud capex spend on your overall data center business.
Most pronounced in storage, but you do have compute you've got networking, you've got optical products as well and looking specifically at your cloud optical connectivity segments, which obviously is Pam four DSP.
Color solution, if I look back at the last cloud spending slow down which was in 2019. Both of these segments combined grew about 35, 40% right granted this was still in the early innings of the 200 400 gig upgrade cycle, but part of it is also very strategic in nature, because your customers are still trying to enable.
Performance through higher networking speeds, so I guess kind of two questions near term is the team dealing with inventory issues. In these particular optical products and then looking into next year and the team and see continued growth in cloud optical.
Yeah, great. Thanks, very much for the question.
And you're right. It is a little bit of a different situation than a few years ago, where that was fairly nascent technology really ramping up hard at an inflection curve you know that being said.
We still see strong adoption of 800 gig we've seen strong momentum in 400, ZR and the new platform.
We are.
And we expect that overall optics is going to grow.
Next year.
That being said I would say in the fourth quarter part of the adjustment would would be in that area.
But I think that's a shorter term thing and again because to.
To your point it is so strategic.
We anticipate that that optics is going to continue to grow and by the way we're heads down on new product development, there as well because for the next generation of.
Hi, and 51, two T switches youre going to need the associated optics with that which then moves from 800 gigabit per second tier one six terabits per second and so that's a that's an ongoing.
New product development activity, we have so lots of activity in that area Super exciting, but it's a little bit of a different environment. In 2019, just because there has been more broad adoption, but we do feel good about it.
Great. Thanks, Matt.
Yeah.
Yeah.
Your next question comes from.
Jane you with Evercore. Please go ahead.
Yeah. Good afternoon. Thank you for taking the question or I guess I was hoping to spend a little bit of time on the enterprise networking side of the house.
Roughly $1 4 billion dollar business for the fiscal year and you talked about the China slowdown is there a way to kind of.
Parts between China, and non China, and how you're thinking about that.
The trajectory into January in all of calendar 'twenty three.
Yeah.
Yes, that's a good question.
You know as we indicated China China's down a lot right in Q4 from where it was just two quarters ago.
You know that may end up being a little bit a little bit of an overcorrection on it's hard to tell quite frankly on what's going on there and how long that's going to last in <unk>.
And how that ripples through the.
The non China.
It's been holding up very well again, I'd say based on.
The content gains we have.
As well as the.
Just the new products that are ramping up with with higher asps.
And so that's that's sort of offsetting it to some extent.
But we are guiding for Q4 enterprise networking overall, it's still down just because of the China factor.
But I'd say, if I had to handicap. It for next year, you know non China will be a bigger percentage of the total in fiscal 'twenty for them in China, but I don't I don't have the exact numbers at the tip of my fingers here a lot of this goes through the channel.
And you know other.
Yes, I just don't have those numbers in front of me.
Thank you.
Hi, Brian .
Our next question comes from Christopher Roland with Susquehanna. Please go ahead.
Hey, guys. Thanks for the question I wanted to follow up on carrier infrastructure as well. So a couple of things I guess first of all your agreement with Nokia in the extension there I was wondering if there's any economics associated.
Associated with that and then secondly, I'm looking out into next year.
There's a lot more talk about India five G.
Nokia, winning Samsung winning there as well.
What does the opportunity look like there for growth as this is this going to be sizable overall thanks.
Yes.
Yeah, Thanks, Chris on the Nokia front again it was it was great to see.
US being announced with them.
Our layer two transport processor recall, the initial engagement with them, which was very successful and it's great to see how well. They did was on the layer one baseband processor.
You know I think that partnership has led to now a broader engagement.
And so.
As you probably know you've followed the space.
The layer two transporters CPU is a critical component right with with fairly meaningful content as you sort of roll forward. So I think that's all very positive and on.
On India.
That they seem to be gearing up for a very aggressive rollout next year and I think to your point.
Few of our key customers are well positioned to take advantage of that ramp and so that's why we said earlier, we feel really good about wireless next year I think both.
<unk> sort of our our content gains as well as our but probably even more of the regional deployments.
I think India, probably will be sizable would be my guess.
Thanks, Matt.
Our next question comes from tore Svanberg with Stifel. Please go ahead.
Yes. Thank you and if you don't mind I'm going to ask a question that's not related to the next two quarters.
So.
And it does have two parts so first of all.
Do you see I Express standard is that something that could potentially accelerate the adoption of CX L. A the reason I'm asking is because last time on the call you talked about maybe six cell not contributing to revenues probably for another few years, but there does seem to be a lot of activity here that could potentially pull that timeline a little bit.
Yes, I think the <unk> timing.
You know there's a lot of that is going to be gated story by the server CPU cycle.
And I think companies are gearing up for that.
It may have gotten lost in the noise, but we did call out and I called out in my prepared remarks that we had.
<unk>.
Pretty significant design win in this area.
Which we're now well underway in terms of product development. So and then I'd say, there's a there's a very large pipeline of semi custom products behind that as well as a merchant product.
So I think that activity is still.
Our level of activity is very high with our customers but.
But I wouldn't.
I wouldn't I don't have visibility to any sort of change in terms of when those products would ramp necessarily but it's a it's a very strategic new area for us and I'd say, we continue to be focused on building a leadership position there.
A lot of these products, especially as you get into.
The larger pooling devices accelerators.
These are these are in some cases have multi core CPU there in five nanometer.
They have security features.
Quite a few things that we're adding and so these are looking more and more like very customized Soc, which then enabled these customers to really take advantage of completely new architectures relative to how they interface their CPU GPU SBU, whatever you want to call it <unk> with <unk>.
With memory and so I think that's going to continue to be a very strategic area of focus and getting a large win committed and underway is.
As a really good thing.
Great and then the second part of the question was related to your new product and you did mention this earlier so E C. When should we expect to marvell to get some revenue contribution from AC is that is that also sort of a few years out or could you already start to see some revenues next year.
I think we need to let that one play out a little bit Tori, we're taking that one step at a time I think the milestone really was.
Lining over the last year really really getting our solution designed in across a broad array of high volume proven cable suppliers to the largest hyperscale companies and we've done a great job there and we've now started sampling those and we have a very high level of interest but at this.
This juncture, we haven't really sized.
Exactly our opportunity and the timing, but we will do that in due course, as we get better visibility to the take up.
Of.
Of our customers that are competing in this market, but that trend is very real.
AAC trend is anyway and.
And we we hope to be a important part of it.
Very good thank you.
Okay.
Our next question comes from Sugar.
With BMO. Please go ahead.
Hi, Thank you I just wanted to come back to the sort of clarification for Eugene I'm looking at the data center business and the storage component and the last quarter that you reported that segment before changing the reporting.
I see 300 million without.
Without an Fi and then you had given a number $340 million within phy.
And the number you just cited a third.
The recent court it seems really low.
That would mean $190 million to $200 million number rounding up.
Is there something I'm missing there.
Or a large chunk of that is known and some other business.
Yeah, Yeah, and maybe let me interested recap and clarify I think.
Before we change it every parking our storage business the annualized run rate, it's about $1 4 billion.
So that's what you're mentioning before we changed our reporting by end market. That's what our overall storage business. It just actually reminder include HDD and flash controller.
Pre and and also fiber channel. So it's all that different Nustar AG product lines included there and overtime. The storage has come down the number I mentioned, one third is not a particular last quarter. It's generally when you look at it several quarters on average is.
One third first half if that definitely is much higher and the knowledge is much lower right.
When you think about the one time 4 billion storage revenue I'm talking about about 60%. It's in datacenter, that's what we call a debt investors to join our Investor day.
Yes, they will hope it at how we would clarify different pieces.
Yeah, no. It does so that means.
It's come down from $1 4 billion annually.
Annual run rate to 800 right.
I don't think of the way you can think about that it's a $1 4 billion in the first half of this year a property was much higher than one kind of full annualized run rate and now is it dropping much lower right.
The second half got the renovated properties very low yeah.
Got it okay. Okay that is very helpful. And then I had a follow up for you Matt.
Looking at storage and I don't follow the disk drive guys, but seagate.
Sensus has been down three quarters in a row WD to two quarters for the Master OS business and then you throw in the bullwhip effect, so youre seeing a much bigger impact than what consensus has those guys modeled.
Is that the right way in terms of timing a couple of quarters before this business comes back and then the other businesses within data center that thanks for the clarification earlier.
Not just storage.
When do those businesses because that magnitude is less right in terms of.
No real bullet.
Yes.
So if you combine all of that should we be modeling December a couple of quarters of sequential decline.
Yes, So let me break that into two pieces I think you absolutely nailed it.
When you when you talked about the <unk>.
And customer dynamics.
Their trajectory versus versus ours that is exactly the bullwhip effect I mean, you could actually just draw. The bowl weapon. You can you can kind of plot, where we would be on that.
And that's why you know and we've seen this historically in any business, where you're kind of one additional step removed you tend to have more more volatility right. It's just the way it works.
So that I think you can expect and again, we don't know exactly but we anticipate just on past experience, it's probably a couple of quarters.
<unk> worked through that.
And then on the other piece, which was the non storage piece.
Yeah. It's it's it's inventory digestion I mean, we've kind of taken a view and British wishes.
And I've been.
I've been through different scenarios in my career here on how you manage when volume when demand drops and you can you can kind of work with people and manage a soft landing or you can.
Shipping and then you pay the price later very hard way.
And so our view has been let's get through this and get it behind us and also get to a point where it is.
As you can as you get your visibility up an inventory goes down and lead times turned to normal.
Your forecast accuracy improves I mean, I think you know that old address as well the worst forecast youre going to get is if somebody gives you 52 weeks of orders you are actually better off having a more normalized environment. So thats really what were struck striving to do there and so while there is some inventory adjustment it's fairly normal given the shift in slope in the cap.
Ex trajectory and we have new products ramping and so that probably works its way through fairly quickly as well, but we'll have to see.
The exact timeframe like I said, it's still a little bit of a dynamic environment.
Yes, thank you for being Super transparent I appreciate it.
And Jim.
No problem.
Ashish do we have time for one more or should I, just wrap it up with some closing comments.
Yeah go ahead and wrap it up there thanks.
Perfect well thanks, everybody for all the questions just just a little bit of a few comments as we close here.
Look first I think.
Q3 was a was a great quarter for us I mean, we're in the middle of a <unk>.
Pretty pretty severe macroeconomic environment.
A lot of other companies.
We've obviously seen some of this inventory digestion and impact earlier, but in Q3, we delivered record revenue.
Strong operating margins.
Even if you look at the fourth quarter guide and you kind of compare our second half of this year to a year ago.
We're up about 15% and when you look at sort of the rest of the market take sort of large digital peers that peer groups down about 5%. So we.
We still think even with a.
Softer Q4 guide we continue to perform very well from a topline perspective I would say also we've been disciplined on.
Managing expenses.
Pro forma FY 'twenty, three we will grow about 28%.
And if you look at our Opex increase it's about 14%. So we've been basically growing operating expenses at about half the rate of revenue growth and we've been able to put together a world class team as a result.
To execute on these massive design wins, we've gotten over the last few years and so while we're going to be disciplined in our spending and gene sort of gave you the model on the Opex.
We feel very good about the size of the team the resources, we have and the ability to to execute which our customers are counting on.
And I believe if we do that there's even more to come so in conclusion, we continue to have the right strategy.
With really strong partnerships with key customers, we think we're in the right markets.
And the growth drivers of cloud <unk>.
<unk> wireless communications and automotive continue to be three of the largest.
Growth opportunities in the semiconductor industry in Marvell is extremely well positioned there. So thanks for all the questions I'm sure. We can be more helpful. On the call backs as well Theres a lot of <unk>.
Moving pieces, but thank you so much for your time today.
Yeah.
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