Q2 2024 Marvell Technology Inc Earnings Call
[music].
Please note this event is being recorded.
Thank you and good afternoon, everyone welcome to Marvell second fiscal quarter of 'twenty 'twenty four earnings call.
Joining me today are Matt Murphy, Marvel's, Chairman and CEO and Willem main Keith.
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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 I'll call that site.
Before I turn the call over to Matt for his comments on our performance, let me highlight several new product announcements, starting with our electro optics portfolio first.
The release of Orion the industry's first 800 gig coherent optical DSP for Blockable modules.
Orion has a fifth generation of coherent DSP and it's produced in five nanometer technology.
Carpeting, not 112 gig thirty's, enabling 800 gigabit per second of throughput within the tight power and space constraints of small form factor gluggable optical modules.
Brian enables high performance probabilistic traffic shaping in addition to supporting standards compliant transmission modes, we expect that Orion is well positioned to continue to drive Marvell <unk> leadership in coherent technology in both the carrier optical transport market as well as data center interconnect or Dci in the cloud market.
In parallel with Orion, we launched the industry's first 800 gig D. C. I ZR modules are colored 800 platform we.
Really demonstrating at 800 ZR modules at the equal conference in October .
Marvell pioneer Dci technology, 800 gig followed by a 400 ZR platform, which has been shipping in volume since last year.
Colors 800 will be our third generation of Dci module.
Powered by our new Orion DSP.
Colors 800 incorporates marvell innovative silicon photonics technology, which integrates multiple discrete components on a single die.
<unk> 800, ZR modules provide twice the bandwidth of current solutions by lowering poverty and cost per bit by 30%.
At 800, ZR modules will enable the deployment of next generation 51.2 of these switches and routers by cloud operators.
Support the massive increase in traffic between data centers driven by continued growth from generate Abi.
Moving to our copper connectivity portfolio, we announced the industry's first five nanometer multi gigabit phy platform.
This platform represents a significant leap in performance compared to products on the market today and is a key milestone in marvell journey to physical layer technology leadership. It is based on an innovative architecture that includes optimized circuit design custom digital logic and enhance a DSP algorithms.
<unk> five platform will deliver 10 gig performance at half the power of previous generation Marvell devices and will become the building block for multiple Standalone five products integrated S. O sees and custom asics optimized for specific markets and applications.
We expect the adoption of multi gig five will continue to grow in enterprise networking.
In our automotive end market, we announced the industry's highest capacity automotive central Ethernet switch to support the zonal networking architectures off next generation vehicles.
This addition to our bright lane family of Auto Ethernet switches delivered 90 gigabit per second of bandwidth.
Nearly two times higher than current commercially available solutions. The new switch family also includes a combination of advanced security features not found together in any other automotive switch product.
These features include Mac Mac sick link security on every board.
Deep packet inspection for heightened intrusion detection and an embedded hardware security module for encryption.
This product has started sampling to multiple leading automotive customers and partners. Let me now turn the call over to Matt for his comments on the quarter Matt.
Thanks, Ashish and good afternoon, everyone for the second quarter of fiscal 2024, the Marvell team continue to execute delivering revenue of 1.34 billion.
These results were above the midpoint of our guidance, primarily driven by demand from AI applications growing faster than our prior forecast or.
Our non-GAAP operating expenses were better than guidance due to an acceleration of the cost reduction plan, we outlined last quarter.
As a result, our non-GAAP earnings per share was 33 one.
One cents above the midpoint of our guidance. We are pleased with our performance for the quarter in a challenging macro environment.
Let me now move on to reviewing our results and expectations by end market, starting with data center.
In our data center end market revenue for the second quarter was $460 million growing 6% sequentially well above our guidance for a flat outlook.
We were able to outperform our guidance in this end market because of accelerating demand for optical products to meet the continuing expansion of cloud AI deployments.
Our overall revenue from cloud grew over 20% sequentially, notably revenue from both cloud AI and standard cloud infrastructure grew sequentially with AI growing faster.
As expected revenue from the enterprise on premise portion of our data center end market declined significantly on a sequential basis in the second quarter, reflecting a weakening enterprise market.
As you heard in detail last quarter AI infrastructure requires a staggering amount of high bandwidth connectivity. That's provided by an optically connected infrastructure operating at the highest available speeds.
Marvell is enabling AI with a broad range of solutions, which include <unk>.
Pam four based optical D. S peas in a he sees for connecting accelerator clusters inside AI data centers.
Dci products for connectivity between regional data centers.
Low latency high capacity Ethernet switches for fabric connectivity inside data centers.
And custom silicon for compute acceleration.
We are confident that the breadth of marvell technology positions us as one of our scarce few semiconductor companies that can enable the industry to capitalize on the rapid growth in AI.
Marvell has market, leading Pam four optical D. S. Peas are indispensable for the plug a bull optical module ecosystem that cloud customers rely upon to build their massively scalable networks.
Our DSP is enable full interoperability and backward and forward compatibility.
Also provide the advanced telemetry and diagnostics critical to maintaining an extremely resilient and serviceable network.
We've been shipping the industry's highest speed 800 gig Pam four DSP in high volume for several quarters and it begun sampling our next generation one point 60 platform.
We're seeing demand for connectivity between regional data centers accelerate as in for instance deployed across multiple locations as.
She's told you Marvell has been a key enabler of this application with their Dci products and we just announced our plan to demonstrate the industry's first 800 ZR modules in October based on our new Orion coherent DSP.
Looking at the future of optical connectivity, we are uniquely positioned in the industry with a leadership position in both Pam and coherent technology.
We're also excited about the opportunity for our next generation of Ethernet switches are 51.2 T. Caroling stent platform, which we announced earlier this year, we have begun sampling this product and we are seeing strong interest from customers.
Last quarter, we told you how cloud customers are enhancing their AI offerings by building custom accelerators up their own.
<unk> is leading to a larger and faster growing opportunity for marvell custom compute portfolio.
We have won a number of custom silicon programs tied to AI and these are well on their way to start ramping into volume production next year.
Let me now talk about what we're seeing in storage and data center.
As we expected from a low base in the first quarter, we saw some sequential storage datacenter revenue growth in the second quarter, and we are expecting modest sequential growth in the third quarter.
Or.
Storage end market demand remains significantly depressed and customer inventory remains high as a result, the industry's expectations for a data center storage recovery have pushed out meaningfully.
Looking ahead to the third quarter, we expect sequential revenue growth from overall cloud to accelerate above last quarter's performance driven by continued strong growth from cloud AI as well as standard cloud infrastructure.
Demand for our AI products continues to grow at an extraordinary rate and we're working very closely with our customers to meet the rapidly evolving needs.
On the other hand enterprise on premise is expected to continue to trend down as a result, we are projecting overall data center revenue in the third quarter to grow in the mid teens sequentially on a percentage basis, turning to our carrier infrastructure end market revenue for the second quarter was in line with our guidance at $276 million declining 3% year over year.
And 5% sequentially.
The sequential and year over year decline were driven entirely by the wired portion of our carrier end market, reflecting ongoing demand weakness and inventory digestion at wired customers.
In contrast, our wireless revenue continued to grow in the second quarter building upon the 25% sequential growth we saw in the first quarter, we are expecting additional growth in the third quarter.
As a result of significant share and content gains for marvell products in conjunction with the five G upgrade cycle, we have grown our wireless revenue significantly over a multiyear period.
The full conversion to five G. In the world's installed base of wireless infrastructure will take many years a number of regions are completing their initial phase of fiber deployments and are taking a pause and a challenging macroeconomic environment before they upgrade the balance of their networks.
As a result, following an extended period of strong growth, we are expecting a significant sequential reduction in our wireless revenue in the fourth quarter.
However, we expect that once customer and operator inventories normalize and carrier Capex returns to more healthy levels. We can resume growth in our overall carrier end market and start to realize additional share gains. These will come for five nanometer base station designs, we have won but which are not yet in production.
In addition, we expect the launch of our next generation 800 gig Orion coherent DSP platform will drive long term growth from the wired optical transport market.
Moving to our outlook for the third quarter, we expect revenue from our overall carrier end market to grow in the low single digits sequentially on a percentage basis driven by wireless.
Turning to our enterprise networking end market revenue for the second quarter was 328 million declining 4% year over year and 10% sequentially.
As we've been signaling for the last few quarters, we continue to see inventory corrections impact customer demand in this end market.
We expect this inventory re normalization to take a few quarters to resolve as customer balance sheets get worked down over time.
While we deal with these market dynamics in the near term I would note that enterprise networking has been an important contributor marvell successful transformation to a leader in data infrastructure.
The Marvell team has driven an extended multi year period of exceptional revenue growth with enterprise networking revenue essentially doubling over the last few years.
This is enabled by significant share and content gains.
A testament to the consistent investment we made in refreshing our enterprise networking product portfolio.
And she's told you we continue to introduce new products such as the industry's first five nanometer multi gig Ethernet phy transceiver.
Looking ahead to the third quarter of fiscal 2024, we project our enterprise networking revenue to decline in the low teens sequentially on a percentage basis due to the market dynamics outlined earlier.
Turning to our automotive and industrial end market revenue in the second quarter was 110 million above guidance growing 32% year over year and 23% sequentially.
Year over year growth was led by our automotive business, which continued to benefit from the growing adoption of Ethernet in cars. We also closed on a number of new automotive Ethernet design wins with multiple top 10 automotive Oems during the quarter.
Looking to the third quarter of fiscal 2024, we project revenue from our auto and industrial end market to be flattish sequentially and to continue growing year over year in the 30% range.
Moving onto our consumer end market revenue for the second quarter was $168 million growing 2% year over year and 18% sequentially.
Revenue was below guidance as deliveries for an end of life program were rescheduled to the third quarter.
As a result, we are forecasting consumer end market revenue to grow sequentially in the low teens on a percentage basis in the third quarter.
In summary, we delivered revenue and earnings above the midpoint of guidance for the fiscal second quarter. We are forecasting revenue growth to accelerate in the third quarter accompanied by gross margin expansion we.
We intend to remain disciplined on operating expenses to help us deliver strong operating leverage looking.
Looking ahead, while inventory digestion in some end markets is taking longer to resolve demand from AI applications continues to strengthen and marvell is well positioned to benefit from that trend.
Based on our latest demand outlook for our electro optics products. We now expect revenue from AI to exit this year at over a $200 million quarterly revenue run rate were 800 million annualized.
This is well above what we had outlined last quarter.
To put this in perspective this would put us at the run rate. We had previously communicated for all of next year.
Looking forward between the ongoing strength from electro optics and the expected ramp of multiple custom compute programs. We're expecting continued outsized growth from AI.
Our results and outlook continue to validate our strategy to focus on developing the most advanced silicon for data infrastructure.
The diversification of our end markets are serving us well with strong growth from AI and cloud carrying us through a softening macro environment.
With that I'll turn the call over to William for more detail on our recent results and outlook.
Thanks, Matt and good afternoon, everyone.
Let me start with a summary of our financial results for the second quarter of fiscal 2024.
Revenue in the second quarter was 1.341 billion exceeding the midpoint of our guidance declining 12% year over year and growing 1% sequentially.
Data Center was our largest end market driving 34% of total revenue.
Enterprise networking was the next largest end market with 24% of total revenue followed by carrier infrastructure at 21% consumer, 13% and auto industrial at 8%.
GAAP gross margin was 38, 9%.
non-GAAP gross margin was 63% growing 30 basis points sequentially driven by cost improvements.
Partially offset by weaker revenue mix.
Looking ahead, we expect gross margin to continue to improve in the third quarter and then to increase significantly in the fourth quarter.
As Matt told you the recovery in storage continues to push out which is negatively impacting our product mix.
Never in the fourth quarter, we project a significant improvement in our overall product mix to lead to stronger gross margin.
We expect this improvement will be driven by our continuing growth in data center, while wireless carrier and consumer revenue declines on a relative basis.
In addition, the Marvell team continues to execute well on our efforts to reduce costs.
As a result, we continue to target non-GAAP gross margin returning to the bottom end of our long term model of 64% to 66% in the fourth quarter.
Moving on to operating expenses.
GAAP operating expenses were 727 million, including share based compensation amortization of acquired intangible assets restructuring costs and acquired and acquisition related costs.
non-GAAP operating expenses were 448 million 7 million below guidance. We are pleased to report that we accelerated our cost reduction plan, we outlined last quarter.
We remain on track to execute the remainder of our cost reduction plan by the end of this fiscal year as we communicated last quarter.
Moving onto the rest of the income statement.
GAAP operating margin was negative 15, 7%.
non-GAAP operating margin was 26, 9%.
For the second quarter GAAP loss per diluted share was 24 cents.
non-GAAP income per diluted share was 33 cents one thing about the midpoint of guidance.
Now turning to our cash flow and balance sheet.
During the quarter cash flow from operations was $113 million.
Operating cash flow was negatively impacted by an increase in DSO as well are severance related cash restructuring charges.
Our DSO increased 30 days from the prior quarter, primarily due to worse than the arity as we ramp shipments on orders that were received well within lead time.
Capex was 111 million, which included a large number of leading node tape outs that we expect to drive our future growth.
As a reminder, our capex can be lumpy in any given quarter, we expect capex on average to be approximately mid single digits of revenue on a percentage basis.
Inventory at the end of the first quarter was 1.02 billion decreasing by $10 million sequentially.
We returned $52 million to shareholders through cash dividends.
Our total debt was 4.15 billion, our gross debt to EBITDA ratio was 2.04 times and net debt to EBITDA ratio was 183 times.
During the quarter, we paid down $500 million of our total debt.
Looking ahead, we will opportunistically explore accessing the debt capital markets to refinance our upcoming debt maturities.
As of the end of the second fiscal quarter, our cash and cash equivalents were 423 million.
Turning to our guidance for the third quarter of fiscal 'twenty 'twenty four.
We are forecasting revenue to be in the range of $1 4 billion plus or minus 5% we.
We expect our GAAP gross margin will be in the range of 45, 6% to 48%.
We project our non-GAAP gross margin will be in the range of 63 to 61, 3%.
We project, our GAAP operating expenses to be in the range of $666 million to $671 million.
We anticipate our non-GAAP operating expenses will be in the range of $435 million to $440 million.
We expect other income and expense, including interest on our debt to be approximately $48 million.
For the third quarter, we expect a non-GAAP tax rate of 6%.
We expect a basic weighted average shares outstanding to be $863 million and our diluted weighted average shares outstanding to be $869 million.
As a result, we anticipate GAAP loss per diluted share in the range of a loss of <unk> 12 cents per share. We expect non-GAAP income per diluted share in the range of 35 to 45 cents.
In summary for the third quarter, we are guiding for solid sequential revenue growth.
Are there expansion in non-GAAP gross margin and additional reductions in non-GAAP Opex all.
All of which positions more valve for strong operating leverage and earnings growth.
In addition, following the pay down of 500 million in debt in the second quarter, we resumed buybacks in the third quarter. Operator, Please open the line and announced 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.
If you were using a speaker phone 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.
Okay.
Our first question today is from tore Svanberg with Stifel. Please go ahead.
Yes.
You are not could you just elaborate a little bit more on the on the storage business I'm just trying to understand all the dynamics there. So it sounds like there's a delay in the recovery, obviously, because there's still some inventories out there.
But I'm also trying to understand you know the growth in storage associated with with AI.
I know there is a different architecture. So if you could give us any more color on you know the digestion of the inventory on the compute side, coupled with how storage could benefit more on the on the AI side.
Yeah sure Hey, Thanks story for the question Yeah on storage I would say you know the best guidepost as to.
Look at the end and customer commentary and both with the hard drive companies are saying as well as <unk>.
The flash industry and just relative to.
The sort of extended time, it's taking for inventory to work down.
At their level.
That being said eventually it's going to come back, it's a little bit longer than we had modeled but at this point, where we're following the market and following our customers.
And you know.
Hopefully that's some time.
At the beginning of next year and the first half, but we'll see how that goes but eventually it will come back on the AI question.
It's kind of interesting we we continue to make attempts to model that we don't have a great model for storage at this point, we've got I think an excellent view now of.
Where we sit in the block diagrams relative to our optical products are custom silicon networking.
But the storage impact in our view at a high level as net positive, but we don't have a particularly helpful model to how to think about that certainly AI should be an overall tailwind for storage.
But I think there's there's.
That's all caught up in the inventory that's being worked out the csp's.
Sounds good thank you yep.
Yep.
The next question is from Timothy Arcuri with UBS. Please go ahead.
Thanks, a lot Matt So AI revenue was supposed to be I think 400. This year, it's actually going to exit at 200, a quarter. So it's goodness. So it's you know obviously going to be higher than since you know for for the year.
Can you talk about how much of whatever the number will be for the year, probably five or 550, something like that I would think how much of that is gonna be custom ASIC and then next year, you said that AI would be greater than 800, you know obviously, it's gonna be you know quite a bit greater than 800 can you maybe update that number and give us an idea of of you know how much of that is gonna be custom ASIC I'm guessing.
50 million something like that but I'm wondering if you can give us some more milepost there. Thanks.
Yeah. Thanks, Tim Yeah. So I think very encouraged by the demand trajectory upwards on the AI segment for us.
Exiting the year at 200 run rate that is still.
Mostly driven by the electro optics platform DSP, Tia and drivers at 800 gig.
There's there's probably going to be a little contribution even in the fourth quarter from custom silicon, but that really.
Ramps up more meaningfully next year.
But we we look at this as just a very positive sign that you know a quarter ago. When we well we did have made our best estimates as to the Hum.
Opportunity in front of us the fact that exiting the year will be at next year's run rate is very positive. So think of it as this year, mostly electro optics.
Is going to grow again next year, obviously, and then you need to layer on top of more you know a more meaningful ramp in custom silicon, but at this point.
You know demand has so far up into the right. It's actually hard for us to put an exact number or give you a refined number on next year other than it's going to be obviously bigger than we said the last time around.
Right I guess, just but is the so there's obviously this big surge happening during the back half of the year, but if you took the AI piece does it continue at that sort of linear rates through the year or does it sort of flattened flattened off as you kind of go out through next year, just trying to shape that thanks.
Yeah, I think it well I think the way you should think about it is in Q4, if we're already at 200, and it's going to be at a higher run rate.
Throughout fiscal 'twenty five each quarter. So it is going to keep growing on the Opex side, and then you're going to layer in custom silicon on top so we're not we're certainly not saying it's going to flatline at that level. We're just saying it's come at a lot faster demand has been a lot better.
Supply chain team in Marvell is doing a great job to source the components and the capability that we need so I think it's a great setup for next year relative to the AI AI revenue.
Great Matt. Thank you so much thanks, Tim.
The next question is from Blayne Curtis with Barclays. Please go ahead.
Hey, guys. Thanks for letting me ask the question I wanted to ask either matter willing I guess on the gross margin can you just remind us what the headwinds are that you expect to resolve in Q4, because I guess, you know stores, taking longer but I think the gross margin and electro optics are quite good. So you would think that'd be a tailwind. So you can just walk us through the puts and takes on the gross margin guide that would be helpful.
I think Blaine, yes, if suddenly the optics is a tailwind and then in addition to that we have.
Signals that are.
The Y wired wireless carrier is really stepping down in the fourth quarter and consumers also already stepping down so the combination of those things and then in addition, our cost structure for our products has really improved and the overhead on manufacturing.
We see that benefit it really started to flow through more significantly in the fourth quarter.
Two stores Sydney as a headwind for us is that recovery is pushed out.
Yeah.
Yeah.
Oh, okay.
Thank you.
The next question is from Matt Ramsay with TD Cowen. Please go ahead.
Yeah. Thank you very much guys good afternoon.
Matt I think you you address the debt the AI revenue.
Commentary I wanted to ask you about the.
Yeah.
Sort of goalposts for custom silicon.
And we had been and we had had that conversation around $400 million and 800 million and then it got pushed out a little bit and there's been I mean, I don't think any of us have seen anything like the capex shifts that have happened around <unk>.
<unk>, AI and spending patterns and a lot of your large customers.
Uh huh.
What we've observed is a lot of custom compute AC programs in flight some of them or for us.
Sort of CPU offload and whether it's called D. P were smart Nic or whatever you want to call. It some of them are for small smaller model in France custom silicon programs at Hyperscale, maybe you could talk a little bit about where your engagements or what you're seeing in terms of timing and magnitude because it's been such a.
Tumultuous capex environment with AI versus traditional compute than if you have any updates on some.
Some of those numbers around a custom compute programs and timing that would be really helpful. Thanks guys.
Yeah, great. Thanks for the question I'd say a couple of things. The first is on your question about the custom silicon opportunity.
Which really if you sort of summarize the different pieces of it as you mentioned is really all to provide accelerated computing right and accustomed format for for these various companies.
I think the overall capex.
Gift towards accelerated computing is clearly get a benefit those that are participating in that segment, including us and we do see.
We do see and some of that overlap and that's why last quarter, we tried to decouple them somewhat but some of that revenue, obviously overlaps with D. A I numbers I gave earlier, but it's certainly a positive set up you know we talked about having two different products last quarter that were kind of the lead ones that were tied to AI one of which.
Was in sample stage that product is looking very good and most likely go into production first passed the second product taped out as we expected in the second quarter and that's also planned to ramp up next year.
The size and the timing of those are still to be determined we're working with our customers on those but the overall shift in capex spending is clearly a tailwind on that business. So so I'd sort of say to calibrate it today kind of tracking towards what we updated you guys on the last time and then next year you know really.
Depends on how much it how much it moves over Matt and how much it can actually how much business can be driven so we're not we're not calling out other than to say, it's it's the custom stuff for us is mostly going to be driven by our by AI next year in terms of the the <unk>.
Got it no. Thank you Matt appreciate it yeah.
The next question is from harsh Kumar with Piper Sandler. Please go ahead.
Yeah, Hey.
I think when you talked about gross margin drivers for the fourth quarter.
Matt you mentioned that you might be expecting significant recovery in revenues as well did I understand that correctly and if so could you talk about what might be happening in the fourth quarter to drive the recovery.
Yes, you're saying overall harsh your question is with what's sort of the view yeah. Yeah, obviously, we're guiding one quarter at a time, but to give you some perspective.
Because we gave you a lots of puts and takes including commentary about about.
About carrier in wireless, which which which we've been actually saying for several quarters now relative to that.
<unk> right in taking a pause overall, we expect revenues to be up again in the fourth quarter, we were sort of consistent with what we outlined in the last quarter's call, which is that Q3 and Q4 growth would accelerate so kind of kind of think of that as a.
Growing again in the fourth quarter.
Sort of like we did in Q3, but really driven by by cloud and AI and AI being the big driver, but also as we said in our prepared remarks.
Standard cloud infrastructure revenues are also growing very nicely through the year are not only from Q2. You ended Q2 in Q2 to Q3, but also into the fourth quarter and beyond.
And that means if you're if you kind of do the back of the envelope you know data center.
A bigger part of our revenue in AI becomes a bigger part of our revenue by the fourth quarter and then overall Marvell Inc. Is also up so you know I just kind of frame. It at a high level. You know we did set out a long time ago to have a diversified strategy.
Within data infrastructure by serving multiple end markets with a with a suite of products. So we've got enterprise five G.
Automotive data center, and you know as you've seen even this dynamic environment.
Certain quarter, some are performing better than others and then you know we're we're we're sort of blessed to have markets that then have kicked in at the right time, so even even in a in a in a tough macro right now marvell is continuing to grow throughout the year starting from our first quarter and we anticipate that gross you. Obviously go through Q3, and then through Q.
For but the mix shifting by end market.
If that makes sense and I know, you'll create your model and.
We are getting enough commentary I think to to put the pieces together.
No. We appreciate it Matt Thank you so much.
The next question is for Christopher Roland with Susquehanna. Please go ahead.
Hey, Thanks for the question and this one's for Matt.
You know just.
Kind of a an amazing revision here on the electro optics portion.
Hum you know since you've seen this inflection you've probably done some more research here. How are you thinking about the attach rate for these products per G. P. You call. It is it one for one or are you thinking it could be two for one I've seen some research that suggests depending on how many layers there or it could even be three.
<unk> per one.
And is the revenue that we're talking about here all 800 gig Pam four DSP is there is there anything else.
Related.
Well.
Yep Yep, Thanks, Chris Yeah, I think it's fairly similar to our view last quarter we were.
We were pretty clear about the direct attach which was which was the one the one you mentioned.
Understanding that as you get to the upper layers of the network.
There's more and you know, there's there's a range and you've probably size the range, where we're still.
We're still I think refining our exact models there. So I don't I don't know that I have an exact number to give you, but I think youre thinking about it the right way is it starting at the direct attach and then building higher and the second part of your question.
It's it's almost it's all 800 gig for AI at this point, we have strong traction on our next generation products at one point 60, which would be starting starting sometime next year.
Products that are at frequency is lower than 800 gigabit are typically served for the traditional cloud infrastructure, which is also seeing a recovery as well so hopefully that's helpful.
Fantastic Thanks, Matt.
The next question is from Ross Seymore with Deutsche Bank. Please go ahead.
Hi, guys I don't know if this one's for Matt or William but I just wanted to talk about the puts and takes to next year's gross margin and I know youre not guiding that far out with any specifics, but it seems like youre going to have a number of custom products that'll be going up in the data center side, the storage side should recover at some point in time.
But the general question is if custom products tend to be lower gross margin in storage and some other areas like enterprise eventually come back cyclically, how do we think about the puts and takes in your gross margin versus that 64 to 66 historical target range.
Yeah, Rob maybe I can start and Matt can can add so when you look back you know Sidney.
The last couple of years, we've grown both a carrier in Asia business at a faster than the rest of the business and we were able to maintain our gross margin with our target range.
We're talking to get back to that 64 exiting this year and then to maintain that through through next year.
But clearly it's too early to decide exactly how big the ASIC ramp is next year.
Now if we do show outsized growth there that would negatively impact our gross margin, but suddenly our views are that would be very accretive to operating income and to EPS.
But it's too early right now to know exactly the extent to that so hopefully that's helpful for us.
Yeah, and Ross maybe it is Matt I'll, just add I think the.
Clearly the custom business carries a lower gross margin and we've been very very open about that.
But I think looking out to next year, it's a little early to call. It right. We don't know the rate of recovery for storage. That's a big part of the equation. We also have you know whats the even within like AI and cloud what's the optics revenue is gonna be versus the <unk>.
Custom stuff, you've got automotive continuing to perform well and growing which is a higher than average gross margin category for us. So we've got a lot of irons in the fire relative to various businesses that may or may not pick up at different times.
As William said, you know, we had a pretty consistent you know.
Our ability to manage gross margins in the range that we were targeting understanding there's mix issues. All the time, we've been going through a period here Q1, Q2, and Q3, where we've had it for a longer period, I'd say unfavorable gross margin relative to our traditional mix.
But it's such a dynamic environment, it's really hard to call the ball exactly rahsaan when all those markets sort of burn through inventory kicked back and what is the recovery look like but when we look at it a very high level. We continue to believe we have a very nice balanced portfolio of different products technologies with with different business.
Models behind them and that generate different gross and operating margin profiles.
And as an example, like Williams said just because some of these custom programs are at lower than corporate average gross margin, especially if they ramped significantly they are extremely accretive to operating margin and operating income at the bottom line level, which ultimately over time you know that's what we're laser focused on is driving driving earnings per share and driving.
Driving operating profits for the company.
No.
High level answer, but maybe just frame that up we need a little more time in front of us to really figure out what that looks like for next year.
Fair enough. Thank you.
Okay.
The next question is from Vivek Arya with Bank of America. Please go ahead.
Alright. Thank you for taking my question I was hoping you could help us size, how big storage is.
Currently in the quarter you recorded both kind of data center and outside the data center and I forgot what you mentioned that there was going to be up down flat in Q3, and Q4 organic kind of hold at these low levels.
And what are you looking forward to inform you as to when it starts to grow.
Sequentially it like how much excess inventory is out there or do you think that it can actually hold at these low levels. So just help us kind of what the right baseline view is of storage as you get into next year.
Sure sure that an extra back to.
Great question, Okay, I think it's in some ways the million dollar question, Let me tell you where we're at so far so.
Obviously Q1 was very very low in terms of our storage revenues and in particular, we're really talking about data center storage. If you think about it the consumer piece is kind of hung in there because of some of the some of the specific applications, we have but but that's what's moving the needle as the data center side.
In Q2.
It had recovered which was nice to see it was coming off of bottom right around 100 million, let's call it something like that.
And then from there we we said in our prepared remarks Q3, we'd see a modest recovery again, so that would be up.
It's still not sloping towards.
I think where we thought it was going to be a quarter or two ago relative to the year end exit rate and I think most of the.
The end customer commentary suggests this is more of a first half of.
24 type of recovery.
But I guess the good news is it's come off the bottom.
Good growth in Q2, it's going to grow again in Q3, and it'll grow again in Q4, but it's just not quite at that slope and that rate when we dug in with the customer base kind of all the way to the end companies that consume this storage.
It's hard to get an exact clear picture of where the inventory is and the timing as I mentioned, however, we do understand is that.
There's a lot of activity on qualifying the next generation drives and technologies, there's a big T C L benefit.
We haven't been able to detect anything structurally that's changed per se. Although we continue to study that so in our mind it looks like.
This has to come back to where it was at some point in terms of the number of extra bytes that are being shipped are consumed and then it should grow from there for all the reasons, it's been growing for the last.
20 years in NII. It was a question earlier about that it's probably a tailwind on that but I think with how far back we are in the supply chain I will just conclude my remarks by saying, it's just very difficult to get a get a full read.
We're at all is what's going on at the end customer level and when it comes back. So all we can do is sort of look at what our customers are saying and talking to us about in and follow their lead.
Hopefully that's helpful.
Thank you Matt.
Yes.
The next question is from three repo jewelry with Raymond James. Please go ahead.
Thank you Hi, Matt My question is on the custom Silicon side I think you called out two programs that are in AI that you expect to ramp next year can you talk about the design win pipeline and and and also I want if you could touch on you know I know, it's difficult to predict and what kind of revenue opportunity.
You know our forecast the revenue opportunity. This early but could you give us at least some sense because some of this program. So we do hear that from some of these programs do get cancelled. So just want to make sure that you have that visibility that these programs are for real what you have for next year and then you know if you can talk about other opportunities beyond those two.
Programs that you talked about that'd be helpful. Thank you.
Yeah, Great question, let me start with the are they real because I think that was that was the big question, probably two quarters back Sweeney and even at the end of last year. When I think the reality of the macro economy really hit the cloud.
Companies pretty significantly and that's when you saw those companies at a very high level take take actions on head count take actions on expenses look at program priorities, you know down at the at the at the infrastructure level and part of our call in Q1, and Q2 was sort of.
Advising investors, how how that had changed what emerged from that was a shift from traditional cloud infrastructure to AI now we've seen that play out through the first half of the year. So so so those programs not only are getting funded there theres extreme urgency around them and so now.
We're at a point given where these products are actually talking about you know when do we start wafers, how do we make sure. The capacity is lined up how do we have three way calls to make sure. We're all dialed in on what's needed. So so that gives us quite a bit of comfort.
And you know that and we've we're farther along in a quarter from now two quarters from now we'll be even farther along relative to being able to provide more visibility on what that ramp looks like but we feel good about that and certainly going through that process. We for all the programs in the pipeline we have both one and opened a good view of where.
Where our customers want to go.
Onto the opportunity size just to give you a sense. If you look at the overall Marvell just total design opportunity pipeline. The biggest segment as datacenter Wouldnt surprise you, but it's it's it's a huge portion of our open funnel and of that we look at it every quarter. The AI portion just continues to grow in.
It's become very significant from a from an opportunity standpoint, and what I would say is it's really a combination of all the technologies I mentioned in the prepared remarks.
The Pam products going from from <unk>.
800 gig to one point 60, it's our AUC offerings, it's the big custom <unk>.
<unk> silicon programs that are that are out there and there's a tremendous urgency to increase the beat rate on those and get them out faster.
Significant interest in our Ethernet switching platform at 51 point T. Two T and not only that the roadmap beyond that.
We have a number of new exciting technologies to like bring silicon photonics inside the data center.
So when you think about the kind of the conversations we're having it's just a number of technologies that really work well together and I think customers are engaging with us now to figure out how they can get the best out of Marvell.
Overall, and really differentiate themselves within their data center architectures.
On T C O on power on performance and using the suite of technologies and really optimizing for their architecture. So I'd say, there's a number of sockets. The pipeline is big there those are all the all the catch all that sounds great, but I'd say, the more strategic and interesting piece and that's where I'm spending time is really making.
Sure we marshal the resources of Marvell to engaged very deeply at the highest levels with our big cloud customers and partners in the ecosystem.
And.
Present ourselves as one company with with a suite of solutions that can process. The data. It can move the data can store the data and it can.
Can even secure the data inside your cloud and I think all of those together is very exciting so.
Yeah, we will see lots of opportunity in front of us.
Thanks, Matt.
The next question is from Harlan sur with J P. Morgan. Please go ahead.
Hi, good afternoon, and thank you for taking my question you know there's been a lot of focus on your electro optical business tied to AI, but I think the bigger portion of your electro optical businesses focused on the persistent upgrade cycles across the entire cloud data center footprint right and I think these killings are still in front of the team, but I think you still have there.
There's one more cloud Titan that has yet to upgrade for 400 gig across its data center do you still have the 800 gig 116 optical upgrades.
The remaining three type thing.
And then on D. C. I, you know you're still ramping 400 G. R. D. Seattle, but you still I think have to more customers that are in the pipeline. So are these broad upgrade cycle starting to line up the fire next year, maybe even some starting in the second half of this year maybe into some of your commentary on.
Strength in broader cloud, but just trying to get a sense of the ramp profile on these upgrade cycles.
Yeah, I think you did a great job summarizing it.
The the AI piece has obviously become very meaningful and we gave you. We gave you a sense of what that that that level of revenue is going to be in the fourth quarter. So it's pretty amazing how fast that's grown obviously, but to your point.
The the the standard cloud infrastructure side of connectivity.
Is having a nice recovery off of some inventory that was built last year.
Now, becoming a tailwind does that burns down.
You pointed out that there's still there's still a major cloud company to go through their upgrades. So that's also in front of us as we transition each of the technologies in terms of of.
Of speed, there's always an ASP bump and it makes sense because youre delivering talk it talk to X. The bandwidth for not two X. The price right. So we're on a nice sort of share the benefits with our customer a trajectory there and even at $1 60 for next year, while AI will lead it right behind.
It's going to be a key part of the overall infrastructure build you know probably the year. After and then the regional data center stuff, which is really the ZR products.
Also D is doing extremely well this year I mean large upside sides due to.
Due to two regenerative AI and then we said in the prepared remarks, and we just put out the press release I think it was today or it was yesterday about 800, ZR and there'll be more to come on that but theres a theres another frequency.
Frequency kicker coming in you know probably faster than we would've thought if you went back six or nine months ago, because that between data center bandwidth is actually now becoming a bottleneck. So just tremendous across the board opportunities that are not just AI, but it's really driving our cloud growth and that's a lot of that we're seeing in the second half.
And we're going to see it through next year. So we have both of those irons in the fire for Marvell overall growth.
Perfect. Thank you Matt.
The next question is from <unk> Srivastava with BMO. Please go ahead.
Hi, Thank you very much.
I had a question on the cash flow side.
I.
I was trying to see if there was a discernible pattern of seasonality doesn't seem to be but.
You gave a reason for dsos and impacting our CFO .
Could you kind of just walk us through how should we think about cash flow for the rest of the year.
Yes, sure thing think numbers, yet this quarter Sydney.
DSO was impacted somewhat by by linearity.
We do expect a nice bounce back in Q3, and some normalization as we've mentioned, we're really focused on driving down our days of inventory and we've consistently released actually this year.
And we expect to continue driving that down through.
Through the rest of this year and so you should expect some some a good improvement in the second half here.
Okay.
A question for you, Matt we're hearing a lot of.
More companies are talking about the pushup of Capex General purpose CPU towards AI and ml you addressed it in some ways earlier.
Is that are you seeing that manifest in your business that certain projects are.
Sacrifice at the altar.
[laughter].
Finally way to phrase it yeah, I think I think there's two aspects I think one is where their project re prioritization or not within those companies and then also is it affecting our business right now which is kind of two pieces. So.
Our view is on the first one.
At least for Marvell I can't comment about everybody, but for US we really worked through that issue at the end of last year. Early this year that there was a big.
I'd say kind of re prioritization that went on first driven by the budget squeeze and companies just trying to get more efficient and then almost in line with that was sort of the release of chat G. P. T and the realization that there was this potential massive opportunity right for productivity gains through AI and then what what are people going to do.
And then sort of the race was on so from that standpoint, we feel very good about our whip and what we're working on and that at least for US those decisions and re prioritization were made and some of those are why you know we were lighter on our custom silicon revenue. This year, we sort of talked about that a couple of quarters ago. So those programs got delay.
So we've we've I guess taken taken some medicine on that and we've moved past. It now we've got this after the races with the AI stuff.
And then on the on the on our current business as you saw we had you know and in.
In Q2, we had.
Overall data center revenues up pretty nicely and that included on Prem being down AI being up a lot, but we also said that that standard cloud infrastructure was up and it's going to be up again nicely in the third quarter and it's going to continue through the fourth quarter into next year. So I think we've worked through that as well and probably the reason we don't.
Get hit quite as much there is that.
We're tied more to the networking and connectivity than selling Cpus as an example, and so.
That overall kind of network bandwidth needs to continue to get upgraded and deal with it because a lot of these big data centers, our multi tenant and they've got AI sitting in there and they've got specialty built.
Servers and storage for other things, but it all needs to work together and it all needs to ultimately have the right level of bandwidth to support the compute power.
So those are some some puts and takes I think that the headwind on the whole thing would for us really would be the storage piece, which which shows up in our data center near line and that we've just been kind of answered questions about that already so that's the puts and takes but overall, it's actually growing very nicely for us it'll be a growth driver for us next.
Year or two.
Got it thank you Mike.
Yeah.
The next question is from Chris Queso with Wolfe Research. Please go ahead.
Yes. Thank you I guess the question is digging into the enterprise on premise a little bit more.
If you give some detail on.
What you include in that that's still looking to be down does that include for example, fiber channel as well and do you think that business. You know that this will mark a bottom for that business, you, obviously, probably difficult to figure out when that starts getting better.
Yeah, Hey, Chris Thanks for the question.
Yes, I mean, it's.
Enterprise on premise business is just kept coming down now I think the reality is if you look at overall enterprise server shipments and you look at sort of the end data, that's probably been down for I don't know eight quarters or something so the end markets just not doing as well, it's mostly fiber channel that's within there. There's also some.
Some some ethernet and some niche products as well.
I don't know that we're necessarily calling a bottom, but it's got to be close just because at some point people people need the people actually need to buy buy servers and customers need to work through inventory. So it's been a headwind I think we're close to it you know maybe maybe needs a little more time, maybe another quarter, but at some point that that will re nor.
<unk> as well.
And you know, it's it's all obviously within overall data center all of that sort of.
Inventory adjustment and weakness at the end market levels being just blown away obviously by.
By the AI and cloud infrastructure piece, which is still driving very healthy growth into Q3, and then and then another step up obviously in Q4.
And that's assuming really no material recovery in the on Prem side, but I do expect over time.
Just sort of step back and look at like fibre channel its been a pretty stable business for us ever since we've owned it through the caveat acquisition.
And we don't see any reason why at some point that just doesn't come back to where it was and when it does that that'll also be a be a positive thing for us hopefully that's helpful.
Thank you.
The next question is from Quinn Bolton with Needham and company. Please go ahead.
Hey, I wanted to ask you you talked about the electro-optics driving most of that $200 million of AI revenue could you give us some sense how much of that is infiniband versus Ethernet within those 800 gig modules and do you guys see.
N.
He share difference between your position in Ethernet versus into Nevada.
I know your share is very high.
In general in that market, but just wondering if you.
You would say your shares higher either an ethernet or instead of it and then I've got a follow up.
It maybe the simple answer is first of all as you point out where we're agnostic we participate broadly in the connectivity independent of whether it's in Vantiv Andrew Ethernet.
And.
And I'd say that we continue to have very high market share and penetration into both of those applications.
And and the demand we're seeing is broad based from from both of those as well as multiple customers.
Driving the driving it so its actually really kind of hard to break it down exactly and I don't know that it's super helpful. Because overall the shares.
Still very healthy and and.
And we're agnostic so the same module can kind of be Houston and neither one.
Got it okay. So it's pretty broad based across both the follow up question is just you mentioned the 51.2 terabits switch in and starting to sample it just.
Look out to calendar 'twenty for fiscal 'twenty five D. C that are starting to get deployed.
The U S hyperscale or partners.
Yeah, I think we will have some some contribution from from that product area next year, the bigger ramp is a little bit farther out but.
Very very pleased I'd say with the.
The open funnel on that technology, I'm very happy with with the team I mean, this this architecture and.
The.
Uh huh.
The key kind of key pieces of that initially came from an OEM right, which is a company we acquired in 2021.
But the thing that we did upfront as we put it on the Marvell five nanometer design flow using using our <unk>, our IP platform or our new product development process. So you kind of got the best of both worlds.
And you know the teams executed extremely well on on the chip and as a result, it is giving customers confidence. We can we can really be there for them not only on the on the feature set including.
Very very low latency and in the right power envelope, but also being able to manufacture for high volume, which is no small task on these effectively radical buster type switches or type products.
So we'll see how it goes Glenn but pipeline strong. This is gonna be a big upgrade cycle for the industry and I think it's gonna be overall overall positive for the people that are in that ecosystem.
Thank you I think we'll do one perfect Quint and I think we'll do Gerry one more question and then we can wrap it and that question will be from Gary Mobley with Wells Fargo Securities. Please go ahead.
Hey, guys. It takes we're sticking the question I don't think there's been I've mentioned, so far the influence on the extra week in the fourth quarter, Matt I want to verify your expectation of sequential revenue growth in the fourth quarter is that independent of the extra week or inclusive of the extra week will them yeah, the target out of Opex.
For the fourth quarter, I think you said $430 million with the extra week is that still the target.
That's correct.
Got it.
Okay Yeah.
Well Neal I go and Olga.
Yeah sure Yeah, just on the Opex.
That's correct Gary.
For the 13 weeks normalize we said for 'twenty and so for the full 14 weeks, we got at 430, and so you've got the correct number.
And then on the revenue side Gerry.
My experience doing this for a long time and having the famous 14 week quarter roll through its I think the best practice I found is you end up really not getting the extra revenue per se, but you got to you got to obviously count the expenses. So that's sort of the way to think about it. So we don't we're not we're not saying Hey, you know because it's Q4.
For 14 weeks, we're going to have some better growth than we would have I think it's just that's kind of what the market is doing so Kathy and then William gave you gave you sort of the.
The run rate on Opex, if you look at it netting out what what 13 weeks would've been which is about 420.
Got it thanks again guys.
Yeah.
This concludes our question and answer session. Thank you for attending today's presentation you may now disconnect.
Okay.
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