Marvell Technology, Inc. (NASDAQ:MRVL) Q3 2023 Earnings Call Transcript
Marvell Technology, Inc. (NASDAQ:MRVL) Q3 2023 Earnings Call Transcript December 1, 2022
Marvell Technology, Inc. misses on earnings expectations. Reported EPS is $0.57 EPS, expectations were $0.59.
Operator: Good afternoon, and welcome to Marvell Technology's Fiscal Third Quarter 2023 Earnings Conference Call. All participants will be in listen-only mode. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Mr. Ashish Saran, Senior Vice President of Investor Relations. Please go ahead.
Ashish Saran: Thank you, and good afternoon, everyone. Welcome to Marvell's third quarter fiscal year 2023 earnings call. Joining me today are Matt Murphy, Marvell's 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 our 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?
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Matt Murphy: 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, 5G 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. Late in the quarter, customers started requesting to push out shipments and reschedule orders to manage their inventory in a changing demand environment.
In the third quarter, these inventory reductions started to manifest and we are expecting an even greater impact in the fourth quarter. The largest impact is from our storage customers and has been widely communicated by that set of OEMs. In addition, as our Chinese customers deal with a changing macroeconomic situation, their demand for our products has come down significantly. 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 1/3 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 would 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 has not meaningfully impacted our revenue.
While the inventory correction at our customers is challenging in the near term, we believe it's 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 data center 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 decline during the quarter.
However, our cloud business continued to grow sequentially, driven by strength in our electro-optics and switch products. We are seeing the growth rate 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 preamps, as HDD OEMs deal with a broad-based inventory correction. The rest of our data center 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, Marvell's LiquidSecurity 2 HSM adapter, the industry's most advanced solution for enabling encryption, key management and authentication in the cloud. Powered by Marvell's cloud optimized OCTEON DPU, LS 2 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, CXL and ADCs. In the third quarter, we announced availability of our CXL development platform for cloud data center operators and server OEMs, enabling two key use cases: memory expansion and memory pooling. The platform pairs Marvell's advanced CXL technology with the latest CXL capable CPUs, including the new fourth-gen AMD EPYC processors demonstrating multi-host memory pooling.
With this platform, cloud operators can begin to advance their infrastructure and enable their applications to take advantage of this cutting-edge technology. I'm very excited to announce that we have recently won a significant design at a Tier 1 hyperscaler projected to drive a substantial amount of revenue in aggregate over the program's lifetime. Product development activities are in full swing, and our team is driving a large and growing pipeline of CXL opportunities. In the AC market, multiple cable manufacturers have started sampling 100-gig per lane active electrical cables powered by Marvell PAM4 DSPs to cloud data center operators, which we expect to 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 5G adoption. As you recall, the annualized revenue run rate for our wireless business crossed $600 million in the second quarter of this fiscal year. We are excited to see growth continue from that milestone. Our wired business also grew year-on-year in the third quarter driven by solid demand from metro and long-haul carrier for our market-leading coherent DSPs and accompanying TIAs and drivers. On a 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 5G business continuing to flourish and are looking forward to broader deployment of 5G in multiple geographies, including the U.S., Europe and India. In addition, we anticipate significant share in content growth ahead and new opportunities in ORAN and DRAM architectures. As you will recall, in March 2020, Nokia and Marvell announced that our companies have started working together to develop a leading 5G silicon including multiple generations of custom silicon and infrastructure processors to further expand the range of Nokia's ReefShark chipsets. Earlier this week, we announced an extension of our collaboration with Nokia to further advance their 5G chipset portfolio. Nokia will be using our new OCTEON 10 DPU, the industry's leading 5G transport processor built on Marvell's cutting-edge 5-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 5G's 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 5G 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. Developing cooperation with us, Nokia's ReefShark SoC boosts Layer-1 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 the performance and adoption of 5G Open RAN across Europe. They plan on incorporating Marvell's advanced OCTEON Fusion processor specifically designed for Open RAN into the latest off-the-shelf servers. The specialized accelerator chip also enables massive MIMO technology developed to serve many subscribers in dense urban areas. Moving on to 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 on to our enterprise networking end market.
Revenue for the third quarter was $376 million, growing 52% year-over-year and 10% sequentially. As the quarter progressed, our Chinese customers started to turn cautious due to an evolving macroeconomic environment. In response, we work with customers realigning shipments to reflect their 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 are 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 our 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 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, Marvell's 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. And we have generated a substantial pipeline of lifetime revenue that will benefit us over many years.
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 are 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 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, 5G and auto. We expect that our cloud optimized silicon programs will build from the initial ramp that started in the second half of this fiscal year and continue 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 incredibly efficient and optimized custom hardware to enable their key growth drivers. In addition to our cloud optimized programs, we expect that our 5G products in 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 realign 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 3-nanometer silicon platform, which is now available for new product designs. In addition, we are committed to executing on a number of new products, which our customers have 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 businesses at scale, we have a growing design win funnel, leadership products and strong customer engagement. We've built an extraordinary team at Marvell with a track record of execution excellence, and 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 Jean for more detail on our recent results and outlook.
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Jean Hu: Thanks, Matt, and good afternoon, everyone. I'll start with a review of our financial results for the third quarter and then provide our current outlook for the fourth quarter of fiscal 2023. Revenue in the third quarter was $1.537 billion, within our guidance range, growing 1% sequentially and 27% year-over-year, driven by growth from our data infrastructure end market. Data center accounted for 41% of revenue, enterprise networking was 24% of revenue, carrier infrastructure at 18%, consumer at 12% and auto industrial at 5%. GAAP gross margin was 50.6%. Non-GAAP gross margin was 64% of revenue, below our guidance range primarily due to product mix. Our enterprise and auto industrial end market revenue was lower than expected, and the consumer revenue was higher than our forecast.
GAAP operating expenses were $672 million. Non-GAAP operating expenses were $420 million, declining by 3% sequentially. Year-over-year, OpEx increased by 13%, growing at less than half the rate of the top line revenue growth. OpEx was lower than guidance due to lower bonus accrual and better-than-expected NRE. Our GAAP operating income was $106 million. Non-GAAP operating profit was $564 million or 36.7% of revenue, another all-time record, demonstrating the strong leverage in our operating model. Other income expense, including interest on our debt was $41 million, higher than guidance primarily due to higher interest rate on our outstanding debt. For the third quarter, GAAP income per diluted share was $0.02. Non-GAAP income per diluted share was $0.57 within our guidance range.
Earnings per share grew 33% year-over-year faster than top line revenue growth. Now turning to our balance sheet and the cash flow. During the quarter, 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 in payments for long-term back-end and substrate capacity agreements. These agreements are critical to ramping our complex products in data infrastructure market including the call to optimize the silicon solutions Matt discussed earlier. In the third quarter, we increased our inventory by $44 million or 5% sequentially. Looking at the change in demand we are forecasting in the fourth quarter, we expect our inventory level to continue to be elevated.
We are focused on prioritizing new product ramps to support our customers. These -- most of our products have long product cycles of three to five years or even longer. We are comfortable carrying higher inventory in a dynamic supply chain environment and we plan on reducing inventory starting next fiscal year. As of the end of the third fiscal quarter, our cash and cash equivalent was $723 million increasing by $106 million from the prior quarter. Our total debt was $4.5 billion. Our gross debt-to-EBITDA ratio was 1.9x and net debt-to-EBITDA ratio was 1.6x. During the third quarter, we returned $101 million to shareholders through $51 million in cash dividends and $50 million of share repurchases. In summary, in an uncertain macroeconomic environment, the Marvell team executed very well, delivering top line revenue growth and earnings expansion much faster than revenue growth.
Now turning to our guidance for the fourth quarter of fiscal 2023. We are forecasting revenue to be in the range of $1.4 billion, plus or minus 5%. We expect our GAAP gross margin in the range of 48.2% to 50.2%. We project our non-GAAP gross margin will be approximately 64%. We project our GAAP operating expenses to be approximately $646 million. We anticipate our non-GAAP operating expenses to be approximately $430 million. As Matt mentioned earlier, we have proactively slowed down our pace of hiring and tightened the discretionary spending to manage our operating expenses. We have a proven track record of executing through economic and the market cycles to maintain strong profitability while we continue to invest in long-term growth initiatives.
As a reminder, looking ahead to the first fiscal quarter of 2024, due to the typical seasonality in payroll taxes and employee merit increase, our OpEx 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 fiscal quarter, we are currently planning on holding our OpEx approximately flat at that level for the next few quarters. Other income and expense, including interest on our debt is expected to be approximately $44 million. We expect a non-GAAP tax rate of 6% for the fourth quarter and currently expect this to increase slightly to 7% next fiscal year. We expect our basic weighted share outstanding will be 855 million. And our diluted weighted average share outstanding will be 861 million.
As a result, we anticipate GAAP earnings per share in the range of breakeven to $0.05 per diluted share. We expect non-GAAP income per diluted share in the range of $0.46, plus or minus $0.05. Operator, please open the line and announce Q&A instructions. Thank you.
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