Marvell Technology, Inc.

Ladies and gentlemen, thank you for standing by, and welcome to the Marvell Technology Group fourth quarter 2021 earnings conference call. At this time, all participants are in listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during the session, you'll need to press star 1 on your telephone. As a reminder, today's program is being recorded. I would now like to introduce your host for today's program, Aziz Saran, Vice President, Investor Relations. Please go ahead.

Thank you and good afternoon, everyone. Welcome to Marvell's fourth quarter and fiscal year 2021 earnings call. Joining me today are Matt Murphy, Marvell's president and CEO, and Jean Hu, our CFO. I would like to remind everyone that certain comments made today may include forward-looking statements which are subject to 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 on our website in the investor relations section. With that, I'll turn the call over to Matt for his comments on our performance. Matt?

Thanks, Ashish, and good afternoon, everyone. Let me start with a recap of Marvell's highlights for fiscal year 2021. Our GAAP revenue was 2.97 billion, GAAP gross margin was 50.1%, and GAAP loss per diluted share was 41 cents. On a non-GAAP basis, our gross margin was 63.3%, and non-GAAP earnings per diluted share was 92 cents. Our consolidated revenue grew 10% year on year, led by our networking business, which grew 22% year on year. Revenue growth combined with strong operating leverage from our business model enabled non-GAAP EPS to grow 39% year-on-year. I am very pleased with our outstanding performance during what has been an otherwise challenging year. Our growth initiatives in 5G, cloud, and automotive drove results in these key end markets, which collectively more than doubled in revenue from the prior year to represent more than 25% of fiscal year 2021 revenue. We are really pleased with the performance of Avera and Aquantia, who both delivered revenue above our expectations. We successfully completed the integration of both businesses and overachieved on our Synergy targets. We also made great strides with our technology platform, announcing the jump to 5 nanometer and along with it, the industry's first 112 gig Surdeys for cloud data center infrastructure. This move was a direct result of our multi-year strategic shift to focus on data infrastructure and brings our process node cadence to the cutting edge. The power of our five nanometer platform and the benefits it provides for customers is evident in our opportunity funnel, which has grown significantly since we adopted this new node. The activity level on five nanometer continues to accelerate, and we have already secured multiple leading edge design wins, each meaningful from a revenue perspective. Our advanced technology is also a key enabler of our custom ASIC offering, which has continued to gain momentum, particularly in cloud. Following on from the design when we announced last quarter, activity levels continue to increase, and we are now involved in advanced discussions with multiple hyperscale data center customers. Our ability to offer customization coupled with Marvell's leading standard product IP has proven to be highly compelling to cloud customers. Given its strategic importance, let me provide some more detail on the evolution of the Custom ASIC model, bringing to light some of the key trends that make the opportunity so compelling. Traditionally, the primary customer base for Custom ASICs has been large system OEMs whose core business is developing hardware to sell as a product. These customers design their own system hardware and build unique technology into the hardware itself through custom chip development to differentiate their products. They do much of the chip design directly and work with a semiconductor partner to license IP and manage the physical layout in front and back end manufacturing. Today, in addition to these system customers, hyperscale data center operators are also designing their own silicon. And I'm often asked if this trend is good or bad for Marvell. We believe this trend is very good for us, as we believe we are ideally positioned to help them solve their unique challenges. Their core business is the cloud service they provide, not the hardware itself. They are building custom hardware because they need incredibly efficient and optimized infrastructure. As a result, they are looking for a semiconductor collaboration that goes well beyond the traditional custom ASIC model and allows them to leverage IP that the silicon partner already has available. The design is typically done in true partnership, with the customer focusing on the portions proprietary to their use cases and Marvell bringing our own unique compute, security, networking, and storage IP to the table. Therefore, the end solution is a semi-custom design, which represents the best of both worlds and provides a faster time to market. Because these engagements use our IP, we believe this leads to a more strategic and valuable relationship with these key customers. In addition, compute is becoming increasingly important in this market as hyperscalers are looking to move beyond standard x86 servers and integrate custom ARM-based compute solutions into their architecture. As this trend accelerates, Marvell should be an even more important partner. Our long history in successfully developing and delivering multiple generations of highly complex multi-core ARM-based processors, including server processors, is unique in the industry. Marvell is emerging as an ideal partner for these customers, and our recent cloud engagements involve deep engineering collaboration on all key aspects of design, including chip architecture, memory density, high-speed certies integration, advanced packaging, power optimization, and flexible processor implementation. Now let me move on to our quarterly results and expectations. Revenue for the fourth quarter of fiscal 2021 was $798 million, $13 million above the midpoint of guidance, growing 6% sequentially and 11% year-over-year. Adjusted for the divestiture of Wi-Fi, year-on-year revenue growth was even greater at 15%. Our gap income per diluted share was $0.02. Our non-gap earnings per diluted share was $0.29, growing 16% sequentially and 71% year-over-year. As expected, supply constraints limited our ability to fully meet the growing demand for our networking products. We also saw strong demand for our storage products, which drove the upside in revenue relative to the midpoint of our guidance. Although these industry-wide supply shortages are now well known, I expect that they may still be a topic of particular interest during our Q&A session. So in anticipation of your questions, let me provide as much detail as I can for you now. You're aware, despite, or perhaps more accurately, due to the impact from COVID-19, demand has grown significantly across a range of semiconductor and markets, as data infrastructure has become even more critical to the world's economy. However, the supply chain was not completely prepared for the surge in demand and needs time to increase capacity. While we are confident that the industry will respond to these challenges, we anticipate a supply gap for at least through fiscal 2022. Lead times have extended across the board. We are seeing shortages for multi-layer complex substrates, IC packaging capacity, and fab constraints in certain technology nodes important for our products. From our vantage point, the increase in demand we are experiencing for our 5G, cloud, and auto products appears closely tied to the long-term secular growth drivers present in these end markets. This, combined with the sole source nature of most of our design wins, would suggest that most of the demand we are not able to satisfy in the near term is not perishable. Marvell is collaborating even more closely with our customers to manage demand forecasts over an extended time horizon, and our operations team is continuing to drive our suppliers to match supply appropriately to mitigate impacts and minimize disruptions. In addition, we are taking extraordinary measures, including securing capacity in advanced over much longer than typical time periods, and we are working with customers to get their assistance in helping absorb some of the incremental costs associated with prioritizing their continuity of supply. Let's now discuss our two businesses in more detail. First, in our networking business, revenue during the fourth quarter was $439 million, consistent with our outlook of being flattish to the prior quarter. Year-on-year growth remained robust, with revenue growing 24% compared to the fourth quarter fiscal 2020 results, adjusted for the divestiture of Wi-Fi. The year-on-year growth in networking was led by our 5G and cloud businesses. In addition, revenue from our Ethernet switch and 5 portfolio grew significantly as new design wins started to ramp. Let me provide some color on sequential revenue movements in networking. In 5G, we delivered our sixth straight quarter of sequential revenue growth. This growth was driven by standard and semi-custom product shipments to Samsung and Nokia, partially offset by a decline in 5G ASICs as deployments in China take a pause. Looking past the typical lumpy nature of individual regional rollouts, 5G infrastructure deployments are expected to continue to strengthen worldwide. As an example, the U.S. recently concluded the first phase of the C-band spectrum auction. This was the highest grossing spectrum auction ever held in the U.S., with gross proceeds exceeding $80 billion. A record level of interest is a clear indicator of the potential revenue opportunities carriers expect from 5G technology. Other regions around the world are also opening up spectrum for 5G services, and wireless industry experts expect deployments to gather strength later this year. We launched our Open RAN platform in December 2020 and are gaining traction in the marketplace. For example, we recently announced that we are joining the Evenstar program and will be working with Facebook connectivity to provide a 5G Open RAN distributed unit design. This design will be based on our leading Octeon Fusion Baseband processors and ARM-based Octeon multi-core DPUs. The Evenstar DU design will enable a new generation of RAN suppliers to deliver high-performance, cost-optimized, interoperable DU products to the rapidly expanding Open RAN ecosystem. We recently announced that Fujitsu will be using our industry-leading Octeon Fusion Baseband processors in its new 5G base stations and also plan to engage with us on Open RAN distributed unit products. They are the second 5G regional customer I referenced last quarter. In cloud networking, we benefited from strong customer demand in the fourth quarter for our SmartNIC PPUs, while the cloud ASIC declined as expected. Looking forward, we expect to continue benefiting from the secular growth in Cloud CapEx on semiconductor solutions for data processing. Turning to our automotive business, quarterly revenues crossed into the double-digit million run rate, driven by the ramp of multiple Ethernet design wins in model year 2021 vehicles. Engagements are expanding at additional large OEMs, and bookings have continued to strengthen. We believe that fiscal 2022 is shaping up to be a breakout year for this business. The fourth quarter was robust for our Ethernet switch and Pi business, with product ramps at multiple customers. The design wins we won over the last couple of years are now starting to ramp, and we expect these will contribute higher levels of revenue as we progress into fiscal 2022. Let me now discuss the outlook for the first quarter of fiscal 2022 for our networking business. Reflecting strong demand, despite continued supply constraints, we project revenues to grow close to 10% on a sequential basis and continue strong year-on-year growth exceeding 20%. We expect this growth to be broad-based, led by our cloud DPUs, standard and semi-custom 5G solutions, automotive products, and Ethernet networking solutions, partially offset by softness in 5G ASICs. Turning now to our storage business. Storage revenue for the fourth quarter was better than expected across all product lines, growing 18% sequentially to $326 million. This was a very strong quarter for our storage business, with 10% year-on-year growth driven by our custom SSD controller and cloud HDD products. I'm very pleased with the tremendous progress we have made over the last few years in enabling high-capacity near-line HDDs, which are critical for cloud customers. We have extended our long-standing relationship with Toshiba, and we recently announced that our controllers and preamps are powering their new 18-terabyte cloud-scale HDDs. Toshiba's 18TB products deliver industry-leading data storage capacity by utilizing MAMR technology, an advanced signal processing developed in close partnership with Marvell. The close coupling of Marvell's rechannel and preamplifier IP enables leading-edge features and HDD capacity to extend Toshiba's position in the cloud data center market. Let me now provide some additional color on storage revenue on a sequential basis. In the fourth quarter, our custom SSD controller revenue benefited from the ongoing ramp at a Tier 1 OEM, as well as the initial ramp at a major cloud customer. In HDDs, demand was strong across multiple end markets, including enterprise, smart video, retail, and client, and our business benefited from aggregate HDD unit TAM growth of about 10% sequentially. Our revenue from cloud HDDs also grew on strong customer demand for our products. In our fiber channel business, demand recovered significantly from the COVID-19 impacts earlier in the year. Our operations team was able to increase supply to help our OEMs restock and deliver more product to their customers. Looking to the first quarter of fiscal 2022, we project a seasonal decline in storage controller demand. In addition, after last quarter's inventory replenishment by customers, we expect a more than seasonal decline in fiber channel demand. As a result, after a very strong fourth quarter, we expect our storage revenue to decline in the low teens sequentially on a percentage basis. However, we expect continued year-on-year growth of over 10% in the first quarter. In closing, needless to say, last year was a very challenging period as we adjusted to operating in the presence of a pandemic. It was almost exactly a year ago today when shelter in place policies were coming into effect and we were in the midst of taking action to protect our 5,000 plus employees and an extended support team of contractors and suppliers. None of us really knew how the year would evolve or how the pandemic would impact our productivity or the demand for our products and technology. I can now look back and applaud a strong performance by the Marvell team in the face of adversity. incredible program execution, record design win achievement, stronger customer relationships, double-digit revenue growth, and significant margin expansion. I'm very proud of our employees, and I would like to thank them for their collective efforts in positioning Marvell to emerge even stronger from the pandemic. We ended fiscal 2021 on a strong note, and we are kicking off fiscal 2022 with solid growth expectations, guiding revenue at the midpoint for the first quarter to grow 15% year-on-year, despite ongoing supply challenges. We expect strong year-on-year growth from both our networking and storage businesses in the first quarter. Non-GAAP EPS at the midpoint for the first quarter is projected to grow by 50% year-on-year, demonstrating the operating leverage in our business model. In fiscal 2022, we expect revenue growth from custom SSD controllers, preamplifiers, automotive Ethernet, and enterprise networking, in addition to our expanding 5G and cloud businesses, which are still early in their growth cycles. Our team is also focused on closing key design wins from the large funnel of 5 nanometer and cloud engagements I discussed earlier. We are getting closer to completing the N5 transaction, and as part of integration planning, we recently concluded a series of joint strategic planning sessions. The conclusion of these meetings, our teams walked away more excited than ever about the depth of technology and the level of talent across the combined company. The addition of N5 broadens the opportunity set for the combined company, and this will be a key factor in setting future investment priorities. As a reminder, the closing of the INFI transaction remains subject to obtaining shareholder and regulatory approvals and satisfying other closing conditions. With that, I'll turn the call over to Jean for more detail on our recent results and outlook.