Marvell’s report was primarily in line with a marginal miss for the Q4 guide. The market was expecting $1.46B on the guide and Marvell provided $1.42B at the midpoint. For Q4, the adjusted EPS of $0.46 guided by management also missed estimates of $0.49. However, the cash was strong at $503M in operating cash flow and $448.3M in free cash flow.
Although the data center beat expectations, Marvell is expected to face near-term weakness in its Carrier Infrastructure (5G) and Enterprise Networking end markets, which partially contributed to the miss in guidance vs. consensus for both revenue and Non-GAAP EPS. The 5G market is weak because the initial wave of 5G rollout is finishing and also demand is continuing to weaken as carriers are holding back on CapEx spend in tough macroeconomic conditions. For Enterprise Networking, weakness is due to both inventory management form OEM customers and weak demand. Furthermore, there isn’t that much visibility for the Enterprise Networking business.
Regarding the data center, last quarter, Marvell was forthright in saying they had a $200 million quarterly revenue run rate, or $800 million annualized. Per the Q2 transcript: “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 or $800 million annualized.” It naturally follows that investors want an update to this number the following quarter.
Despite there being 20% growth this quarter in the data center and an impressive 35% expected next quarter for the data center, the CEO declined to raise the exit rate for AI other than to say: “well north of $200 million.” When pressed further, management declined to update the exit rate. This may seem like semantics, but it’s important because this is Marvell’s bull case. The rest of the segments weigh considerably on the company due to cyclicality.
Looking further into Q1, management seemed to imply the other segments could drag on the company’s outlook. They didn’t guide Q1, of course, but the response to a question in terms of whether the other segments will drag too much on revenue growth was answered with what appeared to be low confidence.
Financials
Marvell reported revenue of $1.419B, down 8% YoY and up 6% QoQ, slightly above consensus. Revenue next quarter is expected to be $1.420B, which is below consensus of $1.46B.
Non-GAAP EPS was $0.41, slightly above consensus of $0.40. GAAP EPS of ($0.19) missed guidance of ($0.07) EPS. Of this $269.8M is for the amortization of acquired intangible assets from the Inphi and Innovium acquisitions. There is another $158.5M paid in stock-based compensation.
Adjusted EPS for next quarter is expected to be $0.46 which is below consensus of $0.49.
The gross margin has been improving quite a bit. The adjusted gross margin was 60.6% and the guide for next quarter is 63.5% to 64.5%. The GAAP gross margin was considerably lower at 38.9% this quarter.
The adjusted operating margin was in line at 29.8% and the adjusted net margin was 25% for profits of $354 million.
Cash and cash equivalents was $726M, increasing by $202M from the Jul quarter. Operating Cash Flow was $503M up from last year of $411M. The gross debt-to-EBITDA ratio was 2.21 times and net debt-to-EBITDA ratio was 1.83 times. In other words, debt of $4.19 billion didn’t improve this quarter.
Revenue Segments:
Data Center:
Data Center Revenue of $555.8M (down 11% YoY, up 21% QoQ)
The strength in Data Center revenue was driven by stronger than expected AI revenue. A positive within the Data Center end market was cloud revenue returning to YoY growth. Cloud revenue grew >30% with contributions from AI and cloud infrastructure with AI revenue growing substantially faster than cloud infrastructure revenue. Marvell’s product portfolio of PAM4 optical products, Teralynx, Ethernet switches, and Data Center Interconnect products contributed to the QoQ growth for Data Center revenue. You can read our previous write-up on Marvell here.
However, the strength in cloud revenue was offset by enterprise on-premise data center revenue declining QoQ, which was expected by management. Similar to Q2, data center revenue for the storage market remains weak.
Enterprise Networking:
Enterprise Networking revenue of $271.1M (down 28% YoY, down 17% QoQ). Enterprise Networking revenue weakness was due to weak demand in this end market, which is in-line with management expectations.
Carrier Infrastructure:
Carrier Infrastructure (5G) revenue of $316.5M (up 17% YoY, up 15% QoQ. 5G revenue strength was driven by the wireless part of its 5G end market
Consumer:
Consumer revenue of $168.7M (down 5%, up 1% QoQ)
Automotive:
Automotive/Industrial revenue of $106.5M (up 26% YoY, down 3% QoQ)
Earnings Call:
AI Revenue:
The comments on AI revenue were positive in the opening remarks yet the CEO sounded less confident during the Q&A. Personally, I found it to be confusing and analysts did, as well.
To start, the opening remarks were encouraging but it later changed, for example: “In our data center end market, revenue for the third quarter was $556 million, well above our guidance, driven by stronger than forecasted AI revenue,” and also, “In cloud, revenue from both AI and standard cloud infrastructure grew sequentially with AI growing significantly faster.”
At this point, given this commentary, the expectation was for a higher exit rate than the $200M provided last quarter. Yet, when pressed in the Q&A, management had a different tone.
Q:: I'm kind of hearing mixed signals on the custom silicon opportunity. And I just wanted you guys to clarify on that. I guess, first of all, are you guys above or below $200 million expectation you guys had for the year? […] You guys talked about that $200 million for this year -Christopher Rollins
A: Yeah, exactly. So yeah, so we're tracking, I'd say, close to the $200 million, okay, for this year. And then what we had said at the Investor Day and kind of the long-term was this $800 million, and that was between, sometime between FY 2025 and 2026, that was what the — if you looked at the slide from a couple of years back.
And what we had said, I think I think two quarters back or it was a quarter back that, that number would be bigger overtime now because of the AI piece of it, even though some of the stuff had shifted around that wasn't an AI. And I think that's still largely on track in that timeframe. We never gave an exact kind of — it's going to happen in XYZ quarter.
But in that FY 2024, 2025 to FY 2025, 2026 timeframe it should be able to get towards above that number we gave before which is the $800 million.
So I don't think there's any mixed signals. I don't think there's any update, which I think we're – I think there's some enthusiasm around, but nothing's changed from a quarter ago. In fact, I think the thing that's positive is that the chips are looking really good to go to production for next year, and that was always a risk.” -CEO, Matthew Murphy
My translation: To be frank, I do think the CEO gave mixed signals as the opening remarks stated “significantly above our forecast,” yet later, the CEO stated: “nothing's changed from a quarter ago.” It seems management is mixing words by saying “above our forecast” to reference a forecast from many quarters or even years ago instead of the forecast in Q2.
It's quite obvious this year the market is keen on AI revenue, and mixing words when describing the AI revenue was odd, at best, and careless, at worst.
Fiscal Q1:
The rebound we outlined in our pre-earnings report is crucial for a win-win scenario to where the rebound ideally aligns with AI driving more data center revenue. Therefore, although being two quarters out, Q1 is important because it’s the quarter the rebound is expected to be most evident with 13.2% revenue growth and 60% EPS growth expected.
The question on the call about fiscal Q1 did not exude confidence:
“And then also for fiscal Q1, do you still think that revenue can grow? I know you said that networking is down and carriers down. But data center would be up. Do you think that total revenue can be up? Thanks.” -Tim Acuri, UBS
“On Q1, while we don't guide specifically, I understand what you're looking for. I think the way to think about it is that, and I guess I gave the information. Carrier is down after a really great run in that's going to stay weak. The telco environment and CapEx spending is very constrained out there and the end customers seem to be having some trouble. We talked about enterprise being down.
And then on consumer, which actually did a little bit better than we thought it would have this year. The last time buy program that we had has been largely going to conclude now in the fourth quarter, and so we see a stepping down there. So if you kind of add all that up, that's about half our revenue that's going to come down in Q1.
And then the real question is the data center strength and how does that continue? And it's too early to call, but just the way to think about it is it's a lot to offset at this juncture when you have that much of your of your revenue coming down.” -CEO, Matt Murphy
Later, it was asked if carrier would bottom in Q4 but the CEO indicated it could be Q1 or further out. Carrier is the second largest segment and so this may be where the lack of confidence in Q1 is coming from.
Q: “Thank you for that Matt. One last one on carrier. Is Q4 going to be the bottom? Or do you think there could be some more yet to drop? And then I think you have some additional content coming at one of your customers at the end of the year. Is that going to be a meaningful lift for the segment? Thanks.” -Christopher Rolland
A: “Yes. So there's – as I think I said in my remarks, there's going to be continued softness into Q1 in carrier, okay? It's going to take, who knows how many quarters. And it really depends, I think, there'll be some inventory and then you've got to also look at kind of where the CapEx ends up during next year and where carriers are actually going to spend globally on their deployments.” -Matt Murphy
Conclusion:
Marvell has a strong AI story that is obfuscated by its other segments. The lack of confidence for fiscal Q1 due to the other segments, plus management declining to update the AI exit rate is why the price action reversed. I agree with the market; I think the report needed to be stronger in terms of management communicating more clearly on the AI story since this is the bull case. The tone is that this is a waiting game, and it’s not possible for management to help investors time when the many pieces will come together. Lastly, the opening remarks were confusing — although it doesn’t change Marvell’s potential, it did create some disappointment that there was not “significantly more revenue” from AI – rather, come to find out, the guide was unchanged. Or, if there is significantly more revenue, than Marvell is not willing to be as forthright as management was last quarter, and is leaving investors guessing.
There were some positives such as the cash flow and margin improvement. However, without more AI revenue to report in terms of an exit rate, these improvements won’t be enough to end the year as a 2023 outlier.
Recommended Reading: