We are going to cut our Marvell position until next year. The company missed across the board on every line item and we think there are stronger horses in the stable (for now).

While I have your attention and before I lose anyone on the mundane numbers: Marvell is an exceptionally strong product story. That is hard to see right now … but it’s a top 5G semi and a top AI semi and has a solid entry into automotive and CXL. By 2024, the words “CXL” will be similar to 2022’s words “silicon carbide” for buzz and stock returns. I’m not wavering on conviction; I’m wavering on timing. Also, per the earnings call, 5G is closer than one might think as Nokia is expanding into India and Marvell is the exclusive infrastructure supplier.

So, Marvell is taking a commercial break in our portfolio and we will be back soon.

Q3 Earnings Report:

The current quarter came in slightly below expectations but the fiscal Q4 guide had a larger, unexpected miss.

Marvell reported revenue of $1.53 billion for growth of 27%. This compares to estimates of $1.56 billion and growth of 28.5%.

For fiscal Q4, Marvell is guiding for revenue of $1.4 billion compared to $1.61 billion expected. This will represent growth of 4.5% down from 20% expected.

GAAP EPS of $0.02 this quarter missed estimates of $0.05-$0.13 that was provided by management. Adjusted EPS of $0.57 was reported compared to $0.59 expected. Adjusted EPS guidance for next quarter at $0.46 missed estimates of $0.61, at the midpoint.

On average, there was a one point miss across the top line and bottom line margins. GAAP gross margin of 50.6% compared to 51.1% guidance. Adjusted gross margin of 64% compared to 65% guidance.

The GAAP operating income of 6.9% compares to 8% expected. The adjusted operating margin of 36.7% compared to 37% guided. This resulted in $105.8 million in GAAP operating income and $561 million in adjusted operating income.

The company has operating cash flow of $411 million and free cash flow of $363 million. There is $723 million on the balance sheet.

Revenue Segments:

Marvell beat/met on data center and carrier infrastructure and missed on enterprise networking and automotive.

• Data center grew 25% for revenue of $627M compared to 20% growth expected.
• Carrier infrastructure was in line and grew 26% for revenue of $271M compared to mid-20% growth expected.
• Enterprise networking missed with growth of 52% for revenue of $376M compared to 70% expected.
• Consumer declined (2%) compared to (10%) for revenue of $178 million
• Automotive missed for growth of 26.6% and revenue of $84.2 million compared to 40% growth expected.

Additional Notes:

China greatly impacted Marvell’s guide for next quarter, especially the enterprise networking segment. Per the opening remarks:

“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.”

Despite the beat, storage weighed on the data center segment yet cloud was robust, per management:

“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.”

There is a disappointing guide for data center though for Q4:

“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 [..] 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.”

Carrier infrastructure is an area where Marvell is likely to positively surprise investors next year. Nokia is beginning to ramp using Marvell’s OCTEON 10 DPU, which we have covered in the past. In addition, Marvell helped pioneer OpenRAN for Layer-1 processing capabilities. Nokia/Vodafone and Samsung/Vodafone are partnering on OpenRAN with Marvell and using the company’s accelerator chip, the OCTEON Fusion processors.

Next quarter, automotive is expected to be strong with 30% YoY growth and mid-20% QoQ growth.

Carrier infrastructure is expected to grow mid-teens next quarter and to grow low single digits sequentially.

Marvell continues to provide clues on when it could possibly become a semiconductor leader again in the market. In addition to CXL ramping at some point next few years, the company also stated: “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 […] 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.”

My translation: Give Marvell one to three quarters through Q2 of next year at the latest and come back to the stock somewhere in that window.

Marvell also gave us a good gauge on what to expect next year on Big Tech CapEx:

“Matt Murphy 

Yes. Great question. So let me take it from the top. So, first point would be that if you look over the last few years, cloud CapEx has been on fire. It's been growing 30% kind of plus for the last few years. This year, if you look at reports and kind of what we see is probably something in the 15% range for '22 and then it depends on who you talk to, but probably down in the low to mid-single digits or maybe mid-single digits for next year.”

Conclusion:

We will revisit Marvell again sometime next year. To understand why we like the company in the face of lumpy earnings reports, please reference our last deep dive here. Perhaps it’s because I know the stock well at this point, but it’ll be a top pick for us on 5G in the near term. They spoke about Nokia expanding into India, as well as Europe. Given we may see few growth stories next year, Marvell may be one that finds a new growth trajectory from deep telecom pockets. The other segments are also to not be overlooked, especially if the China headwinds clear.