Marvell’s Q4 was primarily in line with consensus, though GAAP EPS reported a rather large miss. The Q1 forecast across the board was very weak, with revenues guided 16% below consensus with margins firmly negative.
Q4 saw a marginal YoY increase in revenue, breaking a three-quarter string of declining growth, but Marvell guided for a (13%) YoY decline in revenue in Q1 at midpoint, suggesting that it is not yet out of the woods with weak growth in all of its end markets except for data center. Management dangled some carrots in the earnings call, primarily that Q1 would mark the bottom and that qualifications for ASICs are now moving to production for full ramp in FY26 (one year from now).
Revenue and EPS:
- Q4 revenue was $1.43 billion, beating estimates by $10 million, and representing YoY growth of 0.7%.
- Q1 revenue guidance missed at $1.15 billion, +/-5%, representing a YoY decline of (13%) at midpoint. As stated above, this is 16% below consensus with expected revenue of $1.37 billion.
- FY24 revenue was $5.51 billion, a decline of (6.9%) YoY. Prior to the report, analyst consensus was for an acceleration in FY2025 to 11.1% YoY to $6.11 billion and 19.9% YoY to $7.33 billion in FY2026. The acceleration will likely still materialize but could be delayed given the weak Q1.
- Q4 adjusted EPS was $0.46, meeting estimates and representing flat YoY growth. GAAP EPS was ($0.45), missing estimates for $0.00.
- Management guided for Q1 EPS of ($0.23) +/- $0.05 and adjusted EPS of $0.23 +/- $0.05. This is a miss compared to consensus for $0.40 adjusted EPS.
- FY24 adjusted EPS was $1.51, a decline of (40.4%) YoY. GAAP EPS was ($1.08), compared to ($0.19) in FY23. Previously, EPS was expected to rebound to 33.1% YoY growth to $2.01 in FY2025 and 40.4% YoY growth to $2.82 in FY2026. These estimates may come down given the weaker Q1 guide.
Margins:
Margins were weak, as Marvell reported a negative GAAP operating margin whereas it had guided for a thinly positive operating margin in Q4.
- Q4 GAAP gross margin was 46.6%, compared to 47.5% in the year ago quarter. The adjusted gross margin was 63.9%, up from 60.6% in the previous quarters. Per management last quarter: The CFO, Willem Meintjes, said in the earnings call, “Our forecast for this large sequential improvement is driven by expectations of a significantly stronger product mix and our ongoing cost optimization activities. Looking forward, we expect that product mix as well as the overall level of revenue will remain key determinants of our gross margin in any given quarter.”stronger product mix and our ongoing cost optimization activities. Looking forward, we expect that product mix as well as the overall level of revenue will remain key determinants of our gross margin in any given quarter.”
- Q4 GAAP operating margin was (2.3%) versus its guide for 1.6% at midpoint. This compares to 1.6% in the year ago quarter. GAAP operating margins for Q1 are expecting to fall further, with management guiding Q1’s GAAP operating margin at (12.3%) at midpoint, a 1000 bps sequential decline. Regarding GAAP OPM, management stated this includes “stock-based compensation, amortization of acquired intangible assets, restructuring costs and acquisition-related costs.” Stock based compensation was $155.3 million, or 11% of revenue.
- Adjusted operating margin was 33.8% for adjusted operating profits of $482.6 million. This fluctuates due to seasonality in payroll taxes and employee salary increases.
- Q4 GAAP net margin was (27.5%), compared to (1.1%) in the year ago quarter and (11.6%) in Q3. Adjusted net margin was 28.2% for adjusted net profits of $401.6 million.
- FY24 GAAP gross margin was 41.6%, compared to 50.5% in FY23. Adjusted gross margin was 61.2% compared to 64.5% FY23.
- FY24 GAAP operating margin was (10.3%), compared to 4% in FY23. Adjusted operating margin was 29% down from 36% in the previous year.
- FY24 GAAP net margin was (16.9%), compared to (2.8%) in FY23. Adjusted net margin was 23.8% down from 30.8% the previous year.
Cash and Debt:
- Q4 operating cash flow was $547 million, representing a 38.3% margin.
- FY24 operating cash flow was $1.37 billion, an increase of 6% YoY.
- Cash, equivalents and short-term investments totaled $950.8 million.
- Debt totaled $4.16 billion. Gross debt-to-EBITDA ratio was 2.19X and net-debt-to-EBITDA ratio is 1.69X. This has been slightly trending down but is still a concern.
Inventory at the end of the fourth quarter was $864 million, down by $77 million from the prior quarter. DSO was 77 days, decreasing by a day from the prior quarter.
The company returned $52 million to shareholders through cash dividends and repurchased $100 million of our stock during the fourth quarter, double from the prior quarter. The company expects to further increase repurchases in the first quarter of fiscal 2025.
Marvell's Board approved the largest repurchase authorization in company history, increasing the current plan by $3 billion, for a total available authorization of $3.3 billion
Key Segments:
Data Center:
Data center revenue was the strongest point of the report, with growth at 54% YoY in Q4, breaking a four-quarter string of declining growth. Data center revenues increased 38% QoQ, ahead of the mid-30% range management had guided and a sharp acceleration from 21% QoQ growth in Q3 and 6% QoQ in Q2.
Data center accounted for 54% of revenue in the fourth quarter, a large increase from 39% in the prior quarter. According to the opening remarks, it was a mix of primarily traditional data center and some AI driving this increase: “The strong revenue growth in the quarter was driven by the cloud portion of our data center end market. While AI has been a key growth driver, I am pleased that our standard cloud infrastructure revenue has also grown every quarter, and we see that continuing next year. Our 800-gig PAM solutions led our growth in the fourth quarter. We also benefited from higher sequential demand for our storage products as that portion of our data center end market continues its recovery. Revenue from our Teralynx, Ethernet switches also grew sequentially in the quarter.”
Management said data center revenue for next quarter will be in the low single digits QoQ: “Turning to the first quarter of fiscal 2025. We expect our overall data center revenue to grow in the low single digits sequentially on a percentage basis. We expect revenue from both AI and standard cloud data centers to continue to grow sequentially. We project our [ Electro ] optics revenue to continue to be strong, and we also expect to benefit from the initial shipments of our cloud optimized AI silicon programs. Partially offsetting this growth, we are projecting a more than seasonal sequential decline in revenue from enterprise on-premise data centers.”
The main carrot that was dangled on data center as it pertains to AI is for H2 growth. I’ve included that commentary below.
Enterprise Networking & Carrier Infrastructure – Steep declines in Q1, Mgmt says will mark the bottom
- Enterprise Networking revenue was $265M (down 28% YoY, down 2% QoQ).
- Enterprise is expected to decline 40% QoQ in Q1.
- Carrier Infrastructure (5G) revenue of $170M (up 38% YoY, down 46% QoQ).
- Carrier is expected to decline by 50% QoQ in Q1.
Per the comments on the call, Q1 is expected to be the bottom.
“As we have been communicating, these end markets [enterprise and carrier] have been dealing with a period of soft industry demand. As a result, both were down sequentially in the fourth quarter and we expect them to decline again in the first quarter […] Looking ahead, we expect revenue declines in these end markets to be behind us after the first quarter and forecast a recovery in the second half of the fiscal year. Longer term, these are large and enduring end markets, which are critical to the global economy. As a result, we expect both of these end markets to eventually return to contributing over $1 billion each in revenue on an annual basis once demand normalizes, and we begin to realize the benefits of upcoming Marvell-specific product cycles.
Consumer:
Consumer revenue of $143.9M (down 20%, down 15% QoQ). Consumer is expected to decline (70%) QoQ in Q1.
Per management remarks: “This forecast reflects the completion of deliveries for an end-of-life program in the prior quarter as well as significantly weaker demand from the game console market.”
Automotive:
Automotive/Industrial revenue of $82.3M (down17% YoY, down 23% QoQ). This is a small segment for Marvell that has been impacted by the softness in EVs. For the fiscal year 2024, automotive was up double digits YoY. It’s expected to be flat QoQ in Q1.
Earnings Call:
AI Revenue Ramping in H2 & Beyond
Marvell has to find a way to impress Wall Street on AI despite the fact that it’s ramping much slower than its peers. If we read between the lines, a run rate of about $500 million will happen early FY2026. That’s my rough math, but given commentary in the opening remarks, we are looking at $200M per quarter right now on AI networking/optics and can expect $200M by Q1 FY2026 on ASICs/compute. So, if we assume AI networking grows by 50% this year, we arrive at $500M in about 12 months from now.
Here's the commentary I’m basing that on – it’s the second paragraph that has more information on AI revenue specifically:
“We now have a clear view of demand for both this fiscal year as well as fiscal 2026. We have been working closely with our suppliers and are confident that we have secured capacity for the ramp. With the visibility we now have for these programs, along with many new opportunities, we are very excited about the potential scale of long-term revenue for Marvell from this business. As the initial set of design wins reach its full run rate, we expect annual revenue from cloud optimized silicon has the potential to rival our fast-growing data center optics business, which, for reference, grew to over $1 billion in fiscal 2024.”
Additionally, management offered a few more breadcrumbs as to AI revenue, such as: “AI was a key driver of our data center growth in fiscal 2024, contributing over 10% of total company revenue, well above our initial forecast. This was a substantial increase from approximately 3% in the prior year. Our momentum accelerated throughout the fiscal year with AI revenue well over $200 million in the fourth quarter, driven mostly from Optics […] In fact, as our cloud optimized AI silicon programs reach high-volume production, we expect our overall cloud optimized revenue to exceed $200 million exiting the fourth quarter. As a result, on a run rate basis, this momentum would put our overall cloud optimized silicon revenue above the annual $800 million target we had provided at our last Investor Day. And with the full year of contributions in fiscal 2026, we expect to be way ahead of the prior target. In aggregate, we see a favorable setup for the second half of this fiscal year, driven by continued growth from our data center end market, ongoing growth from automotive, and a recovery in carrier, enterprise and consumer.”
Later in the Q&A, this was the better question in terms of discussing potential AI revenue in custom silicon moving from qualification to production:
Question
Harlan Sur (Analysts)
Matt, you mentioned the initial shipments of your AI ASIC program. Can you just clarify because I know last you updated us, these programs were in qualification. So have you guys passed Qual on both these programs? And is it sort of the initial start of the full production ramp? Or maybe you're still in Qual, but you've got enough line of sight to passing the Qual just given you're at the tail end of this process? And maybe more importantly, have you guys secured the follow-on AI programs for these two initial projects?
Answer
Matthew Murphy (Executives)
So yes, we are in the initial start of the production ramp on both products. And then as far as the follow-on, like I said, the opportunity funnel we see across all of the various opportunities right now is significant, and we're involved in, we believe, we think, every single one of them. So yes, and there'll be more to come sort of at our AI day, but I would just say our 3-nanometer funnel and our 3-nanometer hit rate and design win rate is very encouraging and it really gives us this tremendous confidence in where this business is headed. It also has a side benefit by driving this advanced technology for the custom ASIC side, is it's pulling along the technology development that benefits all the other businesses in Marvell, like our high-performance switching, our DSP for optics, et cetera. So there's actually kind of a virtuous cycle happening where being at that bleeding edge is now we're able to show our other solutions that interoperate with this custom silicon, really a best-in-class road map there.
Q1 is the Bottom
The CFO later reiterated that Q1 will be the bottom:
“Yes, so we're really working with customers to focus on Q1 being the bottom, really confident that, that's the bottom. And then we see growth resuming in the second half across enterprise networking, carrier and consumer so really just trying to make sure that we put this behind us really quickly and see growth in the second half.”
Conclusion:
As I left the Marvell call and moved along to join the Broadcom earnings call, there is no doubt which company is stronger right-here, right-now. It’s Broadcom. Marvell has a strong product story but it’s in a sea of AI whales that are ramping quickly. The $500M in AI revenue per quarter (run rate) estimated to be reported in about 12 months time is a strong start, but the stock is trading quite high. Also, the need to impress the market is high and Marvell management is trying hard with this very-forward-looking commentary.
At the right price, Marvell will make a great stock. But unfortunately, it’s the opposite which is that at this valuation, we plan to sell Marvell. The PE Ratio is similar to PS Ratio, which is that it’s trading in a range that the stock struggles to maintain.
In previous quarterly webinars, we’ve pointed out that Marvell is our weakest stock in an environment where rates remain elevated given its debt-to-equity ratio and GAAP profitability issues. Meanwhile, Nvidia’s PS Ratio and PE Ratio is near it’s October 2022 lows and Broadcom stated today it’s expecting $10B in AI Revenue this year, or 20% of its total revenue for this calendar year compared to Marvell’s 13%. Given Q1 is quite troublesome for Marvell with steep sequential declines and AI revenue that is likely priced in, we will look to trim or exit and buy lower. You can also expect us to re-allocate some of this to AVGO in the meantime. Or, perhaps, we will buy more Nvidia as we go along. Overall, we see both as stronger choices at the moment, and will revisit Marvell when it’s either cheaper or moving quicker in terms of its AI growth trajectory.
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