Marvell Technology, Inc. (MRVL) Q1 2022 Earnings Report, Transcript and Summary

Good afternoon, and welcome to the Marvell Technologies Fiscal First Quarter 2022 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask question. Please note that, this event is being recorded. I would now like to turn the conference over to Mr. Ashish Saran, Vice President of Investor Relations. Please go ahead, sir.

Thank you, and good afternoon, everyone. Welcome to Marvell's first quarter fiscal year 2022 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. We closed the acquisition of Inphi on April 20, 2021. Therefore, the results we reported today for the first quarter of fiscal 2022 include the results from the Inphi business for 10 days of the fiscal quarter. Revenue from the acquired Inphi business is reported within our networking product group. To provide a direct comparison to the first fiscal quarter business outlook we provided in our earnings call on March 3, we have provided a table in our earnings press release, which breaks out Marvell standalone non-GAAP results for the first quarter, excluding partial quarter results from the acquired Inphi business. We are providing Marvell's standalone non-GAAP results only on a one-time basis. As a reminder, there are no GAAP results for standalone Marvell. Matt and Jean's first quarter commentary will primarily focus on the non-GAAP results from the standalone Marvell business as it relates to the guidance we provided on our March 3 call understated otherwise. Please note that, the financial outlook for the second quarter of fiscal year 2022 includes expected results from the acquired Inphi business for the full quarter. On the subject of revenue reporting, as you know, we currently report revenue in three broad product groups: networking, storage and other. However, as you may recall, during our Investor Day presentations, we also describe our addressable opportunities by end market. This market focus will provide more information and transparency about the key growth drivers of our business and was received positively by the investment community. We are now taking steps to align our external revenue reporting to our end markets. We believe this will provide investors with a better and more granular understanding of our business. Accordingly, we will discontinue reporting revenue by product group and instead, we will report revenue from the following five end markets: data center, carrier, enterprise networking, auto industrial and consumer. Please note, we will implement this change starting next quarter, when we report results for our second quarter of fiscal 2022. In that earnings release, we will report revenue by end market for the second quarter and provide historical end market revenue data for the preceding seven quarters. Mass discussion of business results and expectations are also transitioned to this end market view. In our second quarter earnings results, on a one-time basis, we will provide revenue results under both the current product group process and the new end market process. With that, I'll turn the call over to Matt for his comments on our performance. Matt?

Thanks, Ashish, and good afternoon, everyone. I'll start with a summary of our first quarter GAAP results for the combined company. Revenue for the combined company was $832 million. GAAP gross margin was 50.2% and loss per diluted share was $0.13. I'm now going to review standalone Marvell non-GAAP results, excluding those of Inphi. We began fiscal 2022 on a strong note, delivering solid results in the first quarter, driven by the strength of our core businesses and continued operational excellence. Marvell standalone revenue for the first quarter was $810 million, exceeding the midpoint of our guidance. Revenue grew 17% year-on-year, driven by robust growth in both our networking and storage businesses. Higher revenue, coupled with stronger gross margin and lower operating expenses, drove non-GAAP earnings per share of $0.02 above the midpoint of guidance to $0.29. Non-GAAP EPS grew 61% year-on-year, demonstrating the significant operating leverage in our business model. I'm pleased that Marvell delivered the fourth straight quarter of double-digit year-on-year revenue growth, despite industry-wide supply constraints that have tightened considerably over the same time period. In fact, our year-on-year growth rate accelerated in the first quarter on strong and growing demand across all our end markets, and I'm pleased that our operations team rose to the challenge in a difficult environment. But we have more work to do. Majority of our products are proprietary and sole-sourced and demand for our solutions continues to grow. We need to support our customers with a flexible supply chain capable of delivering to upside demand within a reasonable lead time, something that has not been feasible this year. To further improve our supply, Chris Koopmans, who has played an instrumental role in Marvell's ongoing transformation, has been appointed as our Chief Operations Officer to lead our global operations and supply chain organization, in addition to his current role leading marketing and business operations. Chris is leveraging his deep understanding of our markets and customers to prioritize and align supply to our key growth initiatives. We are extending our planning horizons, strengthening strategic supplier partnerships and using our balance sheet where appropriate, to build more flexibility. Our suppliers value Marvell's focus on data infrastructure as a source of sustainable growth, driven by favorable secular trends compared to other cyclical end markets. And as a result, they are excited to partner with us. Looking to the second half of this fiscal year, we are confident that we have secured sufficient supply to enable accelerating year-on-year revenue growth for standalone Marvell, above that of the first half. We expect supply to further improve next fiscal year. In a few moments, I'll discuss Inphi's business, where we also expect strong revenue growth throughout the year. Moving on to our merger with Inphi and related organizational changes. We received regulatory approval to merge with Inphi in April, earlier than originally anticipated and began integrating the talented Inphi team. We have emerged from this transaction as a U.S. Corporation, which we believe better positions the combined company for long-term success. Reflecting the larger scale and broader scope of Marvell, several key Inphi executives have joined my direct staff. Loi Nguyen and Nariman Yousefi will manage the Inphi businesses and have also increased their scope to include additional Marvell businesses. Lawrence Tse, Inphi's central engineering leader, will manage Marvell's analog and mixed signal organization. In addition, Raghib Hussain has taken on a broader elevated role as President, Products and Technologies, to drive strategy alignment and growth across the company. Similar to our prior acquisitions, we expect the infusion of Inphi talent will add scale and further strengthen the capabilities of the combined company. We have built a world-class management team with deep technical expertise, vast industry experience and a proven track record in driving growth and value creation. Let me move on now to discussing our two businesses in more detail. Networking. First, for Marvell standalone networking, revenue grew during the first - revenue during the first quarter was $476 million, consistent with our outlook for strong growth. On a sequential basis, revenue grew 9%, underpinned by growth in all key product lines with the exception of 5G ASICs. However, overall 5G revenue continued to grow, marking our seventh straight consecutive quarter of growth. Year-on-year growth was a very robust 21% in networking, with solid contributions from multiple end markets. In 5G, growth was driven by standard and semi-custom product shipments to Samsung and Nokia, partially offset by a decline in ASICs as deployments in China paused. In cloud networking, we continue to benefit from strong customer demand for our SmartNIC DPUs. In automotive, we are growing rapidly with our Ethernet product shipping into multiple model year 2021 vehicles. Our Enterprise Networking business also delivered solid results, extending the double-digit growth trend established last year, despite a soft end market. This performance is a result of our expanding market position, driven by our refreshed Ethernet switches and multi-gigabit PHYs. To the extent, the enterprise spending recovers later this year, that would be another tailwind to our business. Not only are we winning and ramping in the access, aggregation and core switching markets, we are also making inroads in the data center with our feature-rich and scalable multi-terabit family of switches. As a reminder, these products leverage a modular architecture to deliver multiple capacity points, from 3.2 terabits per second to 12.8 terabits for a broad range of data center applications. We have been winning new sockets and expect these design wins to start contributing meaningfully higher levels of revenue next fiscal year. Let me now discuss the outlook for the second quarter of fiscal 2022 for our Networking business. This outlook includes revenue from Inphi's complete electro-optics platform comprised of their industry-leading PAM and coherent DSPs, high-performance broadband analog drivers and TIAs, highly integrated silicon photonics and data center interconnect modules. For the second quarter, we anticipate networking revenue to grow just over 70% year-on-year. Let me walk you through the growth expectations from the Marvell and Inphi businesses implicit in this guidance. We expect Marvell's standalone networking to drive strong year-on-year revenue growth in the high teens on a percentage basis and be up slightly on a sequential basis. Similar to the prior quarter, we expect broad growth from multiple products, offset by a pause in China 5G. This outlook reflects ongoing supply constraints, which have more - been more acute for our networking products. However, as I discussed earlier, we believe we have line of sight to supply improvements later this year and next year to support our growth plans. As we look forward, we expect a strong second half ramp compared to the first half in standalone Marvell's networking business, including an acceleration in our 5G business from both our own product ramps and an increase in 5G adoption in the U.S. and other regions. From the acquired Inphi business, we expect approximately $215 million in revenue in our second fiscal quarter. I am very pleased that at this level of revenue, we expect the Inphi business will be accretive to our non-GAAP earnings in the first full quarter as a combined company. We expect this business to drive strong growth above Marvell's growth rate, benefiting from the demand for high-speed connectivity inside and between data centers and in the carrier market. Let me briefly discuss Inphi's data center growth drivers. Inside data centers, as demand for bandwidth continues to increase, a generational shift is underway from traditional NRZ signaling to more advanced Pulse Amplitude Modulation, or PAM, which enables a significant increase in bandwidth. This is one of the biggest changes in data center connectivity, and Inphi is leading this industry transition. Inphi is the largest provider of PAM4 DSPs to the optical connectivity market, having shipped millions of devices. As the market continues to transition to higher speeds, 400-gig adoption has been accelerating. And last year, we started sampling our next-generation 800-gig solution, which is seeing strong traction with customers. In collaboration with Microsoft, Inphi pioneered pluggable transceiver technology to directly interconnect regional cloud data centers at lower cost, complexity and power compared to traditional optical transport solutions. The first product, COLORZ use PAM4 technology to enable 100-gig per wavelength, which could be multiplexed to support up to 4 terabits per second of bandwidth over a single fiber for data center interconnect or DCI applications. This product has been shipping in volume and established Inphi's leadership in this category. Building on the success of COLORZ, which was deployed primarily by one hyperscaler last year, Inphi introduced COLORZ II, the industry's first pluggable transceiver compatible with the 400ZR industry standard, which enables 400-gig per wavelength using coherent technology. We expect to maintain our leadership position in the DCI market and project that COLORZ II deployments will start this year. With an industry standard now in place, we see multiple hyperscalers and additional customers adopting pluggable ZR technology, which creates a significantly larger revenue opportunity for our DCI platform. Turning now to our storage business. Storage revenue for the first quarter was $303 million, growing 17% year-on-year and declining 7% sequentially. Results were better than our expectations as we benefited from stronger demand for SSD controllers. The stellar year-on-year results were driven by ramps in our custom DIY SSD controller programs and ongoing growth in cloud demand for nearline drives, which benefited from - benefited our HDD controllers and pre-amplifiers. The sequential decline was primarily due to our Fiber Channel business. Looking to the second quarter of fiscal 2022, we expect storage to deliver another strong performance driven by the nearline HDD and data center SSD markets. We are projecting revenue to grow year-on-year in the mid-teens and in the double-digits sequentially on a percentage basis. Our recent results and expectations for ongoing growth reflect the significant transformation of our storage business. In our HDD business, data center has become the largest revenue contributor relative to other markets. Our preamplifier business is now ramped up to an annualized run rate of over $50 million, and we believe that we can more than double this run rate. We are continuing to step up the technology cadence for our SSD controllers, and we recently introduced the industry's first PCIe Gen5 SSD controller family designed to address the data movement and security challenges in cloud infrastructure. We are excited to collaborate directly with hyperscalers and NAND vendors to bring this leading solution to market. In addition, I'm pleased to announce that a key NAND OEM has chosen to partner with Marvell to develop custom PCIe Gen5 and Gen6 SSD controllers for their enterprise and cloud solutions. The Gen6 product will be built on our 5-nanometer process. In the storage market, this is a quantum leap and process node cadence and is a testament to Marvell's advanced technology platform. We expect to leverage the leading-edge IP we are developing to be deployed in additional advanced node storage solutions. Our strategy to refocus this business on the data center market has been a huge success. Data center has grown to over 60% of storage revenue from less than 20% in fiscal 2017. In closing, we had a great start to fiscal 2022, and I'm very excited about the growth prospects in front of us as a combined company. When we announced the acquisition of Inphi, we increased our long-term target model for revenue growth to 12% to 16% annually. I'm pleased that our recent results and near-term expectations are, in fact, currently trending above the high end of this target range. This is primarily due to our own product cycles, combined with sustainable, secular growth trends in our data infrastructure markets. The acquisition of Inphi has increased our exposure to the data center, which is our largest end market. And within that, cloud is the largest growth opportunity across Marvell, significantly bigger than our 5G opportunity. Inphi has already established a strong position within cloud, addressing an opportunity growing at a 60% plus CAGR. The Marvell organic opportunity in cloud is also substantial, which we are addressing with our merchant, semi-custom and flexible ASIC model for compute, networking, acceleration, security and storage applications. At our Analyst Day last year, we discussed this opportunity growing at an expected 19% CAGR to over $5 billion by calendar 2023. The adoption of ARM processors and servers continues to gain traction, and this further increases our cloud opportunity. We expect cloud revenue for the combined company to grow rapidly. As Marvell's 5-nanometer products come to market, we expect a substantial step-up in our cloud revenue. I'm very pleased to report that we have been recently awarded a number of significant design wins, leveraging our advanced technology platform. Respecting customer confidentiality, we will not be in a position to discuss any specific win. They are with multiple customers across a variety of applications and business models. We expect these products to start ramping into production in calendar 2023, achieving peak revenue in the calendar 2024 to 2025 timeframe. As I approach my five-year anniversary at Marvell, I've never felt stronger about our growth prospects, and I'm grateful to all our employees who have worked hard to transform the company to position us for what we believe will be a very exciting future. With that, I'll turn the call over to Jean for more detail on our recent results and outlook.

Thanks, Matt. Good afternoon, everyone. I'll start with our GAAP results for the first quarter for the combined company, followed by Marvell's standalone non-GAAP performance and conclude with our outlook. Please note, our GAAP financials include 10 days of results from the Inphi business and the impact of purchase price comping items, share-based compensation expenses, amortization of acquired intangible assets, vehicle segment and acquisition related costs. Revenue was $832 million. GAAP gross margin was 50.2%. GAAP operating expenses were $500 million. GAAP operating loss was $82 million. GAAP loss per diluted share was $0.13. Turning to the balance sheet. Inventory at the end of the first quarter was $538 million, which include the impact of setting up Inphi's inventory by $187 million due to purchase price accounting. We amortized the $40 million of this step-up into cost of goods sold in the first quarter, and we anticipate amortizing the remaining balance by the end of the third quarter of fiscal 2022. During the quarter, we paid $140 million in cash for fees related to the Inphi transaction. Excluding those one-time payments, our cash flow generation from operations would have been $100 million. As a reminder, our cash flow generation has seasonality and tend to be lower in our first fiscal quarter due to the payment for annual cash bonus to employees. In the first quarter, we distributed $41 million to shareholders in dividends. We accept the quarter with $523 million in cash and short-term investments. Our long-term debt was $4.7 billion and currently carries the blended interest rate of approximately 2.5%. Our gross debt-to-EBITDA ratio was 3.9, and net debt-to-EBITDA ratio was 3.4, based on combined pro forma EBITDA. We continue to have a strong investment-grade credit profile. Our capital allocation priorities over the next 12 months are to maintain our current dividend level, and utilize our free cash flow to pay down debt used for the acquisition for Inphi. We believe we can drive strong revenue growth and free cash flow generation to quickly achieve our target ratio of 2 times gross debt-to-EBITDA. I'll now move on to standalone Marvell non-GAAP results. As Ashish had noted earlier, we are providing standalone Marvell results on a onetime basis this quarter because our previously provided financial outlook for the first quarter excluded any impact of the Inphi acquisition. Reconciliation of our standalone and combined performance as well as GAAP to non-GAAP results available in our press release. Standalone Marvell revenue in the first quarter was $810 million, exceeding the midpoint of our guidance. Networking represented 60% of our revenue with storage contributing 36%. Revenue from other accounted for 4%. Non-GAAP gross margin was 64.3%, above our guidance and the 150-basis point improvement from a year ago, primarily due to better product mix and our team's continued effort to drive operational excellence. Non-GAAP operating expenses were $297 million as we continue to tightly manage our expenses while investing for growth. Non-GAAP operating margin was 27.7%, an 810-basis point increase from a year ago, demonstrating the strong operating leverage in our business model. Non-GAAP earnings per diluted share was $0.29, exceeding the midpoint of our guidance range by $0.02 and is up more than 60% year-over-year. Let me now comment on our plan for operating expenses going forward. After closing the Inphi acquisition, the starting pro forma operating expense trend rate for the combined company was approximately $375 million per quarter. We expect our operating expenses to grow annually in the range of 4% to 5% as we continue to invest to support our long-term growth, including incremental R&D spending for Inphi. However, we expect to more than offset this operating expense growth through deal-related synergies. We expect total cost of synergies for $125 million from the Inphi acquisition with approximately $100 million coming from operating expenses. The midpoint of our second quarter OpEx guidance of $372.5 million includes $10 million of synergy achievement on a run rate basis. We expect to achieve half of our targeted OpEx synergy exiting fiscal 2022 and the full synergy realization by the third quarter of fiscal 2023. We'll continue to be disciplined in allocating resources and expect to drive revenue growth significantly higher than OpEx growth to deliver strong earnings expansion. The remaining $25 million of cost synergies will come from cost goods sold, which we expect to start to take effect in the fourth quarter of fiscal 2023 and be fully realized by the third quarter of the same year. Our team has a strong track record of integration execution from prior acquisitions. I'm very confident about our synergy achievement plan. Now, turning to our guidance for the second quarter of fiscal 2022, which included a full quarter of Inphi. We are forecasting revenue to be in the range of $1.065 billion, plus or minus 3%. At the middle point of this outlook, we expect approximately $250 million of revenue contribution from the Inphi business. As Matt mentioned earlier, at this level of revenue, we expect the Inphi business will be accretive to our non-GAAP earnings. We expect our GAAP gross margin in the range of 34.8% to 37.5%. We project our non-GAAP gross margin to be approximately 64%. In a tight supply environment, we expect our non-GAAP gross margin in the near future to remain around this level, subject to product mix change in any given quarter. We project our GAAP operating expense to be in the range of $633 million to $643 million. We anticipate our non-GAAP operating expenses to be in the range of $370 million to $375 million. Following the Inphi acquisition, the company domicile changed from Bermuda to Delaware. Based on tax deductions and credits we have, we expect our non-GAAP tax rate to remain at 5% for the remainder of the fiscal year. And the current tax laws, we expect our non-GAAP tax rate to increase by approximately 100 basis points each year for the next couple of years. We expect other expenses will be approximately $34.5 million, which include interest expense of $33 million. We expect our basic weighted average shares outstanding will be 822 million and our diluted weighted average share outstanding will be $835 million. As a result, we anticipate GAAP loss per share to be $0.37, plus or minus $0.04. We expect non-GAAP income per diluted share to be $0.31, plus or minus $0.03. Operator, please open the line and announce Q&A instructions. Thank you.

Thank you. We will now begin the question-and-answer session. [Operator Instructions] And our first question today will come from John Pitzer with Credit Suisse. Please go ahead.

Yes. Good afternoon, guys. Congratulations on the solid results. Thanks for letting me ask the question. Matt, I'm just sort of curious, when you look at sort of this quarter and the guide, can you help us better understand relative to your ability to capture supply? The deficiencies grow this quarter, you did a nice job in the core networking business growing almost 9% sequentially, but I'm trying to get a sense as to whether or not demand continues to outstrip supply. And if you could help us understand, is this a wafer issue? Or are there other issues? And as you think about resolving them in the back half of the year, why so confident?

Yes. Great, John. Thanks for the question. Yes, we're very happy with the results in networking. I mean, as you pointed out, that was a sequential number. So clearly, business has been very, very good for us in networking. And certainly, year-over-year, to do 20%-plus is great. The demand, John, continues in Q2 and beyond. We're continuing to work on improving the supply on our networking products. As it turns out, and as you've probably seen, the complexity on our networking business in terms of the manufacturing, cycle time supply chain is much more complex and challenging than on the storage side. So we've been able to meet some more of the upsides on storage than we have networking. But no, John, business continues to be strong. We do have line of sight to the supply improving in the second half, which is encouraging. And that's why we're continuing to be very bullish about the outlook for our overall networking business because the demand is clearly there, and we've now got supply coming online in the back half as well as into next year. So things are improving for sure.

Thank you.

And our next question will come from Vivek Arya with Bank of America Securities. Please go ahead.

Thanks for taking my question. Matt, I had one more and to kind of extend that question into the second half visibility from two aspects. One is the supply aspect, that is supply coming online gradually. Or are you planning to see perhaps a faster improvement on the supply side? And the other perspective on this is how much of your second half growth - fiscal year growth is dependent on enterprise and China 5G recovery, which have tended to be quite volatile?

Sure, Vivek. Yes. I think, look, in this environment, in general, supply is coming in, not in large chunks. Although, I would say, given the ramp we had been planning for some time, in our case, we do see more significant amount of supply coming in, in the second half. So that will improve, and we have visibility of that, both on the wafer side as well as on the back-end side. And at the same time, as we ramp our supply position, as I mentioned to John, the demand side continues to outstrip our ability to supply at all, but we're making good progress there. On your second question, in both cases, both in enterprise as well as China 5G, those are not comprehended to have market-related comebacks in that time frame. On enterprise, as you've seen, I mean, we've been growing that business well above double-digit for some time, including in our Q1, and we do anticipate that to continue. Now that's mostly on the back of our own product cycles, okay? And we've been very successful, I think, in our enterprise and campus switching, also in our PHY business. And so that continues. So that's - and by the way, and what's been viewed as a very soft market, both by the OEMs as well as other semiconductor peers. So if that end market improves with return to work and vaccinations improving, that would be a pretty significant tailwind on our business. As it relates to 5G in China, maybe just to kind of frame it in the bigger picture, I think, first, our own team internally, I want to give them credit, they did a good job for - in the first half, telling us last year that the mapping out the digestion phase, which is what's happened, so that's actually been in line with our plan. And we're not necessarily counting on a big recovery in that in the second half. If it does, that would be great. But just to frame it, Vivek, in the bigger picture, our 5G business and exposure in China is actually less than 20% of our overall 5G business, both now and even going forward. And in fact, it probably slowly becomes a smaller percentage over time as our new OEMs ramp up and some of these other initiatives kick in. So again, either of those two came back very strong, that would also be a tailwind on our business.

Thanks, Matt.

And our next question will come from Timothy Arcuri with UBS. Please go ahead.

Thanks a lot. Matt, I know it's probably early to ask this question, but can you give us a sense of sort of what kind of synergies you might see on the revenue side? I know you're not putting any of those into the model, but can you talk about that? And then I guess also, Jean, I was just wondering if you can talk about what the normalized gross margin is. I know you're guiding to 64%, but it sounds like that's still being hampered by some constraints. So I'm kind of wondering what is the right normalized number if you didn't have those? Thanks.

Yes, Tim, I'll take the first part and then we'll hand it to Jean. So yes, as you noted, historically, we've - just by practice, not tried to articulate or size revenue synergies when we announced the deal. It's just very hard to do. And quite frankly, it's very hard to even measure in the rearview mirror. But that being said, on all of these transactions we've done, we can look back and we can actually point to cases where one plus one was way over two. And it kind of comes in two pieces. The first is really what I would call the customer revenue synergy, Tim, which would be we have products that we can sell, for example, into 5G or the cloud and Inphi, in this case, would as well. And in those discussions, the notion that we can be a better supplier together really comes together. I mean if you remember back in the - after the Cavium transaction, I think that was very significant, what happened with - in 5G and with Samsung, where together, we were able to get effectively the whole platform, where a part we had actually very little content. So I do - I'm very encouraged by what we see. I think customers really like the combination to a person, and those are very strong. And I believe we will see cases we can point to. It's already underway. The second part of it is really more of a technical one, which is how do we actually incorporate the intellectual property of the two companies, put it together and deliver better solutions. Those discussions are also going well, in particular, with the Inphi, SerDes, IP as it relates to our ASIC business, our roadmap into co-packaged optics and our vision of optics everywhere and not just co-packaging and with the switch, but also in things like AI and ML ASICs and DPUs. So that's going to be a very critical piece of the puzzle as we enter these complex markets, and more and more the connectivity moves to electro-optic solution. So that, I think, Tim, is - we're very, very excited about all that. I think it's going to work out very well on both of those fronts, I mentioned. Let me hand it over to Jean to cover the second question.

On your gross margin question, as you remember, when we announced the Inphi deal, we actually guided the combined company gross margin to be in the range of 64% to 66%. We are actually very pleased with our Q1 gross margin performance. Marvell standalone actually achieved 64.3% under a very tight supply chain environment. As we said before, Inphi actually is accretive to our gross margin. I think the dynamics, as all you know, is supply chain is very tight. And we are trying to really manage it through the supply chain challenge, but we do think the combined company with the Inphi margin higher than 65%, we're going to trend higher going forward when we combine both companies, drive the top line revenue growth.

And our next question will come from Blayne Curtis with Barclays. Please go ahead.

Thanks for taking my questions. Just curious on the storage outlook, I heard you say nearline in SSD. Is that kind of the seasonal ramp of DIY and any other drivers to point out? And I'm just curious on fiber channel spend kind of yoyo. Is that going back in July as well?

Yes. Great question, Blayne, on storage. So, a couple of things. So on the SSD side, yes, that's actually multiple DIY programs now. Those are kicking in, in various end markets, and we see that trend being obviously way up year-over-year this year, but growing strongly into next year. So I think that strategy to really work closely with some of these system-level OEMs, whether it’d be in the cloud or other applications. It's a pretty compelling business model. So, that one is going well. On the cloud or on the nearline side, yes, I mean, I think if you just look at the performance of these large cloud properties and how they're performing in terms of their own revenue growth. There's certainly a scaling that goes on with the storage. So, the need for increase capacity in cold storage continues. We're well-positioned with that with our controllers and our preamplifiers, actually which is a new revenue stream for us as well. So that's still continuing and that's very strong. And then finally, the fiber channel, it was one of our most stable businesses, Blayne going back even when Cavium owned it, even when it was QLogic. It certainly have a lot of choppiness this year with manufacturing supply disruptions in Southeast Asia. That's started to stabilize. Actually, fiber channel grew quarter-over-quarter and will continue to get better. And we hope that, that will - just by design that should be a much more stable business. So yes, overall, just I think you've heard in my remarks, I mean, we're just - it's been a journey on the storage side, and I've just got to thank our entire team for fundamentally transforming a business, which, if you go back 5 years ago when I showed up, and this wasn't just me, the whole management team, this was a business that was highly concentrated, HDD controllers only, selling all into 2.5-inch notebooks, okay? And that was sort of the story and the melting ice cube people were worried about. And so I'm very proud of the team when I fast forward 5 years, and we've now got greater than 60% of our storage business in data center and these high-performance applications and then really the bulk of the balance being in very sticky, stable markets. And the exposure to things like notebooks being deminimis, I think it's been a great transformation story. And the fact that we're having calls talking about our storage business growing double digits and continuing to do that is great effort. And by the way, we're not milking this business either. I mean, we've been very aggressive to move our platform to 5-nanometer, which effectively jumped at least a node for most people, probably for most people with 2 or 3 nodes. But for these high-performance applications, Blayne, especially in the data center, you get tremendous power savings by doing this. So that's going to be a first step into a broader platform of products in storage as well as in our traditional networking businesses like processors and switch chips.

Our next question will come from Ross Seymore with Deutsche Bank. Please go ahead.

Let me ask a question and looking forward to hearing the end market split last quarter, so thanks proactively for doing that. Matt, I want to go to the networking business again. And the last 4 quarters has kind of been up 10% then flat, up 10% and now guided flat again. Overall, year-over-year growth is really, really strong. So no complaints, but is that lumpiness something that's just inherent to the markets that you're addressing? Was it supply driven? And perhaps more importantly, you talked about an acceleration in the back half of the year. Can you just talk about a few of the Marvell-specific drivers that will allow that acceleration? And do you expect that lumpiness to go away as the breadth of the business improves internally and with the addition of Inphi?

Yes. Great questions. So just quickly on the first one. Actually, we're - I'm pretty excited about moving to the end market reporting. I think it's going to give investors a much growth drivers. It actually reflects how we think about allocating the capital of the company. I mean I've actually managed the company from a market-based philosophy from the very beginning. And so to now be able to show you our data center business, there's also peers that report those numbers, so it will give investors a sense of our relative growth rates. And then carrier, you can capture our 5G anyway. So I think that will be a real positive thing for everybody. On the networking side, it's interesting, Ross, that individually, some of these businesses are inherently lumpy. I mean I think we all know that the carrier telecom-type businesses tend to be lumpier than others. That being said, when you blend actually our combined networking businesses across things like enterprise and carrier and even right now, automotive is reported in our networking, actually, from an end demand standpoint, you do get a smoother profile, which has all been up into the right by the way. I think in the last year, the dynamic on the quarterly moves has been more supply related than it has been just, 'Hey, networking was up and then everybody kind of slowed down together and everybody is up. Actually, business has been very strong, Ross since last year. If you recall, we started growing the company double digits year-over-year in Q2 of last year. So we've been on this double-digit growth rate. Now we're - it's actually accelerating. And during this time frame, if we could get more supply, it would probably look a lot - look smoother, if you will. But I think you're right to integrate it over maybe a few quarter period, first half, second half or even one-year period to get the full view just because the manufacturing cycle times of some of these products can be several quarters. So if you get upside, there's a time to react. But no, if you just sort of blended end demand, Ross, you'd see a very steady increase. And the nice thing is we have a very diversified business in networking. So it's spread across all these end markets, as I mentioned.

And our next question will come from Ambrish Srivastava with BMO Capital Markets. Please go ahead.

Matt, I wanted to ask about a comments you made at the top of the call, which was you're feeling really confident about just starting a new phase of a multiyear growth. I just wanted to double-click on that, what are the underpinnings of that confidence? Can you talk a little bit about the design wins you have on the cloud side? And then you also gave a bit of a hint when you talked about cloud being a much larger opportunity than 5G? Just kind of frame that discussion in - with that in mind as well. Thank you.

Sure, Ambrish. I mean, I would say both in the relative near term, okay, and over the next several years. I actually break it into three phases. There's the sort of second half of this year, looking into next year and the year after, and then I would say, out a few years beyond that. I think - and I didn't quite answer Ross' question, but I'll weave it in here. This last one was what do you see in the second half? So in networking, for example, I mean, we have the 5G ramp for us will pick up, will accelerate. That's primarily due to increased adoption in the United States and deployments there plus design wins that we have won several years ago ramping into production. You've got a very strong Marvell business in the cloud with our SmartNIC product line, that's been growing very, very nicely and will continue in the second half. I'm surprised no one asked the question about Inphi yet, but we're very pleased to guide 215 for Inphi in Q2, which is, I think, well above what anybody thought. That business is also going to continue to accelerate in the second half, both on the intra-data center business in PAM4 as well as the 400ZR ramp, which we think will be meaningful next year, but also starting this year. And then finally, as I mentioned, the Ethernet switch and PHY business, you could also throw automotive in there. I mean, we got almost all of these growth drivers we mentioned continue. So that's right in front of us. I think what I get very excited about, as you alluded to, is the design win momentum in the company has been extremely strong. And probably - not probably, as strong as I've ever seen it in the past five years I've been here and any kind of prior record I could find. And those are things that, as we noted in my remarks, would be designs we win now that would ramp up starting probably in calendar 2023, 2024 and then go beyond that and that's also you would - you should kind of tie it together with that was when our 5-nanometer platform will be really in full production across multiple end customers, end markets and end applications. So that's one that kind of layers on top of all of this and candidly, would extend beyond what we talked about at the last Investor Day. So I think if you draw a line between here and there, there's all kinds of goodness in different areas, Ambrish, but I think we're feeling really good about the investments we made. I think the acquisitions that we did positioned us really well and they fit together in their own way. And I think - and finally, I would say that the customer go-to-market, our brand promise to our customers, the way we engage, the way we partner, resonates really well in this environment. And we're just - we're viewed as a very credible and reliable partner with scale now, especially with Inphi and to really deliver the most complex critical products that our customers need.

Matt, I'm sorry, just a clarification. This design win momentum does not include Inphi. So that would be on top of this, right? So this is what you're talking about, the organic business has been working on, right?

Yes. This is just Marvell, standalone. So all those comments on largest sort of design type win achievement we've seen plus the funnel, that's all from the organic Marvell business, okay? Starting next quarter, we're going to have the Inphi team in our results and in our internal results in terms of our design win funnel and momentum. But yes, they've done a great job, too. I mean that's the whole other story. But I'm just saying standalone Marvell with our 5-nanometer platform and our 5G cloud strategy, automotive, all the things we articulated at the Investor Day, pre-Inphi, that's all tracking the in line or better than we thought.

And our next question will come from Harlan Sur with JPMorgan. Please go ahead.

Good afternoon and congratulations on the solid results and outlook. On the newly acquired Inphi business unit, it looks like inside cloud data center upgrade to 200 and 400-gig PAM4 optical connectivity is accelerating as we move into the second half with two more cloud titans just starting to upgrade cycle. And then on top of that, it looks like the first or two cloud titans are starting to fire on the data center to data center DCI optical upgrade, the new 400-gig ZR standard. As you mentioned, the team has a strong leadership position in both of these areas. Are you guys already starting to see this ramp in your bookings or backlog for the second half or maybe even some of these already starting to fire here in the July quarter? And it seems like we're still in the very early innings of both of these upgrade cycles, but just wanted to get your views.

Yes. Thanks, Harlan. No, I think we are - to start maybe at the end first. We're in the early innings of both these upgrade cycles. I think your commentary overall is right. Both of those are accelerating. On the PAM side, I would say probably by the end of '23, certainly if you draw a line between now and the end of - I'm sorry, calendar '22, our fiscal '23, you'll see most of this conversion from these legacy NRZ solutions move over. And that's still a decent amount of the connections today. So there's a big lift between now and then. That's pretty exciting. And then, of course, you've got other hyperscalers around the world outside the US. On 400 ZR, that is also just at the beginning phases. I think that's going to be much more broad, obviously, than COLORZ was, which was 100 gig, and it was really for one customer. And that is - both of those, we have strong backlog, bookings, visibility, heads down to plan the supply and to plan the ramp. So those are very much intact, which was really part of our deal thesis for doing it in the first place.

And our next question will come from Christopher Rolland with Susquehanna. Please go ahead.

Yes. Thanks for the question. Matt, you did mention the pause in spending - 5G spending, and you also did talk about China as well. But I was wondering if maybe we could talk about some of the other geographies, how they're ramping. And then, in terms of your 5G lead customers, how close do you think we are to a full run rate in terms of their ramps? Thank you.

Sure. Yes. No, I think in general, the 5G momentum is quite strong. I think, obviously, you saw the impact on people last year with China, which was very meaningful. And that will, by the way, over time, we're debating, is it second half or when is it? But those deployments will obviously continue. They're not done. Then the U.S. is really, I think, where we're going to see a lot of traction this year. India is a little more unclear. I think the latest is, certainly, trials will be conducted at the end of this year. Candidly, I think, with impact of COVID-19 in the country that's probably delayed things. We saw that last year. If you remember, there was supposed to be a much larger U.S. build-out and COVID delayed that. We're watching that. But no, I think, overall, it's been a very meaningful technology transition. And so, we were - we think that's going to be very broad. We've still got a ways to go, to be honest with you. There's a lot in front of us relative to getting to full run rate with the full platform at our two lead OEMs. In one case, we have the platform, but they're really ramping their business based on their geographies that they participate in. And then with our second customer, those chips are still - a lot of those are in development, although our first products are ramping very nicely, and we're pleased to see that both those companies are participating very actively in the global 5G rollouts. So that was all positive. And, yes - and then, by the way, I mean, even with China stays flat, as I mentioned, it's - we do see a very strong second half for our 5G business. And we just came off our seventh quarter in a row of growing that business sequentially. So it's been a real tailwind for us. I did want to just make one comment before we move to the next question. I actually misspoke earlier, there was a question about fiber channel. And I think it was Ross, about it being lumpy. So I had my quarters off. So it was down - fiber channel was down in Q1. That was part of the lumpy down. It's going to be up in Q2, and then we anticipate it - unless there's some other disruptions, that should be a generally flat business going forward. And obviously, in the scheme of things in the combined company, I don't - and reported by end market, I don't anticipate we're going to be having lots of discussions about fiber channel anymore. But if something happens, we'll let you guys know.

And our next question will come from Gary Mobley with Wells Fargo Securities. Please go ahead.

On the topic of COVID spreading in different geographies, I guess we get a little tick-up in Taiwan. I'm wondering if you can share with us based on your conversations with your supply chain, whether or not you're possibly facing any production interruptions out of that region. And then, Jean, given the different moving parts in the OpEx, the 5% growth as you articulated over the long-term and then the leaving in at the $125 million of synergies, when would you expect the quarterly OpEx to bottom, whether in absolute terms or relative terms that $372.5 million Q2 guide? Thank you.

Yes. Gary, I'll take the first one. I think it's - I think you're just highlighting a very important reminder for everybody on this call, who I believe probably everybody here is calling in from the United States, where things are opening up and things are feeling like they're getting back to normal. And as you point out, we're monitoring very closely the situation, not only in Taiwan. Obviously, we don't have production in India, but many chip companies have significant India operations in terms of R&D. You've got other countries in Southeast Asia that are having outbreaks. Malaysia would be one. So we're watching this very, very closely. It's been just an unprecedented year between weather and the virus on the supply chain. But we're watching it, and that's - we've comprehended as much as we could on any of these things into our guidance. We do that every quarter. But certainly, it's a dynamic situation. I mean we had a water issue in Taiwan recently. I guess, with the recent improvement there, some of that's backed off. So yes, it's something we've got to watch and manage very dynamically, Gary, but we've comprehended all of that in our outlook. Jean, do you want to answer the second question?

Yes. Okay. Gary, on the OpEx side, given the opportunities and the revenue momentum we have been seeing in front of us, we definitely want to continue to invest. The 5% increase for next year really, it's incorporated the Marvell side for regular increase, we typically at the 2% to 3%. But on the Inphi side, there are tremendous opportunities, so the R&D investment is higher. So we are looking maybe just the next year. And on the synergy side, we talk about the $100 million OpEx synergy achievement. The way to think about it is exiting fiscal 2022, we should be able to achieve 50% of that $100 million run rate synergy. And then as you know, Q1 always seasonally OpEx is a little bit higher because of payroll increase in Q1 than Q2, Q3, by the Q3 time, we should get to the OpEx to the run rate, which achieved the full synergy at the same time, contemplated the increase, offset the increase of the year-over-year. In the longer-term, you should expect us to continue to focus on to grow revenue significantly faster than OpEx, so we can expand the earnings quickly.

And our next question will come from Quinn Bolton with Needham & Company. Please go ahead.

Two for Matt. First, sort of near term, Matt, with supply, line of sight to supply increases in the second half of the year, have you been able to stabilize lead times to customers? And then my second question is kind of a longer-term with the ramp of 400-gig and 800-gig modules in the data center, that business potentially being even bigger than 5G for you, are you starting to get questions from customers about Marvell developing its own internal switch fabric? Or are customers happy for you to partner on SerDes and optical co-packaging and other opportunities without owning the switch fiber?

Yes, great. Thanks, Quinn. Yes, on the first one, yes, certainly, we have, as I mentioned, line of sight on our supply through the end of the year and encouraged by what we're seeing also for next year as well. Look, lead times are very extended for everybody at this point. We’ve asked our customers for significant backlog to - and not only the backlog, but really the detailed discussion behind the backlog relative to what are the drivers, how much of it is for buffer, or how much do you have now, what are your plans, so we can get better line of sight to allocate the material. And we've also worked with many of them and are in the process of doing that to really firm up those orders relative to their ability to reschedule and cancel them, but we're giving them time to figure that out. So I think that's been a healthy exercise, but lead times are not coming down. They're extended, not because we want to keep them extended, but the supply chain given the - just the volume on it, there's just queues and you just have to make sure you plan for that. And then on the data center side, we certainly have many of the key pieces, if not almost all the key pieces to really be a big player in the cloud infrastructure side with our ASICs, with the PAM products you mentioned, I mean, O-RAN, all kinds of things. On the switch side, it's an interesting discussion because we're very aggressively promoting and developing a co-packaged optics solution that will be very much open source for the industry. So we want to be an enabler of that. We think that's going to be a good thing, whether somebody wants to do their own ASIC or co-package it with a partner. And that's a discussion that we're having. I think we're encouraged because when you look at our - and I noted in my comments, we introduced about 18 months ago, our multi-terabit Switch family, where just as - for a reminder, these are at 3.2, 6.4 and 12.8 terabits per second. It's a modular design architecture. Now it's fully featured, which has its advantages in many applications, because that's really what customers want. On the other hand, there's a lot of optimization you can do if you really want to do a high-end switch for just speeds and feeds. And I think everything is on the table in terms of looking at all that in the context of Inphi coming in, in particular. And those are just some very active discussions we're having. But the roadmap, notwithstanding, we're extremely pleased with this high-end platform that we announced, it's done really well in the market, revenues ramping significantly, and it's going to have a very good year, next year and beyond. So I think that was a good investment that we made. And that really positioned us, Quinn, as a full provider from SMB switches to enterprise and campus, which is core in aggregation, all the way into the fully featured data center type applications. So it would be logical for us to consider broadening the portfolio there.

And our next question will come from Srini Pajjuri with SMBC Nikko. Please go ahead.

That's SMBC Nikko. Thank you. Thanks for taking my questions. I have a clarification question. Matt, first, on the outlook for the networking segment, if my math is correct here, I think you're guiding Inphi to be up at least mid-teens sequentially. And your core networking business, you said it's going to be up slightly. So I'm just trying to understand, is the difference primarily on the supply side? Or is it the demand, if you can clarify that? And then my second question, more of a longer-term question. You mentioned ARM servers and obviously, you've been the leader in that market for a long time. And there's been a lot of buzz, as you mentioned lately, and some of your peers are also announcing design wins. So my question is, when can we expect to hear from Marvell in terms of the design wins and revenue contribution from that market?

Srini, maybe I'll answer your first question on the Inphi guide, right? So what we guide for Q2 combined company Inphi revenue, we said, is about $215 million. So in Q1, we only had $22 million of Inphi business. So you really cannot compare sequentially year-over-year, if you look at $215 million Inphi revenue, it means almost 24% year-over-year increase. On the Marvell side, I would say we guided basically, as Matt has said earlier, slightly up sequentially for the Marvell networking. So if you add Marvell networking plus Inphi's $215 million, that's what our guide for Q2 networking business. I'll let Matt answer the - your second question.

Yes, that's right, Jean. And I mean I think the bigger picture, Srini, on the first one is just the blend of these two businesses are growing around 20% a year on networking kind of plus, right. So it's a very strong performance. And I noted the issues earlier on our side. On ARM, it really is a trend that's been happening. We certainly have a lot of capability in this area. There's a lot of confidentiality around this market. I can't really comment on us or the other people because I think it's also a little dangerous at times to talk about things. Is it a development type of opportunity? Is it a real production thing? So I think we - and our pivot and our business model last year was really to move this business from being one where in a lot of ways, our Thunder product line really was a prototype type of capability that we enabled the whole industry on. But in the end, what we found is nobody actually wanted to buy the standard products. So we're very pleased with the pivot we made. We have - we believe, the best set of IP true ability to stitch together these very large, high-end complex processors. I mean if you think about the things that we're doing for 5G or for networking or even what we built on Thunder, we have a second to none capability there. And you should just assume that we're very active in this market, but in a different kind of a business model where we engage directly with these customers, there's an NRE type of arrangement. We build them exactly what they want. And the use cases and the benefits of moving to ARM are significant. And I think publicly, it's out there, the instances that are being moved more and more with an AWS platform to Graviton, which is their own, we obviously don't participate in that, but it's just a great proof point for the industry. It's real and it's happening, ARM and infrastructure, and we're - our view is we would be the leading company for anyone to talk to about not only be able to design the chip and productize it, but then to supply it in the kind of volumes that's required. It's - that's a key part of the equation now.

And our next question will come from Chris Caso with Raymond James. Please go ahead.

Just some clarification regarding the additional supply. And with that additional supply coming on, at what point do you expect to be back at the level where you're shipping all your customers' orders? Do you think you get there by the end of the second half? Or is that going to take longer? Just following on from that, we've heard from a lot of others, obviously, with the tight supply conditions order visibilities stretching out customers or placing orders for in advance. It sounds like from your prior comments that you're not forcing those customer orders to be non-cancelable at this point. Maybe just clarify that a little more and talk about what additional visibility that gives you going forward?

Sure. Yes, Chris. Thanks for the question. As I noted earlier, we've been growing this company double-digits since a year ago, and it's only accelerating. And as we've done that, that's been great, but candidly, we haven't made a real dent in the delinquency. And in fact, I think our business momentum is growing, but I think the demands on us are growing even faster than our supply. So, we're working hard on it. But I would say anybody that tells you in this industry that they know when this is going to get better, like, hey, it's going to happen in a quarter. It's going to - I don't think that you're probably getting a realistic answer is my view. I think it's very dynamic. It's unprecedented. And at this point, there are so many industries that are up and to the right and everybody is clamoring for product that - but we're working on it. And like I said, we're the type of company, Chris, that I think we're more focused on the long-term, slow and steady, keep cranking it out every quarter, keep blocking and tackling through this time period and keep making sure our customer are up. And then on your second question, no, we are ensuring that we have protection and not only protection, but I would say mutual commitment with our customers around the supply. So, we do have a large portion of our backlog, which is only getting more, to be honest, that is non-cancelable. We are being somewhat flexible around building in some reschedule capability. Maybe you can do it once. And we're trying to work with our customers on this, but we're having to make commitments, especially with the growth that we see in front of us, which I'm very comfortable doing, but I also want to have the backstop of my customers. And this environment has created a dynamic where pretty much the CEO level at all of our major accounts, they're willing to engage in this type of discussion, activate their materials teams and get everybody together so that we can plan this thing as a combined team, a Marvell team and a customer team versus two independent entities doing their own thing and the era of customers being secretive about their volumes or hiding the ball or not one you're doing just in time, that's kind of all out the window at this point. And so the visibility is pretty good that we're getting, but we are ensuring that we - when we're making commitments, we've got some backstop from the customers that want the product.

And our next question will come from Harsh Kumar with Piper Sandler. Please go ahead.

First of all, congratulation on solid results and also being so clear about all the numbers. It really helps us out. I had a question, Matt. I was wondering if you could break down your networking business. Let's say, just even for core Marvell organically, the split or rough color between 5G, cloud and enterprise and also if Nokia is - is it running at ramp? Or has it got still room to run from here?

Yes. Well, Harsh, all of your wishes are going to come true next quarter because we're going to break out for you in detail the data center business of Marvell, which is going to have the cloud in it. We're going to break up the carrier, which you'll be able - we'll build it. And we'll talk to all of these, by the way, right? So you'll be able to get a sense of the moving pieces of 5G. We're going to have an auto industrial, which is - obviously, the big growth there is going to come from the automotive. And then our enterprise networking, which I think is a great proxy as well. So I think we're going to give you what you want, and we're going to give you seven quarters of history, and we're going to guide it. Okay. So you'll be like a kid in a candy store. And then on the second question on Nokia, yes, that's still ramping. You've heard their commentary. They're ramping up. We're kind of replacing their legacy solutions within their - they have their recharge portfolio. We're part of that. They talk openly about sort of replacing FPGAs with recharge. So we're just part of that growth. And then, of course, we've got future opportunities where we're going to intersect with them with new sockets over time. So that's still in a ramp phase though. It's still early.

Ladies and gentlemen, this will conclude the question-and-answer session, also concluding today's call. We'd like to thank you for attending today's presentation. And at this time, you may now disconnect your lines.