Ladies and gentlemen, thank you for standing by, and welcome to the Second Quarter Fiscal 2021 Marvell Technology Group Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session.

[Operator Instructions] Please be advised that today’s conference is being recorded. [Operator Instructions] It is now my pleasure to introduce Vice President of Investor Relations, Ashish Saran..

Thank you, and good afternoon, everyone. Welcome to Marvell’s second quarter fiscal year 2021 earnings call. Joining me today are Matt Murphy, Marvell’s President and CEO; and Jean Hu, our CFO.

I would like to remind everyone that certain comments made today may include forward-looking statements, which are subject to significant risks and uncertainties that could cause our actual results to differ materially from management’s current expectations.

Please review the cautionary statements and risk factors contained in our earnings press release, which we filed with the SEC today and posted on our website, as well as our most recent 10-K and 10-Q filings. We do not intend to update our forward-looking statements. During our call today, we will refer to certain non-GAAP financial measures.

A reconciliation between our GAAP and non-GAAP financial measures is available on our website in the Investor Relations section. With that, I’ll turn the call over to Matt for his comments on our performance..

Thanks. Ashish, and good afternoon, everyone. During the second quarter of fiscal 2021, we delivered strong financial results and achieved $727 million in revenue, $7 million above the midpoint of guidance. Revenue grew 5% sequentially and 11% year over year. Our GAAP loss per share was $0.24.

Our non-GAAP earnings per share was $0.21, above the midpoint of guidance, driven by higher revenue, better gross margins, and lower operating expenses.

We’re now halfway through our fiscal year, a time period, which has turned out to be very different than we had all imagined, impacted by a global crisis that has significantly disrupted our daily lives and altered our work environment. The Marvell team has met these challenges head-on and has been executing at a very high level.

I’m continually impressed by the relentless determination of our engineering teams in the face of a multitude of unprecedented circumstances, like having to manage a chip bring up remotely. I have proudly watched our sales, marketing, and support teams embrace Marvell’s new brand identity and use current circumstances to increase customer engagement.

In times of uncertainty, I believe that we benefit significantly in building upon our existing, deep-rooted engagements. When customers make forward-looking platform decisions, their experience with our products and trust in our team works to our advantage. We have continued to close design wins at an impressive rate.

While getting a design win is a critical milestone, getting our customers to production and volume ramp is the ultimate goal.

To that end, over the last few months, we have received customer approval to move into production several key programs, including a critical SSD controller and a cloud ASIC which are both ramping now, and a 5G baseband processor for Nokia is expected to start ramping later this fiscal year.

Let me now provide an update on our process technology platform and our custom ASIC chip strategy. Underpinning the development of all our high-performance storage, networking, compute, and security products is our industry-leading IP portfolio, developed on the leading edge of process technology.

Earlier this week, we announced an extension of our long-term collaboration with TSMC, the world’s largest dedicated semiconductor foundry to deliver a comprehensive silicon portfolio leveraging the industry’s most advanced 5-nanometer process technology.

This joint development positions Marvell for multigenerational leadership in data infrastructure technology. This accelerated cadence in driving to the latest process node and jumping to 5 nanometers is the outcome of our multiyear evolution to focus on data infrastructure.

In the infrastructure market, 5G, cloud, enterprise, and automotive customers are migrating to silicon partners who can solve their most challenging problems, requiring the highest performance to be delivered within a very-tight power budget. This requires access to the latest process technology.

The acquisition of Cavium with their processing and compute-heavy portfolio further crystallized the need to change our strategy from a fast follower to a technology leader.

The later acquisition of Avera was done with a recognition that our advanced process roadmap would be a significant step up for Avera’s ASIC technology platform and will also increase the volume of projects in advanced geometries with the subsequent benefit to scale across all of Marvell.

The leadership position we have established for our process technology platform is the culmination of the last two years of hard work by our central engineering team. This has been a key driver of our recent success in winning sockets in multiple upcoming platforms, such as next generation 5G base stations.

Marvell’s 5-nanometer platform solution covers the full spectrum of infrastructure requirements, including high-speed 112 gigabit per second long-reach SerDes processors subsystems, encryption engines, system-on-chip fabrics, chip-to-chip interconnects, and a variety of physical layer interfaces.

We have multiple 5-nanometer products in development now on TSMC’s N5P process, an enhanced version of TSMC’s 5-nanometer technology, which delivers higher performance and up to approximately 40% lower power compared to the previous 7-nanometer generation.

We expect to start sampling these products by the end of ‘21, with volume production soon thereafter. Our advanced technology is a key enabler of our new custom ASIC platform, which builds upon the Avera acquisition.

While customizing silicon is not new to Marvell, this acquisition significantly expanded our capabilities to become a much broader custom silicon supplier. We benefit from Avera’s decades of experience in developing over 2,000 complex full custom ASICs as part of IBM and GlobalFoundries.

We believe that access to our more advanced process platform combined with exposure to Marvell’s large customer base opens up a host of new opportunities for the Avera team. Equally important, we are evolving the traditional ASIC model by including all of Marvell’s leading standard product IP into Avera’s custom platform.

The breadth of IP we’re offering for customization is what sets us apart. We aren’t just providing high-speed SerDes and other foundational IP, we are also providing highly scalable multi-core ARM processors, Ethernet switches, and controllers, storage controllers and more.

This IP can be integrated on chip, or as a companion chip, tightly coupled with advanced system and package solutions.

Customers can reuse Marvell’s hardened and widely deployed IP and focus their engineering teams on only the unique aspects of their application, benefiting from faster time to market and lower program risk by using our proven technology.

I’m very-pleased to announce that our ASIC team has recently won a major design win under the Marvell umbrella with a Tier 1 hyperscaler. This is a new ASIC account for the Avera team, and we hope that this is the first in a series of design wins with this important customer. Let me, now provide an update on our server processor strategy.

Very much aligned with our growing emphasis on custom solutions, we are evolving our ARM-based server processor efforts towards a custom engagement model. Over the last few years, we have developed multiple generations of ARM server processors and have been working with customers to qualify our products for volume adoption.

Our ThunderX2 processor was the industry’s first ARM-based processor, capable of powering dual socket servers, which can go toe-to-toe with x86-based solutions and that has established the performance credentials for ARM in the server market. Hyperscale datacenter customers represent the largest opportunity for ARM server processes.

Having worked with them for multiple generations, it has become apparent that the long-term opportunity is for ARM server processors customized to their specific use cases rather than the standard off-the-shelf products.

The power of the ARM architecture has always been in its ability to be integrated into highly customized designs optimized for specific use cases, and we see hyperscale datacenter applications is no different. With our breadth of processor knowhow and now our custom ASIC capability, Marvell is uniquely positioned to address this opportunity.

A significant amount of unique ARM server processor IP and technology we have developed over the last few years is ideal to create the custom processors hyperscalers are requesting. Therefore, we have decided to target future investments in the ARM server market, exclusively on custom solutions.

The business model will be similar to our ASIC and custom programs, where customers contribute engineering and mask expenses to NRE for us to develop and produce products specifically for them. We believe that this is the best way for us to continue to drive the growing adoption of our base compute within the server market.

While we continue to invest in a number of initiatives to drive long-term growth, such as advanced process technology, new markets, such as automotive and the launch of our new brand, our team has also remained focused on driving operational excellence.

The successful integration of Aquantia and Avera, continued operational discipline, and the change in scope of the ARM server project are collectively driving a significant reduction in our quarterly operating expenses from the current $300 million non-GAAP run rate to the $280 million we are guiding for the third quarter.

Our success in customer engagements where we do not need to bear the cost and risk of new product development completely on our own, has also enabled us to manage OpEx tightly, while continuing to invest in advanced technology.

The increased willingness of our customers to co-invest with us is truly a testament to the trust and belief they have in our capabilities to provide them with differentiated solutions.

Improvements in efficiency and the cost structure of the Company allow us to improve our earnings power, while we continue to invest more in R&D as a percentage of revenue than any other semiconductor company our size.

We’re investing heavily because we believe we can grow faster than the industry, and we have the conviction in our strategy to drive long-term growth. However, we remain extremely diligent about how we allocate the Company’s resources.

Last week, we held our annual strategic portfolio review, where we deep dive into each of our product lines, evaluate end market dynamics, and review progress against our goals. This review is the cornerstone of our annual business planning process and lays the strategic foundation for everything else.

This was our fifth review since I joined Marvell in 2016, and it was by far the best one. It is clear how far we have come over that time period and I could not be more impressed by the quality of our leaders and their depth of experience and technical capabilities.

Every year this process informs our capital allocation decisions and has driven a significant improvement in the quality of our businesses over time. I expect this cycle will be no different as we continue to drive long-term success for our employees, customers and investors. Let me now move on to discussing our two businesses in more detail.

First, in our networking business, revenue group during the quarter, was $406 million and grew 3% sequentially and 23% year-over-year. Growth was driven primarily by ongoing 5G deployments in China. In the cloud data center end market, we started ramping a new custom ship at Tier 1 hyperscaler.

A LiquidIO programmable SmartNIC and LiquidSecurity HSMs continued to gain traction at cloud customers, and revenue for these two products more than doubled from the same quarter last year. We are very-pleased with these results which came on the heels of the very strong growth we had delivered in the prior quarter.

This is also the fourth consecutive quarter of sequential revenue growth from the wireless infrastructure market as we benefited from the start of the 5G transition, and our diversified design win position at four of the top five Tier 1 base station OEMs.

In addition to the top five global OEMs, there’s also a very accurate next tier of more regionally focused OEMs who are developing their own 5G base station equipment.

We believe that our full suite of production-ready 5G silicon solutions, including the industry’s only merchant baseband processor, provide a very compelling path to market for this set of customers.

I’m excited to announce we have now secured design wins for our OCTEON embedded processor and our OCTEON Fusion baseband processor with a new 5G customer in this next tier of base station OEMs. We expect this design to serve ramping toward the end of next fiscal year.

We continue to engage with this group of customers and look forward to updating you on our progress. We remain on track to start shipping basebands to Nokia and processors customized for massive MIMO applications to Samsung later this year.

We believe that OCTEON can continue to improve its position within the large $4 billion market for embedded processors in infrastructure applications.

OCTEON has a number of very-compelling advantages, including our process technology platform, multi-core ARM architecture, optimized hardware accelerators, flexible programming model and our ability to customize solutions.

Compared to alternative products, our next generation processors, designed on the industry’s most-advanced 5-nanometer process using TSMC’s proven technology platform have become a very attractive solution for customers. We believe that our competitive differentiators will enable us to continue to take share in this large market.

Now, shifting gears to our Ethernet portfolio. We’ve been working closely with our customers to design the next generation of Ethernet products tailored to meet some new requirements being placed on networks by mobility and cloud applications, which are extending the boundaries of the traditional enterprise.

This quarter, we announced our latest Ethernet solutions for the emerging world of the borderless enterprise.

And the borderless enterprise is not just about the transformation of on-campus corporate environments, such as Marvell’s own infrastructure, but also includes new use cases in the rapidly evolving retail, manufacturing, hospitality, finance and education verticals. The number of devices connecting to the network is expanding rapidly.

And no matter where the users are physically located, enterprise IT organizations are being asked to deliver a secure high bandwidth experience. Increasing amount of cloud access and remote work need switches with more intelligence, visibility, security and bandwidth. And these requirements are driving the next refresh cycle.

As such, switches need to apply intelligent processing right at the edge and offload data to inference engines. The data needs to be encrypted and secure end to end with enhanced network visibility for a seamless experience. The adoption of Wi-Fi 6 is increasing the bandwidth requirements of wired networks.

Marvell’s unified Prestera Ethernet switch and Alaska PHY solution set is architected from the ground up to manage this complex and evolving environment. Our advanced telemetry capabilities facilitate network automation and our switches have embedded cryptography based security for Ethernet traffic.

Intelligent workload management enables optimized data processing at or near the network access edge, improving the performance of hybrid cloud architectures. Our multi-gig capable switches and PHYs facilitate the transition to 2.5 and 5-gig connectivity, which is essential for Wi-Fi 6 enabled access points and high-performance end devices.

Our software development kit enables networking system vendors to easily develop new and differentiated products quickly on our silicon platform. As you may recall, we refreshed our Ethernet portfolio soon after I joined Marvell in 2016.

And that led to a sustained period of growth for our switch and PHY businesses, as we took share with our differentiated products that commanded higher gross margins and outgrew the market.

This year’s refresh adds an even more impressive set of capabilities and addresses a larger part of the enterprise market, further expanding the access, core and aggregation layers, and we believe that we will continue to drive share gains.

In our emerging automotive business, we continue to make progress in expanding the customer base for our Ethernet switch and PHY connectivity products. We have recently closed design wins with 8 new customers, adding to the 16 I have discussed in prior calls. We also continue to see a larger opportunity for us in automotive.

Leveraging our growing Ethernet position, we are front and center in discussions around future architectures, and have the opportunity to expand into the adjacent compute, security and storage domains within the connected car. Let me now discuss the outlook for the third fiscal quarter for our networking business.

We expect strong growth from the wireless infrastructure and market, driven by multiple customers. We also project growth in the cloud data center market, and we expect our automotive Ethernet products to start shipping in the model year 2021 vehicles, which are starting production now.

However, given the softness in the enterprise market driven by COVID-19 and recently telegraphed by multiple customers and peers, not surprisingly, we project demand for our networking products selling into enterprise applications to be weak.

The net result is that we expect our overall networking revenue in the third quarter of fiscal 2021 to increase sequentially in the mid to high-single-digits on a percentage basis. Turning now to our storage business. Storage revenue for the second quarter was $290 million, growing 12% sequentially and 6% year-on-year.

Strong growth was driven by the start of a ramp of a customized SSD controller for a do-it-yourself or DIY program and easing of COVID-19 production challenges we and our customers experienced in the first quarter. Supply chain improvements benefited both our storage controller and Fibre Channel products.

Controller demand from nearline 16 terabyte HDDs was particularly strong. The combination of our product cycles and supply recovery drove our outperformance as compared to the drive market where demand was starting to get impacted from COVID-19.

Our pipeline of SSD controller engagements continues to grow, driven by our commitment to deliver the most responsive and best user experience at the lowest power using the most advanced process technology.

I’m very-pleased that we have won the next generation of SSD controllers for data center applications at one of our key tier 1 NAND OEMs, extending the multiyear relationship we have with them. This controller features our leadership PCIe Gen5 technology, and we expect to continue to drive long-term growth for our storage business.

Looking to the third quarter, we are expecting very different trends between our storage controller and Fibre Channel business. We project our storage controller business, which addresses both, hard disk drives and solid state drive applications to continue to grow sequentially.

We expect this growth from the continuation of a ramp of a custom SSD controller partially offset by weaker drive demand from enterprise datacenters and some edge applications such as retail. Stores controllers, shipping into cloud applications are also expected to continue to trend up in third quarter.

Conversely, in our Fibre Channel business, we project a significant sequential decline in revenue, resulting from COVID-19-related weakness in enterprise server and storage system demand. The weakness in Fibre Channel is expected to offset the growth from storage controllers.

And as a result, we project third quarter consolidated storage revenue to be approximately flat on a sequential basis. In closing, our results continue to validate our strategy to focus on developing the most advanced silicon for data infrastructure. Our portfolio actions have also significantly diversified our end market exposure.

And we have a much larger share of revenue today from fast growing 5G wireless and cloud end markets. In 5G, we have wrapped up an impressive set of design wins, which we expect will drive significant revenue growth for us over a number of years. The product ramps at Samsung and particularly Nokia are largely in front of us.

In addition to the strong momentum expected from our own product cycles, we’re also turning increasingly positive on the likelihood of our diversified customer base to gain share in light of recent geopolitical events and market dynamics. Cloud has only recently become a larger part of our business, crossing over 10% of our total revenue.

In this market with long-term secular growth, we have multiple drivers through our OCTEON processor platform for security products, full custom ASICs, merchant and DIY datacenter SSD controllers, and nearline HCE controllers and prints.

In enterprise, while there are near-term headwinds from COVID-19, it is important to keep a longer term perspective that this is a large and diversified worldwide market, spread across a number of industry verticals.

The need for secure and intelligent access to bandwidth is not going away, and the number of end points trying to connect to a network are only expanding. We’ve introduced new solutions, specifically designed to address these challenges, and we believe that we can gain share and drive revenue growth from our own product cycles.

In our edge end market, we have barely scratched the surface of the current Ethernet and future compute opportunity in autos, which we believe will become another key driver for long-term revenue growth.

We have assembled under one roof, a critical mass of scarce and unique IP with a very flexible and customized engagement model, which is proving very attractive to our customers. We’re accelerating our adoption of advanced process technology, which has already started to pay dividends in the form of design wins and new sockets and customers.

Our borderless enterprise and ASIC announcements received strong validation from the industry, and we have seen an increase in inbound requests for collaboration from customers, as they become more aware of the depth and breadth of technology at Marvell.

We believe that we have built a business for the long haul and are confident in driving revenue growth and managing through any transitional challenges in some of our end markets. We continue to invest in technology, while reducing overall operating expenses by driving higher levels of efficiency with our platform.

This operational excellence enhances our ability to deliver operating leverage and drive earnings growth. With that, I’ll turn the call over to Jean for more detail on our recent results and outlook..

Thanks Matt and good afternoon, everyone. I’ll start with a review of our financial results for the second quarter and then provide our current outlook for the third quarter of fiscal 2021. Revenue in the second quarter was $727 million, above middle point of our guidance.

Networking represents 56% of our revenue in the second quarter with storage contributing 40%. Revenue from other accounted for 4% of revenue, declining 25% sequentially and 41% year-on-year. As a reminder, this business consists of product we have stopped investing in. So, we expect they will continue to decline over time.

Our guidance for the third quarter anticipated a small sequential decline in revenue from these products. GAAP gross margin was 49.4%. Non-GAAP gross margin was 63.3% of revenue, better than expectations, reflecting the hard work from our operations team to drive operational efficiency to improve our product costs.

GAAP operating expenses were $511 million, and they include the cost of share-based compensation expenses, amortization of acquired intangible assets, acquisition and divestiture related costs as well as the impairment and other related restructuring charges as a result of the changing scope of the similar processing program Matt discussed earlier in the call.

Non-GAAP operating expenses were $297 million, $3 million lower than expected, primarily because of our continued focus on OpEx management. GAAP operating loss was $151 million. Non-GAAP operating profit was $163 million or 22.4% of revenue. For the second quarter, GAAP loss per diluted share was $0.24.

Non-GAAP income per diluted share was $0.21, above the midpoint of the guidance. Now, turning to our balance sheet. During the quarter, cash flow from operations was $226 million. Our team continues to drive the improvement of working capital metrics in the second quarter.

We improved our days of sales outstanding to 61 days and days of inventory to 90 days. We returned $40 million to shareholders through dividend payments. We have temporarily suspended our share repurchase program as we believe it’s prudent to further strengthen our liquidity and increase our cash balance during the uncertain environment.

We’ll continue to evaluate the business conditions to decide when to restart share repurchase program. We exited the quarter with $832 million in cash and short-term investments, an increase of $164 million from the prior quarter. We continue to have $500 million of liquidity available from our undrawn revolver.

Our net debt-to-EBITDA ratio was 0.8 times on a trailing 12-month basis. As of 4th of August 2020, the $450 million term loan is still within 12 months and has been classified as a short-term debt on the balance sheet.

We expect our business to continue to generate a strong cash flow, and we intend to repay this amount with the cash flow from operations. I’m pleased that revenue growth combined with our strong business model and operating expense discipline, continue to drive improvement in operating results and strengthening our balance sheet.

Now, moving on to our current outlook for the third quarter of fiscal 2021.

Please note that compared to second quarter results, our outlook for operating expenses reflect the significant improvement Matt discussed earlier from the successful integration of Aquantia and Avera, continued operational discipline and the change in scope of the ARM server project.

As a reminder, our operating expenses can vary quarter-to-quarter, affected by factors such as the number of tape-out within a particular quarter. And these tape-outs are becoming more expensive in newer process geometry. The cadence of an NRE payment, which are primarily treated as contra OpEx can also add variability.

And we now have a higher level of NRE following the acquisition of Avera with their customer ASIC model. Due to the typical seasonality in payroll taxes, our OpEx in the first fiscal quarter tends to increase sequentially, and this effect then dissipates in the rest of the fiscal year. Here is the specific guidance for the third quarter.

We are forecasting revenue to be in the range of $750 million, plus or minus 5%. We anticipate our GAAP gross margin will be approximately 51.4%, and the non-GAAP gross margin will be approximately 63%. We project our GAAP operating expenses to be approximately $368 million.

We anticipate our non-GAAP operating expenses to be approximately $280 million. We expect net interest expense to be approximately $15 million and expect non-GAAP tax rate of 5%. As a result, we anticipate GAAP results in the range of a loss of $0.04 per diluted share on the low end to an income of $0.04 per diluted share on the high end.

We expect non-GAAP income per diluted share in the range of $0.22 to $0.28. Operator, please open the line and announce the Q&A instructions. Thanks..

Certainly. [Operator Instructions] Your first question comes from the line of Blayne Curtis with Barclays..

Hey, guys. Thanks for taking the question. Nice results, obviously, given the backdrop in enterprise. Matt, I was just kind of curious, you mentioned as you were walking through, you spent a lot of time on ASICs. You mentioned a new design win with hyperscaler.

I don’t know if you could give any color with that, but maybe just thinking broader, if you can kind of just give us a flavor as to the types of wins that you mentioned you are picking up in types of segments I think both across wireless and networking, that would be helpful..

So, on the hyperscale win, as I said, we’re pretty excited about that. I think bringing the Avera team into Marvell has created a much more relevant portfolio and broader portfolio for all the hyperscale accounts, and I think it was a great testament to the capability of the team to actually break into a new one.

As you know, due to the nature of the ASIC business, these are highly confidential type of engagements that we have, so we can’t go into a ton of detail, but what I would say is that, broadly speaking, our 5-nanometer platform is being extremely well received, both from an ASIC as well as a standard product offering.

And what I mean is, when you go out into not only hyperscale, but also the 5G market, and enterprise. We’re migrating the entire Marvell platform across multiple product lines, jumping into 5. So, it’s much broader than just an ASIC engagement.

In fact, it’s -- you should assume that our Ethernet business, our OCTEON platform and others are all going to migrate. And so, it’s just created a very rich and compelling set of IPs and engagement model that’s been well received. And so, this is one example of that where we’re actually gaining new customers for new types of technologies.

And hopefully, there’ll be more to come on that as we head towards the Investor Day that we just announced in early October to give even more details around our technology platform and the various engagements that we have and talk about them in as much detail as we can at that time, Blayne..

And our next question comes from the line of Vivek Arya with Bank of America..

Thanks for taking my question, and congrats on the good outlook despite all the headwinds. So, Matt, I’m just curious. You mentioned two kinds of headwinds, one because of all the restrictions in terms of shipping to customers in China, and I think separately you also mentioned some headwinds because of COVID and fiber channel.

I was hoping if you could address and maybe quantify how much of those headwinds, and I think specifically on the China customer headwinds, do they -- just do those sales just go away? Are some of that recoverable with some license? I’m just curious what is the China exposure now in terms of kind of wired, wireless, and enterprise mix?.

Sure, yes. I’ll answer it separately because I think, there are two different dynamics. I think that the China situation obviously is broadly impacting people. And certainly, all of our disclosures, we always call it out as a risk factor just in general.

But just to be very clear, in terms of our guidance for the third quarter, there are no China headwinds included in that. So, that was not something that we’re saying is a big part of any headwind we’re seeing there. I mean, it could be minor, but it’s not really material.

But, really the central issue in terms of just the growth sequentially, which is still up quarter-over-quarter, certainly would have been better if enterprise had performed maybe where we thought there would have been a few months back, was really around the enterprise market.

We saw it in both of our -- both in our networking business, really where we sell Ethernet solutions into things like enterprise campus and SMB, and then also our fiber channel business, which is pretty broadly deployed in a number of enterprise applications, including storage, and that also is projected to be down in the third quarter.

And that business, just to note, is generally pretty stable. It doesn’t fluctuate around a whole lot. And so, we definitely are noting it for Q3.

So, I would say, ex-those trends in the enterprise very specifically, the rest of the business is obviously performing very well in terms of the strong growth we’re seeing sequentially in our 5G customers, which if you look out to Q3, assuming we achieve what we believe that would be five quarters in a row of quarter-over-quarter growth in that market.

And then, in cloud datacenter, again another up quarter after a really strong Q1 and Q2. So that’s really the nature of the headwinds that we’re calling out there. We’re very, very focused on the enterprise set of issues that are out there..

Thank you..

Sure..

Thank you. And our next question comes from the line of John Pitzer with Credit Suisse..

Hey, Matt, Jean. Congratulations on the solid results. Matt, I was wondering if you could just spend a little bit more time on the 5G drivers. I mean, clearly, there’s been some of your peers after several quarters of very strong growth that are kind of characterizing September, October as sort of a digestion period for the 5G wireless CapEx.

And I know you’ve got a lot of Company-specific drivers.

But, I was hoping you could help me understand what percent of revenue is 5G today? And as you look out into October, what percent might it be? And I guess importantly, how much runway do you have of Company-specific drivers before you become a little bit more dependent upon the overall macro backdrop for spending?.

Sure, yes. Great, question, John. And you’re right to note that the performance we’re seeing in that business is really very, very specific to us. And because we didn’t have very large share in 4G, we’re not really seeing that counterbalance that maybe others were -- that are more broadly exposed to both.

And then, as you’ve seen, we have new products ramping, we have new OEMs. They’re going into production. We have certainly regionally -- there are regions like China is one example, we called out that is obviously very aggressive in deployment. So, we have a lot of wind at our back in terms of the 5G business.

And then, of course, in front of us really is still all the other major geographies, which are projected at various stages to roll out 5G, and then we have new content with new customers also in front of us with Nokia being an example.

So, I think, the longer view is it’s going to take us a while, which I think is a good thing, to be at a point where we’ll kind of represent the market. I think, the market needs to develop and 5G would need to be a bigger portion of the total wireless CapEx out there, and then our design wins would have to ramp.

So, I think that’s something that we’re -- well, it is a choppy market. We certainly feel like at least at this point, based on our own product cycles and our own design wins that we achieved, that’s why the business is performing that way. And it continues to grow every quarter in terms of revenue as a percent of total, and just as a net amount.

And when you think out to the Investor Day, we typically take that opportunity to frame the various markets and our sizes and our shares. And so, sort of look forward to the Investor Day to get a more comprehensive view from a market standpoint of where we are.

But, we’re very pleased at the growth rate of that business, similarly to where we were happy with the growth rate of our cloud business and its representation inside the Company. Both of those are working really well for us right now..

Perfect. Congratulations..

Thanks John. .

Thank you. Our next question comes from the line of CJ Muse with Evercore..

Hey, CJ.

Are you there? Why don’t we go to the next question, please?.

Wait for a moment, please. Pardon me. CJ Muse, please check your mute button..

Let’s just go to the next question.

Operator, can we move to the next question please?.

Operator, do you want to just move us to the next person’s question, please?.

Hey, operator, can you just move to the next person’s question?.

I just got a message. I think, the operator is having technical issues. So, just hang on for a second..

Pardon me. This is the conference coordinator. I do show our next question comes from the line of Tore Svanberg from Stifel. Please go ahead..

Yes. Thank you and congratulations on the results. Matt, I had a bit of a broader question for you. You talked a lot about 5-nanometer, you talked about custom ASICs. I know recently you talked a lot about edge processing. It just seems like the world is changing right in front of us.

And I’m just wondering what that means for Marvell as a company, but perhaps more importantly, for the whole business model because it does seem like we are a bit at an inflection point on all those fronts..

Well, I think you are right. And you certainly look downstream, Tore, in the design chain all the way to the OEMs. And I think the level of digital transformation that’s occurring certainly in companies and in the equipment that needs to get designed to service these new needs is quite dramatic. And so, we’re aware of that.

And, I think that really is playing to our advantage, to be honest with you. I think, when you look at what our customer base wants, it’s a unique blend. They want access to the leading edge IP.

And maybe that sounds like table stakes, but they have their own very critical applications that they’re trying to serve, and they’re trying to do that in a lot of cases with much higher performance than they ever had to deal with before or much lower power, especially as applications move closer and closer to the edge.

And so increasingly as well, the other trend I would note is that the intersection of computing, of networking, security and even storage, these key IPs for the data infrastructure, they’re all tending to blend together in a lot of ways in terms of what customers want to go do.

And what that really speaks to is you need to have flexibility in your model in order to service these opportunities.

And I think one advantage we have, Tore, at Marvell is that we’ve by design, developed this extremely flexible business model from merchant offerings where customers can prove about our IP because they can just go buy the part to this partner model we innovated, where it’s a combination of our intellectual property and our customers to drive time to market as well as just being able to service this huge opportunity for custom silicon.

And so, I think when I look forward, we’re very enthusiastic about all the opportunities in front of us, and also the way that the platform we are really able to leverage. And when I mean platform, I mean, our design win platform, our technology platform where we don’t have a lot of random adjacent businesses.

What we do for a living is we do this data infrastructure silicon really, really well, and we do that in a very concentrated manner.

And you see that both in our -- now our 5-nanometer platform, which we announced this week with TSMC and the translation of all that investment and the focus we have actually, surprisingly, even driving lower operating expenses than we had before. So I think it’s a unique combination. And Tore, I would just say you nailed it.

There is a big opportunity for Marvell on the go-forward here..

I show our next question comes from Karl Ackerman from Cowen. Please go ahead..

Jean, it’s great to see the solid execution on OpEx. I’m curious, though, what’s the argument for OpEx to not trend toward 30%, even if we assume flattish revenue from here, particularly given the maturity of the storage TAM and the co-investment from customers for processors? Thank you..

Yes. First, we’re really pleased that our team has done a great job to reduce the OpEx to $280 million quarterly run rate versus our original expectation. It’s more like a $300 million when we entered into fiscal ‘21.

So that’s just a tremendous effort by realizing more synergies from Avera and Aquantia integration and also just operational efficiency across the board. So, if you think about that, we’re investing in the right level and with our portfolio adjustment, the portfolio optimization, we constantly review as a company.

We do see actually driving the revenue ramp. If you look at our Q3 guide, it implies revenue year-over-year growth of double digit. And the continued revenue ramp with the current operating expense level, we do think our model are going to show tremendous leverage and continue to drive the earnings expansion.

If you look at our Q3 guide, the operating margin at the middle point of our guidance actually is close to 26%. So, I think we are setting up a great business model with the OpEx level to invest and to continue to expand..

Thank you. I show our next question comes from Quinn Bolton from Needham..

Hi, guys. This is Michelle on for Quinn. Thanks for taking the question and congrats on the results. So, my question is on the storage business. I know you guys don’t break out the storage controllers from Fibre Channel. But, I was wondering if you can give some color on how the 2 segments are broken up within that bucket.

So, I’m just trying to figure out like the puts and takes for the Fibre Channel decline and trying to determine kind of like the magnitude..

Hi. Michelle, I’ll help you give you some color. We typically don’t give all the details and report all the details. But to help you out, the way to think about it is Fibre Channel business, the overall market opportunity of SAM is about $500 million each year. It’s quite a stable market. Actually, it’s a split between Marvell and Broadcom.

So, largely, we are very much similar size. And so, if you think about our Fibre Channel business, it’s all selling into the enterprise data center on-premise. So, current weakness certainly impacts it tremendously. Sequentially, the revenue declined actually to 20% quarter-over-quarter. So, it’s quite significant.

Hopefully, that will give you some color. But we don’t break down the details within the storage category generally..

Thank you. I show our next question comes from Gary Mobley from Wells Fargo Securities. Please go ahead..

I wanted to dig a little bit deeper into the ThunderX ARM-based service development.

And so, to what extent was that $121 million charge related to the restructuring development of Thunder? And how does it impact your joint development, I guess, cost-sharing relationship with ARM and as well the related option for them to take some Marvell equity? And then, the ThunderX3 that you highlighted at Hot Chips last week, is that -- should we think about that as being funded by maybe one or two specific customers?.

So Gary, we’ll divide this question in two pieces. I’ll answer the impairment part, then Matt can talk about the strategic side of the ARM business. So, the impairment actually is quite straightforward. As you recall, we acquired Cavium, and we closed the transaction two years ago.

So, there’s a very small piece of developed technology intangible related to all the TX2 Cavium developed before the acquisition of Marvell acquired Cavium. So, that’s primarily, if you look at the impairment, the primary impairment is related the intangible developed technology of TX2, how Cavium did that business in the past.

With our new focus going forward, definitely, those all the development technology intangible is going to be impaired. That’s the impairment part of it. I’ll let Matt answer the strategic side of the ARM server business..

Sure. Yes. Hey, Gary. So, I think at the highest level, and you know this well, we’ve had a long-term history with ARM. They’re used in almost all of our products, and we cooperate on a number of different applications, like the ARM server opportunity to 5G, automotive, et cetera. So, two companies work together.

And the way you should think about, again, what we’re doing with the Thunder product line is really just focusing it. The market that we’ve always called out for this has always been the hyperscale customers.

And so, what we’re basically doing is just really acknowledging that and also acknowledging the fact that it turns out they seem to really want their own thing, their own special chip.

And this notion of maybe if you go back a few years to where you would have a broad-based ARM server platform that you would drive and you could sell to everybody and maybe put it on like a TikTok type of cadence and sort of run it like a normal CPU business. I think just so much has changed since we acquired Cavium and this market’s developed.

ARM in the data center and ARM in servers has actually continued to get traction in the market, whether that’s with us or that’s with customers doing their own developments themselves in-house with partners. And so we expect that to continue.

We’re just going to do this in a much more focused and targeted manner and with a business model that looks more like our traditional customer semi-custom model versus funding the whole thing on our own kind of in perpetuity.

We’ve said basically, -- we think it’s more -- it’s better for us and better for the customers actually to do this in a more focused manner. I hope that helps..

And our next question comes from the line of Harlan Sur with JP Morgan..

Hey. Good afternoon. And good job on the quarterly execution. Good to see the diversification in the storage business driving flattish growth in what I would consider to be a very tough storage environment. You guys have been talking about the ramp of your DIY SSD controller into the large gaming opportunity.

That’s starting to fire and looks to be pretty strong here in the second half. But, even on the HDD side, I believe that your second nearline HDD customer just got qualified on its 16-terabyte platform and is ramping here in the September quarter.

Are you guys benefiting from this ramp here in Q3? And maybe mid to longer term, you guys also have some DIY SSD controller wins with Tier 1 hyperscalers.

When do you guys expect these programs to ramp?.

Yes. Great questions, Harlan. And I think, yes, if you think about the storage business, the storage controller portion is performing quite well into Q3.

As Jean sort of laid the breadcrumbs earlier on the Fibre Channel business, how to think about that market size, our share of it, how much it was down, we’re basically offsetting that by growth in the -- both the SSD side, and to your point, in our custom SSD engagement as well as in both of our nearline customers that continue to ramp with our solutions of SOCs and then one also using our preamplifier solution as well.

So yes, the traditional, call it, Marvell storage controller business is performing quite well in the near-term here coming off of the lows through the COVID-19, supply issues that were going on. So, that’s doing well. It’s really this very-targeted slowdown in enterprise we’re seeing within the storage areas offsetting that growth.

So, the growth drivers are very much working in storage is what I would say, the areas where we put a lot of R&D and investment in cloud applications as well as in DIY. It’s nice to see the revenue coming in. And I think there’s more to come on discussions of future DIY engagements, which we’re very active in right now.

Some of those have already turned into design wins with hyperscalers, and that is also part of our future growth strategy. To continue to keep storage growing is expanding with additional customers that we didn’t have before. So, more on that later..

Thank you. And our next question comes from the line of Timothy Arcuri with UBS..

Matt, I think you alluded to a design win with another 5G base station customer beyond the two that we already know about.

Can you talk a little more about that and maybe help size the content for that win maybe versus the two that you’ve already talked about?.

Sure. Yes. I think, yes, so there was a lot of content we went through today. But the main point was that while there’s a lot made certainly of the top five vendors, in the base station market -- and typically, those five are, call it, 90% of the total. So, it’s a big number historically.

But there’s also a -- the remainder is currently quite active in this 5G transition. And I would say in almost every region, whether it’s in parts of Asia, certainly North America and other geos, there is a lot of activity there in what we would call the second tier.

And the nice thing is, is that the products that we develop for the top -- call the top guys, those are all going to be available as standard products for the rest of the market. And so, for example, the win that we got that’s in the second tier, it’s using the existing parts we already have.

So obviously, a lot of leverage from that because we didn’t have to go and design a brand new chip and spend a bunch of money on it, and they are able to leverage the investment that we already made.

And without getting into dollars, what we did say is that the content is both the Fusion baseband, and you guys have a sense of what those go for, as well as our OCTEON embedded processor for the transport and layer 2 processing. So, we have very solid content from a processing perspective there.

And I would say is, with -- the last thing, Tim, is with all the disruption going on in all the geopolitical events, I think there’s an opportunity for this second tier to actually become more relevant in 5G, whether it’s taking share from traditional incumbents or even with new standards like ORAN, where you might see new people come in and actually the meaningful participants in some of the regions.

So, that’s -- again, that’s one that we’re watching. But, it’s nice that we’re able to take kind of benefit from all the hard work we’ve done to put these IP platforms together, to be able to then go in and sell those and enable other customers of ours to participate in 5G market..

Thank you. And our next question comes from the line of Ross Seymore with Deutsche Bank..

Matt, I want to go back to the enterprise side. I think, everybody understands that the demand is weak right now. It’s nothing Marvell specific. But, I wanted to dig a little bit into your views of the duration of that weakness and some of the sub causes of it.

So in the past, we’ve seen the macro demand weaken and there also be some significant inventory burn that exacerbated that for a period of time.

So, I guess the two parts of this question would be, is your fiscal third quarter enterprise guidance being weak, exacerbated by that inventory digestion, and do you think that continues into your fiscal fourth quarter? And similarly, are there Company-specific offsets either share gains or losses within enterprise that would be either offset or magnify that weakness?.

Sure, Ross. Yes. I’d say, certainly, in the short term, we’re seeing the impacts you said. And I think some of this may be certainly inventory related. I do think that when we had the supply crunch and countries we’re shutting down left and right, I think certainly, OEMs wanted to make sure that they have some inventory.

But, I would say that is also very much coupled depending on the segment you’re talking about with just straight up demand weakness just given that certain segments of enterprise companies aren’t spending on. And I think those are very well known.

So -- but I’d say that the inventory part, unlike sort of, I’d say prior cycles, which I’ve been through, I’d say this one is just more on the demand side at this point. So that’s really in the short term, and we just have to deal with that.

We’re still very encouraged, okay, and bullish about our enterprise offerings, once we’re through this cycle we’re in, especially as we look out to calendar ‘21. And I referenced in my remarks as well as you probably saw some of the announcements we made around our borderless enterprise.

I mean, that whole thing is really code for Marvell just refreshed its entire Ethernet switching and PHY portfolio. And the last time we did that, which was a few years ago, we jumped a process node or 2 at that time. We added a whole bunch of features. We optimized the products. And we had great success.

It was part of the kind of the initial Marvell turnaround story was that networking growth. And so, we see the same type of opportunity starting really next year with some of our new products, which are, again, in the latest process nodes that are relevant for those markets, the latest sets of features.

And then, even beyond that, as we look out, I’d say, beyond next year and you start looking at our 5-nanometer portfolio, which we’re sampling our first products next year on, but all the design wins that we’re in the hunt on right now are really in that node for the large sockets. We’re extremely well positioned.

And I would say that even goes beyond Ethernet, and also looking out to our next-generation OCTEON products, which have gotten a lot of press because of their success in base stations recently. But don’t forget about the wired market.

And the wired market, I think, if you look at all the networking OEMs and communication OEMs and what they’re going to need in the future and you look at us with a best-in-class infrastructure processor in 5-nanometer, which would be the 10th generation Cavium processor, we’re very excited about that business between -- on a number of fronts.

So I think the shorter term, we certainly have some chop. Fortunately, it’s being offset by cloud and 5G. But we’re still very optimistic on enterprise, which drives great margins for the Company, great stickiness. And I think, we’ll benefit from the hard work the team has put in to really refresh the portfolio.

We’re seeing great traction on those products..

Thank you. And the last question we’ll take comes from Srini Pajjuri with SMB..

Thank you. Thanks for squeezing me in. Jean, I have a question on the cash usage. I saw that the share count has perked up a little bit in the quarter.

Just wondering how you are thinking about the cash usage as we go into the next few quarters? And maybe along the same lines, Matt, you guys have done a great job with M&A, integrating some of the acquisitions. And now that the cash flow is improving, the balance sheet is pretty strong.

I’m just curious as to how you’re thinking about M&A for the next 12 months, what do you see out there in the market? What kind of opportunities you’re seeing and how you’re thinking about it?.

Yes. So, on the cash usage for the next few quarters, certainly, our business will continue to generate a very strong free cash flow. If you look at the first half of fiscal year 2021, our cash flow conversion is very significantly higher than the -- more than 100% of our net income.

So, I think certainly, we’re going to be able to pay down our short-term debt, which is $450 million. And the additional excess cash, we have always been quite committed to return cash to shareholders. Certainly, the macro environment is still uncertain, but we definitely will monitor and assess, if we should restart the share repurchase program.

So, that’s definitely what we are considering..

Yes. And I’ll just conclude on the second topic you mentioned about M&A. So, yes, I think we’re -- first of all, we’re very pleased with how all the effort we put in, in 2019. We bid off a lot, as you remember. We sold our Wi-Fi business to NXP, and then, we purchased Aquantia and Avera.

And we made those decisions candidly right kind of in the midst of trade war and a lot of uncertainty. And I think reflecting back, we’re thrilled that we made those decisions. I think, both of those acquisitions we did last year were performing better than we had anticipated when we announced them.

As you saw from our results, I think, the benefit of the Marvell platform from a cost standpoint has really enabled us to run these 2 businesses that we acquired, very efficiently, while keeping key technical talent and key management talent, which we were thrilled to get. And so, we like those kind of deals.

I think the prices paid were very reasonable. And certainly, they’ve really helped our Company. And so, look, we’re in execution mode at this point. We got a lot of design wins in front of us. We’re executing a 5-nanometer platform.

But, we’re always going to keep a look out and certainly very encouraged by the guidance we gave in terms of revenue growth. But also, if you even look at last quarter, it was the cash flow generation of the Company.

I think you’re starting to see that the Company has got a tremendous leverage in its operating model and can generate significant free cash flow as we grow, and that certainly sets us up well if we were to find opportunities to go after. But, as you know, we’ve been very-disciplined on this front. Multiples are definitely high at this point.

We’ve got a lot going on. So, of course, we’ll look around. But right now, I know myself and the team are plenty busy with executing our current initiatives that we’ve worked really hard to put together. But, we will see. Thank, Srini..

Thank you. And ladies and gentlemen, this concludes today’s conference call. Thank you for participating. And you may now disconnect..