Earnings Call Transcript
Marvell Technology, Inc. (MRVL)
Earnings Call Transcript - MRVL Q2 2021
Operator, Operator
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. Please be advised that today’s conference is being recorded. It is now my pleasure to introduce Vice President of Investor Relations, Ashish Saran.
Ashish Saran, Vice President of Investor Relations
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.
Matt Murphy, CEO
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 from what 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 by 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 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 2021, 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 as no different. With our breadth of processor know-how 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-dived into each of our product lines, evaluated end-market dynamics, and reviewed 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 growth 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 chip at a Tier 1 hyperscaler. A LiquidIO programmable SmartNIC and LiquidSecurity HSMs continued to gain traction with 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, provides 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 start 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. The increasing amount of cloud access and remote work needs switches with more intelligence, visibility, security, and bandwidth. 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. 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 eight 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 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 benefitted 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 by 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 the 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 data center 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 endpoints 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.
Jean Hu, CFO
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 the midpoint 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 products we have stopped investing in. So, we expect they will continue to decline over time. Our guidance for the third quarter anticipates 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, which includes 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 our 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 August 4, 2020, the $450 million term loan is still within 12 months and has been classified as short-term debt on the balance sheet. We expect our business to continue to generate 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 strengthen 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 reflects 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-outs 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 a 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, Operator
Certainly. Your first question comes from the line of Blayne Curtis with Barclays.
Blayne Curtis, Analyst
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.
Matt Murphy, CEO
We're really excited about the hyperscale win. Bringing the Avera team into Marvell has enhanced our portfolio, making it more relevant and extensive for all hyperscale accounts. This demonstrates our team's capability to break into new markets. Due to the confidential nature of the ASIC business, we can't share too many details, but generally, our 5-nanometer platform is being very well received for both ASICs and standard products. This applies not only to hyperscale but also to the 5G market and enterprise sectors. We are transitioning the entire Marvell platform across multiple product lines, moving into 5. This initiative extends beyond just ASIC engagements, as our Ethernet business, OCTEON platform, and others will also migrate, creating a rich set of IPs and engagement models that are well accepted. This is just one example of how we're attracting new customers for new technologies. We hope to share more during our upcoming Investor Day in early October, where we’ll provide additional details about our technology platform and various engagements.
Operator, Operator
And our next question comes from the line of Vivek Arya with Bank of America.
Vivek Arya, Analyst
Thank you for answering my question, and congratulations on the positive outlook despite the challenges. Matt, I’m interested to know more about the two types of challenges you mentioned. One is related to shipping restrictions to customers in China, and the other is due to COVID and fiber channel issues. Could you provide more details and perhaps quantify the impact of these challenges? Specifically regarding the situation with China customers, do those sales completely vanish, or is there a possibility for recovery through some licensing? I'm also curious about the current exposure in China concerning your mix of wired, wireless, and enterprise products.
Matt Murphy, CEO
Sure, I'll answer that separately as there are two different dynamics. The situation in China is broadly impacting everyone, and we always highlight it as a risk factor in our disclosures. However, just to clarify, our guidance for the third quarter does not factor in any headwinds from China. While there could be minor impacts, they are not material. The main issue regarding our sequential growth, which is still up quarter-over-quarter, relates to the enterprise market. We observed challenges in our networking business, which involves selling Ethernet solutions to enterprise campuses and SMBs, as well as in our fiber channel business that is widely utilized in several enterprise applications, including storage. This area is expected to decline in the third quarter, although it usually remains stable without significant fluctuations. Therefore, I want to emphasize that aside from those specific trends in the enterprise sector, the rest of our business is performing very well, notably with robust sequential growth in our 5G customers. If we meet our expectations, it will mark five consecutive quarters of growth in that market. Additionally, the cloud datacenter segment is also seeing another up quarter following strong performance in Q1 and Q2. Overall, those are the headwinds we're identifying, and we remain focused on addressing the various issues facing the enterprise segment.
Vivek Arya, Analyst
Thank you.
Matt Murphy, CEO
Sure.
Operator, Operator
Thank you. And our next question comes from the line of John Pitzer with Credit Suisse.
John Pitzer, Analyst
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?
Matt Murphy, CEO
Sure, great question, John. The performance we're experiencing in that business is very specific to us. Since we didn't have a large share in 4G, we're not seeing the same counterbalance that others might experience due to wider exposure. We have new products being rolled out and new OEMs entering production. For instance, regions like China are aggressively deploying, which is a positive factor for our 5G business. Additionally, there are major geographies projected to roll out 5G, and we have new content with customers like Nokia. Looking at the long term, it will take time for us to align more closely with the market. The market needs to mature, and 5G must become a greater segment of total wireless capital expenditure before our design wins significantly increase. Despite a choppy market, we feel confident in our current product cycles and design wins, which is why our business is performing well. We're seeing consistent revenue growth as a percentage of total and in absolute terms. During our Investor Day, we plan to provide a detailed perspective on various markets and our shares, and we're excited about the growth rate of this business, similar to how pleased we are with the growth of our cloud business and its significance within the Company. Both areas are currently performing well for us.
John Pitzer, Analyst
Perfect. Congratulations.
Matt Murphy, CEO
Thanks, John.
Operator, Operator
Thank you. Our next question comes from the line of CJ Muse with Evercore.
Ashish Saran, Vice President of Investor Relations
Hey, CJ. Are you there? Why don’t we go to the next question, please?
Operator, Operator
Wait for a moment, please. Pardon me. CJ Muse, please check your mute button.
Ashish Saran, Vice President of Investor Relations
Let’s just go to the next question. Operator, can we move to the next question, please?
Matt Murphy, CEO
Operator, do you want to just move us to the next person’s question, please?
Jean Hu, CFO
Hey, operator, can you just move to the next person’s question?
Ashish Saran, Vice President of Investor Relations
I just got a message. I think the operator is having technical issues. So, just hang on for a second.
Operator, Operator
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.
Tore Svanberg, Analyst
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.
Matt Murphy, CEO
I agree with your observation. Looking downstream in the design chain to the OEMs, the extent of digital transformation taking place in companies and the need for equipment to meet these new demands is significant. We recognize this trend, and I believe it benefits us. Our customers are seeking a unique combination of leading-edge intellectual property, which might seem like a baseline expectation, but they have critical applications that require much higher performance or lower power consumption, especially as applications move closer to the edge. Additionally, there's a trend towards the convergence of computing, networking, security, and storage, reflecting what customers are looking to achieve. This clearly indicates that we need flexibility in our model to exploit these opportunities. One of our advantages at Marvell is our deliberately designed flexible business model, which includes merchant offerings that allow customers to easily access our IP by purchasing parts, as well as our partner model that combines our intellectual property with customers to accelerate time to market while addressing the vast potential for custom silicon. Looking ahead, we are very optimistic about the opportunities before us and how effectively we can leverage our platform. By platform, I refer to our design win and technology platforms, where we focus exclusively on delivering data infrastructure silicon excellently and with a concentrated approach. This is evident with our recent announcement of our 5-nanometer platform in collaboration with TSMC, demonstrating our investment and focus, which has even led to lower operating expenses than previously. It's a distinctive combination, and I agree that there is a substantial opportunity for Marvell moving forward.
Operator, Operator
I show our next question comes from Karl Ackerman from Cowen. Please go ahead.
Karl Ackerman, Analyst
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.
Jean Hu, CFO
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 $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 digits. And the continued revenue ramp with the current operating expense level, we do think our model is going to show tremendous leverage and continue to drive the earnings expansion. If you look at our Q3 guide, the operating margin at the midpoint 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.
Operator, Operator
Thank you. I show our next question comes from Quinn Bolton from Needham.
Michelle Waller, Analyst
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 two 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.
Jean Hu, CFO
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 that the 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 datacenter 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.
Operator, Operator
Thank you. I show our next question comes from Gary Mobley from Wells Fargo Securities. Please go ahead.
Gary Mobley, Analyst
I wanted to explore further the development of the ThunderX ARM-based service. To what extent was the $121 million charge related to the restructuring of Thunder? How does this affect your cost-sharing relationship with ARM, including the option for them to acquire some Marvell equity? Additionally, regarding the ThunderX3 that you mentioned at Hot Chips last week, should we consider that as being funded by one or two specific customers?
Jean Hu, CFO
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 to the intangible developed technology of TX2, how Cavium did that business in the past. With our new focus going forward, definitely, 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.
Matt Murphy, CEO
Sure. Yes. Hey, Gary. At a high level, we have a long-standing partnership with ARM, which is integral to nearly all our products. We collaborate on various applications, including the ARM server opportunity, 5G, automotive, and more. The two companies work closely together. Regarding the Thunder product line, we are really narrowing our focus. The market we've consistently targeted has been hyperscale customers. We are acknowledging that they seem to prefer their own specialized chips. A few years ago, there was a concept of a universal ARM server platform that could be marketed broadly, but much has changed since we acquired Cavium and as the market has evolved. ARM's presence in the data center and server space continues to grow, whether that’s through our efforts or customers developing solutions in-house with partners. We anticipate this trend to persist. Our approach will be more focused and targeted, adopting a business model that resembles our traditional semi-custom customer model rather than fully funding everything ourselves indefinitely. We believe this focused approach is better for us and for our customers. I hope that clarifies things.
Operator, Operator
And our next question comes from the line of Harlan Sur with JP Morgan.
Harlan Sur, Analyst
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?
Matt Murphy, CEO
Yes, great questions, Harlan. The storage controller segment is performing well in Q3. As Jean pointed out earlier regarding the Fibre Channel business, we are seeing a decline in that market, but we are offsetting it with growth in both the SSD area and our custom SSD engagements, along with support from our nearline customers who are ramping up with our SOC solutions and one using our preamplifier solution. The traditional Marvell storage controller business is doing well in the short term as we recover from the lows during COVID-19 and the associated supply issues. The only challenge is a targeted slowdown in enterprise storage, which is affecting overall growth. However, growth drivers in storage are still strong, particularly in cloud applications and DIY, which is encouraging as revenue increases. We expect further discussions on future DIY projects, as many have already resulted in design wins with hyperscalers, contributing to our growth strategy. We aim to continue expanding storage with new customers that we didn't have previously, and we'll share more on that later.
Operator, Operator
Thank you. And our next question comes from the line of Timothy Arcuri with UBS.
Timothy Arcuri, Analyst
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?
Matt Murphy, CEO
Sure. There was a lot of content we discussed today. The main takeaway is that while much attention is given to the top five vendors in the base station market, which represent about 90% of the total, the remaining players are also quite active in the 5G transition. In nearly every region, including parts of Asia and North America, there is substantial activity among what we refer to as the second tier. Importantly, the products developed for the top vendors will also be offered as standard products for the broader market. For instance, our recent win in the second tier utilizes the existing components we already have, allowing us to leverage prior investments without needing to design a new chip. In terms of content, this includes the Fusion baseband and our OCTEON embedded processor for transport and layer 2 processing. With the current geopolitical disruptions, there is a chance for the second tier to gain relevance in 5G, possibly taking market share from traditional players or participating under new standards like ORAN. We're monitoring this situation closely and are pleased to benefit from the efforts we've put into building our IP platforms, enabling us to support other customers in the 5G market.
Operator, Operator
Thank you. And our next question comes from the line of Ross Seymore with Deutsche Bank.
Ross Seymore, Analyst
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?
Matt Murphy, CEO
Certainly, in the short term, we are experiencing the impacts mentioned. Some of this may be related to inventory, as OEMs aimed to maintain stock during the supply crunch and shutdowns. However, it's also tied to demand weakness in certain enterprise segments where spending has decreased, which is widely recognized. Unlike previous cycles, this one appears to be more demand-driven. In the short term, we need to manage through this situation, but we remain optimistic and confident in our enterprise offerings as we look towards 2021. Recently, we made announcements regarding our borderless enterprise initiative, which involves a full refresh of our Ethernet switching and PHY portfolio. The last time we did this, we advanced our process nodes and significantly improved our products, leading to success and networking growth during our turnaround. We anticipate similar opportunities with our new products next year that utilize the latest process nodes and features. Looking further ahead, we are preparing to sample our first 5-nanometer products next year and are pursuing design wins in this category for large opportunities. Our positioning is strong, particularly beyond Ethernet. Our next-generation OCTEON products have gained attention due to their success in base stations, but we shouldn't overlook the wired market. All networking and communication OEMs will require our best-in-class infrastructure processor, the 10th generation Cavium processor, in 5-nanometer technology, which excites us greatly. In the short term, while we face some challenges, the impacts are being mitigated by cloud and 5G sectors. We remain optimistic about the enterprise sector, which offers strong margins and loyalty. We anticipate benefiting from our team's efforts to refresh our portfolio and are seeing positive traction with our products.
Operator, Operator
Thank you. And the last question we’ll take comes from Srini Pajjuri with SMB.
Srini Pajjuri, Analyst
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?
Jean Hu, CFO
Yes. Regarding cash usage in the upcoming quarters, our business will continue to generate a strong free cash flow. In the first half of fiscal year 2021, our cash flow conversion was significantly higher than 100% of our net income. We plan to pay down our short-term debt, which stands at $450 million. Additionally, we are committed to returning cash to shareholders. While the macro environment remains uncertain, we will monitor the situation to determine if we should restart the share repurchase program. This is something we are definitely considering.
Matt Murphy, CEO
Yes. To conclude on the topic of M&A, we are pleased with the efforts we made in 2019. We divested our Wi-Fi business to NXP and acquired Aquantia and Avera. These decisions were made during a challenging time with trade tensions and uncertainties, and in hindsight, we are glad we proceeded with them. Both acquisitions last year have performed better than expected since their announcement. Our results show that the Marvell platform has allowed us to run these acquired businesses efficiently while retaining key technical and management talent, which we value highly. We are satisfied with the prices paid for those acquisitions, as they have greatly benefitted our company. At this time, we are focused on executing our strategy, with numerous design wins ahead and actively working on a 5-nanometer platform. However, we remain vigilant for potential opportunities while being disciplined in our approach. Current valuations are high, and we are busy with our current initiatives, but we will continue to assess the landscape. Thank you, Srini.
Operator, Operator
Thank you. And ladies and gentlemen, this concludes today’s conference call. Thank you for participating. And you may now disconnect.