Earnings Call Transcript - MRVL Q1 2021

Operator, Operator

Ladies and gentlemen, thank you for standing by, and welcome to Marvell's First Quarter Fiscal Year 2021 Earnings 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. I would now like to hand the conference over to your speaker; Vice President of Investor Relations, Ashish Saran. Sir, please go ahead.

Ashish Saran, Vice President of Investor Relations

Thank you, and good afternoon, everyone. Welcome to Marvell's first 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 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?

Matthew Murphy, President and CEO

Thanks, Ashish and good afternoon everyone. During the first quarter of fiscal 2021 we delivered strong financial results and achieved $694 million in revenue, $14 million above the midpoint of guidance. As you may recall, our revenue guidance for the first quarter included an assumption for a 5% headwind from COVID-19. We did in fact experience some impact on revenue from COVID-19-related issues, but stronger-than-expected demand from our data center and 5G infrastructure end markets and our networking business drove consolidated company revenue above the midpoint. Compared to our assumptions when we provided our revenue guidance for the first quarter, the impact of COVID-19 turned out to be greater than expected in our storage business and lower than expected in our networking business. Our GAAP loss per share was $0.17. Our non-GAAP earnings per share was $0.18, above the high end of our guidance range, driven by higher revenue and tight OpEx control. On a sequential basis revenue declined by 3%. However, compared to fourth quarter results, adjusted for the divestiture of Wi-Fi, revenue for the ongoing business was actually flat on a sequential basis, a very solid result under current conditions, and in what is typically a seasonally weak quarter. I'm extremely pleased with our team's ability to deliver great results despite the massive disruption from the COVID-19 pandemic. The vast majority of our employees have been working from home since early March, earlier than most official shelter-in-place orders were announced, as the health and welfare of our employees and their families were our first priority. Our IT team quickly jumped into action to provide secure, remote access for our 5,000 plus employees. Our Worldwide Operations Group battled through a number of supply chain challenges and met the upside in demand in our networking business. Since the start of work from home, our engineering team has taped out eight new chips, an extremely high level of engineering output in this time frame, on schedule to meet our customers' critical timelines. Our sales team maintained a strong focus on customer communication through this critical time period and continued to drive our growing design win funnel. I have personally experienced a much higher level of direct engagement with the leadership at multiple key customers at the CEO level. Normally, I fly out, meet my counterparts in person a few times a year. But during this crisis we have quickly adopted virtual meetings over video to increase the frequency of communication. We believe the change in cadence reflects our customers' desire to involve us deeply as a trusted partner in solving their need for higher bandwidth and storage in the post COVID-19 world. Our mission as an infrastructure semiconductor solution provider to move, store, process and secure the world's data has never been more relevant and we are seeing strong demand drivers for our products and technology. I truly believe that the culture we have created at Marvell is enabling our success and has earned us the trust of our employees, customers and partners, and our new brand reflects these values. Celebrating the company's 25-year anniversary, we recently launched Marvell's new brand identity, marking a milestone in our transformation to focus on semiconductor solutions for data infrastructure. This was something we had considered doing soon after we started to pivot the company in the fall of 2016. But as you know, the company's brand is their reputation, and a reputation is earned. So instead we focused first on creating our new strategy, revamping our culture building, operational excellence and delivering business results. After four years of hard work, we are ready to reveal a new brand that mirrors our culture, which focuses on substance first. Our brand is built on a foundation of collaboration and partnership with our customers and we are driven by the belief that doing things the right way matters. Essential technology done right reflects our customer-centric approach to high-quality tailored solutions. None of this would be possible without our dedicated employees who have been putting in a lot of extra hours through this unusual period which is likely to persist for a while. Recognizing this challenge, we are giving all employees a few extra days off and we are shutting down for a four-day recharge weekend in June. Similarly, we have taken steps to help our contractors and the local community. We are continuing to pay our hourly workers in full as well as the service providers that support our facilities, regardless of whether they can fully perform their duties. In addition, Marvell has started a COVID-19 relief fund to support our global communities and provide financial relief to those in need. A portion of the fund is dedicated to matching employee donations, so that employees will also have the opportunity to participate. Until we are able to return to the office in Santa Clara, we plan to donate our entire cafeteria grocery budget to the Second Harvest Food Bank in support of those in need. It is in times of crisis that our values and leadership principles are truly tested. I'm proud of our team and the company we have built. We are in the fortunate position of being able to take care of our people and give back to our communities when it really counts. During and after this crisis, we expect the demand for bandwidth to continue to grow stronger. Major cloud and service providers are facing unprecedented demand for their services as a result of so many people working from home and are scrambling to add capacity to their networks. 5G has become a strategic priority for many nations and also an economic growth driver for economies worldwide. Enterprises are rapidly upgrading their networking infrastructure to support their workforce with remote access to critical business applications and advanced collaboration tools in a secure and scalable environment. We are in the midst of enabling all the key megatrends in 5G, data center cloud, enterprise and automotive as a leading supplier of their infrastructure semiconductors. Over the last few quarters, we have discussed in detail our progress in the carrier market tied to the transition to 5G. Investor focus has been high in this area and I'll provide color on this opportunity in a few moments. For now, I'd like to draw your attention to the cloud data center market, which represents an opportunity for our storage and networking products, similar in magnitude to 5G. This is in addition to our ARM server opportunity, which we have previously outlined as a large multi-billion dollar market for us. We've been working on building our business through organic investments over the past four years, as well as through products and engagements via the Cavium and Avera acquisitions. We are now starting to see the benefits from these efforts and I'm excited to share them with you. In our storage business over the last few years we've been transitioning our HDD business to focus on nearline drives, which are primarily consumed by cloud data centers, and this business has been growing nicely for us through both our storage controllers and pre-amplifiers. We expect that the 16-terabyte transition this year will drive strong growth for us. Our custom flash controllers are very well suited for cloud customers who have unique storage applications and are looking to disaggregate their SSDs to optimize performance, and we pioneered the do-it-yourself model. We also have storage accelerators in evaluation at multiple cloud customers. In virtualized environments and cloud data centers, multiple customers can be accessing the same physical storage resources simultaneously. To ensure quality of service, expensive CPU cycles are consumed in managing workloads to ensure that all clients get uninterrupted access to their stored data. Our NVMe storage accelerators enable a better solution by offloading storage IO and freeing up CPU cycles, provisioning bandwidth and ensuring low latency to satisfy service level agreements, which are difficult to achieve with software-only solutions. We expect to see initial production ramps for our storage accelerators starting later this year. In our networking business, our OCTEON compute platform is ideally suited for a variety of offload and acceleration applications in hyperscale data centers. At GTC 2020 last week, Jensen Huang referred to this category of computing as the DPU, or data processing unit, and indicated it would represent the third major pillar of computing in hyperscale data centers after the CPU and GPU. We couldn't agree more. OCTEON is an ideal DPU platform as it is an SoC that combines a scalable multi-core ARM processor, high-performance networking and a variety of hardened acceleration engines. As many of you know, Cavium was a pioneer in this area. We have continued investing in this segment since the acquisition. Our recently announced OCTEON TX2 was specifically designed for cloud applications such as our LiquidIO programmable Smart NIC and LiquidSecurity HSM, or hardware security module product lines. Cloud infrastructure requires optimized hardware for performance, cost and power at scale. Data center operators can achieve these goals by moving specific workloads on the highly optimized off-load engines in the host server to run more efficiently. Our LiquidIO Smart NICs offload network virtualization, storage protocols, security, distributed firewall, software-defined networks and a network overlay for various cloud data center models. Our latest LiquidIO Smart NIC incorporating OCTEON TX2 is ramping now as cloud provider demand is surging. Our LiquidSecurity HSM, which have been adopted by multiple leading cloud providers to provide fully managed cloud-hosted protection for cryptographic keys and Crypto-as-a-Service, are also ramping. Last year we announced deployments with Amazon, Google and Oracle and I am pleased that we have recently added another large Tier 1 cloud customer. Our ARM-based server processors have been qualified at Microsoft for internal Azure development workloads and we are looking forward to broader adoption in production environments. Our ThunderX3 processor will become available later this year and we continue to engage with additional cloud providers on our solutions. The Avera acquisition brings to us leading-edge custom chip design capability, which continues to become more relevant as hyperscalers seek to differentiate and control their own key pieces of silicon. They have very specific needs, and we can combine our leading intellectual property with their unique IP to most efficiently solve their most complex system design challenges. As these customers continue to design their own silicon, they need a reliable ASIC partner that they can count on for the long haul. Avera was already shipping into the cloud market when we acquired them and they brought over additional cloud design wins which have yet to go into production. The level of engagement with hyperscalers has also continued to grow after we completed the acquisition and we are seen as a very attractive choice for next-generation design decisions. Collectively, we are now building a strong cloud franchise, combining our storage networking and processor technology, and have the unique ability to deliver products in standard, custom and semi-custom solutions. I'm pleased to report that for the first time we estimate that our revenue from the cloud market exceeded 10% of total company revenue, growing from a fairly small position at the same time last year. We expect that this business will continue to grow with that end market and our own unique product cycles and become another key growth driver for Marvell. Let me now move on to discussing our two businesses in more detail. First, in our networking business, revenue during the quarter was $394 million and grew 5% sequentially, significantly above our expectations for a low to mid-single-digit decline. Compared to fourth quarter results, adjusted for the divestiture of Wi-Fi growth for the continuing networking business in the first quarter was in the double digits sequentially, and I'm thrilled with this result. Excellent supply chain execution allowed us to meet strong demand from cloud data centers for our Smart NICs and security adapters that I discussed earlier. Our one gig and 10 gig PHY products experienced robust demand from enterprise data centers as companies continue to upgrade the core of their network operations to deal with higher security and throughput demands. Our wireless infrastructure business grew sequentially and performed better than our expectations of a flat quarter in strong contrast to the pause or slowdown in 5G deployments mentioned by a number of industry peers for the same time period. We are benefiting from the start of the 5G buildout in China, where we have content through two of our key customers, who collectively have been awarded about 50% of the share of recently announced contracts. We are currently supplying custom ASICs and standard connectivity products to these customers and are working with them on additional opportunities. In addition, we have a very strong position at Samsung where we have just started to ship our full suite of solutions and expect that their success in Korea, Japan and the US will drive growth in the coming year. Our custom baseband solution for Nokia is progressing very well through qualification, and we expect to start production later this year. Collectively, we are designed into the latest generation of base stations into multiple OEMs, which are expected to be powering all key geographies over several years. We are still at the very beginning of the industry transition from 4G to 5G and look forward to driving significant revenue growth from this end market. Demand from the enterprise campus end market remained stable on a sequential basis, a good outcome under current market conditions. When we start to come out of the COVID-19 crisis, we are looking forward to the deployment of Wi-Fi 6 which requires higher speed Ethernet connections. We expect this adoption will drive growth for our multi-gig Ethernet products as we have a very strong design win position across most leading OEMs for enterprise Wi-Fi access points. We also have a strong position on campus switches, which aggregate traffic from these access points. We recently taped out additional products from our recently announced OCTEON TX2 family of ARM-based infrastructure processors, including our flagship highest performance solution featuring 36 cores which can deliver up to 200 gigabits per second of packet processing for the most demanding applications. We also taped out our Fusion-based processor, customized for massive MIMO applications for our leading wireless customer ahead of schedule. Our customer will be using this solution in their high-volume massive MIMO SKUs and we expect to be ramping into production in the fall. The design win funnel for OCTEON processors is continuing to expand with a broad set of Tier 1 networking and high-end security firewall OEMs. The OCTEON platform is an extensive ARM-based embedded processor product family which can scale from four cores at the low end to 36 cores on the high end, all on a common software framework. This is a critical advantage for Marvell when engaging with Tier 1 networking OEMs who want to partner with solution providers able to support their broad range of products, allowing massive software reuse. We are deep into the development already of our next-generation OCTEON family based on advanced node process technology. The combined strength of our recent OCTEON announcements and aggressive roadmap is resonating very well with key OEMs. In our emerging automotive business, there are encouraging signs that auto production is restarting in multiple geographies. If this happens, we expect to start ramping Ethernet switches and PHYs in the second half of our fiscal year for the designs we had won in model year 2021 vehicles. We expect to grow our automotive footprint over the next few years through our Ethernet connectivity products, but we see an even bigger opportunity for Marvell as cars continue to evolve towards becoming truly connected platforms. Traditional point-to-point solutions in cars are heading towards zonal architectures, very similar to modern enterprise networking, where endpoints connect to centralized compute and storage resources over a secure Ethernet backbone. We believe that we have all the pieces in place to be a leader in the market for this evolution: low power and high-performance ARM-based embedded processors, proven security IP, automotive grade gigabit and multi-gigabit Ethernet connectivity, advanced storage technology and a solution delivery model which can span from standard product to full custom. We will discuss this broader initiative in more detail at our Investor Day in October. Let me now discuss the outlook for our networking business. After a very strong first quarter, we expect our networking business to continue to grow in the second quarter of fiscal 2021 and project revenue to increase in the low single digits sequentially. We expect this growth to be driven by 5G wireless infrastructure deployments and our carrier end market. Looking out to the third quarter, based on our recent bookings and firm backlog position, we expect our 5G business to continue to ramp strongly. Turning now to our storage business, storage revenue for the first quarter was $259 million, a double-digit sequential decline, worse than our expectations for a mid-single-digit decline. This was due to multiple manufacturing facilities in Southeast Asia coming under new shelter-in-place orders in connection with COVID-19 as the quarter progressed, impacting production of fiber channel adapters and hard disk drives. Our SSD controller business, in contrast, remained resilient and grew sequentially, driven by higher shipments into data center applications. Looking to the second quarter, we expect our storage business to start to recover from COVID-19 impacts on the supply chain. Although a full recovery is more likely in our third quarter. We have started initial shipments of our custom SSD controllers for system-level applications in our second fiscal quarter. As a result, we are projecting storage revenue growth of approximately 10% sequentially for the second quarter. This custom SSD controller is based on our new PCIe Gen4 architecture and was developed in close collaboration with our customer to create a storage controller uniquely tailored to their application. I'm very pleased with our strong engineering and operations execution, which has enabled us to start early shipments to meet our customers' production schedule. We expect the storage controller to ramp into high volume in our third fiscal quarter. In closing, we have a strategy focused on semiconductor solutions for data infrastructure. The critical nature of that infrastructure became even more evident during the current crisis, as it keeps people connected, businesses running and information flowing. Our pivot to data infrastructure wasn't an accident and is a direct result of our decisive strategic portfolio actions over the last four years. Our strategy is in place. We are executing well and we have the right team and technology to exceed our customers' expectations. Our booking and backlog trends are very healthy, especially in 5G cloud and custom SSD, and support our expectations of driving overall company growth beyond the second quarter. We of course will continue to closely monitor demand signals from our customers in this uncertain environment. We remain confident in our ability to continue to benefit over the long term from the macro trends I outlined during this call. 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 first quarter and then provide our current outlook for the second quarter of fiscal 2021. Revenue in the first quarter was $694 million above the middle point of our guidance. Networking represented 57% of our revenue in the first quarter with storage contributing 37%. Revenue from other accounted for 6% of our revenue as we maintain this business consists of products such as print solutions and application processors. As we have stopped investing, we expect it will continue to decline over time. Our guidance for the second quarter anticipates an approximately 20% sequential decline in revenue for these products. GAAP gross margin was 47.1%, which includes the amortization of both Aquantia and Avera inventory step-up costs. Non-GAAP gross margin was 62.8% of revenue and it reflects the change in product mix compared to our expectations, as Matt discussed earlier. GAAP operating expenses were $423 million. Non-GAAP operating expenses were $300 million, lower than expected, primarily because of our continued focus on OpEx management and the lower travel expenses due to the COVID-19 impact. I'm pleased that we were able to get to our target for non-GAAP operating expenses three quarters sooner than earlier expected. We currently intend to manage OpEx at this level through the rest of the fiscal year. GAAP operating loss was $96 million. Non-GAAP operating profit was $136 million or 19.6% of revenue. For the first quarter GAAP loss per diluted share was $0.17. Non-GAAP income per diluted share was $0.18 above the high end of our guidance range. Now turning to our balance sheet, during the quarter, cash flow from operations was $176 million. We returned $65 million to shareholders, through $25 million in share repurchases and $40 million in dividends. We temporarily suspended our share repurchase program midway through the first quarter 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 the share repurchase program. We exited the quarter with $660 million in cash and short-term investments, and we have $500 million liquidity available from our undrawn revolver. Our net debt-to-EBITDA ratio was 1.2 times on a trailing 12-month basis. I'm very pleased with our solid financial performance in the first quarter here in the current environment. We achieved this result by building a strong business model to focus on the growing opportunities in the infrastructure market and continuing to be very disciplined in operating our business to focus on channel investment while keeping ample liquidity and low debt leverage ratio. Our performance also underpins our strong investment-grade credit profile, which provides us with significant financial flexibility to invest in our long-term growth initiatives so we can emerge from this uncertain time even stronger. Now moving on to our current outlook for the second quarter of fiscal 2021, we are forecasting revenue to be in the range of $720 million, plus or minus 5%. We anticipate our GAAP gross margin will be approximately 50.6%. And our non-GAAP gross margin will be approximately 63%. We project our GAAP operating expenses to be approximately $393 million. We anticipate our non-GAAP operating expenses to be approximately $300 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 that GAAP loss per diluted share in the range of $0.02 to $0.10 and non-GAAP income per diluted share in the range of $0.17 to $0.23. Operator, please open the line and announce Q&A instructions. Thank you.

Operator, Operator

Our first question comes from the line of Timothy Arcuri of UBS. Your question please.

Timothy Arcuri, Analyst

Thank you. In the release, you mentioned that there was some impact from trade. Jean, can you elaborate on that and discuss what the impact might be and if there could be a longer-term opportunity, especially with High Silicon facing restrictions on what they can produce? Will there be an opportunity for you in that context? Also, I would like to ask if you have an update on the $600 million incremental 5G opportunity. It sounds like it could be larger, maybe even as big as $1 billion. Can you provide some comments on that? Thank you.

Jean Hu, CFO

Yes, hi, Tim. Thank you. Regarding the trade impact, the effects from Huawei occurred in the past and have already affected our revenue last year. We actually no longer expect to have any Huawei revenue moving forward. At this time, based on our assessment, we do not anticipate any additional impacts from other customers. It's uncertain, but currently, we do not foresee further impacts. I'll let Matt address the 5G question.

Matthew Murphy, President and CEO

Sure, yes. And Tim just to clarify on the trade side, yes, as Jean mentioned we felt primarily the brunt of that impact about a year ago when the initial restrictions were put in place. And so we've worked through that issue. I think the other thing you may be asking is, what's the kind of overall picture if there's an impact to that particular customer in the 5G space and will other vendors take share, will that be a tailwind for Marvell? And the answer to that is in our current base case assumption we're assuming no share shifts. We have a strong position at the other four, but certainly to the extent that there are share movements within the 5G players, that would be to the benefit of other customers that we supply, and that would be a good thing for us. Related to that was your second part of the question, which was on the long-term opportunity. Yes, it's actually a little bit larger. It was $600 million when we standalone Marvell, and then when we did the acquisition of Avera, we added another $150 million of run rate business coming over. So, that really framed the whole opportunity at $750 million. We still feel very good about that as you heard in my prepared remarks, as well as even some of the comments from last quarter, we continue to have very strong design win momentum there and content increase at a number of the key players. We continue to be heavily engaged and we're still in the early stages of this, and we hope to update that figure at some point in the future, but just clearly based on what we've won already there is $750 million that's in the pipeline. Probably a little bit more if you look at the Nokia partnership that we announced last quarter. So that's very much on track. Thanks for the question by the way.

Timothy Arcuri, Analyst

Okay, understood, Matt. Thanks.

Operator, Operator

Thank you. Our next question comes from the line of Gary Mobley of Wells Fargo Securities. Your line is open.

Gary Mobley, Analyst

Hey, everyone. Good afternoon. Congrats on a good start to the fiscal year. Want to start out by asking about the strength that you've been seeing on the networking side, in particular, 5G and cloud as well. And so clearly we've seen some good demand trends there, and I'm just curious to hear your perspective on where we might sit with respect to some of those customers maybe adding some capacity ahead of demand or are they playing catch up and trying to get a sense of whether or not there might be some carry through on the strength in the second half of the year.

Matthew Murphy, President and CEO

Sure, this is Matt. I'm pleased to report that we've had a strong beginning in our first quarter. As I mentioned last quarter, we ended the year with significant momentum in our business. To provide some context, it's important to remember that the semiconductor industry experienced its third-largest downturn in 2019, largely due to trade tensions. As we moved into 2020, inventories were low across the customer base and supply chain, including our own at Marvell. The demand we observed at the end of last year before COVID-19 has persisted, and we believe the factors driving our business are quite sustainable. In the areas you highlighted, the 5G rollout is just beginning, and we anticipate robust demand from the China market this year. This is widely recognized, and we expect other regions to follow suit, benefiting our customers. On the cloud front, we see lasting demand trends. Despite discussions around potential market adjustments, from our perspective at Marvell, we have unique product cycles, including our Smart NICs and the new LiquidIO III Smart NIC, which are ramping up strongly. Our LiquidSecurity products and nearline storage are also expected to perform well this year. Additionally, we saw strong enterprise performance in Q1, particularly in enterprise data centers, which contributed positively. Overall, we have a favorable combination of factors, and we believe that 5G and Cloud will continue to drive our business for the rest of the year.

Gary Mobley, Analyst

Okay. And the follow-up question I want to ask about China and 5G. You mentioned some success and market share gains for some of your customers in that region, based on their tender activity and whatnot. Why don't you anticipate a more meaningful contribution for that specific region?

Matthew Murphy, President and CEO

Well, it's a little bit started and helped us even in the first quarter is that again, we'll see more in Q2 with really we see a very, very strong Q3, our Q3 for that particular business. I would say that's really when the volume starts. So we're still in the early stages of that build with some of that comprehended in our Q2, but a much stronger outlook for Q3 and beyond.

Gary Mobley, Analyst

Got you. I appreciate it, thanks.

Operator, Operator

Thank you. Our next question comes from the line of CJ Muse of Evercore. Your line is open.

CJ Muse, Analyst

Yes, good afternoon and thank you for taking the question. I guess another question on China. Could you walk through your infrastructure exposure there both direct and through Avera and potentially additional opportunities outside of Huawei? Thank you.

Matthew Murphy, President and CEO

Sure, I'll start with that and then ask Jean to add if she'd like. There are a couple of key points to note: we do have revenue from China. Before the entity list issues, Huawei was our top customer in China, and that's been clearly communicated. As I mentioned, we've managed to gain some market share with their biggest competitor in China, which will be beneficial as 5G ramp-up continues. Additionally, we provide support to several other OEMs, although we haven't specified those numbers. Historically, our quarterly shipments have shown numbers like 50% and 47%, but those figures are exaggerated, mainly reflecting contract manufacturing activities in the region. Overall, we have exposure in the right areas, both in 5G and with key enterprise OEMs, along with some distribution as well. Thus, our business is fairly diversified beyond the first customer I referenced.

CJ Muse, Analyst

Thank you.

Ashish Saran, Vice President of Investor Relations

Thanks, CJ. Can we have the next question, please?

Operator, Operator

Our next question comes from the line of Vivek Arya of Bank of America. Your line is open.

Vivek Arya, Analyst

Thanks for taking my question and congratulations on the improving growth and the execution. Matt, just a clarification, I think you started to mention something about networking continuing growth in Q3. I was wondering if you could elaborate on that. And then the question really is, have you seen any double ordering or excess inventory or any abnormal orders from any of your customers in cloud or data center or the China markets, because I think we conceptually get that certain parts of your customer base are strong, but just given all the macro issues, I think investors are naturally worried about anything abnormal that might be going on because of all the trade concerns that that are ongoing. So any color in terms of actual consumption of your products I think would be very helpful, thank you.

Matthew Murphy, President and CEO

Yes, let me begin with Q3 before addressing the over-ordering concern. For Q3, I want to clarify that we see an increase in overall company revenue from Q2 to Q3, primarily driven by our networking business, including 5G and Cloud, as well as the custom SSD opportunities I mentioned. We are actually seeing strength beyond Q2 in both our networking and storage businesses. Regarding the issue of double ordering, I want to emphasize that I've been in this industry long enough to recognize the various shocks and resulting supply-demand imbalances, and I'm closely monitoring this situation. The interesting aspect here is that at the end of 2019, the industry came out of a severe downturn with low customer inventory levels. While there may have been some over-ordering, I believe even without COVID-19, we would have experienced stronger demand than we indicated last quarter. We've dedicated significant time to analyzing customer ordering patterns and assessing our market shares. Ultimately, I feel confident in our current forecasts and our backlog and order position. Additionally, we've maintained our distribution inventory below target levels to ensure we align supply with demand. Overall, we do not see a double ordering issue. It's worth noting that we have not hesitated to point out abnormalities when they arise, as we did in the third quarter of 2018 during the onset of the trade war. We acknowledged then that conditions were unusual and should not be expected to continue. At this stage, we believe the supply-demand balance is fairly aligned, but we are remaining vigilant.

Vivek Arya, Analyst

Thank you.

Operator, Operator

Thank you. Our next question comes from Atif Malik of Citi. Your line is open.

Atif Malik, Analyst

Thank you for taking my question and good job on results and guidance. Jean, I have a question. You have talked about Avera plus Aquantia minus wireless adding about $100 million to fiscal 21 sales in the past, I don't expect you to break out these acquisitions anymore, but can you just talk about if you're running above this run rate currently with Aquantia and Avera.

Jean Hu, CFO

Yes, so we're very pleased with both acquisitions. I think last earnings call, we said that both Aquantia and Avera have been on track with our expectations, definitely through this year. We think that they are going to perform better than our expectations, just based on the backlog of the order pattern and everything. So overall, very, very pleased with the two acquisitions.

Matthew Murphy, President and CEO

Yes, and I'll just add to back that up. We had a very strong Q4 and Q1. And so the six months that we've owned both of them, we've gained a lot of confidence that not only are those the right acquisitions to do, but the level of top line contribution was going to be not only right where we thought, but probably given all the dynamics I mentioned, with strength in cloud and strength in 5G that is benefiting certainly Avera. And then on Aquantia, as I mentioned, we've had very good enterprise strength in some of these segments. So we do see both of those probably performing better than we had indicated back at the time of announcement for calendar '20.

Atif Malik, Analyst

Thanks.

Operator, Operator

Thank you. Our next question comes from Harlan Sur of JPMorgan. Please go ahead.

Harlan Sur, Analyst

Good afternoon and great job on the quarterly execution. On your DIY SSD controller with your lead customer, good to see the initial ramp this quarter. Given that this is a semi-custom chip, utilizing the vast majority of your I, I assume that you're the sole supplier of this SSD controller. So in other words, your customer may be using different NAND memory suppliers, but they will be using your controller solution irrespective, is my assumption correct, because I'm just trying to size opportunity because your customer's platforms here has a historical cadence of ramping anywhere from 5 million to 7 million units in the first year to around 16 million to 20 million units by year three. So, pretty substantial opportunity if you guys are the sole supplier.

Matthew Murphy, President and CEO

Yes.

Jean Hu, CFO

Harlan, you are right. Yes.

Matthew Murphy, President and CEO

I’ll take this, Jean, and then you can add. Yes, you’re correct. The way to think about it is that all these DIY opportunities are intentionally designed to be proprietary and sole source. Typically, they include substantial and rich intellectual property from Marvell. This allows us to command better average selling prices and add additional functionality beyond what is usually expected from a standard SSD controller. Thus, it’s a strong combination in these DIY projects we are involved in, and we have close collaboration with the OEMs to create something truly special and unique for their needs. As a result, they can achieve significant performance benefits across a range of applications in flash-based storage. So yes, it is proprietary, sole-source, and we are on track to ramp up.

Harlan Sur, Analyst

Great job in the execution.

Jean Hu, CFO

Yes, I'll just add, right. Matt said earlier, we already started production in Q2, which is much earlier than we expected. And then Q3 certainly that's the major ramp. It's going to happen.

Harlan Sur, Analyst

Great, thanks for the insights.

Matthew Murphy, President and CEO

Thanks, Harlan.

Operator, Operator

Thank you. Our next question comes from Ross Seymore of Deutsche Bank. Your line is open.

Ross Seymore, Analyst

Hi guys, thanks for letting me ask a question. Matt, I want to go back to the cloud theme that you talked about in your script. And kind of clarification on a question, that greater than 10% number that you talked about, which is up a lot year-over-year, just roughly how is that split between the two segments, storage and networking and more importantly going forward, how do you expect that to grow? Customers can be very, very lumpy, especially on what I would assume would be your networking side of the business. It could be a little bit more steady on the storage side, but give us an idea of how we should think about monitoring the growth and kind of the lumpiness of that going forward.

Matthew Murphy, President and CEO

Thank you for the question, Ross. I'm glad you raised it. We have indeed dedicated time to this topic. Over the past year, we've been highly focused, particularly from an investor standpoint, on the demand for information and opportunities surrounding 5G. As I mentioned, we are starting to ship and it's gratifying to see our results aligning with our expectations. Parallel to this, due to various portfolio moves we made last year, along with earlier investments in Marvell, we've concentrated on cloud and hyperscale, which we view as significant opportunities. We felt it was the right time to highlight this now that our business in both networking and storage is ramping up. This growth is substantial, excluding ARM server. Even without ARM server, the potential market for our networking and storage products is now comparable to that of 5G. While cloud spending may be unpredictable, similar to the carrier market, our broad product offering allows us to mitigate some of that unpredictability. Notably, both segments are becoming important for Marvell, and we anticipate growth in both this year and in the future. It's a close competition between them regarding which will grow larger over the coming years. This is why we wanted to focus on it; we believe it represents a major opportunity. A year ago, when our cloud business was still emerging, we were cautious, but it brings to mind when I was at Maxim and we decided to highlight our growing automotive business once it surpassed 10%. That growth took off from there. I hope these insights help you understand our cloud business better.

Ashish Saran, Vice President of Investor Relations

Thanks, Ross. Can we have the next question please?

Operator, Operator

Yes, sir. Our next question comes from the line of Blayne Curtis of Barclays. Please go ahead.

Blayne Curtis, Analyst

Hey guys, thanks for taking my question. I was just curious, Matt, you provided a wider range, and kind of curious how you're thinking about that. Clearly, the factory shutdown did impact you in storage; it seems like most factories are kind of back online. So it seems like some of the headwinds or tailwinds, I'm kind of curious what you're thinking about. On the other side of the coin there as you look out into Q2 as well. At the end of the year.

Matthew Murphy, President and CEO

I'll share both perspectives. On one hand, there's the viewpoint you've mentioned, which aligns with what we're seeing today—factory operations are resuming and countries are reopening, leading to some signs of stabilization. However, if we take a step back, the overall environment remains highly uncertain, and the speed at which challenges have emerged has surprised many. I wouldn't overanalyze the current situation, especially since we widened our range last quarter. Out of caution, we won't tighten our approach at this point; we don't perceive anything significantly different from your initial observations. We believe our demand drivers remain robust, with strong orders and a solid backlog. This gives us confidence in our business, but the overarching uncertainty is a significant factor. Our current range is also in line with many other semiconductor companies, and I think I'll maintain a slightly wider range until we see more stability in the global environment.

Blayne Curtis, Analyst

Thanks for that.

Operator, Operator

Thank you. Our next question comes from John Pitzer of Credit Suisse. Please go ahead.

John Pitzer, Analyst

Congratulations on the results. Matt, to rephrase Blayne's question, you clearly have a different go-to-market model compared to many other semiconductor companies—it's more direct and less dependent on distribution, particularly in relation to some of the broader players. You have fewer customers, but as I review the guidance for July, it appears that many of your peers have significantly discounted their bookings and backlog figures when they provided guidance for June and July. I'm trying to assess the level of conservatism here. Could you provide some insight into how you developed this guidance in light of the current macro uncertainty? For instance, some companies have indicated they have 100% backlog coverage, whereas they typically estimate coverage at around 75% to 80%.

Matthew Murphy, President and CEO

Yes, I’m happy to address that. I have noticed those comments, and they relate to what you mentioned. Specifically, the analog-mixed-signal companies that serve a wider range of customers, particularly in consumer and industrial sectors, seem to be experiencing significant challenges, especially in automotive markets. Our market mix is clearly benefiting us at this stage in our strategy. Over the past few years, we have focused on this approach, which is increasingly relevant in the current environment. We are quite different from some of the other companies that are more broadly based, and I can understand their cautious outlook. However, our situation is distinct. Due to shifts in our sales mix, particularly with reduced consumer sales, we are seeing solid lead times and strong terms and conditions. Our backlog coverage has improved, particularly with the integration of Avera and the reduction of consumer-oriented products like Aquantia and Wi-Fi. This transition has yielded a much stronger backlog position. Additionally, we are currently experiencing higher delinquency rates than usual, indicating that we have backlog scheduled for Q3 that customers prefer to be shipped in Q2, which is an increase from our typical levels. These factors contribute to our confidence in our guidance, along with a starting backlog position that is higher than in most previous quarters.

John Pitzer, Analyst

Perfect. Great color. Thanks.

Operator, Operator

Thank you. Our next question comes from Christopher Rolland of Susquehanna. Your line is open.

Christopher Rolland, Analyst

Thanks for the question. Matt, in your prepared comments, you spoke about Jensen and the DPU, and you guys were really pioneers in smart NIC technology with LiquidIO and Cavium there, and you called that out specifically as a driver this quarter. I know Cavium used to have one key partner there that eventually went internal with their own development, but perhaps you can talk about this renewed interest, how broad is it, what kind of levels are we at, are we close to old levels, and is it going to be sustainable in your opinion in this time?

Matthew Murphy, President and CEO

Thank you, Chris, for your question. I think our colleagues at NVIDIA did an excellent job explaining the DPU. Their explanation really clarifies what these products are and addresses some confusion in the market regarding SmartNICs, which are often seen as a commodity. This explanation effectively highlights a crucial intellectual property area that Cavium pioneered. Regarding our SmartNIC offerings, I believe it ties into the question Ross asked. While we've focused on 5G recently, we've quietly continued developing our roadmaps, which are progressing well and are quite sustainable. We're actively collaborating with multiple OEMs, and I believe we are in a strong position compared to other semiconductor companies to customize and optimize solutions based on the SmartNIC architecture. We have everything in place: the latest OCTEON core that is highly programmable, Ethernet network connectivity, security features, and access to the most advanced process technologies. Additionally, we possess ASIC capabilities, which some large hyperscalers are now opting for, choosing to bypass a LiquidIO type of solution in favor of highly specialized solutions. We can offer this through our co-partner model in baseband, where we provide significant intellectual property while allowing customers to make contributions as well. This collaborative approach leads to a tailored solution for the customer, enabling rapid development without requiring them to build a large design team and wait for years. I see a considerable opportunity here, Chris, with both the current developments in our latest generation products and our roadmap for customization and growth in this area. Thank you for your question.

Christopher Rolland, Analyst

Thanks, Matt. Congrats on the quarter.

Matthew Murphy, President and CEO

Yes, thanks. See you.

Operator, Operator

Thank you. Your next question comes from Joe Moore of Morgan Stanley. Your question please.

Joe Moore, Analyst

Great, thank you. You mentioned Thunder and the excitement surrounding it. Can you elaborate on the key workloads you are targeting? At one point, there was a perception that this could replace Intel across a wide range of applications, rather than just acting as an enhancement for specific workloads. How are you currently framing this over the next three to five years?

Matthew Murphy, President and CEO

Sure, Joe. Yes, our Thunder investment has maintained a strong focus. If we look back to before we acquired Cavium, there was a belief that we could tap into a large market and serve many customers across various applications, directly competing with more general-purpose x86 products. However, our strategy has shifted to honing in on a select group of key customers in the cloud sector. For instance, in our recent announcement with Microsoft, we are the first property featured in Azure storage. We designed the product specifically for that use case while also allowing for a high level of customization for hyperscalers since they have precise needs. We do see potential for expanding into more compute-oriented applications and workloads, but that's something for the future. Overall, I would summarize the Thunder story as a transition from a broad-based approach aimed at competing with x86 across various applications to a more concentrated effort focused on hyperscale opportunities tailored to specific customer needs.

Joe Moore, Analyst

Great, thank you.

Matthew Murphy, President and CEO

Yes, thanks.

Operator, Operator

Thank you. Your next question comes from the line of Tore Svanberg of Stifel. Your question please.

Tore Svanberg, Analyst

Yes, thank you. Congratulations on the results and the new branding. I really liked the logo. Not to sort of steal your thunder from your Analyst Day in October, but you talked about in the automotive space, you kind of see the zonal architecture, that's very similar to the sort of enterprise networking world. I was just wondering how that's going to play out. Will you be working with networking companies here or will you be working with the hyperscale guys or the auto companies? Just trying to get a head start on how that whole world is going to look like. Thanks.

Matthew Murphy, President and CEO

Yes, that's a great question. I believe the focus is primarily on our automotive customers and the OEMs. If we look back to the mid-2000s to 2010, automotive OEMs began to take greater control over their semiconductor strategies, particularly around areas such as infotainment, electric vehicles, and advanced driver-assistance systems. This led to the formation of substantial semiconductor teams within these large automotive companies. Initially, their focus was on purchasing and quality, but over time they have added design capabilities and resources, significantly enhancing their expertise. They are committed to managing their future vehicle architectures. We have a significant advantage due to our Ethernet solutions, which are already deployed in 16 different OEMs for in-car networking. This has established a strong foundation for us to present other types of IP as well, and we are beginning to gain traction in these areas. This is a long-term opportunity that has the potential to be very substantial. I would compare it to the shift we experienced in automotive during the mid-2000s with the infotainment revolution, which benefited many semiconductor companies and led to the emergence of new automotive suppliers. We believe that this evolving data-centric approach in automotive will be just as impactful and aligns well with our strengths. We are eager to provide more detailed insights at our Investor Day. While this is indeed a long-term opportunity, we have made enough progress that it is important to communicate with investors and analysts about what we are doing and the potential future opportunities, particularly for our long-term investors who are curious about the next steps following our advancements in 5G and cloud. We believe there is a compelling narrative about what lies beyond these current cycles that could drive the company for years to come.

Tore Svanberg, Analyst

Thank you for that.

Operator, Operator

Thank you. Our next question comes from Srini Pajjuri of SMBC. Your line is open.

Srini Pajjuri, Analyst

Thank you. Thanks for squeezing me in. Matt, I just want to go back to the 5G topic, you alluded to Q3 being potentially up. I'm just curious, I mean are you getting better visibility as some of these regions roll out 5G. Is that what's giving you confidence? It looks like it's mostly coming from China, your Q3 commentary. Could you also talk about what's going on in some of the other regions like the US or Japan and Korea and also touch upon India because that's been a big market for Samsung historically. Thank you.

Matthew Murphy, President and CEO

Thank you for the question. There are a few points to mention. First, with the upcoming ramp and the lead times linked to these products, we currently have a solid backlog and strong bookings for Q4 and Q1, which certainly boost our confidence that Q2 and Q3 will be promising. The primary driver we’re observing, based on insights from both the external market and our customers, is China. However, OEMs are also preparing for growth in other markets. Japan is expected to start rolling out later this year, despite earlier concerns about delays due to the Olympics and COVID-19. It appears that those challenges may not be as significant as anticipated, and while we’re uncertain about the timeline, Japan is indicating that rollouts will commence soon. In the US, carriers are expected to ramp up their deployments in the second half of the year once they can resume full sales operations. Additionally, both the US and India have crucial spectrum auctions that need to take place to effectively advance 5G. India has a strong 4G presence with our leading customer, but the growth will be driven by 5G. While there may be slight adjustments in timing, we are confident that it’s a matter of when, not if. Overall, while some regions may have delays, the opportunity in China more than compensates for that. We foresee several countries moving forward with rollouts; it will take time, but we believe this will be a significant driver for us.

Operator, Operator

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.