Earnings Call Transcript - MRVL Q4 2021

Ashish Saran, Vice President, Investor Relations

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

Matthew Murphy, President and CEO

Thanks, Ashish, and good afternoon, everyone. Let me start with a recap of Marvell's highlights for fiscal year 2021. Our GAAP revenue was $2.97 billion, GAAP gross margin was 50.1% and GAAP loss per diluted share was $0.41. On a non-GAAP basis, our gross margin was 63.3% and non-GAAP earnings per diluted share was $0.92. Our consolidated revenue grew 10% year-on-year, led by our networking business, which grew 22% year-on-year. Revenue growth, combined with strong operating leverage from our business model, enabled non-GAAP EPS to grow 39% year-on-year. I am very pleased with our outstanding performance during what has been an otherwise challenging year. Our growth initiatives in 5G, cloud and automotive drove results in these key end markets, which collectively more than doubled in revenue from the prior year to represent more than 25% of fiscal year 2021 revenue. We are really pleased with the performance of Avera and Aquantia, who both delivered revenue above our expectations. We successfully completed the integration of both businesses and overachieved on our synergy targets. We also made great strides with our technology platform, announcing the jump to 5-nanometer and along with it, the industry's first 112 gig SerDes for cloud data center infrastructure. This move was a direct result of our multiyear strategic shift to focus on data infrastructure and brings our process node cadence to the cutting edge. The power of our 5-nanometer platform and the benefits it provides for customers is evident in our opportunity funnel, which has grown significantly since we adopted this new node. The activity level on 5-nanometer continues to accelerate, and we have already secured multiple leading edge design wins, each meaningful from a revenue perspective. Our advanced technology is also a key enabler of our custom ASIC offering, which has continued to gain momentum, particularly in cloud. Following on from the design win we announced last quarter, activity levels continue to increase, and we are now involved in advanced discussions with multiple hyperscale data center customers. Our ability to offer customization, coupled with Marvell's leading standard product IP, has proven to be highly compelling to cloud customers. Given its strategic importance, let me provide some more detail on the evolution of the custom ASIC model, bringing to light some of the key trends that make the opportunity so compelling. Traditionally, the primary customer base for custom ASICs has been large system OEMs whose core business is developing hardware to sell as a product. These customers design their own system hardware and build unique technology into the hardware itself through custom chip development to differentiate their products. We do much of the chip design directly and work with a semiconductor partner to license IP and manage the physical layout in front and back-end manufacturing. Today, in addition to these system customers, hyperscale data center operators are also designing their own silicon. And I'm often asked if this trend is good or bad for Marvell. We believe this trend is very good for us as we believe we are ideally positioned to help them solve their unique challenges. Their core business is the cloud service they provide, not the hardware itself. They are building custom hardware because they need incredibly efficient and optimized infrastructure. As a result, they are looking for a semiconductor collaboration that goes well beyond the traditional custom ASIC model and allows them to leverage IP that the silicon partner already has available. The design is typically done in true partnership, with the customer focusing on the portions proprietary to their use cases and Marvell bringing our own unique compute, security, networking and storage IP to the table. Therefore, the end solution is a semi-custom design, which represents the best of both worlds and provides a faster time to market. Because these engagements use our IP, we believe this leads to a more strategic and valuable relationship with these key customers. In addition, compute is becoming increasingly important in this market as hyperscalers are looking to move beyond standard x86 servers and integrate custom ARM-based compute solutions into their architecture. As this trend accelerates, Marvell should be an even more important partner. Our long history in successfully developing and delivering multiple generations of highly complex, multi-core ARM-based processors, including server processors, is unique in the industry. Marvell is emerging as an ideal partner for these customers, and our recent cloud engagements involve deep engineering collaboration on all key aspects of design, including chip architecture, memory density, high-speed SerDes integration, advanced packaging, power optimization and flexible processor implementation. Now let me move on to our quarterly results and expectations. Revenue for the fourth quarter of fiscal 2021 was $798 million, $13 million above the midpoint of guidance, growing 6% sequentially and 11% year-over-year. Adjusted for the divestiture of Wi-Fi, year-on-year revenue growth was even greater at 15%. Our GAAP income per diluted share was $0.02. Our non-GAAP earnings per diluted share was $0.29, growing 16% sequentially and 71% year-over-year. As expected, supply constraints limited our ability to fully meet the growing demand for our networking products. We also saw strong demand for our storage products, which drove the upside in revenue relative to the midpoint of our guidance. Although these industry-wide supply shortages are now well known, I expect that they may still be a topic of particular interest during our Q&A session. So in anticipation of your questions, let me provide as much detail as I can for you now. As you are aware, despite or perhaps more accurately due to the impact from COVID-19, demand has grown significantly across a range of semiconductor end markets as data infrastructure has become even more critical to the world's economy. However, the supply chain was not completely prepared for the surge in demand and needs time to increase capacity. While we are confident that the industry will respond to these challenges, we anticipate a supply gap for at least through fiscal 2022. Lead times have extended across the board. We are seeing shortages for multilayer complex substrates, IC packaging capacity and fab constraints in certain technology nodes important for our products. From our vantage point, the increase in demand we are experiencing for our 5G, cloud and automotive products appears closely tied to the long-term secular growth drivers present in these end markets. This, combined with the sole source nature of most of our design wins, would suggest that most of the demand we are not able to satisfy in the near-term is not perishable. Marvell is collaborating even more closely with our customers to manage demand forecast over an extended time horizon, and our operations team is continuing to drive our suppliers to match supply appropriately to mitigate impacts and minimize disruptions. In addition, we are taking extraordinary measures, including securing capacity in advance over much longer than typical time periods. And we are working with customers to get their assistance in helping absorb some of the incremental costs associated with prioritizing their continuity of supply. Let's now discuss our 2 businesses in more detail. First, in our networking business, revenue during the fourth quarter was $439 million, consistent with our outlook of being flattish to the prior quarter. Year-on-year growth remained robust, with revenue growing 24% compared to the fourth quarter fiscal 2020 results, adjusted for the divestiture of Wi-Fi. The year-on-year growth in networking was led by our 5G and cloud businesses. In addition, revenue from our Ethernet switch and PHY portfolio grew significantly as new design wins started to ramp. Let me provide some color on sequential revenue movements in networking. In 5G, we delivered our sixth straight quarter of sequential revenue growth. This growth was driven by standard and semi-custom product shipments to Samsung and Nokia, partially offset by a decline in 5G ASICs as deployments in China take a pause. Looking past the typical lumpy nature of individual regional rollouts, 5G infrastructure deployments are expected to continue to strengthen worldwide. As an example, the U.S. recently concluded the first phase of the C-band spectrum auction. This was the highest grossing spectrum auction ever held in the U.S. with gross proceeds exceeding $80 billion. A record level of interest is a clear indicator of the potential revenue opportunities carriers expect from 5G technology. Other regions around the world are also opening up spectrum for 5G services and wireless industry experts expect deployments to gather strength later this year. We launched our open RAN platform in December 2020 and are gaining traction in the marketplace. For example, we recently announced that we are joining the Evenstar program, and we'll be working with Facebook connectivity to provide a 5G open RAN distributed unit design. This design will be based on our leading OCTEON Fusion baseband processors and ARM-based OCTEON multi-core DPUs. Evenstar DU design will enable a new generation of RAN suppliers to deliver high-performance, cost-optimized, interoperable DU products to the rapidly expanding open RAN ecosystem. We recently announced that Fujitsu will be using our industry-leading OCTEON Fusion baseband processors in its new 5G base stations and also plan to engage with us on open RAN distributed unit products. They are the second 5G regional customer I referenced last quarter. In cloud networking, we benefited from strong customer demand in the fourth quarter for our smartNIC DPUs, while the cloud ASIC declined as expected. Looking forward, we expect to continue benefiting from the secular growth in cloud CapEx on semiconductor solutions for data processing. Turning to our automotive business. Quarterly revenues crossed into the double-digit million run rate, driven by the ramp of multiple Ethernet design wins in model year 2021 vehicles. Engagements are expanding at additional large OEMs and bookings have continued to strengthen. We believe that fiscal 2022 is shaping up to be a breakout year for this business. The fourth quarter was robust for our Ethernet switch and PHY business with product ramps at multiple customers. The design wins we won over the last couple of years are now starting to ramp, and we expect these will contribute higher levels of revenue as we progress into fiscal 2022. Let me now discuss the outlook for the first quarter of fiscal 2022 for our networking business. Reflecting strong demand, despite continued supply constraints, we project revenues to grow close to 10% on a sequential basis and continued strong year-on-year growth exceeding 20%. We expect this growth to be broad-based, led by our cloud DPUs, standard and semi-custom 5G solutions, automotive products and Ethernet networking solutions, partially offset by softness in 5G ASICs. Turning now to our storage business. Storage revenue for the fourth quarter was better than expected across all product lines, growing 18% sequentially to $326 million. This was a very strong quarter for our storage business with 10% year-on-year growth, driven by our custom SSD controller and cloud HDD products. I'm very pleased with the tremendous progress we have made over the last few years in enabling high-capacity nearline HDDs, which are critical for cloud customers. We have extended our long-standing relationship with Toshiba, and we recently announced that our controllers and preamps are powering their new 18-terabyte cloud scale HDDs. Toshiba's 18-terabyte products deliver industry-leading data storage capacity by utilizing MAMR technology and advanced signal processing developed in close partnership with Marvell. The close coupling of Marvell's rechannel and preamplifier IP enables leading edge features and HDD capacity to extend Toshiba's position in the cloud data center market. Let me now provide some additional color on storage revenue on a sequential basis. In the fourth quarter, our custom SSD controller revenue benefited from the ongoing ramp at a Tier 1 OEM as well as the initial ramp at a major cloud customer. In HDDs, demand was strong across multiple end markets, including enterprise, smart video, retail and client, and our business benefited from aggregate HDD unit TAM growth of about 10% sequentially. Our revenue from cloud HDDs also grew on strong customer demand for our products. In our fiber channel business, demand recovered significantly from the COVID-19 impacts earlier in the year. Our operations team was able to increase supply to help our OEMs restock and deliver more product to their customers. Looking to the first quarter of fiscal 2022, we project a seasonal decline in storage controller demand. In addition, after last quarter's inventory replenishment by customers, we expect a more than seasonal decline in fiber channel demand. As a result, after a very strong fourth quarter, we expect our storage revenue to decline in the low teens sequentially on a percentage basis. However, we expect a continued year-on-year growth of over 10% in the first quarter. In closing, needless to say, last year was a very challenging period as we adjusted to operating in the presence of a pandemic. It was almost exactly a year ago today when shelter-in-place policies were coming into effect and we're in the midst of taking action to protect our 5,000-plus employees and an extended support team of contractors and suppliers. None of us really knew how the year would evolve or how the pandemic would impact our productivity or the demand for our products and technology. I can now look back and applaud a strong performance by the Marvell team in the face of adversity: incredible program execution, record design win achievement, stronger customer relationships, double-digit revenue growth and significant margin expansion. I'm very proud of our employees, and I would like to thank them for their collective efforts in positioning Marvell to emerge even stronger from the pandemic. We ended fiscal 2021 on a strong note, and we are kicking off fiscal 2022 with solid growth expectations, guiding revenue at the midpoint for the first quarter to grow 15% year-on-year despite ongoing supply challenges. We expect strong year-on-year growth from both our networking and storage businesses in the first quarter. Non-GAAP EPS at the midpoint for the first quarter is projected to grow by 50% year-on-year, demonstrating the operating leverage in our business model. In fiscal 2022, we expect revenue growth from custom SSD controllers, preamplifiers, automotive Ethernet and enterprise networking, in addition to our expanding 5G and cloud businesses, which is still early in their growth cycles. Our team is also focused on closing key design wins from the large funnel of 5-nanometer and cloud engagements I discussed earlier. We are getting closer to completing the Inphi transaction and as part of integration planning, we recently concluded a series of joint strategic planning sessions. The conclusion of these meetings, our teams walked away more excited than ever about the depth of technology and the level of talent across the combined company. The addition of Inphi broadens the opportunity set for the combined company, and this will be a key factor in setting future investment priorities. As a reminder, the closing of the Inphi transaction remains subject to obtaining shareholder and regulatory approvals and satisfying other closing conditions. 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 fourth quarter and then provide our current outlook for the first quarter of fiscal 2022. Revenue in the fourth quarter was $798 million, $13 million above the midpoint of our guidance. Networking represented 55% of our revenue, and storage contributing 41%. Revenue from other accounted for 4% of our revenue. GAAP gross margin was 52.8%. Non-GAAP gross margin was 63.9% of revenue, both consistent with our guidance. GAAP operating expenses were $423 million and include the cost of share-based compensation expenses, amortization of acquired intangible assets, legal segments and acquisition and divestiture-related costs. Non-GAAP operating expense was $283 million, just above midpoint due to slightly higher project costs. GAAP operating loss was $2 million. Non-GAAP operating profit was $226 million or 28.4% of revenue. For the fourth quarter, GAAP income per diluted share was $0.02. Non-GAAP income per diluted share was $0.29. Now turning to our balance sheet. During the quarter, cash flow from operations was $158 million. We returned $40 million to shareholders through dividend payment. During the quarter, we paid down $150 million of our term loan and exit the quarter with $748 million in cash and cash equivalents and total debt outstanding of $1.2 billion. Our net debt-to-EBITDA ratio was 0.5x on a trailing 12-month basis. We have temporarily suspended our share repurchase program due to the pending acquisition of Inphi. For the full fiscal year of 2021, we returned a total of $186 million to shareholders through $161 million in dividends and $25 million in share repurchases. In addition, we paid down $250 million of our term loan. During fiscal 2021, we also generated strong cash flow from operations of $817 million. Turning to our guidance. For the first quarter of fiscal 2022, we are forecasting revenue to be in the range of $800 million, plus or minus 5%. We expect our GAAP gross margin will be approximately 52.5%. We project our non-GAAP gross margin will be approximately 63.5%. We project our GAAP operating expense to be approximately $391 million. We anticipate our non-GAAP operating expenses to be approximately $300 million. We expect our non-GAAP tax rate to be 5%. We expect our basic weighted average share outstanding will be 677 million, and our diluted weighted average share outstanding will be 619 million. As a result, we anticipate GAAP earnings per share in the range of a loss of $0.05 per share on the low end to an income of $0.05 per diluted share on the high end. We expect non-GAAP income per diluted share in the range of $0.23 to $0.31. Finally, 2 housekeeping points. As a reminder, our GAAP EPS is calculated using basic weighted average shares outstanding when there's GAAP net loss, and they're calculated using diluted weighted average shares outstanding when there is GAAP net income. Non-GAAP EPS is calculated using diluted weighted average shares outstanding. In terms of expenses, you should expect us to continue to invest in our long-term growth with disciplined resource allocation. We expect our operating expense growth to be well below our revenue growth. Our OpEx increase year-over-year will be primarily due to employee merit increase and the normal inflation on items such as EDA. Our outlook for operating expense in the first quarter reflects the seasonal increase in payroll taxes. This seasonal effect is expected to dissipate in the second quarter, offset by a partial quarter of merit increase. The full impact from merit increase will be present in the third quarter. By the time we exit the fiscal year, we estimate our non-GAAP operating expense in the fourth quarter will increase in the range of 3% to 4% on a year-over-year basis.

Harlan Sur, Analyst

Appreciate the commentary on supply constraints. And I'm not asking the team to endorse higher revenues in the second half of the year, but I would expect China 5G spend to come back in the second half. 5G outside of China remains strong. Sony is going to double their PS5 shipments this year, and then you have continued momentum in cloud. But if the backlog supported higher revenues in the second half, let's say, 10% higher versus the $800 million in April, is the team confident that you can support quarter-on-quarter revenue growth through the second half? Or do you think that will be a challenge just given the tight wafer substrate and assembly and test capacity constraints?

Matthew Murphy, President and CEO

Thank you, Harlan. I believe you've pointed out several key factors contributing to our growth. To add a few remarks, we have been preparing for growth in fiscal year '22, and I think we're off to a solid start. Our Q1 guidance indicates a 15% increase year-over-year compared to last year. Several strong growth drivers are at play, including 5G, which is showing positive signs, particularly for the second half. Our cloud business is also expanding, along with new product introductions, and our automotive segment is also starting strong this year, which we anticipate will continue. We have consistently driven growth throughout fiscal year '21, managing to grow each quarter. In Q4, we exceeded our guidance and met some of the demand, which was a positive outcome. Overall, I feel we've been performing well amidst a new surge, and our focus now is on collaborating with our supply chain partners to capitalize on this growth beyond what we've already achieved. In short, I'm very confident that we can boost revenues in the second half due to the capacity we've secured through hard work with our supply chain partners. We're also exploring additional opportunities for growth. Looking ahead to fiscal year '23, we're proactively engaging with our supply chain to prepare for even stronger trends in 5G, cloud, and automotive as we ramp up new products and welcome new customers. We're excited about what lies ahead and are committed to working diligently across all areas.

Vivek Arya, Analyst

Matt, when I look back at this earnings season, most semiconductor companies reported and guided to trends well ahead of expectation, right, so much so that investors have often complained about overshipments or pull-in of orders. But when I compare your Q4 and Q1 against expectations, it's been more measured. I'm curious, how much of this would you attribute to a different end market mix, right? How much of this is due to supply constraints? And then more importantly, what changes or gets better the rest of the year so you can start to accelerate your sales growth?

Matthew Murphy, President and CEO

Sure. I think it's a couple of things. First, it relates to the end markets we're in. We're one of the few pure-play infrastructure companies, so we don't experience highly volatile consumer demand. We don't have demand that fluctuates significantly; instead, our business model is designed to combine various end applications to drive consistent and ideally predictable growth. While we may not have explosive results in some quarters like other companies, we focus on steady progress and continue to execute and grow our company quarter-over-quarter and year-over-year. There are certainly opportunities to achieve some growth, and we're pursuing those. In Q4, we were pleased with our revenue performance and feel good about our guidance for the first quarter as well. We've been one of the faster-growing companies recently, and our end-market dynamics support this. Our goal is to deliver more repeatable and sustainable long-term growth with less variation from quarter to quarter, which has been our strategy.

Timothy Arcuri, Analyst

Matt, I just had a question on the storage business. It was well above seasonal Q4 and a little below seasonal for fiscal Q1. I guess I'm a little surprised that it will be below seasonal for fiscal Q1 while all your customers are talking about controllers being on allocation. So I guess I wanted to just talk about that. And then I was wondering if maybe you can talk about what sort of you see as normal season in fiscal Q2. I think, typically, it's up like mid-singles. Do you also have flatter tail happening as well? So can you just sort of talk about those 2 factors?

Matthew Murphy, President and CEO

Sure. Maybe, Jean, I'll have you answer the first part on storage. And then, Tim, I'll have you repeat your question; you broke up a little bit on the second part of it. But Jean, why don't you go ahead and give us some comments around storage?

Jean Hu, CFO

Yes. On storage side, in Q4, we really had a really strong quarter, and the performance really is a combination of our own product cycle and also strong end-market demand across the board. So in HDD and the fiber channel, certainly, we see the demand in nearline, which our business performed really well, and also just broad demand for on the client side, too. On fiber channel, we do see the demand bouncing back, and also the customers are restocking because of the supply challenge in the last year has caused a lot of problems in fiber channel. So fiber channel is a little bit lumpy. And then if you look at the Q1, frankly, the storage controller business, when you look at HDD and SSD, they are actually quite seasonal. It's declining quarter-over-quarter, very consistent with the broad market. The fiber channel is where it becomes really lumpy. The Q4 performance is pretty good and strong, but the customers also are restocking. So we do see Q1 fiber channel, again, is declining much more than seasonal. But if you look at the overall, in the longer term, the fiber channel business actually is quite stable. So the quarter-over-quarter lumpiness is definitely exaggerated last year by the supply chain constraints. I think you need to repeat your second question because we did not hear it clearly.

Timothy Arcuri, Analyst

Okay. You can hear me now. So I guess the question was just given all that movement, how you think about what normal seasonal is for fiscal Q2, like it's typically up sort of mid-singles. Is that the right way to think about it into fiscal Q2?

Matthew Murphy, President and CEO

Yes. First of all, I think we have a new normal in storage that is unclear, but there is definitely a seasonal effect. However, we are not providing guidance that far ahead at this moment. What I want to emphasize is that the fiber channel has shown some irregularity, which started with the shelter-in-place orders early in 2020. It has been a more unpredictable business than usual, but we saw a strong performance in Q4, although we have guidance indicating a downturn for Q1. Overall, storage for Marvell is up 10% year-over-year in Q1 as we expect, despite some inconsistencies. This segment tends to be more volatile than our other businesses, but we are still quite pleased with its growth trajectory. We anticipate that the fiber channel will stabilize over the course of this year, barring any unexpected supply chain issues.

John Pitzer, Analyst

Matt, glad to see the 10% sequential growth expected in networking in the April quarter. But I'm curious, when you look back at the January quarter, I'm a little surprised that networking was down sequential. I mean, it was essentially flat in line with your guide, but just given the level of delinquencies, did the supply problem get worse? Or is this maybe a function that when you look at the networking business, there's portions that are just tied to campus and enterprise? And then there's sort of the growthy parts of your business. I guess, that the growthy parts grow sequentially and there was an enterprise overhang. As you look out throughout the balance of the year, how do you think about just a reopening trade around enterprise and the impact it's going to have on your networking business?

Matthew Murphy, President and CEO

Yes. No, I think as we've said, the supply impacts we've seen have been more pronounced in the networking business. So that has limited our ability to deliver upside, like we want to. Even then, you got to remember, too, our the compare is a little bit tough because we did have a very strong Q3. I mean, you've got to now go back to sort of what are you comparing it to. If you remember, Q3 was up very significantly from our Q2. And then year-over-year, it was up a ton. So the flat compare, while we wish we could have done a little better, it's still, on an annual basis, still growing really well. I wouldn't really break out that there was sort of weakness in one or the other. I think we're coming off a big Q3 and then also the 5G was up and enterprise has continued to be up, and we've actually seen, from a year ago, everything growing. So I think it's more of a sequential issue. And certainly, we're pleased with the Q1, 10% up, and that business continues to do very well for us.

John Pitzer, Analyst

And then, Matt, just on the cost side, how much are you absorbing versus being able to pass on? Is it material to gross margins? And is that something that sticks around for most of this fiscal year? Or is that something that could reverse itself in the second half?

Jean Hu, CFO

John, this is Jean. Yes, I'll take this question. So definitely, as Matt mentioned earlier, we are working with the customers to share the increased cost. And the way we're looking at it is our first priority is to really meet customer demand, especially with the increased demand for our product. As far as the gross margin, we are very pleased with our Q4 performance and the Q1 guide. And the Q1 guide, if you look at it, it's primarily driven by mix and we'll continue to improve our gross margin to our target level. We discussed during our Investor Day, which is 65%. I think the pace of that improvement is probably different in today's supply-constrained environment versus a normal environment because we do want to make sure we meet customers' demand, increase the demand on this current supply-constraint situation. So the pace will be a little bit different, not as we expected during our last Investor Day.

Blayne Curtis, Analyst

Just I just want to ask, I know you answered a lot on the storage and said it would be short all year. You did miss some shipments in January. And I thought at the time you were thinking of catching up in April. So as you look to the guidance of 10% for networking, one, I just wanted to know, you're catching up on some of those January shipments within that 10%. And then I think I heard you say basically everything but 5G ASICs would be up. I was wondering if you could give us any more color as to what the primary drivers of that growth is.

Matthew Murphy, President and CEO

Yes, you're correct about the second part. Aside from 5G ASICs, which were primarily linked to strong deployments in China during 2020, we are currently experiencing a period of digestion. While other areas are showing growth, it's not exactly a straightforward catch-up in the first quarter. We are witnessing an increase in demand, and revenue is rising accordingly. This suggests that the growth is demand-driven rather than simply a recovery leading to flat demand. Overall, we have a strong demand situation for that specific sector, both compared to last year and sequentially.

Jean Hu, CFO

And overall, to just add to what Matt said, overall, we continue to have a similar delinquency, right? So it's certainly supply chain constraint.

Christopher Muse, Analyst

I guess to clarify, Jean, are you implying OpEx in fiscal '22 is growing roughly 2.5%? And then I guess for the primary question, Matt, can you discuss your engagement with hyperscale customers? Can you kind of walk us through the initial work on perhaps discrete ASICs and how that kind of relationship is evolving to perhaps more custom solutions across increased areas of processing?

Jean Hu, CFO

Yes, it's our OpEx year-over-year, you can think about, it's around 3%, the typical inflation year-over-year. We are managing our resource allocation to ensure we continue to invest in all the growth platforms we have. So that's how you can model it.

Matthew Murphy, President and CEO

I will address your other question. If you look back at our acquisition of Avera, our thesis was based on two fronts. The first was to enhance our relevance in the 5G market by offering complete custom design capabilities alongside the semi-custom designs we developed with our lead customer. This has been very successful. The second part was recognizing that in the cloud hyperscale market, there is a growing shift towards full custom or semi-custom compute-based solutions, necessitating robust ASIC capabilities. These applications can range from AI and machine learning chips to server-class CPUs and networking products like smartNICs. This trend is set to continue, and we believe it benefits us. We envision a future beyond x86, where more of the computation and solutions will be highly customized products. We have all the necessary components to support this, including our process technology and in-house IPs such as our SerDes for various reach capabilities at high frequencies. Furthermore, we can engage in traditional ASIC models, but we are increasingly seeing more partnership-oriented interactions with cloud companies, collaborating on solutions, architecture proposals, and creating tailored models to meet their requirements. Our go-to-market strategy, technology roadmap, and key assets—from networking IPs and a strong compute portfolio, including our history with Cavium and ARM-based processors, to security and storage capabilities, along with optical connectivity—position us as an ideal partner in this space. We believe this presents a significant and lasting opportunity.

Ross Seymore, Analyst

Just a clarification, then a question. The clarification, just, Jean, usually you give a little color on what the other segment is going to do. But the main question for Matt is on the 5G side of things. I think everybody knows the digestion period that's going on in China now, some of the transitions going on geographically and the optimism people have in the second half, but you're really outperforming during that transition period that we have right now and it sounds like you'll continue to in the back half. So I guess what I'm getting at is when you think about your company-specific drivers, separated from the market as a whole, improving in the back half, do you think that outperformance you're delivering now accelerates or decelerates? And what are the drivers of that performance above and beyond what the end market itself is going to do?

Matthew Murphy, President and CEO

Sure. I'll address the 5G question first, and then Jean can provide additional comments. Yes, Ross, I believe you're correct. We have performed exceptionally well throughout this cycle, achieving six consecutive quarters of revenue growth in 5G, and successfully navigating the introduction of new products while onboarding new customers, even as some others experienced varying levels of digestion. We're pleased with this strong performance. The deployments in China last year were particularly significant. As you mentioned, several companies are facing similar digestion challenges, but we expect this sector to accelerate and continue to exceed expectations for a few reasons. Firstly, our lead customer has gained momentum in various markets that we will be expanding into in the latter half of the year and into 2022, which is encouraging. Additionally, there are programs involving new sockets that provide us with new content. Our second customer, Nokia, will see its first full year of ramping our baseband product this year, although it won't be completely full until 2022. We also have more content with Nokia that was publicly announced last year, which will start being integrated afterward. There are several specific drivers for Marvell associated with significant companies in this industry. Furthermore, looking ahead, we are gaining strong traction with our ORAN initiatives and are involved in numerous critical sockets across all OEMs, which will support continued growth. Overall, we are very optimistic about our position in 5G and believe it can keep outperforming and accelerating in the future.

Jean Hu, CFO

Yes, Ross, on the other question, just a reminder, other is largely for our printer business today. And quarter-over-quarter, it's actually going to be just up a couple of million dollars sequentially.

Tore Svanberg, Analyst

Yes. And I'll keep it to the one question. So Matt, you referenced some strategic meetings with Inphi. I know the deal is not going to close for a few more months. But from those meetings, could you perhaps give us a few examples on how the 2 companies are combining the IP to go out and target some new opportunities?

Matthew Murphy, President and CEO

Yes, let me provide some background on what we've done, how we're approaching it, and outline some general opportunities. We still operate as two separate companies, so there will be more updates on that. Some opportunities are clear while others are more subtle, but overall, the collaboration between Ford, Lloyd, the founder of Inphi, and our team has been remarkable. We've engaged with key engineering leaders, product marketing staff, and business unit executives from both sides. It was a powerful meeting where we reviewed our businesses and discovered several exciting areas for collaboration. Our technologies are complementary, and we can explore joint processes and customer engagements. We're treating this as a merger with the Inphi team, planning to integrate them fully and strategically allocate spending to maximize return on investment and fuel top-line growth. We believe this approach will allow us to provide targeted support to accelerate Inphi’s ambitions and growth. My team and I are excited about their product lines and future potential, and I look forward to discussing these in more detail during future meetings. Theme-wise, our collaboration enhances our significance in the cloud hyperscale market, making us more relevant together than we would have been independently. Given the complexity of the systems these companies are tackling and the advanced performance they require, we see this market becoming as important and potentially larger than 5G. Our strategy from the Investor Day, which occurred before Inphi was on our radar, considered 5G as the initial wave of growth, with cloud following closely behind. Incorporating Inphi will hasten our cloud opportunities, and we will soon have more to share regarding our automotive ventures, starting with Ethernet but extending into other areas such as storage, security, computing, ASICs, and additional networking solutions. Overall, the combined company will play a crucial role in the cloud market.

Christopher Rolland, Analyst

Going to the ASIC side of the business, maybe piggybacking on some that have already been asked, but maybe you can talk about where this new design pipeline is coming from? Is it storage? Is it networking? Is it compute? Where are you getting the most traction there? And then as we look out, let's say, 5 years, Matt, what percent of your business do you think or expect or would like ASICs to be?

Matthew Murphy, President and CEO

I believe it's important to provide some context. The exciting aspect of our ASIC opportunity, which is part of our broader advanced technology initiative, is significant. Our 5-nanometer platform represents a major growth opportunity. We publicly announced this in August 2020, but we began securing designs with this technology as early as late 2019 and early 2020. Since then, our design opportunity funnel has grown to a substantial size, unlike anything we've seen before with a single process node. There are numerous opportunities across markets. For example, we have already secured several 5G designs, and there's a large pipeline as companies transition from 12-, 14-, and 16-nanometer products to our technology. We've also identified substantial opportunities in the cloud hyperscale category, as previously mentioned. In the enterprise sector, our OCTEON-based CPUs have seen success in the market as a standard product, not a custom one. Additionally, we've collaborated with key customers in the storage market to develop advanced flash controllers for data center and enterprise applications utilizing our 5-nanometer technology. This situation extends beyond simply having a 5-nanometer offering for ASICs to generate revenue; it represents a transformational platform for us. While we are using it for traditional ASICs, we are increasingly receiving requests for custom products, several of which we've now developed into Marvell products designed according to specific requirements. This approach enhances the value we can capture and fosters stronger relationships. These opportunities, particularly in the cloud market, are very significant. I hope this provides helpful context. Initially, after acquiring Avera, we envisioned a robust ASIC business, but it has evolved into something much larger. We look forward to discussing this further in the coming quarters as we finalize designs and capitalize on the strong pipeline that our sales team and business units have built. And what percent do you think it could be in 5 years?

Ross Seymore, Analyst

In terms of the constraints, could you discuss the substrates you mentioned as the biggest factor and which specific geometries of wafers are involved? Additionally, it seems that networking chips are generally tighter than other components, despite some tightness in graphics. Is there something unique about substrates that is impacting the infrastructure businesses more significantly compared to other areas?

Matthew Murphy, President and CEO

Yes. On the first question, it's difficult to assess. The environment is very dynamic. We've been examining every part of the supply chain as a team for months and find that when we resolve one issue, another arises. If you recall our last earnings call, we discussed supply chain issues, and now, just three months later, the U.S. automotive industry is struggling due to a chip shortage. The situation is evolving rapidly. However, I should emphasize that we are performing well in supplying our automotive products, so that comment is more general. We do experience capacity stress with complex substrates, particularly with older nodes, which I refer to as anything above 28 nanometers, that face different challenges. A lot of automotive manufacturing relates to these nodes. There isn't a simple solution; it will require significant effort. For instance, lead times for wire bonders have increased, and our OSATs are struggling to keep up. They are investing in capacity, and we're involved in the planning process to ensure we are prepared, but that's more detail on that topic. What was your second question?

Joseph Moore, Analyst

Yes. No, that was basically the question is just, is there something different...

Matthew Murphy, President and CEO

Oh, on the networking chips, yes. Yes, it's difficult for me to make comparisons since we're not in the graphics field, which operates on a different scale. However, the complexity of these products, particularly regarding the substrates, has significantly increased. In advanced products at 14-nanometer and below, the number of layers has likely doubled, resulting in very large die sizes, some approaching the dimensions of a credit card with thousands of IOs. This leads to a reduced number of die per wafer amid high demand, making it challenging for manufacturers to keep pace. Additionally, the testing process is lengthy due to the intricate nature of the products. That may explain the situation. While I manage an analog business and now lead Marvell, I have no experience in the graphics industry.

Srinivas Pajjuri, Analyst

Jean, I have a question on OpEx and also on the margins. I guess as you ramp some of this 5-nanometer designs and as you engage more in 5-nanometer, I'm just wondering how you're thinking about OpEx, if there's going to be more volatility as we go forward? And also, I guess, as we go to the second half of this year and beyond, and 5G and ASICs become a bigger portion of your revenue, do you see any further opportunity to improve your gross margins from these levels?

Jean Hu, CFO

Yes. On OpEx, right, our team has done an excellent job to manage operating expense. But you're right, there are some variabilities quarter-over-quarter due to the project cost and also we are working with our customer together; sometimes the customer portion of it may accelerate or push out. So there are variations, but I feel quite comfortable. Look at the overall for fiscal '22, we can manage the OpEx at the same time investing. So for instance, our Q4, our OpEx is slightly higher because of project cost, but we'll manage it overall. On the margin side, I think our #1 objective is really to meet the demand. We have significant opportunities for the company, and we have increased the demand across all the growth platforms, as Matt mentioned, the 5G, cloud and also automotive. So that's actually our #1 objective, and we certainly will continue to improve gross margin and make sure we get the most margin dollars out of our business.

Operator, Operator

Our first question comes from Harlan Sur at JPMorgan. This concludes the question-and-answer session as well as today's program. Thank you, ladies and gentlemen, for your participation in today's conference. You may now disconnect. Good day.