Marvell Technology, Inc. (NASDAQ:MRVL) Evercore ISI 2023 Semiconductor & Semiconductor Equipment Conference. September 7, 2023 1:00 PM ET
Company Participants
Ashish Saran – Senior Vice President of Investor Relations
Matt Murphy – Chairman and Chief Executive Officer
Conference Call Participants
Unidentified Analyst
Hi, good afternoon everyone. Last session of the day and we saved the best for the last. Delighted to have with us Marvell Technology. We have the CEO, Matt Murphy and VP of Investor Relations Ashish Saran. I’m going to kick this off as we have done the whole day, kick it off with a few questions. Half the way through I’m going to pause and see if anyone has any questions in the group. Happy to kind of jump in as you want. Thanks Matt for being here, really appreciates your time.
Matt Murphy
Yes.
Question-and-Answer Session
Q – Unidentified Analyst
I guess maybe just to kick things off, I think Matt one of the debate everyone seems to be having is what does end demand trajectory look like, right? We’ve gone from supply constraints to potentially demand constraints in certain places. You just had your earnings call recently and it sounds like AI is doing well, but rest of it is perhaps a bit uneven if you may. Just on a high level, what are you seeing when we can dig in kind of from there?
Matt Murphy
Sure yes, great question. Thanks for having me. Yes if I summarize, can you guys hear me okay. If I summarize the last earnings call we had, I think the AI upside is great and it’s great to see how that strengthened throughout the year and basically what we said was that’s up and everything else is sort of down. So such that just basically don’t change your numbers, right. And we want to – and I’d say the way we’re thinking about and managing it is clearly there was a huge inventory bubble built. This is not like anything I haven’t seen before. I mean, I’ve been doing this for almost 30 years kind of on the front line, so I’ve seen all the cycles going back to – my first one was 1995 supply demand imbalance and this happens I think the balance sheets of our customers need to get worked down. I mean, you can sort of see that Marvell is still sitting out there, but I think the way to think about this is that we’ve really built a very diversified company with a very strong foundational layer in some very, very profitable, very attractive end markets that are going through correction, one of them is enterprise, right, which by the way, even after we sort of get through the inventory correction, that business is up so meaningfully versus where this was back in 2019, 2020, and that’s really mostly organic, it’s through our share gains, our content, uplift, and performance there, so that once it goes through its correction, will still be at a significantly higher level than it was before, very profitable.
We’ve built a nice carrier business to kind of layer on that as a foundational layer, with both wired and wireless infrastructure, and then we’ve kind of got the growth stuff layered on top, which is cloud infrastructure, AI automotive, and a few other collections. And so, the goal really for us always has been to, from day one for me, was to always think about diversifying the firm, such that when you have to go through down periods, you’re going to just, in theory, outperform.
Yes, and maybe just to add just one more I think important point is it’s not just AI, which is outperforming clearly, but I think we also started to see growth from what we call standard cloud infrastructure, right? So as data center start to accelerate, starting in Q2, and we got it up quite meaningfully in Q3, AI is certainly growing quite significantly, but our networking business, which is really connecting standard cloud infrastructure, has also started to recover quite nicely, right? So we saw call it as short to quarter panic correction there, and that business is also now looking very healthy. So that’s an important point. It’s not just AI.
Unidentified Analyst
Got it. That’s fair. Yes, I’ll say this. If you get most of the OEMs networking enterprise, they are sitting on a lot of inventory, and they’ll all tell you, it takes 12 months to work down, so maybe there’s a little bit of that, as you were talking about that. You need to happen as well.
Matt Murphy
It’s a simple map. If you just look at all those companies and just look at their inventory level growth year-over-year for the last couple of years, and you look at their revenue growth, I mean, it was like everything else, right? Imbalance, right it’s got to correct.
Unidentified Analyst
Exactly. And maybe just to dig on the AI opportunity, right? I think you folks talked about at 800 million, exit run rate at this point, I think it was 400 was and the prior expectation, if you may. Obviously, a lot of questions are on that, a lot of focus on that, and maybe just touch on what’s driving this upside, is it all around the PAM4 optical, is it more diversified, but custom silicon stuff? So what’s enabling this big step up?
Matt Murphy
Sure, yes. I think if you look two quarters back, we size the AI business from our well is about 200 million last year, we’re going to go to 400 million this year roughly double, and then at that time two quarters ago we also reviewed the opportunity it was to double again. And we did that to really try to be helpful to investors that we’re trying to sort through all of your different investment opportunities, and how big can this be, and where’s the ballpark and what’s the range? So we did that. The latest update is we basically provided incrementally kind of positive news in that, in that the fourth quarter would actually already, of this year would already be at the 800 run rate.
So we’re not, and we’re not going to go through and every quarter try to update and call the ball, like what’s this year was it’s just it’s too complicated, but we, we do want to and it’s too uncertain at this point. But the upside and the strength that we’ve seen for the last six months has really been driven primarily by the strength and the PAM4 optics business.
And that order backlog and bookings and sort of pull for supply that’s really, that’s really continues to increase at this point. And that will also grow next year as well. So, so that’s a real positive. Beyond that, we’ll see where next year lands and where this AI cycle takes us because right now it’s got a significant head of steam on it.
Unidentified Analyst
Yes, I think even our DCI business which is a module business within our Optics portfolio. To Matt’s point the bulk of this activity is really PAM4 which is connecting clusters inside cloud data centers and then it switches between each other. But we started to see upside earlier in the year. In fact, the first upside we saw on our AI revenue was actually the inflection post ChatGPT in terms of higher deployments of these data center interconnect modules, right. So, now that’s a small part of the revenue, but that’s also growing quite nicely.
And as you look forward, as you start to think about more and more, you’ve spent the money, you’ve built your training model; you’re not to get it out all your inference clusters. This is where you’ll see a lot more activity right between data centers. So PAM remains probably see one of the bigger fast-to-grow drivers, but I would put DCI kind of right behind that.
Well, I think I know, Sienna actually talked about this very topic on their call, talking about this. And it’s the initial, very initial signs of the DCI business starting to ramp up, and I like this is more of a 24 story, but to you point like eventually you have to take the training to the inferences and that’s where the data is in the data center, the connections will work better.
Matt Murphy
Yes DCI is a market clear for us. It’s a 23 story. It’s a monster upside. This is something in the future. We kind of the genesis was when it was Inphi they pioneered this approach, right? For a plug-able data center, interconnect module, replacing a transport box and replacing sort of the traditional architecture. And so at 400 gig, it obviously is transition to 4X the bandwidth and urban industry standard, but yes, that business today is running significantly higher than anything that in-fi sort of ever sized and that’s this year, and of course, that’s going to keep going and just put a cherry on top. I mean, just to kind of emphasize the importance of this, we as the, over the last six to nine months, as the AI thing has really become real in this trend towards inferencing closer to the source, plus some of the challenges quite frankly of actually building mega-scale data centers, like physically like getting enough land, enough power, enough energy, permits, you name it. This regionalized approach I think is gaining momentum. So we recently announced our 800 gig CR product which I think was very much a surprise to the industry. We timed it with our release of our 800 gig coherent DSP for telecom, it works in both applications.
And so that’s a, that’s a roadmap change that we pivoted on actually because of AI. So that, I think the bulk is PAM, and that’s kind of what everybody talks about, but this coherent technology DSP, which is used in the DCI application area, is very strategic, very hard to do. And I think both of those are actually going to be very significant growth.
Unidentified Analyst
Got it. Yes. And you said, it’s not the intent to keep updating these AI run, run rate numbers, do appreciate you giving it right now. I think what are the concerns that I’ll always hear from folks is what’s the durability of these AI numbers for everyone, right? Like is this just like a nice big sugar rush, and then we’re going to have a crash? Or how do you think about the durability of this, and the sustainability of these growth rates?
Matt Murphy
Yes, I would up-level it, the way we’re thinking about this is that we strongly believe, as a collective team at Marvell, that the shift from traditional computing architectures to accelerated computing is accelerating. And it couldn’t be more clear just by looking at a video, right? That’s sort of the poster child for that. But it’s not just AI, right?
And it’s not just a GPU, as an example. I mean, it’s actually all the reasons why all the same growth for the last few years quite frankly, in computing, even in traditional data centers was actually moving to DPUs, customized offload chips, right, trying to optimize around the whole system. That train’s been running for a while. It’s inflected, but that sort of structural shift is going to create a significant TAM increase in the semiconductor industry.
Now that may become at a decrease from somewhere else. But where Marvell has always been pointed is in that area. And it’s not just compute for us, right? And we’re talking about it has a ripple through to our optical strategy, a ripple through our DCI strategy, a ripple through to our switching approach. Our custom silicon TAM gets massively larger, right? As things go to from a traditional kind of fixed architecture to a very open and customized, things like ADCs become critical. CXL, and that can go, and then we’ve got a whole bunch of things you guys don’t even know about because obviously we’re investing for the future.
So to put it in context, there’s clearly a massive rampant AI. It’s breath taking in scale. None of us know how long it’s going to last, per say, and is there going to be a reset period at some point, and then it continues. But for us and for me is the CEO, where my main job, number one job is to allocate capital for the company. We have to think in five to 10 years, seven years kind of timeframes. So when I draw a line from here to there, the trend towards traditional computing systems moving to accelerated computing, clearly happening, it hasn’t profound impact and creates an opportunity for Marvell.
So I can’t comment on when the AI thing’s going to happen. And that’s what everybody wants. Every question is a specific question, and sometimes when you don’t know the answer, it’s unknowable, but it’s better to tell, at least share with investors, that from my standpoint, the thing that I can help affect the most is outcomes that are beyond above all a reset, a correction if you will.
Unidentified Analyst
Right, fair enough. And actually also think about this is the amount of cost savings that companies are going to get through deploying AI probably right like IBM will talk about 30% labor reduction if you can do it well. It would be logical for them to keep investing in AI. If those are real savings you can end up with. So it might be lumpy, but to your point the 5, 10 year journey has to be much higher at year 5 year 10.
Matt Murphy
Yes, I think they’re in the, at the much higher level. I think there, yes, there’s absolutely a massive productivity unlock and probably we haven’t seen an opportunity in a long time in the world where there’s a technology that can actually enable significant productivity to be launched and then that’ll, in theory, justify the capital. The question is the mismatch and the timing and why that has happened. And I get hard to know, but it seems real from sort of top to bottom. And again, we have to look through cycle to think about our investments.
Unidentified Analyst
The only way I can think about it is not as big is deployment of blackberries back in the day in terms of how that unlock productivity, but everyone got a blackberry because it was so much more efficient.
Perfect. I guess maybe just broadly talk about the breadth of your design pipeline, what resonates with customers comes to AI stuff versus not, and it can be the DSP optical stuff resonating very, very well, but how about things like Ethernet switching or custom silicon or photonics just talk about the breadth of what you’re doing here?
Matt Murphy
Yes well, I think I think it’s actually the power of the portfolio that’s resonating the most. The reason why I say that and I would say that this is true all the way to the very highest levels of these customers we have. And sort of the reason is that for these companies who are especially hosting services and doing that for a living, I mean, this inflection on AI is represents like a massive opportunity for them and a massive threat if they don’t get it right. And this is sort of where market shares move and history gets made. And so I think strategically, all of our customers and everybody in the ecosystem, thinking about this, is thinking about how do I, with whatever unique set of applications or competitive advantage I have leverage my own somewhat unique approach to drive a TCO advantage?
Right. I mean, at the end of the day, if you don’t have a TCO advantage or some kind of competitive sustainable advantage, you’re going to get commoditized out and you’re just, you’re just going to be competing on price and it’s going to blow your whole value prop up. So the reason I frame it all that way is, when if you’re a customer and you actually look at like well who is a supplier of technology that can really enable all this?
Having that all come together is really important. As an example, the switching platform technology we have, or you could even say custom silicon, think of those as the large digital blocks. Those need to directly and are operating interface to the outside world through optics as an example, it could be PAM4, could be a road map for new modulation technologies to enable faster throughput in the future. Once PAM at some point runs out of gas, we have a road map there, co-package optics is one angle, linear direct drive is another angle. You have the ability then to optimize those solutions together and it’s not just taking well, somebody had a part that got it, defined three years ago and here’s the part, so can you make a better part? It’s like I mean, everything down to the neck to the switch to the interconnect, it’s all going to get rethought because it’s a completely different application instead of applications.
And so I think somebody that can do the customized silicon approach have all the right connectivity interfaces between those, have the upper layer networking to actually move the data around. I mean, we have incredible storage assets as an example. Maybe there’s a new way to scan the CAD on how these large language models use that. So I think we have like all the pieces, that’s what we’ve been building in Marvell for like our data infrastructure strategy. So we’re kind of here and now you have the ultimate sort of killer application that’s going to drive a lot of need for innovation and you can’t just do this overnight, you can’t sort of be on like a corporate board and say, oh wow, hey this AI thing’s happening. Do we have a solution for that? In some companies I don’t even know what all the stuff is. I mean, it was about like seven year’s right to put all this together. Plus you layer on process technology leadership, packaging leadership, IP leadership in terms of controlling our destiny on IO, both optical and electrical.
It’s a pretty powerful combo and then to be able to come in and a very partner oriented way and also have a culture of collaboration inside our company which allows all these different groups to actually come together and that is a very, very powerful value prop that I don’t think is really matched or at least if there is, there’s a couple of people that have that sort of combination. It’s a scarce few of us and so I think I think as I look at this way to accelerate computing and AI and what customers want, I actually think I think what we have for one of the companies that really has what these customers want because we can actually do this. And we can execute it. And it’s not like oh yes I’ll get a couple of people and then groups that never talk to each other are trying to show up in a meeting and one person’s on some other flow or has some other vision of the future so we’re driving a lot of internal alignment so that the whole company gets rallied behind this and all the groups and all the technologies come together and we look like one unified partner to our customers.
Unidentified Analyst
Do customers come to you and say I want all of this from you or do they come and say I just want you optical stuff I’ll figure out custom silicon somewhere else, I’ll do Ethernet switch and stuff. Or do they want a one stop shop?
Matt Murphy
It kind of goes like this. It’s like top down bottom up, right. Bottom up there’s a team and all they do is optics and they’re like the best in the world at our customers. And they’re super detailed and like that’s what they’re focused on and then you meet another group and they’re doing this and so but if you go actually executive down think if you’re an executive at one of these companies like running these big properties I mean you’ve got to be thinking about boy if I’ve got all my people running around doing point solutions optimizing every little thing and am I going to get the best outcome?
How am I even going to synthesize what the heck is going on. And so I think we — we’re trying to do a good job of being very sort of 360 with our customers and selling the value at the very detailed level to run the gauntlet but also making sure that we’re aware and I think the combination of those is leading us to a much more solution oriented approach which ultimately does add a lot more value to our customers as content opportunity for us to drive and it helps drive our roadmap because then we can think three steps ahead. How are they architecting the systems, where is it going and if you get the input from the switch group and the optics group and the custom group we actually have a pretty good view of where these things are heading and then we actually take that back in and we work very closely kind of in a bespoke manner with our customers on how we could help them think it through because we can see a lot of their organization that they might not especially be companies.
And this is all we do for a living, right. So it’s not like we’re we got some other business on the side, like oh we got to go to creative, is it the TV accounts and we’ll be back — it’s like this is all we do. We all we do is infrastructure, all that we have in the company and all this stuff. They’re like super geeked out on it. Everybody loves it. It’s very esoteric. It’s not mainstream, but we’re really really good at it. And so I think, I think the approach seems to be resonating.
Ashish Saran
Yes and this is a bold significantly. If you look back five years back, I think we’ll have to give you a very different answer which will be more in terms of hey this point solutions, right. But I think in the last five years the companies of all we’ve added all this capability this technology I think the conversation moved up massively. I think the levels you talk to Matt today are very different than what would have been the sales like five years back. It’s a complete change.
Matt Murphy
And I have somebody on my staff in charge of this. I mean Loi Nguyen who was the founder of Inphi who’s one of our most steam technologists business executives champion of the culture of the company he runs an entire task force on this with CTO heads of engineering from the businesses product and he’s driving so it’s not just like hey I’m a CEO go grab a task force. I’ve got literally an executive whose big part of this remit is to actually really get organized on this front. It’s unique.
Unidentified Analyst
It is it’s truly very differentiated. Like you don’t hear that narrative from others. So yes. This this is going to be off question on a different topic than what we just talked about since he talked about you know, having a complete system strategy on that core optical cyber, you’re actually doing well. Can you tell me what the competitive landscape looks like right now? Who do you see compete against though? The colors kind a like from the job.
Matt Murphy
On the DCI side?
Unidentified Analyst
On the DCI side.
Matt Murphy
Well yes I think there’s always been a very strong competitive competition. Back in the pre-M&A on two sides, it was really Inphi and a very good company called Acacia. And Acacia was acquired by Cisco and we acquired. And I think those are the two that primarily sort of that market. There’s clearly, there’s a volume there, there’s other people that are kind of from the system side coming in. And like anything, we have, every market we’re in, we have very strong capable competitors. Certainly we’re doing what we do, what we always do, which is we’re driving the innovation really hard. And as an example, the 800-ZR announcements we’ve made and the speed at which we’re able to turn those products, which is really tied to our coherent DSP roadmap, which we have a whole market for, as a merchant supplier, really helps us. But yes, there’s really one main competitor.
Unidentified Analyst
Got it. And then just on optical attach rates, something that comes up which is I think traditionally servers don’t have a lot of optical attach that typically, right? Seems to be a wall being changed when it comes to AI enable or AI centric servers. Can you just talk about how does that change and what does that look like for you folks?
Matt Murphy
Well, let me tee it up and you can hit the ball here. I think I just say that the answer is that the accelerated computing platforms and AI platforms have significantly higher content of our products in the optical area. And that’s primarily because just the raw computing capacity and throughput is such that you just need to you’ve just done more bandwidth coming out. I mean, you’re talking about 3.2 terabytes of computing capacity needed to pass through, well, even more than that, actually down at the digital silicon level, it’s probably like…
Unidentified Analyst
Yes, it’s like 30.
Matt Murphy
20 or 30 terabytes. It’s got to go get shoved out through a 3 terabyte pipe. And servers are 100 gig. 200 gig, 50 gig. So it’s just a different ball game. And so that was an early concern by some investors was, [Indiscernible] AI systems are really going to, I’m going to get this intermediate and we’re going to have a content issue. It’s not as much volume. So but it as you’ve seen in our numbers, it’s actually turned out to be a very important part of the equation.
Ashish Saran
Yes, I think at a high level to your point, right servers individually the first hop from a server to a top off racks, which is traditionally like direct attached copper, right? Because you’re dealing with tens to maybe 100 maximum 200 gigabits per second of capacity. And that’s very bad. It’s mostly 50 to 100, right? You don’t need an optical connection. It’s really at the switch connection. So now you’re like one or two hops above. The actual server is where you have our 200, 400 gig optical product shipping and volume for the last few years. What changes in an AI cluster, essentially, you’re driving the first hop itself from an accelerator, whether it’s GPU or it’s a customization, is optical right from the start.
Right? And you can imagine every other hop switch to switch has also to be optical. So the attached rate is think of many servers in traditional cloud, driving call it one or two optical links versus you’ve got basically a higher ratio. You’ve got more than one optical DSP required for one accelerator. It’s just like a massive massive difference, right? And that’s what we see today, and as we look forward, as you can imagine, the compute power of the next generation of AI chips will even higher. This actually, as Matt said is a big mismatch in what’s inside the box versus how much you can actually connect out. And the value of AI really is it’s a distributed compute application. So the value of the cluster is how much can you network. And we see that actually growing as we go forward.
Unidentified Analyst
So what do you think about the [Indiscernible] how underutilized you want your GPU clusters to be if you’re running…
Matt Murphy
That’s right. You’re spending all this money on compute, right? You want to feed the monsters as fast as you can. Right? And like I said, as you look forward, these AI applications don’t fit in a single accelerator. Even 10 could be 100 could be 1000. You have to network them together, worse than a standard server. A lot of applications fit inside a single CPU, which is why you virtualize them. And actually slice up the application. Right? Because you can’t actually use a full CPU for one application, completely different world when it comes to AI.
Unidentified Analyst
Fair enough. We will pause there for a minute to see if there’s any questions in the group. Good. Wait for the microphone.
Unidentified Analyst
Thanks guys. I wonder if you could talk a little bit more about the 51T switch upgrade cycle. And whether you see that primarily being driven in AI applications, or as well as traditional infrastructure as well.
Matt Murphy
Sure. I think it’s both. Simple answer I think that the current installed base and sort of state of the art that’s broadly deployed is at 12.80. Today, in traditional cloud infrastructure, there’s been a sort of everybody generically decided to skip 25-6 and wait for 51-2. You get sort of the quadruple effect, and there’s a big left to go do one of these cycles. So that’s going to happen independent independently. Then on top of that, I think the increased bandwidth and network capacity required is going to have a kick around AI. And I think there’s very specific sort of AI features as well that probably need to get integrated into a future release as well.
So I think there’s going to be a ton of activity. I think it’s going to be a very strong industry upgrade cycle going on and networking in cloud infrastructure driven by the 51.T platforms that are becoming available.
Ashish Saran
Yes, and I think we’re very well positioned as we just basically just announced we started sampling our product. So I think we should see a lot of activity on this front. There’s a lot of excitement from customers as we go forward. Even size that opportunity. I mean, the data center switching markets already are very large, multi-billion dollar market today, right? And as you go from generation to generation, as you give your customer, call it 4x more bandwidth, you also see a pretty nice content uplift, right? So not only do port counts, continue expand for a number of reasons like I talked about, from AI as one example, total throughput is going to keep increasing on top of that as you go from 12.8 to 51.2. You also get a pretty nice ASP uplift. So the market is going to be growing at a very, very fast rate.
Matt Murphy
Yes, multi-billion dollars same today and going to grow at a very healthy rate, actually going forward, just given the content side of it. Perfect.
Ashish Saran
All right, I guess maybe I’ll maybe switch gears a little bit on custom silicon. We just touched on what do you see the opportunity over here? What sort of design opportunities are you engaging around the custom silicon site? And then what is Marvell’s kind of value proposition in this product?
Matt Murphy
Well, I started with this one. Yes sure, I think this is the journey we started down custom silicon was really going to be a quite a company called Avera, which was a few years back. And this is the old IBM internal ASIC, which they’ve done probably close to 1,000 designs worldwide. And what we saw as an opportunity as we saw cloud customers start to focus on really building our massive internal data centers. And having very unique workloads by trying to clarify, they were starting to look at building their own augmenting what they buy from kind of the merchant market. And we saw that initially as really think of these server-offload devices, accelerators. And as you move into the AI era, you’ve now seen more than one public example of some very large applications, right which are going to what’s custom silicon. And then again, the idea there is, especially for workloads where it’s kind of their own data stream. They want to be able to understand how they can extract the maximum value, how do you differentiate. And they’re looking for partners because these are incredibly complex devices, especially the type of activity we’re engaged in, right which is typically advanced process geometry, typically very high IO rates. You need someone who has the world’s best SerDes, essentially, which we are one of two companies I would say, which have the world’s best SerDes at this point in time.
The ability to invest consistently, it’s not just five nanometer today, it’s three nanometers now and it’s two nanometers going forward, right? And having very advanced packaging capabilities. So think of these as, this is really a core design effort where kind of the very front end is done by the customer because they have a unique understanding of what they want to implement. But they’re looking for a partner who can now take this design into something which can be manufactured with very high yield on time first time, right? And that’s really the capability we provide. And soon after we did Avera, jump to five nanometers, really had this custom platform available for the first time. We want to hold two design wins, a number of products and production today, and we’re looking forward to ramping additional much larger AI programs as we get into the next year.
Unidentified Analyst
Have you talked about how big could this opportunity you get over time and then maybe not somewhat related to that? One of the questions always are on customers, so I guess what are the margins look like? Are the gross margins better or worse than the corporate? It’s just sending on those two fronts.
Matt Murphy
Yes, maybe I’ll talk about margins first, right? So I think first is end of the day, what you’re trying to drive is bottom line, EPS Group, operating margin dollars, right? So I think you should think about the way we manage a business is essentially that the operating margin profile of custom silicon is no different than what it is for our motion products. The difference is your gross margin will be lower because the customer is fronting some of the NRE and as well as doing some of the design work. So my R&D spends going to be a lot lower, right?
So the net net of it is the business model essentially is the same, which is you want to be able to drive our long-term corporate average which for us is 38 to 40 points a month margin. And that’s essentially what we see in the custom silicon business.
Unidentified Analyst
Got it. And in terms of the opportunity size, I mean. I will say.
Matt Murphy
And just to clarify for the team here, the way that we treat the NRE and the customer funding side is offset to R&D, so it’s contra OpEx. So that’s where you get the margin flow through. So it doesn’t show up in the top line. So it’s just, so it’s like you take whatever, if you start with our target model, you just build it back up and you say, well how much funding are you getting, and then you sort of get the difference in the two, and you can figure out the gross margin.
Unidentified Analyst
Okay got, so the NRE is not a revenue number, it’s a correct set to the optics.
Matt Murphy
Correct. Correct exactly. So we really, so in that business, for most of the reasons Ashish mentioned, and from day one, even when we bought Avera, that was the thesis that we laid out from day one is, it’s going to be a lower gross margin. Nobody panic, because we have a business model, we’re targeting for that business, we’ll be in line with the Marvell corporate average target. And that’s, and that’s still true today, that was five years ago by the way, and that’s, and we’ve been managing that business since then. In fact, it didn’t start off that way. I mean, we’ve gotten it scaled up, we’ve grown the business. It’s actually the custom business of Marvell has grown at a faster rate than the overall company average if you look back to when we bought Avera.
So you would think, well gosh, if a business is growing faster, and it’s lower gross margin, oh my God, what would happen. But actually we have all these other businesses that are better than the average and so we just sort of manage the portfolio. And along the way we’ve chunked the operating margin up over time. And that’s how we think about it.
I just want to add one of their points, strategically, maybe this is where you’re going, but why not. It’s actually and this is also by design from going back to the Avera days is we concluded for us to be a real leader in our field. Table stakes was going to be process packaging IP leadership, and that was not the prior strategy. The prior strategy was, and you still hear the remnants of this in other smaller companies who sort of hey, Marvell got away with this for a while which is, oh don’t worry, we’re a node behind. We’re two nodes behind, but we have better design than the other guys, so therefore we can do the same chip for that. It’s like total fake news, like table stakes is also, you have to have a really good circuit design, really good architecture, really good engineers, and you need leadership.
Okay, it’s just how it works, so that’s a decision that we and my team made very early on as we got a pivot this company, or we’re just going to be an [Indiscernible]. And so part of doing Avera was the fact that it was going to drive the company being in a sick business for advanced infrastructure applications. It was going to drive the node train, and we just hooked onto it, right, and between that. Between the Cavium business, always being a node behind, we needed to get that cut up because it was processors. I mean, things like Innovium, things like these coherent DSPs I mean, switch every one of these. It’s kind of required, or else you’re not competitive, you follow me.
So going back to it, why have an ASIC business that drives lower gross margins? Oh boy, that’s not good. Well, if it can drive EPS and equivalent operating margin. And literally be the pipe cleaner, if you will, that the whole company benefits on, because all we do is infrastructure. So all the IPs we do for that, they all flow back to the mothership. So it’s super strategic, it’s not like a side show business. Hey, let’s go run around and get into the ASIC business. And then let’s go run over here and get into this business. Like in my mind, when we map this whole thing out and where we wanted to take this company, it was just a critical piece of the puzzle. And so we’re going to go after that business, even if it is lower gross margin. But if it’s at the equivalent sort of net income level, and you can get outsized topline growth and addresses huge emerging SAM [Ph] and you can get a whole bunch of extra EPS, I think investors were going to be cracking the Champagne if we’re successful. Even if the blended average gross margin is not as high as and at some point you get your gross margin upto higher growth [Indiscernible].
So we balance all that I think in general other than going through this downturn we’ve managed this extremely well for the last 7 years in terms of managing around the gross margin target, dealing with all the different sort of dynamics, but yes ASIC is always going to be lower, but it’s not a bad thing, it’s a good thing.
Unidentified Analyst
I mean it’s a key part of the integrated offering for infrastructure companies. It’s dilutive gross margin, but it’s good on operating margins and certainly net income accretive sale.
Matt Murphy
Big time, and to your point, at the first point, it’s super strategic. I mean, it’s as strategic you get of any kind of hardware decision that any one of these major companies is going to make. Not just in the, for hyperscale companies, but all of the ASIC things that we do, it becomes like one of the key decisions, because that chip architecture is ultimately going to drive the hardware, which is ultimately going to drive the value prop along with software and other things that those companies offer. But it’s, so when you have that, you’re just in the complete sort of center of the decision in terms of the, the block diagram, if you will, go back to the old days. You want to, like, drive the block diagram and attach, like boom that’s the main thing. And then if you do a good job on that, it’s like well we’re betting the farm on this company, right? Let’s give them more business, right?
Unidentified Analyst
So it’s — I was going to ask you this later, but since we have I have this discussion already on the integrated solution of M&A I think you folks have actually created a lot more value through deals and typically seen from companies and one of the things that always stood out to me is a lot of the founders are still at Marvell after. As you the best things are all done and they are, they can do what they want. As you reflect back, like what have you done to integrate these assets and the kind of the strategy behind it? Because it is someone unique to have all these folks still at the company together.
Matt Murphy
Yes, I think there’s a couple angles on the M&A. First, I think it, it has worked out really well for us, both in that, on every deal we’ve done and we review the history after the fact. We’ve always exceeded the cost synergies that we committed to. The — I’m going to get to the straight forward stuff first, but it’s important because it’s part of the track record, right?
The second is really strong team that we and I built from the very beginning in terms of the sort of call it the IT, the infrastructure, like how do you get this done? And we did some of these, we did some of these ERP migrations in like three months. I mean companies go years sometimes and they struggle and they get underwater. And so we really, and I mean, early on we hired like really, really good people kind of punching above our weight just in case we were going to go do that. So that part’s been really clean. And then you kind of get up to the next layer. It’s like, so you can do that, that’s great. That’s a value creator, perfect. And we always, in general, Inphi was the exception, try to justify these deals kind of on that basis. Can you get enough sort of cost synergies out in integration?
And the top line revenue synergy side which if you look on any of our deals, we never committed a number. I never mentioned the word revenue synergy ever is part of a deal rationale. But monster revenue synergies have come from all this, right? If you look at 5G right, how did we actually get all this stuff going? It wasn’t because we had this one based band we pulled an L2 and we pulled the switch and we did all these things. And then with Inphi was like a beyond home run, because it had this sort of second order of fact of a tailwind on the custom business, a tailwind on. Another thing. So I’m going up the stack now.
And then you go, okay, cool, good job. You got the IT done, good job. You took the cost out, good job. Hold, you got some revenue synergy. That’s pretty cool. Well, did you like blow up the company in the process and everybody hates your guts and all the founders quit, because it was like a terrible place to work. And you’re sorry about that. But I got the other three.
And I think we’re, I’m very proud of the fact that the key people, not just the founders, but the key people, in general, we’ve had a really excellent retention on. So they say, well, why? And by the way, just on the founders, we have Raghib Hussain, who was co-founder of Cavium he’s on my staff. Loi Nguyen who’s founder of Inphi. He’s on my staff. Puneet Agarwal who was the founder of Innovium. He’s the Chief Architect and CTO for our switching platform business. I could rattle off a few others. A few others, by the way, [Indiscernible] stayed for a while remained. He went off to go do a start-up. We actually helped him out. We funded him to go do that. I mean, it was not like oh, I quit. I hate this place. It was like, hey, I want to go do my own. Here’s the money. So we, and so then what’s the reason?
And the reason I think and you can comment is that from the very beginning, I also my feeling and become the CEO of this company was that, to build a really kind of built to last organization. And one that could execute this strategy I wanted to do, which was be this infrastructure leader and get a team that could work together. It was what resonates is the company’s culture. The core behaviors that we espouse the value, the respect that we show, right? Well, the way we always use the word and we’re going to merge. We’re not going to acquire you. And then also making sure we take care of the people, both in terms of meaningful scope when they come in. Every one of those leaders I rattled off, everybody got more scope. Some of my existing executives gave stuff up. I mean when I acquired Cavium Chris Koopman’s who’s my COO, he was running our networking business, he gave it to Raghib, gave it to him. And then Raghib said, cool, now I’m running the Cavium business and the Marvel networking. When Loi joined, I gave him like a billion-dollar business to manage, it was bigger than Inphi. Wow, thank you for that trust.
And so I think we benefited huge from their leadership, right, and there, and but they really liked the culture. They like working for the company. So…
Ashish Saran
And customers see it by the way, because customers are also happy to see that there’s significant bench strength, there’s folks that actually work with individually, right, because that’s what made those businesses successful. So they like the fact that there’s that continuity as well as that additional leadership you’re providing, but there’s also like, I’m not relying on one single person when I work with them. These are very massive large projects spanning multiple disciplines.
So the fact that’s the same group of people, but a broader responsibility, much bigger bench strength across the company. I mean, all of those things are critical. Because for these customers, you’re not like a piece part supplier at this point, right. They are betting the fact that we’re going to work with you for the next five to 10 years, not for the next one to three years. So that’s a piece they picked up on as well.
Matt Murphy
You can kind of look at these executives as CEOs have different ways of looking at, they’re an asset or they’re a liability, right? Too much costs, chop them all out. We don’t need those people. They’re useless. I just go down there, or you can say, hey, I wonder why these companies were so freaking successful and they hired so many great people and all those people stayed for a long time.
And then you meet these amazing people that ran them and you’re like, I want these people on my team. So it’s, and they don’t have to do it to your point, right. They’re very successful. They’re very financially independent, but I, they – I’m really just honored to work with them because they love the mission and we love this infrastructure stuff. I mean, it sounds super geeky, but this team loves to do this. And so it’s like a paradise for engineers, it’s a paradise for executives that want to pursue their passion and do it in a non-political, like good place to work, get rewarded if you do a good job, get the bad feedback, if you did a bad job move. I mean, it’s very simple. But so far, it’s been working. And it’s, it’s just very lucky to work with the people that we do. Sorry.
Unidentified Analyst
Perfect. I’m almost up on my time. Just maybe the last one. I think in the past you’ve talked about hey the portfolio we have is great. We’re good. Good with the way we are on the field. I wonder does AI changed that at all from your perspective, does that create more opportunities, does it create anything from an M&A basis we look at?
Matt Murphy
Yes, I think it provides a different lens, certainly when you look at the world is if accelerated computing and our structurally changes, which we believe it will, then it certainly opens up our aperture. You want to look at things always in your strategic context. Not hey, that looks pretty good. I can get some EPS out of that guy. I can get some accretion out of there. I mean, yes, that’s one but if it’s orthogonal, you guys would slaughter me, it’s like, oh, what are you doing? Oh, wait, I got you. I got you like another $0.10 of EPS and some random thing to do. So we’ll, we’ll always tend to stay very, very, very focused on our strategy there. But we really, really do have all the organic pieces we need now from the inorganic stuff, but it’s all one Marvell and so that’s really what we’re driving. And it’s cleaner. M&A is really hard. It’s like really like this. It’s not easy to do. We’re good at it. Certainly, if stuff came along, it’d be great. But we don’t. There’s not like a must have. We really did what we needed to do there.
Unidentified Analyst
Fair enough, pass the time sorry….
Matt Murphy
I’ll have our core bankers in the room that are like, oh man, that’s the bummer, can I cancel my meeting later?
Unidentified Analyst
Oh boy, I will avoid that one. I’m up on my time, maybe I’ll turn it back to you. Any closing comments you want to touch on…
Matt Murphy
We appreciate the opportunity. And actually, I appreciate the opportunity to get to talk a little bit more about our company. And actually what we’re trying to accomplish and the vision we have in the people we have, it’s not often you get to do that, quite frankly, I just get pinged all day at these with how many GPUs are going to sell next year times the number of 800 Gig PAM4 times the ratio times the ASP to some point I got that and we’re going to be helpful to our investors to create the models you need to size the opportunity. But I also hope for the folks that have a little bit of a longer horizon to realize that it’s we’re very motivated team to build something really great And you can’t it could just sort of say that but if you don’t understand the underpinnings then maybe the story rings a little bit hollow. So anyway.
Unidentified Analyst
Perfect. Right thank you very much. I very much appreciate it.
Matt Murphy
Hey, thanks for the clap. Appreciate that. It was great.
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