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Making Markets EP2: Matt Murphy, CEO of Marvell Technology | Q2 FY ’22
by Daniel Newman | August 30, 2021

On this episode of the Making Markets podcast, Daniel Newman is joined by Matt Murphy, CEO of Marvell Technology.

Their conversation focused on:

  • How Marvell’s momentum is leading to such positive results
  • New revenue breakouts and how the company’s “Big Bets” are performing
  • The strategy behind Marvell’s acquisition of Innovium and what is driving M&A
  • Elements of the Marvell story that are sometimes missed by outsiders, analysts, and pundits

You can grab the video of the interview here (and subscribe to our YouTube channel if you’ve not yet done so)

You can also listen below or stream the audio on your favorite podcast platform — and if you’ve not yet subscribed, let’s fix that!

Disclaimer: The Making Markets podcast is for information and entertainment purposes only. Over the course of this podcast, we may talk about companies that are publicly traded and we may even reference that fact and their equity share price, but please do not take anything that we say as a recommendation about what you should do with your investment dollars. We are not investment advisors and we do not ask that you treat us as such.

Transcript:

Daniel Newman: Episode two or one, is it? Who knows? It’s the first episode since the zero episode, and we are thrilled to have Matt Murphy, CEO of Marvell Technologies joining Making Markets.

Announcer: This is the Making Markets podcast, brought to you by Futurum Research. We bring you top executives from the world’s most exciting technology companies, bridging the gap between strategy, markets, innovation and the companies featured on the show. The Making Markets podcast is for information and entertainment purposes only. Please do not take anything reflected in this show as investment advice. Now your host, principal analyst, and founding partner of Futurum Research, Daniel Newman.

Daniel Newman: Hey, everybody. Welcome to Making Markets episode one. Very excited about this show. I have Matt Murphy, CEO of Marvell Technologies joining me day after earnings to talk a little bit about what’s going on at Marvell. Matt, welcome to Making Markets.

Matt Murphy: Yeah, hey Daniel, thanks for having me.

Daniel Newman: Yeah, very excited to have you on the show, excited to have you as episode one. We’re going to have a number of your peers joining this show. What it’s all about, Matt, is getting to those stories that kind of sit between the lines. There’s the folks that like the numbers, there’s the folks that like the technology, but really it’s both. And that’s becoming more and more story, and what’s driving momentum in the industry. So if you’re ready to rock and roll, I have a few questions for you and I’m going to get you on because I know day after earnings is busy.

Matt Murphy: Yeah, no problem. Let’s do it.

Daniel Newman: All right, so this quarter, Matt, you guys saw some really strong numbers. 48% of the top line, you closed a $10 billion acquisition with Inphi adding to that momentum. It seems you guys are in all the right areas at the right time. Talk to me a little bit about this momentum and basically what’s leading to these great results.

Matt Murphy: Yeah, no great question. And, it was a very strong quarter for Marvell for a few of the reasons, some of which you mentioned it was our first full quarter with Inphi under our belt which was great. So we got a first quarter results from them. When we had announced our guidance for Q2, the Inphi numbers were well above at that time what consensus had, had them at. And, then what we said yesterday as they actually even exceeded those revenue projections, so the Inphi acquisitions very much on track.

We also completed all of the ERP integration in the quarter. I mean, that’s pretty fast. We closed in April 1st quarter out, completely done with ERP, so we actually got some cost savings pulled forward because of the system integration so that was very positive. And then on top of that, the business momentum from the standalone Marvell side was also very strong. Growing in the 17, 18% range year over year, independent of Inphi which grew, obviously, well above that given their growth rates. So, all in all Q2 was a very strong set of numbers. The result of which was actually a three cent beat on EPS. We have record revenues for the company record gross margins for the company and record operating income. So across the board it was a great quarter.

Daniel Newman: Yeah, absolutely. That was definitely my observation. The integration that you speak to is such a big thing, and sometimes gets missed that integrating the acquisition. We get really excited about the announcements and then we sort of quickly forget, and we move on looking for that next big headline. But the truth is, is it’s way after a deal is made. So, pulling all that together to get that synergy that you invested in out and getting that integration of ERP and other systems done quickly is going to extract that value more quickly, and start to help both those bottom and top line results that you’ve been talking to the market about.

One of the highlights this quarter and Matt at our 65 Summit, you and I had the pleasure of talking a little bit about this because you’d already announced it. But, this was the quarter that the company moved forward with the breakouts, right. Moving from basically two segments that were sort of difficult for many that don’t closely follow Marvell to moving to five. That much more clearly articulate where your focal points are and how the company is shifting, especially that consumer to enterprise shift that’s been so important for you. Talk a little bit about this whole transition, talk about how this helps the market better understand the big bats and the focus that Marvell has today.

Matt Murphy: Yeah, no, great point. And, I think the increased transparency was actually very well received by all of our investors. As you mentioned, we really had these two giant segments that we would discuss our business around. One was networking, one was storage. We actually had a third, which was called other which is not all that exciting to be in other. That’s little single digit percent of total. So, it allows a conversation was, “Well, can you unpack the two product segments, right?” Which was storage and networking.

So, we moved to five and markets that we report around now. There was a lot of work internally to go get all that mapping done which has all gone through. Like even our process with our auditors, right, to make sure we’ve got a SOX compliant, really robust process. And so now that’s all been announced in the five segments, our data center which is where our cloud business resides. Carrier, which is where our 5G business resides. Auto and industrial, which is where the automotive piece. Right, so if you think about cloud 5G and auto, those are the three main growth drivers of Marvell. You can now see them pretty clearly. And then we’ve got enterprise, which is a great story if you want to talk about it, because while it’s considered to be a generally of low growth market.

I mean, we guided up in Q3 for that business to grow 30% year over year in enterprise. Okay, and then finally, consumer which has been an area we’ve been deemphasizing over time. But, that transparency was well received and I think the big news really was that data center was 40% of the company revenue. And, we said over half of that is actually in the cloud which would then say that one data center is two X the size of the next largest market for Marvell.

Second, cloud on its own is actually bigger than all of the other end markets. Even the ones we break out individually, and the relative concentration we have in data center is actually higher than all of our industry peers. So kind of the shocking part of, I guess, our transformation for some people is, you’ve turned from sort of a enterprise going to 5G story to probably what’s considered now to be one of the most important and highly leveraged stories to the cloud and the growth in the hyperscale. Which is just a remarkable transformation for us. We’re happy to talk more about that.

Daniel Newman: Yeah, absolutely. The way I kind of put it is you guys are putting yourself in these bright markets at the right time. Cloud for instance, not necessarily something that people had immediately associated with Marvell. But 40% of the business now sits in that data center area and cloud is a big emphasis of what comprises that data center business. The carrier business, not just about carrier supporting carrier, it’s about being aligned to 5G. And, 5G is really still in its infancy.

So I think it’s funny, a lot of people are looking at 5G because we’ve started to see hundreds of millions of device shipments as somehow we are late. We are in the early innings of a game that’s going to go over a decade. And, 5G on past generations of mobile connectivity isn’t just about the device and the phone anymore. It’s about so much more, it’s about the enterprise. It’s about future innovations, AR and VR.

And by the way, something you didn’t even really mention, Matt, that you guys are well positioned in. So you’ve got 5G, you’ve got the cloud and the world’s pretty excited about automotive. And I know in terms of the size of that business, it’s still small proportionally to other parts. But you guys are really well positioned playing in a [inaudible], playing in autonomous vehicles, in-vehicle networking.

So you can go down any of the list here, Matt, but the company has really found a way to put themselves in each of these spaces. And by the way, not in such a head budding way with the other chip makers, but really in a way that’s very complimentary coexisting and partnering. And, that gives you a lot of staying power as these various markets that you’ve put yourself in grow.

Matt Murphy: Yeah, you’re absolutely right on all those friends. I think at the end of the day, Daniel, it’s really born out of the philosophy that we had and I had when I joined. Which was really the strong belief that the biggest impact you can make around your own capital allocation, and how you think about investing your precious R&D resources, where do you direct your engineers? How do you think about M&A is really around an end market orientation, because ultimately that’s going to drive your business over time. These getting attached to the right secular growth drivers, and then you can drive out performance. Obviously if you can gain share, and gain sockets and things like that.

I mean, just real big high level numbers. If you went back five years ago and to your point about people don’t really think of Marvell in this way. I mean, if you add it up 5G cloud and automotive, if the whole thing was 75 million bucks a year all in, you’d be lucky. Okay, the company is now doing, call it, over a billion dollars a quarter just to make it easy. At our analyst day last October, we had said that cloud 5G and auto was 25% of revenue. Kind of a trailing 12 months. It’s now 30 plus percent of revenue. So just start doing that math, I mean, we’ve gone from basically something that was literally less than a hundred million dollars to billion plus, right. Growing at a tremendous growth rate.

So it’s real, it’s not a PowerPoint and it’s not a marketing thing. It’s actually these designs are ramping, we’re winning more of them. I told my whole team, “At the end of the day, the market always wins. So, you have to pick the right markets.” If you’re swimming upstream, trying to get into an end market that’s actually in decline. But your strategy is to sort of gain share, that’s typically not a great strategy. You can do it sometimes if there’s a technology disruption, or some exogenous event. But, usually you’re best off focus where the growth is and where you can differentiate. And to your point, we don’t operate in these sort of giant vertical strategy, meaning we have our own products, but we compliment and work with all the major industry partners.

I mean, Intel is a big customer of ours as an example. Nvidia, we’re a key partner of theirs. If you think about our automotive efforts on ethernet, right. If you pull up any of their reference designs, we’re part of that. I could go through the list of the other chip company. So we do compete, we obviously have strong competitors out there, but we sort of taken a view that we’ve got really good IP and technology. How do we sell as much as of it as we can, and really help enable our customers to do more, especially in these focus areas.

Daniel Newman: Absolutely, and I could take that in so many directions, but we only have five, six more minutes of your time. And, so I want to pick a couple here. You started talking about M&A, I mean, a big part of the story since you came on as CEO of the company has to do with some moves. I mean, Cavium was a big part of changing direction of the company. The Inphi acquisition in proportion to the size of Marvell was massive, but critical to the direction. And, then Innovium was another near billion dollar net acquisition that was announced this quarter. Give us a little bit on the inorganic strategy and overall what’s really driving your M&A.

Matt Murphy: Yeah, no problem. It’s been critical, right. It’s helped drive our transformation. I would say just quickly though, we shouldn’t neglect the tremendous performance that our team has shown on the organic businesses that we did keep, because when I came in was there was a number of assets that we sort of said didn’t make sense. But just quickly, if you look at our storage franchise which was considered to be basically left for dead, right. It’s growing double digits, it’s on a $1.4 billion a year run rate. And we said, “We expect that’s going to continue to be a growth business for us for the foreseeable future.” That was an organic business.

Our enterprise networking business, which is our switches and our FYs. That’s the one that’s driving all that growth, I mentioned. In a flat to down market we’re growing, like I said, next quarter we’re projecting to that business to be a 30% year over year. That’s clearly because of our execution. And then finally in automotive, none of that came from M&A. That was all home grown, basically $0 five years ago to this a hundred million dollar run rate we’re on with line of sight to a few hundred million. So, we complimented that with some pretty strategic M&A, focused around our core.

It’s funny, Inphi was big at the price we paid and the valuation. But, actually if you go back to Cavium was a little bit of a swing for the fences. And it was my first acquisition, I had been CEO for 18 months. We paid 85% of our enterprise value to buy Cavium, so it was not a small bet. It was a merger and that’s how we treated it, but that got us the really high-end CPU processing capabilities. We did, Aquantia in an era where we got some additional ethernet assets. Plus we got custom ASIC which has been very key, especially with more and more customers building their own front end silicon teams, but needing partners to design the whole chip.

And then as we talked about with Inphi while it was the biggest dollar amount as a percentage of the total, it was actually less aggressive, if you will, than Cavium although the multiple paid was high. But now looking back, given the performance of the business, I think the multiples now looking actually much more reasonable given that the businesses outperforming this year relative to what the street handed out for last year. So all those pieces, Daniel, have come together.

And then we just announced Innovium, which is funny these days that a billion dollar acquisition doesn’t even get noticed hardly. They used to have headline news four or five years ago, somebody spends a billion dollars. But for us, at roughly a $50 billion valuation as a percentage of our kind of our total, it wasn’t too much of a stretch. And we’re doing the deal in stock. And actually, if you look where the stock is trading today, it’s actually up versus where it was when we agreed to buy Innovium. So, they’re also able to ride the upside of the overall Marvell story.

So, yeah we’ve done them in different ways and in different shapes and sizes. They’ve all been really around this data infrastructure strategy. We’ve been very consistent on that. And I anticipate for the foreseeable future, we’re going to stay very focused on our mission. Do fewer things, do them really, really well. And, I think you can achieve a much better end result than getting yourself spread too thin across too many end markets, and customers and business models. It ends up diluting the focus, so we’re very focused company and all these acquisitions and organic has really put us in a place where we have the broadest, most competitive portfolio in the industry for sort of data centric IP and data centric semiconductor technology.

Daniel Newman: Yeah, I’m really glad you took a minute to give a little pat on the back to the organic side of the business. I didn’t want to, for a moment, discount that. I mean, I think the best companies on the planet understand the application of both organic and inorganic growth, and the synergies that need to exist between the two. Generally speaking, if it’s just inorganic and just buy, that tends to have a fuse that will not continue to stay lit. And at the same time, though, if you really want to keep up with the growth at the pace of the market, inorganic is sometimes the accelerate you need to keep things moving and to grow fast. Because as we know the markets, I think Facebook bought Instagram for about a billion dollars. Just think about that now, and so now what’s a billion dollars-

Matt Murphy: It was the shot heard around the world. I mean, people talked, “They paid a billion dollars?”

Daniel Newman: Yeah, now when Snapchat turned them down for a billion and that was a shot heard around the world. And, now we’re seeing billion dollar deals barely get news time. And again, that’s part of the reason why I wanted to start the show is there’s so many great stories underneath. There’s just not a time. And unfortunately, they’re sometimes just not sensational enough to talk about in our post pandemic sort of we’ve been locked up too long, and we just want things to keep us fired up.

Well, this is really good stuff and what this show is really all about. And I want to ask you this, and I only got a couple of minutes of your time, so I’m going to make it… You be concise, but you’re having these great quarters. The multiples are coming off, the M&A strategy is seemingly working but from a standpoint of outsider analysts pundits, there’s always parts of your story that are missed. What do you think the biggest part of the Marvell story that’s being missed at the market, and that those paying attention to your work should be looking at more closely?

Matt Murphy: Yeah, it’s a great question. To keep it succinct, I wouldn’t say there’s a miss per se. If you think about it, we have very sophisticated investors that are in our company. We’re adding more and more of them. But I think what’s happening, Daniel, is the pace of change inside of Marvell is so greatly exceeding the pace of change in the industry that there’s a lag, okay. And so for example, it took about 18 months to really get the investment community their heads wrapped around our 5G opportunity and narrative. It wasn’t like we said, “Hey, we got these 5G chips and everybody go get excited.” We had to show proof points, we had to build credibility. And ultimately, that was understood.

I think the newest one, Daniel, that isn’t quite digested yet and I think the first step was doing the year market reporting, was really the cloud in the data center opportunity for Marvell. And the fact that the narrative was, well, Marvell is this 5G company, sounds great. You still got that, and it’s still performing in line or better than our expectations. But I think the recognition is, wait a minute, we might be dealing with what could be the most important semiconductor company over the next five to 10 years relative to the hyperscale type of opportunity. Is that Marvell?

And, I think there’s going to be a lag as people digest that and we start showing our progress and track record. And, I think it will be a lot like 5G. I think it’ll take some quarters and it’ll take some proof points, but I think that’s the exciting thing. And then the final thing I would say is you get an incredible 5G story, you’ve got a less understood but even more compelling cloud story. And, you’ve got an automotive call option and kicker on top of it. Which again, people say, “Well, it’s only a hundred million.” But it was zero five years ago, so it’s a hundred million. Run rate I’m talking about, so where could that go?

And that’s really how we think about the company long-term, Daniel, not in six months cycles or 12 months cycles, but how do we put the investment in now to generate returns and the right market position? We want five years from now? In the case of automotive, it’s a seven to 10-year story. If you think about all the other things that we could bring to the table in that market. So, yeah I think there’s still a lot in front of us and until we slow down, I think people will probably always be missing a little bit of the story and that’s okay. That’s our job to bring them along with us in our journey.

Daniel Newman: Absolutely, well, fast companies always move a little bit faster than the market. Matt Murphy, CEO, Marvell technologies. Thank you so much for joining Making Markets.

Matt Murphy: Yeah, thanks Daniel and good luck on your show. Happy to be in an episode one.

Daniel Newman: Lucky to have you.

Matt Murphy: Thanks.

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About the Author

Daniel Newman is the Principal Analyst of Futurum Research and the CEO of Broadsuite Media Group. Living his life at the intersection of people and technology, Daniel works with the world’s largest technology brands exploring Digital Transformation and how it is influencing the enterprise. Read Full Bio