Last week, we attended Marvell’s analyst day, we also talked about it on the Circuit. One of the persistent topics around the company lately has been the role of its “Custom” silicon design business. For some reason, there is a lot of confusion in the market about how much business Marvell is actually doing here and what their role is in regards to a few big customers. Some of this is just Street rumor-mongering, but digging into the details a bit can shed some light on what their custom business actually consists of and give a sense as to how meaningful it can be.
In particular, there seems to be an ongoing debate as to who “won” the design services for AWS’s Trainium 2 chip. We have seen considerable coverage, structured and as conflicting claims, pitting Marvell against Taiwan’s Alchip. Alchip seems to have told investors that they won Trainium 2, and while Marvell has not said it quite so explicitly, they are clearly signaling they won Trainium 2. The reality is that they both won – the services that Alchip provides are very different from the services that Marvell offers. There is plenty of room for both of them in this.
But that does not mean they are the same. Both companies help hyperscalers design chips and bring them to production, but that covers a lot of territory. To put this in context, Alchip has gross margins in the 20%-30% range, Marvell’s custom business does 50%+ gross margins, and the scale of its revenues for each customer has a couple more zero’s on it. Ten years ago, several companies tried to operate a custom chip design business in the US, they all foundered on cost competition problems with companies like Alchip, but Marvell’s business has more legs.
One way to think about the difference is that Alchip essentially provides a consulting service. Their engineers advise customers about ways to improve the design to get better performance or better manufacturing yields. Marvell offers components of the design, adding to the chip’s functionality. At the risk of oversimplifying, Alchip provides a service, Marvell provides IP.
Alchip’s business grew up helping companies with small chip design teams integrate into the workflow of the foundries, especially TSMC. By contrast, Marvell comes from its history of delivering products which they have now de-constructed into component parts which they license to customers.
The difference here is that Marvell invests heavily in state of the art of designs – capabilities unavailable elsewhere. Their recent introduction of ‘custom’ HBM is just the latest example of this. There are a lot of companies, and teams, that could displace Alchip, there is currently no one who can provide Marvell’s HBM IP. We do not mean to diminish Alchip, they have done some impressive work of their own, but it should be clear that they operate at a different corner of the market.
So the question then becomes is this a good business for Marvell. We have long maintained that no merchant chip company loves doing custom work, the margins are not as good and customer churn is always a risk. The most prominent news out of Marvell this month was their announcement of a “multi-generational” agreement to support Amazon’s chip design. This press release, with a quote from Amazon, should have silenced all those concerns about Marvell’s role in Tranium 2, but it’s really that multi-generation part that matters most. This assuages the concern that Amazon is going to switch to another provider any time soon.
That being said, this business still has challenges. For starters, Marvell is competing against Broadcom. In addition to being much larger, Broadcom is laser focused on cash generation. They are perfectly happy to take variable, lower-than-average gross margin business if it delivers operating profits. Marvell has to contend with the high visibility nature of its custom business in the midst of a much smaller revenue pool. Moreover, Marvell also has to contend with competition with Mediatek. They have also announced their intention to be a bigger player in the custom silicon market. As of right now, it is not entirely clear what that means. Mediatek has actually been doing custom silicon work for over a decade. For the most part they have helped smaller volume customers (think networking electronics) design chips, with a service not so dissimilar from what Alchip does. It sounds like they have broader ambitions. As a merchant chip company, they have more to offer than Alchip, they also have extremely good relationships with the Taiwan foundries. This could mean that Marvell ends up sandwiched between the powerhouse Broadcom and the highly cost adaptive Mediatek.
All of this is a problem for a different day. For the moment, Marvell has what appears to be a solid book of custom business with some sizable customers, likely with several years of growth ahead.
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