Q3 2024 Marvell Technology Inc Earnings Call
Yes.
[music].
Good afternoon, and welcome to Marvell technology, Inc's third quarter of fiscal year 'twenty 'twenty four earnings conference call.
All participants will be in listen only mode.
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After todays presentation, there will be an opportunity to ask questions.
Please note this event is being recorded.
I would now like to turn the conference over to Mr. Ashish Saran Senior Vice President of Investor Relations. Please go ahead.
Thank you and good afternoon, everyone welcome to Marvell third fiscal quarter of 2024 earnings call.
Joining me today are Matt Murphy, Marvel's Chairman and CEO.
And William <unk>, our CFO.
Let me remind everyone that certain comments made today 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 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 in the Investor Relations section of our website, let me now turn the call over to Matt for his comments on the quarter Matt.
Thanks, Ashish and good afternoon, everyone.
For the third quarter of fiscal 2020 for Marvell delivered revenue of $1 four 2 billion growing 6% sequentially above the midpoint of guidance. In addition on a non-GAAP basis. The Marvell team drove a sequential increase in gross margin remained disciplined on operating expenses and delivered EPS of <unk> 41 above the midpoint of.
Our guidance, we are pleased with our results and execution.
And our data center end market revenue for the third quarter was 556 million well above our guidance driven by stronger than forecasted AI revenue.
We were also encouraged by revenue from cloud returning to year over year growth.
On a sequential basis overall data center revenue grew 21% in the third quarter, while cloud grew well in excess of 30%.
As expected revenue from the enterprise on premise portion of our data center end market declined sequentially in the third quarter, reflecting weakening demand.
Demand for data center storage also remains depressed and industry expectations for a recovery have continued to push out.
And cloud revenue from both AI and standard cloud infrastructure grew sequentially with AI growing significantly faster.
Growth was broad based led by our Pam four optical products <unk>.
Harry links Ethernet switches as well as our data center interconnect or Dci products.
Earlier today, we released a video highlighting our long standing collaboration with video or using Marvell optical interconnect technology to enable the bandwidth scale and reliability required by generative AI.
Marvell has built a broad product portfolio, which our customers are relying upon to power their accelerated computing infrastructure.
We are benefiting from strong demand for our 800 gig Pam electro optic products highly correlated to the growth in deployment of AI accelerators. In fact, we are seeing the overall attach rate of our Pam products to accelerators being higher than one to one and high performance AI systems currently shipping in the market.
We're also seeing strong customer traction for our next generation 160, 200 gig per lane Pam platform that we started sampling this past April.
Customer qualifications have begun and we are looking forward to ramping our 160 solution into production.
Complementing our optical solutions, we expect our Pam DSP for the active electrical cable or AUC market to start ramping in our next fiscal year in tier one cloud deployments. We also demonstrated our 224 gigabit per second long reach <unk> at the <unk> Global Summit held in October we expect that this.
Technology will serve as a building block for our next generation 200 gig per lane AUC.
And our switching portfolio, we're making great progress on our next generation 51, <unk> cloud switching platform.
C. P. We demonstrated marvell 51, <unk> solution operating at full capacity with very low industry, leading latency running on Sonic.
Our enablement of Sonic and agile open source network operating system is very important for cloud customers, who value flexibility interoperability scalability of an open Ethernet switch ecosystem.
Customers have started development on our 51 <unk> solution and we look forward to wrapping this platform into production.
In addition earlier this week, we announced our membership in the Ultra Ethernet consortium.
This is another step in our commitment to driving continuous innovation.
On an open Ethernet based cloud fabric, which can deliver the scale and performance required for next generation workloads, including generative AI.
These modules are based on our new five nanometer 800 gig coherent DSP and silicon photonics or Saiful platform.
Which integrates multiple discrete components within a single device.
This level of integration enables that performance in packaging density required for small form factor applicable modules to drive a high bandwidth signal across long distances between data centers.
Marvell Saiful platform has accumulated billions of operating hours over the past seven years in Dci applications.
In addition, we are starting to see emerging applications for our field proven <unk> technology to power next generation higher bandwidth and optical connections inside data centers we.
We look forward to updating investors as this opportunity unfolds over time.
Cloud customers remained focused on enhancing their AI offerings by building custom compute solutions of their own and we have already won a number of these designs. We've completed qualification on one key AI project and have started wafers in their production.
For another project, we received first silicon back from the Fab and the initial testing is looking positive as.
As a result, we expect both of these custom compute programs to start volume production next year.
Turning now to our guidance for overall data center end market.
In the fourth quarter of fiscal 2024, we expect revenue from our data center end market to grow in the mid 30% range on a sequential basis.
In our last earnings call, we provided a forecast or AI revenue to cross a $200 million quarterly run rate exiting this year.
Since then demand has continued to grow and we now expect our AI revenue in the fourth quarter to come in significantly above our forecast.
In addition to strong growth from AI. We also expect revenue from standard cloud infrastructure to grow sequentially in the fourth quarter.
For the enterprise on premise portion of our data center end market, we expect revenue to decline sequentially in the fourth quarter.
Turning to our carrier infrastructure end market revenue for the third quarter was $317 million above guidance growing 17% year over year and 15% sequentially.
The over achievement in the third quarter was driven entirely by the wireless portion of our carrier end market.
Marvell specific product cycles have enabled our wireless revenue to Buck the trend of a soft end market for several quarters.
However, we have been forecasting for some time that this wave of above market wireless growth for Marvell would start to decline by the fourth quarter as the initial wave of <unk> Rollouts near completion.
Additionally, demand is continuing to soften as carriers are managing capex in a difficult macroeconomic environment.
As a result, following an extended multi year period of strong growth, we are expecting a period of digestion.
In addition, we expect revenue from the wired portion of our carrier end markets continued to decline reflecting weakening demand.
As a result for the fourth quarter, we expect revenue from our overall carrier end market to decline in the mid 40% range on a sequential basis.
Looking longer term as data traffic continues to grow we expect that operators will need to continue to invest in adding capacity in both the wireless and wired and markets. We also expect to benefit from share gains, including significant five nanometer base station design wins, which we have won but are not in production.
We are optimistic that carrier Capex will normalize over time and our revenue from this end market will return to growth.
Turning to our enterprise networking end market revenue for the third quarter was $271 million declining 28% year over year and 17% sequentially as we've been signaling we see weak demand in this end market.
As a result for the fourth quarter of fiscal 2024, we project enterprise networking revenue to decline in the mid single digits sequentially on a percentage basis.
Turning to our automotive and industrial end market revenue in the third quarter was $107 million growing 26% year over year and declining 3% sequentially.
Looking to the fourth quarter.
Our fiscal 2024, we expect revenue from our overall auto and industrial end market to decline by approximately 20% on a sequential basis, we expect a sequential decline to come from our industrial end market, which includes aerospace and defense, where order patterns can be lumpy in any given quarter.
Moving on to our consumer end market revenue for the third quarter was $169 million declining 5% year over year and growing 1% sequentially.
In the fourth quarter, we're expecting revenue from the consumer end market to sequentially decline in the mid teens on a percentage basis.
In summary, we delivered revenue and non-GAAP earnings above the midpoint of guidance for the fiscal third quarter.
Through fiscal 2024, the Marvell team has continued to execute in a dynamic environment remaining focused on driving continuous improvement on what we can control, while dealing with inventory corrections and macroeconomic induced demand headwinds in many end markets.
We re prioritized our investments to align to the highest ROI opportunities in front of us our team drove efficiency improvements to reduce operating expenses and we are well on track to meet our commitments.
We have worked proactively with our customers and suppliers to best manage inventory across the compliant combined supply chain.
Our operations group has rapidly responded to the increase in demand from AI.
At the midpoint of our guidance for the fourth quarter, we are forecasting that our revenue for the second half of this fiscal year should grow approximately 7% over the first half.
In addition, we are forecasting a 300 plus basis points sequential improvement in our non-GAAP gross margin in the fourth quarter.
This projection reflects our expectation for an improving product mix as well as a multi quarter cross functional effort to further optimize our cost structure.
Heading into next year, while we don't typically guide beyond a quarter, we expect softness in demand the impact revenue from our enterprise and carrier markets in the first quarter.
We also anticipate a significant reduction in consumer end market revenue due to seasonality in demand and the completion of deliveries for an end of life program in the fourth quarter.
Although the enterprise and carrier markets are experiencing near term headwinds these large and long lasting and markets are critical to the global economy. So we expect them to recover and turn into a revenue tailwind over time.
In the meantime, our datacenter revenue was growing rapidly, reflecting our emergence as a key enabler of accelerated computing.
Datacenter revenue driven by the ongoing strength in our connectivity solutions inside and between data centers to grow to over 50% of our total revenue in the fourth quarter.
Longer term, we expect additional tailwind as the data center growth from the ramp of multiple customer accelerated compute programs for AI.
We are also looking forward to a number of new marvell products entering the datacenter market as I discussed earlier.
With that I'll turn the call over to William for more detail on our recent results and outlook.
Thanks, Matt and good afternoon, everyone.
Let me start with a summary of our financial results for the third quarter of fiscal 2024.
Revenue in the third quarter was $1 49 billion.
Exceeding the midpoint of our guidance declining 8% year over year and growing 6% sequentially.
Data Center was our largest end market driving 39% of total revenue.
Next largest was carrier infrastructure with 22%.
Followed by enterprise networking at 19%.
Consumer at 12% and ultra industrial at 8%.
GAAP gross margin was 38, 9%.
non-GAAP gross margin was 66% growing 30 basis points sequentially, driven by higher revenue and cost improvements moves.
Moving onto operating expenses.
GAAP operating expenses were $698 million, including stock based compensation amortization of acquired intangible assets restructuring costs and acquisition related costs.
non-GAAP operating expenses were $437 million.
Line with our guidance.
GAAP operating margin was negative 10, 3% non.
non-GAAP operating margin was 29, 8%.
For the third quarter GAAP loss per diluted share was <unk> 19.
non-GAAP income per diluted share was <unk> 41 <unk>.
<unk> above the midpoint of guidance.
Now turning to our cash flow and balance sheet cash.
Cash flow from operations in the third quarter was $503 million, which grew by $391 million sequentially.
This significant growth was driven by a relative improvement in DSO lower inventory along with better profitability.
Our inventory at the end of the third quarter was $942 million decreasing by $74 million from the prior quarter.
So was 78 days, reducing by four days from the prior quarter.
Capex was $54 million.
We returned $52 million to shareholders through cash dividends, and we repurchased $50 million of our stock during the third quarter.
Our total debt was $4 one 9 billion.
Gross debt to EBITDA ratio was 221 times.
Net debt to EBITDA ratio was 183 times during.
During the quarter, we issued new bonds and use the proceeds to pay down our upcoming debt maturities.
With our investment grade credit rating, we were able to execute this refinancing while decreasing our average interest rate on our outstanding debt balance in.
In addition, we increased our average debt maturity from $3 nine years 253 years.
As of the end of the third fiscal quarter, our cash and cash equivalents were $726 million, increasing by $302 million from the prior quarter.
Turning to our guidance for the fourth quarter of fiscal 2024, we.
We are forecasting revenue to be in the range of $1, four 2 billion plus or minus 5%.
We expect our GAAP gross margin to be in the range of 48, 2% to 57%, we expect our non-GAAP gross margin to be in the range of 63, 5% to 64, 5% with a midpoint projected to be back to the low end of our long term target model.
Forecast for this large sequential improvement is driven by expectations of a significantly stronger product mix.
Ongoing cost optimization activities.
<unk> forward, we expect that product mix as well as the overall level of revenue will remain key determinants of our gross margin in any given quarter.
For the fourth quarter, we project, our GAAP operating expenses to be approximately $680 million.
We anticipate our non-GAAP operating expenses to be approximately $430 million.
This stable of operating expense reflects the completion of the cost reduction plan, we communicated in our first fiscal quarter of this year.
Looking ahead to the first quarter of fiscal 2025, we anticipate typical seasonality in payroll taxes and employee salary merit increases.
As a result, we expect opex to increase by mid to high single digits on a percentage basis.
For the fourth quarter, we expect other income and expense, including interest on our debt to be approximately $50 million, we expect our non-GAAP tax rate of 6% for the fourth quarter, increasing two 7% in fiscal 2025.
We expect our basic average shares outstanding to be $865 million.
And our diluted weighted average shares outstanding to be $874 million.
Anticipate GAAP earnings per diluted share in the range of a loss of <unk>.
To a gain of <unk> <unk> per share.
We expect non-GAAP income per diluted share in the range of 41 to <unk> 51.
Operator, please open the line and announce Q&A instructions. Thank you.
We will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone.
If you are using a speakerphone please pick up your handset before pressing the keys.
To withdraw your question. Please press Star then two.
In the interest of time, please restrict yourself to one question only.
If you have additional questions. Please rejoin the question queue.
At this time, we will pause momentarily to assemble the roster.
And our first question will come from Toshi Hari of Goldman Sachs. Please go ahead.
Hi, good afternoon. Thank you so much for taking the question, Matt I had a multi part question on your data center business.
It sounds like the outlook has improved since 90 days ago, just curious how.
If you can size the AI business for us.
Where you landed in the October quarter it.
It sounds like you'll be in excess of $200 million in Q4, but the outlook there and then more importantly into calendar 'twenty four.
You can speak to visibility you have across your optical business as well as the compute business.
That that would be helpful. Thank you.
Yeah. Thanks for the question, we're very pleased with the performance of our datacenter business.
<unk> grew over 20%.
In Q3, we're guiding it up 35% in Q4 as you noted that is driven by AI and the Q.
Q4 exit rate is well north now of $200 million, what's very encouraging as well is that the <unk>.
Traditional cloud infrastructure piece of it is also growing nicely.
It's come back very strong for us and those two will be growth drivers for us into next year.
We seek.
See continued weakness and softness and this is a broader market statement in the on premise piece and that probably persists for some time, but the mix now of cloud and AI is so much higher that it's driving the overall segment.
And in a very positive trajectory both in the third quarter and into the fourth quarter and then as we head into next year.
As you've seen you know most of the.
Strong growth we saw in the current fiscal year in AI and cloud and for that for that matter has been in the optics area.
But we are tracking well for growth there next year as well as the ramp of our custom silicon programs.
And in my prepared remarks, I talked about the strong progress we made on new product development and starting to plan for ramps there. So while we're not re sizing.
Those specifically.
Those the performance clearly in the fourth quarter as well as what you would.
How are you think about next year is much much stronger than when we first signaled.
These are the AI AI opportunity for Marvell, a couple of quarters back. So I think things are tracking nicely and as you said compared to 90 days ago I think the overall aggregate data center business as you can see from our results is doing quite well.
Thank you.
Yes.
The next question comes from Tim Arcuri of UBS. Please go ahead.
Thanks, a lot Matt I also had a.
Payout multipart question so.
Enterprise networking is going to be down about 35% from the peak in fiscal Q4.
And the customers are still though reporting that their inventory levels are actually going up. So is this marvell product is this product from another supplier and can you talk about just the.
Dynamics going on in that segment and then also for fiscal Q1 do you still think that revenue can grow I know you said that networking is down and carriers down but data center will be up do you think that total revenue can be up.
Yeah. Thanks, Tim.
I appreciate the creativity on the two parter, but no problem on the enterprise side.
It's hard to comment I mean, if you look balance sheets are still pretty heavy from from the Oems out there.
We've been saying I think since even going back in December of last year that enterprise was going to come down this year and it's just continued to come down I think there's a combination of both.
Inventory management at the at the OEM level as well as you know from some of the projections you see out there at the end market level.
A softer and more weakening demand environment. So we still feel very good about our position we had grown this business significantly from where it was just a few years ago. We've had we had great years. The last couple of years and even in the first half of this year. So we're going through what would be kind of a normal inventory correct.
<unk> cycle, it's taken a little bit longer than we thought if you went back to the beginning of the year, but I also think the macro and the environment has deteriorated more than we would have anticipated at that time and so we are we see it down and we see that having to work through that issue.
For the next couple of quarters.
On Q1, while we don't.
Guide, specifically I understand what Youre looking for I think the way to think about it is that.
I guess I gave gave the information you know carrier is down after a really great run in Q4, that's going to stay week the.
Telco environment in Capex spending is very constrained out there and the end customers seem to be having some trouble.
We talked about enterprise being down and then on consumer.
Which actually did a little bit better than we thought it would have this year.
The last time buy program that we had.
Is largely going to conclude now and in the fourth quarter and so we see a stepping down there.
So if you kind of add all that up that's about half our revenue that's going to come down.
In Q1, and then the real question is the data center strength and how does that continue and it's it's too early to call, but just the way to think about it is it has a lot to offset at this juncture. When you have that much of your of your revenue coming down the last thing I would say, though on on carrier and enterprise as that.
These are these are this is a cyclical downturn on these in the kind of design win strength we've had in the.
Designed position we had is such that these will recover and they will come back to a normalized run rate over time and when that happens that'll be a tailwind to EPS in a tailwind to revenue growth as that kind of think of it as the base business of Marvell.
Returns to growth and in the meantime, our diversified strategy is working well because we've got AI and cloud that's really firing on all cylinders.
<unk> got a lot of information there you guys are going to have to come up with your own model, but hopefully that gave you some pieces on how to think about it.
Wonderful thanks.
Yes.
The next question comes from Vivek Arya of Bank of America. Please go ahead.
Thanks for taking my question, Matt So I think in the data center the value of the optics business I think is well understood and appreciated.
Shannon just still for us too.
We value your ASIC business. So is it one or two customers is it more customers how's the visibility for the next one or two years like are we talking one.
200 million next year are we talking three $400 million next year.
Because unless we have a good way of sizing what this business is and what the visibility and what the growth potential.
It's just very hard to value and give appropriate value to marvell, but this business. So could you just help us understand.
What is the right way you think about your <unk> business.
Again, the Lumpiness here really swing your sales next.
<unk> next year.
Yeah. Thanks Vivek.
I think a couple of ways to think about it the <unk>.
First is on the customer opportunity just by design, it's highly concentrated if you think about it and.
There's just a handful of companies that can really drive the kind of silicon Tam opportunity that.
That.
That's out there and you've probably seen in the last few weeks. There has just been a tremendous number of announcements.
Cross the industry around AI, whether it's strategic partnerships that are being announced people doing their own silicon behind that their own silicon. There's typically partners there people like marvell, who are going to participate.
So a lot of activity you can see and I would say you know even when one broader statement and then I'll get to your question.
We do see is that as the Tam is moving from traditional computing architectures to accelerated computing. It is really opening up up the custom silicon.
Piece of that and so that we believe will be a larger portion of the Tam going forward.
We.
When we talked about sizing if you remember a couple of quarters back our AI opportunity. We had signaled already that this year, we would do about 400 million in the optical area.
Said another way, we do about $400 million. This year in total AI revenue most of it driven by optics and that next year would be about $800 million that was the original sort of bogey, we put out to help investors to your point size. This and then you would assume some optics growth and so you could sort of due to the do the math on what the difference might be.
Now.
AI has got a bigger head of steam than it was back then the optics piece is higher.
And we've made significant progress now on new product development in terms of getting the the chips actually taped out and through the fab and now starting to think about ramping but what I would say is and I have been saying this to investors for about six months, we are not in a position to call. The ball just yet on how big.
Custom silicon opportunity can be for next year, it's still early Vivek I understand the investor appetite for this.
I'd say between us and our customers we're not we're.
We're not fully.
We don't fully know how big this can be yet so I'm going to need a little bit more time to probably size that for you, but what I can say is from when we first talked about AI two quarters back and what the opportunity was looking out to next year, it's much much higher and that's both on the custom side as well as on the optic side, So I hope that.
Helps I understand the question, but it's.
It's a pretty dynamic market as you see what's going on but the good news is it's all moving in a very positive.
Upward direction.
Thank you Mike.
Yes.
The next question comes from harsh Kumar of Piper Sandler. Please go ahead.
Yes.
Thanks, guys.
Great tremendous execution in very choppy environment.
So my question for you was on the carrier side Youre guiding down.
<unk> down mid <unk> on a sequential basis and I think you mentioned, both the wired and the wireless pieces are down I was curious if you can help us think about perhaps what is taking a bigger part of the hit.
And which one do you have more confidence in in terms of returning back to growth first.
Yeah, Thanks, harsh and it is a choppy environment as you point out.
Look I think on carrier.
We're coming off a very very strong Q3. It was over 300 million and I think if you just kind of and for the whole year, it's going to be have been like $1 billion business for marvell. So I think that's been a bit.
Been a success story for us.
Clearly some.
We've been trying to signal if you go back over the last couple of calls we've attempted to signal to investors.
The fourth quarter that there would be.
During the third quarter would be the peak on some of the <unk> stuff and then it would take some time for that to digest through and we bucked the trend. If you remember on our performance here. So both of those are deferred that carrier segments, a strong segment for marvell. It will it will return over time.
Back to a normalized run rate, but it's very lumpy and volatile as carrier usually is.
What I would say on.
On the timing I think they are both kind of come back. It's just it's hard to know exactly when on these I think the predictability in this segment is tough. So I don't think I have an exact answer on which when it comes back sooner I'd say wired has been trending down for some time as I think some of that pandemic led infrastructure build.
Has waned.
The carrier <unk> stuff and really performed extremely well for us this year and by the way when it does come back both on the carrier on the wireless and wired side, we have incremental design wins in those segments. One is incremental content in base stations with.
With the layer two processor opportunity and also our new 800 gig DSP piece.
For a carrier for wired infrastructure those are going to be new revenue drivers for us when we come back out of it. So timing is still unknown, but I would just say that this is.
Part of the base business of Marvell kind of the core part of Marvell that overtime will return to a normalized run rate.
Thanks, Matt.
Yes.
The next question comes from tore Svanberg of Stifel. Please go ahead.
Yes.
Thank you, Matt you mentioned, the Nvidia and Marvell partnership and I do appreciate the video on your website, but could you add a little bit more color on exactly what this means I assume this is a multi year partnership but any additional color you could share with us.
Great. Thanks.
Yes, Thanks, Cory I think the video was posted today, but it really I think.
Sort of captures a very long term working relationship between the two companies.
Across a number of.
Of opportunities by the way I think we've had a complementary and very strong partnership with Nvidia to really help enable them and their products in the optical area.
We've been working with them for some time.
And this goes back even to working with.
With melanoma.
In some of their their applications. So this was really a way just to I think highlight.
The years of work, we've done together and also signify that theres a lot of opportunity for us to kind of double down together on this AI opportunity. So we're proud to be a partner with them and support them in their growth.
That's really what's behind it it's not theirs.
There is not a new announcement or anything per se. It's just a recognition of our long standing cooperation between the two companies.
Great. Thanks, since that was kind of a soft question I had a question on the enterprise networking business.
It sounds like the sequential decline is going to be a little bit better than what we've seen lately.
Is that a sign that you're starting to see stability, there or the order rates and the visibility is still very limited.
I'd say, it's still it's still limited I think it is still coming down.
And.
I think where we want to see one customer.
Customer balance sheets get back in shape to them talk a little bit more robustly about their end market demand.
<unk> thing before we before we make a call there.
So we'll have to see where enterprise it spending really ends up Tori next year given the macro.
So right now, we're just sort of taking it.
Week by week and we're.
Monitoring.
What products they need and looking at their forecast for next year and we're trying to plan accordingly, but I would say visibility is pretty limited at this point for the full year.
Great. Thank you very much.
Yes.
The next question comes from Ross Seymore of Deutsche Bank. Please go ahead.
Thanks for letting me ask the question, Matt I just wanted to ask about your business in perhaps a different way to split. It I think everybody is excited about the AI and the clouds part of it and for good reason, but if I took that out of the revenues everything else seems to be down in your guidance, 30%, 35% year over year somewhere in that range. It really.
Wanted to get what percentage of that do you think is down just because of cyclicality and it sounds like the first quarter might come down again, but should bounce back at some point versus the businesses. You are just de prioritizing so how much of a cyclical snapback whenever that happens should we expect out of marvell versus a REIT focused away.
From some of those non cloud areas.
Yeah got you Ross, Yeah, I think maybe I'll start just super fast at the high level and we'll just dive in I'd say that this this sort of supply demand inventory.
Cycle, we've gone through and the industry has taken a lot longer than historical to play out and it's sort of the dynamic I would characterize this time as you had various end markets resetting and correcting at different times in a pretty protracted manner. I mean, if you go all the way back to last year in 2022. It started early with PC.
<unk> and went to smart phones and went to gaming and then it started with data center and cloud and it sort of had this kind of a couple of year series of a reset if you will in our business.
We saw these sort of declines in that manner as you talked about earlier this year in data center as an example, and now you can see a few quarters later, it's like Roaring back as we worked through some of those issues. So that's the cyclicality part you are talking about and you're asking the right question, which is hey over time do these come back or not because may.
We pulled R&D are we sort of shifted our beds.
I would say for our business. We are we are committed to a diversified portfolio.
We invest R&D.
Ross those various segments, including enterprise carrier and then within the cloud Theres a number of opportunities in NII. The only one that we really have the emphasized and this goes back.
Five or six years ago is consumer.
And we've always projected in our models and our analyst days that that would be.
A declining business for us over time, both in revenue as a percent of total but then.
Our investments in the other areas would more than offset that and that's proven to be the case.
And so I think when you think about and model this going forward.
We have we have R&D, that's going in and will continue to be invested in kind of the core base business of Marvell and we've been able to grow that very nicely over time. If you look at it on a trend line, it's really the consumer piece that is.
Is not going to come back and just to give you an example.
This year one reason it did better is one of the programs, we have which has been in last time buy mode for several quarters. It actually outperformed during the year now it looks like it's not going to continue into next year, but that business is probably in like the $50 million a quarter range type of thing and that was a design, we one years and years ago and that's just not.
Going to repeat as an example, that's not going to come back and Thats, Okay, because thats not something were putting R&D into but for the rest of the segments. We still take a long term view that we can grow them at or above market and then of course take advantage of the cloud AI opportunity, which is really the big growth driver for Marvell Hope that's helpful.
Thank you.
The next question comes from Matt Ramsay of TD Cowen. Please go ahead.
Thank you very much good afternoon guys.
Matt I wanted to go back to some of the custom compute an ACO programs and maybe asking a couple of questions about that one is I mean, it's been a heck of a year from a G&A perspective. When you just go back 12 months.
We're just starting to hear of GBT and the whole thing is blown up so the customer base all had to think about that react to that.
And so I wanted to think about the programs that you have in flight and the interactions that you have with the customers and that the limited set of customers in that space that are all going to be large.
Have you seen them lean more into merchant more into using ASIC houses or more into doing some of the silicon directly with the foundries themselves. There has been a change in mix. That's the first part of the question the second part.
And when you look at AI overall, but the leader in that space, which you guys announced the partnership with today.
Leads not just because of the silicon, but hugely because of software and cures.
Curious as to whether with the custom programs Youre doing for AI compute.
Are you seeing the customers invest that the scale and software that can make those programs successful that volume over time. Thanks.
Yeah. Thanks, Matt Yeah, I think youre right to kind of reflect that how.
How much things have changed in basically a year.
I think it's a pretty simple answer on the first one I'd say every one of those different.
Sort of segments. If you will that you mentioned.
All of them are up in terms of the activity.
You can see it from from the leaders numbers in their guide you can see it from some of the other companies in the ecosystem talking about a second custom I mean look at where we've come from even on that from having very kind of modest expectations to this being a significant revenue driver for US next year, and then theres various business models I think that.
All of the large companies are trying to pursue to figure out how to I think do all of the above which is kind of have a nice mix of custom for things that are very very specific to them as well as take advantage of.
Kind of the market unlocked that's happening because of the work of say somebody like Nvidia right, that's actually helping to create a market. So I think I think all of that is going to be it's not a zero sum game.
At all and I would say on the on the sort of customization side and working with those hyper scaler. The design activity is through the roof at this point and.
So a lot of excitement in that area both for the customer and then all of the stuff. We can do around it from an optics and networking perspective.
And then I'm not probably the best person to comment on the second one.
But clearly these are very very well capitalized smart companies they understand their customers and they're going to do what they need to do for their workloads and for their custom silicon to make sure I am sure that the software and the service offerings are more than competitive, but <unk> got a great company. That's also out there that's driving the market. So.
I think both are going to exist in my last point would be to reiterate this is clearly not like in traditional computing, where it's more of a zero sum game. It's just find it hard to grow the pie and in fact, it may be hard to keep the pie even flat in this area, there's going to be a lot of winners and there's going to be a lot of opportunity created for the companies that have the right positioning.
Customer relationship and IP portfolios to support these emerging needs, but it's very dynamic at this juncture and I think for us that's what creates a lot of opportunity.
Thanks, I appreciate the perspective.
Yes.
The next question comes from Ann Breeze.
Stifel.
Of BMO. Please go ahead.
Hi, Thank you very much.
Another question on gross margin.
You surprise does negatively early in the year.
And then you gave us good counsel don't panic.
You're back at 64, so just wanted to think through for the next year and what's the right way to think about.
The gross margin profile, given you help Pennsylvania coming in.
These lower margin.
Maybe it's not for you guys, but.
What's the right way to think about the margin profile for the company.
Near to medium term that thank you.
Hey, well, maybe I'll, let will want to take a victory lap on this one so well go ahead.
Yeah, Hey, Hey, I'm. Please yes. So thanks for the question. So first of all really pleased to be guiding back to 64% at the midpoint right I think the team internally has done a phenomenal job controlling what we can control.
In a pretty volatile environment.
When we look to next year, we've been discussing some of the uncertainty you on the recovery on some of our core businesses right enterprise networking and storage and then also the timing and the scale of the ramp on custom.
I'll just remind you of your prior to this last year.
We scaled our carrier and custom business is very significantly while maintaining our gross margin right and so looking ahead at next year.
Custom.
On a relative basis grow significantly more clearly that would put pressure on our gross margin.
<unk> our view is that there will be very accretive on operating margin and on EPS.
So yes, so that's how we're looking at it hopefully that's helpful. Bruce.
It is I had a quick clarification for you Matt sorry.
You mentioned something about one one to one pool attach rate for your for your business I was just wondering what was it before and kind of what has changed.
What is changing the dynamic to push it to greater than one one to one thank you.
Yeah. Thanks, <unk>, it's been a little bit of a journey on this topic I think if you go back two quarters ago. We were still we were still building our models out for how to think about the attach rate.
And help investors size of the opportunity.
And and we ballpark that at one one to one initially and subsequent to that as we sort of looked at the.
Kind of the.
All of the optics through.
Up into the switch in and in the network.
And we've I think we've updated that I think we were really reiterating this we've updated this number before that it has grown to.
Greater than one I think that was more of a clarification, we were doing but initially it was a little bit of how do we actually get our hands around how big this could be and people wanted to know balance that against how many gpus. They thought were going to ship, but I wouldn't say, that's really incrementally new news I think that was more of a <unk>.
<unk>.
Reiteration, if you will.
Because it's not just the optics.
Attaching.
From the accelerators to the switch, but also in between switch layers and that was sort of a nuance that I think we needed to clarify.
So in aggregate more than one to one.
Thank you.
Yes.
The next question comes from Harlan sur of Jpmorgan. Please go ahead.
Yes. Good afternoon, thanks for taking my question.
After six quarters of sequential shipment declines in near line or capacity optimized hdds by your customers.
Cloud and Hyperscale excess inventory of drives appears to be normalizing and then on top of that you have cloud storage utilization to keep on increasing I think your storage customers are cautiously optimistic on sequential shipment improvements on their new 20 terabyte platforms.
You guys are still shipping about half the rate of your pre slowdown run rate on storage I know you've been growing slightly sequentially last few quarters, but are you guys starting to see signs of a sustainable pickup in data center storage moving into next year.
Yes. Thanks.
I think this is one of those markets heartland, where any any any any good news is good news I mean, it's been very very rough out there for that part of the.
Electronics industry and you certainly saw the impact on our revenues.
Look I'm encouraged to see the same reports of inventory coming down and some of the end customer commentary.
<unk>.
We we I think aren't going to call. This until we really see the backlog build again I mean, it's come off the bottom and it's grown a little bit and it's but but even if it sort of.
Improving off the bottom at least the end market side, it's still kind of flattish units right I don't think it's necessarily off to the races. So we're staying pretty cautious on this we got hit pretty hard on the downside here and where.
Cautiously kind of guide our way back into.
That market normalizing, but I will say the end market signs, we're hearing and seeing are positive and it certainly gives us some hope for next year, but we're not ready to call any kind of recovery in that area with any any certainty of timing, but it has come off the bottom and it's continuing to grow which is which is a good thing.
Appreciate the color thanks, Matt.
Yes.
The next question comes from Christopher Rolland of Susquehanna. Please go ahead.
Hey, guys. Thanks for the question.
I'm kind of hearing mixed signals on the custom silicon opportunity.
And I just wanted you guys to clarify on that.
I guess first of all are you guys above or below the 200 million expectation you guys had for the year.
Second.
Or are you expecting this to kind of double off of that 200 million or even $600 million. Originally that had been an 800 million number you discussed and then third where are we on that $800 million long term goal that you had is that like.
Like a 'twenty 'twenty five 'twenty 'twenty six opportunity or is it something beyond that.
Gotcha.
You're going back to.
Original like 2021, Investor Day, Hey, here's kind of a custom silicon opportunity, which which couple of quarters back we had reset to $200 million. This year and then over time get into 800 I just wanted to clarify that's what you're asking about.
Yeah, that's right I think that was in March you guys you guys talked about that 200 million for this year.
Yeah exactly so yes, so we're tracking I'd say close to the 200 million okay.
For this year and then what we had said at the Investor day, and kind of a long term was this $800 million and that was between sometimes between FY 'twenty five 'twenty six that was what the if you looked at the slide from a couple years back and what we had said I think I think it two quarters back. He was a quarterback that that number would be would be bigger over.
Our time now because of the AI piece of it even though some of the stuff had shifted around that wasn't NII.
And I think that's still largely on track in that timeframe, we never gave an exact.
Kind of.
It's going to happen in xyz quarter, but in that FY 'twenty four 'twenty five FY 'twenty five 'twenty six timeframe.
It should be able to get towards.
Above that number we gave before.
Which is the $800 million. So they I don't think theres any mixed signals I don't think theres any update which I think.
I think theres, some enthusiasm around but nothing has changed from a quarter ago and in fact I think the thing that's.
That's positive is that the chips are looking really good to go to production for next year and that was always a risk Chris if you remember in our commentary was hey, these are extremely large die very complex.
Our re spend either by us or by our customer would could cause some delay in so far knock on wood. Both these programs look like they are in good shape. The real issue is given the.
Growth that we've seen in <unk>, we just don't know the total magnitude but.
It will be bigger than what we sized before and I think we're largely tracking to what we thought was going to happen.
Thank you for that Matt.
One last one on carrier.
Is Q4 going to be the bottom or do you think there could be some more yet yet to drop and then I think you have some additional content coming one of your customers at the end of the year.
Is that going to be a meaningful list lift for the segment.
Yes. So there is as I think I said in my remarks, theres going to be continued softness into Q1 and carrier okay, it's going to take.
Who knows how many quarters and it really depends I think there'll be some inventory and then you got to also look at kind of where the capex ends up.
During next year, and where carriers are actually going to spend globally on their deployments.
But over time, there is a left there's a there's a content lift we get from the additional sockets.
And we still don't know kind of where lets go a couple of years out over the next couple of years, where the market share is going to go as well relative to the.
So the sort of western suppliers versus the Chinese suppliers on a global basis. So theres a few factors in there.
That need to be considered but yeah over time.
They are sort of the number of base stations per year has been relatively well understood. Our content is going to be larger.
<unk>.
It's a solid business for us I think that we built from a very kind of a nascent position just a few years ago, but it will come back and it'll be it'll have a little tailwind because of the.
The content.
Thanks, so much Matt.
Yes.
The next question comes from shiny Potpourri of Raymond James. Please go ahead.
Thank you Matt.
Couple of clarifications at this point.
First on the custom silicon understanding that you know, it's a little bit early to size what the opportunity given.
Given the complexity of these chips and the supply chain issues that we've been hearing about on the HBM and Nicola side I would think that you know the lead times from your customers are fairly long. So my question is when do you expect to start building inventory I guess.
So wafer inventory in and packaging inventory et cetera, what timeframe should we kind of expect that you know if you.
I guess you now are looking to ramp next year.
Well the planning certainly is happening now <unk> to your point and I think between ourselves our supply chain partners and our end customers, who have a vested interest to make sure. This all goes well I think we've been working quite well as a combined team to make sure we've got the necessarily.
Barry capacity, that's required from our wafers packaging and kind of third party component perspective, including HBM.
Yes.
And yeah, I mean, all of those are either.
Capacity is reserved or we're in the process of starting wafers I mean again, there's multiple programs. So it's not sort of a.
Each product is at a different point, but yes, I think the answer is well I think I was saying this even a quarter or two ago, we love a lot better visibility kind of come come call. It March.
When.
What this is going to look like because at that point given lead times and all the other factors, we'll just have much better visibility.
So that's sort of the.
The pro if you will of some of the complexity. We're dealing with is you do have to plan in advance and you do have to.
You do have to start wafers, but so so all of that is kind of in motion I would say the capacity planning has been done some time ago. So we feel comfortable with where we are on that.
Even though it's tight but yeah, we're in that process, but I don't think we're going to get that granular on.
No.
When exactly we're starting wafers and what we're just going to try to size the opportunity for investors. When we have a better view in terms of what the revenue is but the capacity sides.
Looking to be in good shape for us.
That makes sense and then.
My other follow up Matt on your Q1 guidance and obviously you said you know half of your business is going to be down, but I would have to imagine that the data center will continue to be healthy and strong.
You know, especially you know kind of.
Mel Watt.
Your customers are talking about in terms of AI investments continuing and also in video kind of sounded fairly positive about next year as well. So my question is given the strength that you saw in the last two quarters. I mean is are you concerned about any inventory build in your components is that what's giving you pause about guiding for growth in the first.
Water for the overall business because you know, even if 50% of the business is down because.
Looking at how much this business has grown in the last two quarters and if that trend continues.
Imagine that the total revenue should grow in Q1, so I'm just wondering what's giving you that pause.
And for growth in Q1.
Yeah, No no problem.
Maybe give you a little bit of a bad time here I think I think we're trying to get through the Q4 call first and then we can do the Q1 call okay.
Maybe first things first.
So so that being said.
You know.
I mean look I think I think I would agree with the market commentary you gave which is year over year, we do expect strong growth I'd say on our side.
<unk>.
If you look at kind of the the growth we've seen on <unk>.
AI, we're having a very very strong fourth quarter and some of that we're catching up from the upsides, we hit our supply chain team has done a phenomenal job right. So.
I'd just say that.
We're not guiding Q1, its dynamic at this point and.
I need to really see where the orders flow in and what people really need and right. Now we're just focused on executing Q4, but yes overall demand looks good overall growth next year should be good, but I think trying to guide two quarters now with this precision trainee is just not going to be helpful for anybody.
How fast things are moving so I'd prefer to give you My Q1 guide when we guide Q1.
Got it thanks, Matt.
Our last question will come from Chris Caso of Wolfe. Please go ahead.
Yes. Thank you my questions on the cloud part of datacenter and it sounds like that was an area.
Which may have surprised you a little bit coming back here can you talk about the driver of that and to what extent the extent youre seeing and kind of the traditional cloud business.
As a cyclical or product cycle driven.
Yeah. Thanks.
Our thesis.
Earlier, this year, which actually did play out I think we have a lot of predictions and so.
In some cases the market didn't cooperate but one area that did was that we did not believe that our traditional cloud.
Yes.
Business was going to be really impacted by the shift to.
<unk> AI and in fact, it might even provide a tailwind.
And our position was that hey, because of our position in switching and in optics.
<unk> broader networking build was going to be required.
And Datacenters in particular, multi tenant data centers, where you had to actually put in increased networking bandwidth to handle the AI.
Capability that was being put in and that's played out.
So I'd say there has been some on the product cycle in terms of.
New products kicking in at that time, but also I would just say that it's increased demand increased demand for products. We added 400 gig increased demand for $12 80 switches things that had been a little bit depressed earlier in the year with inventory correction. So.
That's been a real positive it's kind of a nice combination of strong growth on the products, we have as well as new products.
Wrapping up.
Ramping up sorry.
So yeah, and that's played out and that should be a nice driver and tailwind for us into next year as well Chris.
Got it. Thank you alright, fantastic, Hey, listen I think we're pretty much at time.
I am going to conclude the call maybe just a few words first I appreciate everybody's interest in the company.
A couple of final comments would be.
Despite the challenging macro out there.
We're very pleased with the Marvell team and our performance and I think what it what it shows is that even when you have a lot of volatility from a cyclical perspective and some of these end markets right now its enterprise and carrier as an example.
The diversified business model that we've really put together at marvell.
Has been able to.
Have some strong offsets to those things and like right now we're seeing in our datacenter business come Roaring back with strong growth in the third quarter, and then very very strong growth in the fourth quarter.
And that's the commitment we made several years ago was to diversify the company by end market focus on data infrastructure, which in our view was going to be probably the best.
Tam growth opportunity in semis, and we still believe that and while we have some inventory digestion and end market weakness, we're seeing in some segments, that's going to that's going to revert over time in an enterprise and carrier and I would view that as an.
And describe that as kind of the core foundation of Marvell and then you have these nice growth driver with large Tam.
On top of it and cloud and AI and things like automotive that are going to drive our growth over time so.
Our model is working and we're managing in a tough environment and we are managing what we can control at this point.
And with that I will conclude the meeting thanks everybody.
The conference has now concluded. Thank you for attending today's presentation and you may now disconnect.
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