Earnings Call Transcript - MRVL Q1 2025

Operator, Operator

Good afternoon, and welcome to the Marvell Technology Inc.'s First Quarter of Fiscal Year 2025 Earnings Conference Call. All participants will be in listen-only mode. After today’s presentation, there will be an opportunity to ask questions. Please note that 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, sir.

Ashish Saran, Senior Vice President of Investor Relations

Thank you and good afternoon, everyone. Welcome to Marvell's first fiscal quarter 2025 earnings call. Joining me today are Matt Murphy, Marvell's Chairman and CEO; and Willem Meintjes, 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 and 10-Q filings. We do not intend to update our forward-looking statements. During our call today, we will refer to certain non-GAAP financial measures. A reconciliation between our GAAP and non-GAAP financial measures is available in the Investor Relations section of our website. Let me now turn the call over to Matt for his comments on the quarter. Matt?

Matt Murphy, Chairman and CEO

Thanks, Ashish and good afternoon, everyone. For the first quarter of fiscal 2025, Marvell delivered revenue of $1.16 billion, above the midpoint of guidance driven by stronger-than-forecasted results from our data center end market. Higher revenue combined with disciplined expense control drove non-GAAP earnings per share of $0.24, also above the midpoint of guidance. The Marvell team executed well in the first quarter and we are looking forward to revenue growth and financial performance strengthening throughout this fiscal year. Let me now discuss our results and expectations for each of our end markets. In our data center end market for the first quarter, we drove record revenue of $816 million, well above our guidance. The outperformance was driven by strong demand from cloud AI applications for our electro-optics portfolio, including PAM, DSPs, TIAs and drivers as well as our ZR data center interconnect products. Data center revenue grew 87% year-over-year and 7% sequentially, with double-digit growth from cloud more than offsetting a higher than seasonal decline in revenue for enterprise on-premise data centers. Strong revenue growth was driven by cloud AI as well as standard cloud infrastructure. In addition to strong contributions from our market-leading electro-optics products, we also benefited in the first quarter from the initial shipments of our custom AI compute programs. Turning to the second quarter of fiscal 2025, we expect our overall data center revenue to grow in the mid-single digits sequentially on a percentage basis as our custom AI silicon continues ramping. I'm very pleased with our results and projected guidance for our data center end market. Our continued growth in data center and AI, in particular, is being driven by our leading portfolio of connectivity and custom compute products. Starting with our interconnect solutions. Our 100 gig per lane, 800 gig PAM products are the primary interconnect enabler for state-of-the-art AI deployments today, and customers have already started qualifying our first-to-market next-generation 200 gig per lane 1.6T solutions. Our 1.6T solutions are poised to enable the next generation of AI accelerators. We are seeing similar success with our DCI products, with 400 gig ZR shipping high volume, strong interest for our next-generation 800 gig products and an expanding DCI customer base with design wins at multiple new data center customers. As we discussed at our recent AI event, we are further expanding our DCI opportunity enabled by our new coherent DSP, which extends the reach of our DCI modules to 1000 kilometers, which is expected to be a new $1 billion market for Marvell over the long term. In aggregate, we expect our overall market for DCI products to grow to $3 billion by calendar 2028. Complementing our optical interconnect solutions, we have started shipping PAM DSPs for active electrical cables with design wins at multiple Tier 1 cloud customers. This is expected to be another new and completely additive $1 billion market for Marvell over the long term. This morning, we announced that we are entering a new interconnect market with our PCIe Gen 6 retimers. AI applications are driving data flows and connections inside server systems at significantly higher bandwidth, driving the need for PCIe retimers to meet the required connection distances at the faster speeds. PCIe Gen 6 is the first PCIe standard to use PAM 4 signaling technology, which Marvell has been leading for many generations. We have also been working closely with key customers and industry partners to intercept this technology transition and are now sampling our new eight and 16 lane PAM 4-based PCIe Gen 6 retimers. These products are designed to help data center compute fabrics continue to scale inside accelerated servers. We look forward to updating you on our progress in this new market. In data center switching, we are looking forward to starting production shipments of our next-generation 51.2T switch later this year. We are encouraged by the traction we are seeing with both existing and new customers, which has expanded our opportunity funnel for cloud switching. As we discussed at our AI day, we have also been making excellent progress with our custom compute business. Our custom compute AI programs are beginning to shift in the first half of this fiscal year, and we are expecting a very substantial ramp in the second half of this year, followed by a full year of high-volume production in fiscal 2026. The multiple custom cloud products we are ramping today are validating the strategy we put in place following the acquisition of Cavium and Avera, combining decades of experience in both compute and custom silicon. As we gain momentum, we are now even more optimistic about our prospects in benefiting from the rapidly expanding opportunity funnel for custom cloud silicon. In fact, at our AI day in April, we outlined our significant and growing new design wins for custom AI compute, in addition to our continued work with existing customers on a multi-generational basis. As a result, we are increasingly confident in our ability to meaningfully grow our share over the next several years in the market for custom accelerated compute, which is expected to grow from approximately $7 billion in calendar 2023 to over $40 billion in calendar 2028, a 45% CAGR. Underscoring Marvell's strategy to be the leader in data infrastructure, data center drove approximately 70% of our consolidated revenue in the first quarter. We see a massive opportunity ahead with the data center total addressable market expected to grow from $21 billion last year to $75 billion in calendar 2028 at a 29% CAGR. We have numerous opportunities across compute, interconnect, switching, and storage. As a result, we expect to double our market share over the next several years from our approximately 10% share last fiscal year. Now let me turn to Marvell's enterprise networking and carrier end markets together. As expected, reflecting a period of inventory correction and soft industry demand, revenue from both end markets declined in the first quarter. Enterprise networking revenue was $153 million, while carrier revenue was $72 million. In line with our expectations for these end markets to reach a bottom in the first half of this fiscal year, we project our revenue in the second quarter from both enterprise networking and carrier infrastructure to be flat sequentially. For enterprise networking, we are encouraged by recent comments from our networking customers that their order patterns are stabilizing, and that they expect their end customers’ inventory to start to normalize. As a result, we expect to start a recovery in the second half of this fiscal year as we begin shipping closer to end market demand. In the carrier end market, while overall demand remains subdued, we are looking forward to the initial transition to our next-generation 5 nanometer-based OCTEON 10 DPUs at a Tier 1 customer. As previously outlined, while we are shipping the baseband socket in the current generation, we have already secured both the transport and baseband sockets in the next generation. The transition begins towards the end of this fiscal year and more meaningfully next year; we expect Marvell's market share to continue to grow in the 5G market. In aggregate, we are beginning to see encouraging signs that support our expectations for the modest revenue recovery later this fiscal year in both the enterprise networking and carrier end markets. While the pace of recovery will depend on how quickly we still elevated inventory levels normalize at our customers, we are looking forward to these two end markets returning to strength for Marvell. Turning to the consumer end market, revenue in the first quarter was $42 million, declining 70% year-over-year and 71% sequentially. These results were in line with our forecast and reflected the completion of deliveries for an end-of-life program in the prior quarter as well as the change in demand from the game console market. During the quarter, we worked closely with our gaming customer to help them quickly complete the realignment of their inventory of our products to their updated production plan. This gaming inventory correction behind us, we are expecting our revenue in the second quarter from the consumer end market to rebound and approximately double on a sequential basis. Turning to our automotive and industrial end market, revenue in the first quarter was $78 million, declining 13% year-over-year and 6% sequentially. These results are reflective of a broad inventory correction taking place across the automotive end market, which is expected to take some time to fully resolve. As a result, we are forecasting revenue from our overall auto and industrial end market for the second quarter of fiscal 2025 to be flat sequentially. Looking further ahead, we expect revenue growth to resume in the second half of this fiscal year, driven by an increase in Marvell's Ethernet content and upcoming model year 2025 vehicles, as they enter production towards the end of this calendar year. Marvell continues to deepen relationships with the world's largest automotive OEMs. General Motors recently named us Supplier of the Year and honored us with the 2023 Overdrive award for automotive Ethernet technology. This prestigious award recognizes suppliers who consistently exceed expectations in their partnership with GM. We are excited that our automotive Ethernet portfolio is being recognized for playing a critical role in the industry. In summary, the first fiscal quarter played out largely as we had expected. Led by AI, data center continued to outperform, with revenue almost doubling on a year-over-year basis, while our other end markets found what is expected to be the bottom. For the second quarter, at the midpoint of guidance, we are forecasting consolidated revenue to grow 8% on a sequential basis. We expect a favorable setup for the rest of this fiscal year, driven by continued growth from data center and a recovery in the rest of our end markets. Our storage revenue has also resumed year-over-year growth. And given positive demand commentary from customers, we are expecting that to continue. We project robust growth to continue from AI with the expected ramp in our cloud, custom AI programs to augment our substantial base of electro-optics revenue, which we expect will remain correlated to accelerator shipments. Given the strong start in the first quarter from AI and our expectations for continued growth in the rest of this fiscal year, we are confident that we are well on our way to exceed the full-year AI revenue target we had discussed earlier this year and at our AI event. So with that, I'll turn the call over to Willem for more detail on our recent results and outlook.

Willem Meintjes, CFO

Thanks, Matt and good afternoon, everyone. Let me start with a summary of our financial results for the first quarter of fiscal 2025. Revenue in the first quarter was $1.161 billion, exceeding the midpoint of our guidance, declining 12% year-over-year and 19% sequentially. Data center was our largest end market, driving 70% of total revenue. The next largest was enterprise networking with 13% followed by auto industrial at 7%, carrier infrastructure at 6% and consumer at 4%. GAAP gross margin was 45.5%. Non-GAAP gross margin was 62.4%. Moving on to operating expenses. GAAP operating expenses were $680 million, including stock-based compensation, amortization of acquired intangible assets, restructuring costs and acquisition-related costs. Non-GAAP operating expenses were $454 million in line with our guidance. GAAP operating margin was negative 13.1%, while non-GAAP operating margin was 23.3%. For the first quarter, GAAP loss per diluted share was $0.25. Non-GAAP income per diluted share was $0.24, $0.01 above the midpoint of guidance. Now turning to our cash flow and balance sheet. Cash flow from operations in the first quarter was $325 million as a reminder our first quarter cash flow reflects the payment of annual employee cash bonuses for the prior fiscal year. Our inventory at the end of the first quarter was $826 million, decreasing by $38 million from the prior quarter. On a year-over-year basis, we have reduced our inventory by $200 million or almost 20%. Our days sales outstanding was 69 days, decreasing by eight days from the prior quarter. We returned $52 million to shareholders through cash dividends. In addition, we repurchased $150 million of our stock during the first quarter, an increase of $50 million from the prior quarter. We expect to further increase repurchases in the second quarter of fiscal 2025. Our total debt was $4.15 billion. Our gross debt-to-EBITDA ratio was 2.27x and net debt-to-EBITDA ratio was 1.8x. As of the end of the first fiscal quarter, our cash and cash equivalents were $848 million, decreasing by $103 million from the prior quarter. This is primarily due to payment of annual employee bonuses as we funded stock repurchases and dividend payments for our operating cash flow generation during the quarter. Turning to our guidance for the second quarter of fiscal 2025. We are forecasting revenue to be in the range of $1.25 billion plus or minus 5%. We expect our GAAP gross margin to be approximately 46.2%. We expect our non-GAAP gross margin to be approximately 62%. We are forecasting a small sequential decrease in non-GAAP gross margin due to a projected change in product mix as our consumer revenue rebounds and custom cloud silicon continues to ramp. In the second half, we expect a substantial ramp in our custom silicon programs to drive strong revenue growth with only a modest recovery in our traditional businesses. As a result, we expect this revenue growth and accompanying mix shift to be dilutive to our current gross margins, but to be accretive to operating margin and earnings. We expect that a rebound in our traditional businesses to more normalized levels would meaningfully improve our overall gross margins in the future. For the second quarter, we project our GAAP operating expenses to be approximately $688 million. We anticipate our non-GAAP operating expenses to be approximately $455 million. For the second quarter, we expect other income and expense, including interest on our debt, to be approximately $46 million. We expect a non-GAAP tax rate of 7% for the second quarter. We expect our basic weighted average shares outstanding to be 867 million and our diluted weighted average shares outstanding to be 877 million. We anticipate GAAP loss per diluted share in the range of $0.15 to $0.25. We expect non-GAAP income per diluted share in the range of $0.24 to $0.34. Our guidance for revenue in the second quarter is to grow sequentially in the high single digits at the midpoint on a percentage basis and we continue to be optimistic about the prospects in the second half of this fiscal year. As we drive revenue growth, we remain focused on delivering robust operating leverage, strong cash flow generation and returning increasing amounts of capital to investors through our active stock repurchase program.

Operator, Operator

Our first question comes from Vivek Arya of Bank of America Securities.

Vivek Arya, Analyst

Matt, just kind of near-term, I was hoping you could help quantify how much custom compute accounted for in Q1 and how you are thinking about it in Q2. And then as we look into the back half, I think you've given an overall AI number for the data center. But is that a supply-constrained number? Just give us a sense for what are the puts and takes in the back half? How much flexibility is in the model to upside expectations from here on?

Matt Murphy, Chairman and CEO

We began production shipments in the first quarter, which is a positive development. In Q2, a large portion of the growth in the data center segment is driven by custom solutions. Looking ahead, we project that AI revenue for Marvell will reach a minimum of $1.5 billion this fiscal year, with approximately two-thirds coming from electro-optics and one-third from custom, both of which we anticipate will exceed this figure. Regarding supply constraints in the second half, we believe we are well-prepared. We experienced strong demand for optics last year, and our team managed to exceed revenue expectations in both the fourth and first quarters. We are continuing to carefully oversee our supply chain to ensure we maintain the necessary flexibility. This approach applies to both the optics and custom areas, as we are preparing to manage potential increases beyond our previous projections.

Operator, Operator

Your next question comes from Timothy Arcuri of UBS.

Timothy Arcuri, Analyst

Matt, I wanted to ask about the evolution of the custom ASIC total addressable market. You mentioned it was roughly indiscernible last year. At the Analyst Day, you noted that you'd surpass a 10% market share very soon. Is it accurate to say that you could reach $1 billion in custom compute next year? I would estimate the total addressable market to be around $10 billion next year. Do you believe you can achieve that $1 billion in custom compute next year? Additionally, I’m curious about the upside. Data center revenue was $30 million to $35 million higher in fiscal Q1. What contributed to that? It seems it wasn't primarily from custom compute since that's still quite small. Is it more related to the connectivity side?

Matt Murphy, Chairman and CEO

We discussed at the AI day a significant custom silicon total addressable market exceeding $40 billion by 2028, with considerable growth expected. I believe your estimates regarding our near-term market share are mostly accurate, and Raghib mentioned our aim to increase our share in custom silicon to 20%. You can envision a trajectory from our current position to achieve this opportunity, and while the total addressable market must materialize, we are making progress. Our programs are expanding in terms of scope, and although we didn't provide a specific breakdown for next year, we indicated a minimum increase of $1 billion from this year's range of $1.5 billion to $2.5 billion. This increase is mainly due to our custom programs entering their first full year of volume production. While we haven't called out the exact distribution for next year, this should help clarify our current position, our business targets, and our expectations for the overall AI market next year. I'm confident that you and your team can develop an effective model based on this information. In Q1, custom silicon had just begun, but our optics business remained exceptionally strong, exceeding previous performance expectations, and all signs suggest that this business will continue to perform well year-over-year, surpassing the targets we shared at the AI day.

Operator, Operator

Your next question comes from Chris Caso of Wolfe Research.

Chris Caso, Analyst

Question is on gross margins and some of the comments that you made with regard to gross margins in the second half of the year. Could you give a little more detail about some of the puts and takes of that? Understand that some of the lower-margin segments such as consumer, I guess you would include some of the carrier business and that coming back will weigh on margins. What are the segments in the traditional businesses that need to come back to bring the gross margins back to more normalized levels?

Willem Meintjes, CFO

Let me take that. So when we look at our gross margin, it's still very much driven by overall product mix as well as the overall level of revenue and the overhead absorption that we get. If you look at the merchant side of our business, those gross margins continue to be extremely healthy, actually, quite a bit above our overall corporate target range. However, some of the key components of that, if you look at data center storage, enterprise networking, and enterprise on-prem are really going through a significant inventory correction. And so at the same time, we're seeing the beginning of a very strong ramp on our custom programs. And those are typically lower gross margin. However, we get a ton of leverage on operating expenses, especially as we are able to recognize the non-recurring expenses on that as contra R&D, and so as a result, that really drives a really strong operating margin for us. So overall, I'm not going to guide more than one quarter at a time. I think you have to triangulate with what we're indicating here, but we do see that as those other merchant businesses start recovering, that drives a nice tailwind for us across next year.

Matt Murphy, Chairman and CEO

Thanks Will. And Chris, just one more add and then we can go to the next question. I'd say, in addition to that, which is really as Willem said, both the on-prem data center or the enterprise networking, those types of segments are weaker that are healthier gross margins. The other one that is poised for a stronger recovery as well is automotive in the second half, and that’s been a strong driver for us as well. So there's some goodness out there for sure, we’ll have better reach obviously as this current quarter progresses in terms of what the second half is going to look like on those other businesses, but we do expect them to recover and return to growth. It's just a timing issue. And so hopefully, that's helpful to think about the different drivers of gross margin.

Operator, Operator

Your next question comes from Karl Ackerman of BNB Paribas.

Karl Ackerman, Analyst

Within data center, it looks like the AI portion of your business was about $500 million this past quarter. And so I was hoping you could just also size the non-AI portion of data center. And I guess what you're seeing there both this quarter and going forward because there does appear to be green shoots within the storage ecosystem and perhaps even fiber channel from a seasonal basis. So if you could just discuss the non-AI portion of data center both this quarter and throughout the balance of fiscal ‘25, that would be very helpful.

Matt Murphy, Chairman and CEO

Yes, I won't go into the details by quarter regarding the different components of the data center. In general, AI has been very strong and continues to show promise for this year and the next. However, there are also a couple of other trends we expect to play out throughout the year. First, companies providing standard cloud infrastructure are definitely continuing to invest. We've seen growth in both AI and standard cloud infrastructure in our recent results, and we anticipate this trend will persist throughout the year. Regarding the on-premises segment, which has been quite low due to declines in traditional server shipments over the past eight quarters, we do believe we have reached a bottom in this area during our first quarter. This will contribute to growth for the rest of the year, with some segments returning to more normalized levels. This is connected to earlier comments about expected improvements in gross margins as these businesses recover. I foresee growth in all three areas moving forward, albeit driven by different factors.

Operator, Operator

Your next question comes from Tom O'Malley of Barclays.

Tom O'Malley, Analyst

Matt, this one's for you and it's sort of a follow-up from the AI day. You talked about with the kind of timing inference and CPU and when you look into the future, could you talk about if you think any of the three are more or less defensible? Do you think it could be over-indexed to any of those? I know that you spent a lot of time at the AI day saying this is really a process that both involves your chip design as well as the customers' design. So I understand that where flags are planted today. There may be some defensibility. But just could you talk about those three opportunities and where you see more defensibility and where you may see some more success?

Matt Murphy, Chairman and CEO

I would categorize them all similarly. What I mean is that in the data center custom silicon market, where we provide a wide range of solutions, as Raghib presented at the AI day, we are involved in multi-year development cycles and long-term partnerships. We're developing some of the most advanced semiconductor products in the industry, with some featuring over 100 billion transistors. This includes cutting-edge packaging, processes, and input/output capabilities. As a key partner, we need to integrate all of these elements effectively for our customers and deliver them in large volumes with high yield and reliability, while also working concurrently on next-generation products. These plans are typically established well in advance. The initial successes in these custom programs began in 2021, and we are anticipating a ramp-up by 2024, looking at the calendar year, with a more comprehensive impact expected in 2025. Coordinating these efforts requires significant collaboration between the engineering teams of both companies. These partnerships create very defensible and solid positions, and I wouldn’t prioritize one over another. Each custom silicon investment has its dynamics, but generally, once we are engaged and demonstrate our execution and partnership capabilities, it often leads to future opportunities. I am confident in our standing in this area, and so is Raghib, which is why we believe we can gain market share over the next several years. If the market evolves as we hope, it will have a significant positive impact for Marvell.

Operator, Operator

Your next question comes from Quinn Bolton of Needham.

Quinn Bolton, Analyst

Matt, I wanted to revisit the gross margin question. I understand that the increase in custom compute might be a challenge. When you mention the pressures on margins as custom compute increases, can you clarify? Are you referring to the long-term model of over 64, or are you discussing the pressure from the July quarter guidance level of 62?

Matt Murphy, Chairman and CEO

We're focusing on the short-term regarding the ramp-up of our custom programs and its impact on our business starting in Q2 and throughout this year. As you are aware, we have a variety of business models and product lines. Currently, the custom aspect is showing strong indicators, which provides significant operating leverage but results in a lower gross margin compared to our corporate average. In the near-term, we anticipate a strong ramp and change in that business, but recovery for our more margin-rich sectors will take longer. We have maintained a healthy gross margin across our product portfolio, but we still need to navigate through this post-cyclical phase before returning to normal demand levels. Once we see those higher-margin businesses return to their previous performance and start to grow, we expect a much healthier margin profile. However, this is likely beyond the next few quarters. This is what we want to convey about how to approach modeling the business in the near-term. Willem, do you have anything to add?

Willem Meintjes, CFO

No, I think that's perfect, Matt. Nothing else.

Operator, Operator

Your next question comes from Ross Seymore of Deutsche Bank.

Ross Seymore, Analyst

Why don’t you get to the cyclical parts of your business? Matt, you talked about kind of a slow recovery in the combination of the enterprise networking and carrier business. Just wondered, if they're dropping so hard and so abruptly over the course of a couple of quarters, why would it be such a gradual increase? Usually, if you have those kind of big drops, you'd have big step-ups. Are you just being conservative in that? Is there a share loss? Just what sort of slope would you expect in that recovery? And I think last quarter, you said they should get to be $1 billion businesses individually to $2 billion overall. The timetable for that, can you get there next year? Is it further off? Any color on those two topics would be helpful.

Matt Murphy, Chairman and CEO

Yes, that’s a great question, and I'll provide an example. To address the first part, we are indeed taking a cautious approach to the recovery slope given the significant drop we've experienced. Until we see the bookings solidifying, it will be easier to make predictions. I understand that may come off as flippant, but it reflects the reality; when something declines, it’s wise to be careful about the recovery. That said, I’ve noticed similar patterns before. For instance, our consumer business faced a downturn in the first quarter, but it is now rapidly improving heading into the second quarter as we work through inventory and realign. This was quite a swift recovery. Now, regarding the carrier and enterprise markets, I believe it's crucial to share what we're observing. I see both markets returning to a combined rate of about $2 billion, with approximately $1 billion each. However, the situations are different. On the carrier side, the overall environment remains weak with operators and capital spending still looking depressed. Yet, we have our own growth drivers, particularly on the wireless front, where new content is ramping up. We've seen improvements in bookings and demand outlook for the second half of this year. So, when those orders start coming in for the latter part of the year and into the fourth quarter, we gain confidence in our growth prospects, even amidst a broader depressed market. Surprisingly, we feel quite positive about this due to the order activity. On the enterprise side, the situation varies. The commentary about the end market is strengthening, which is encouraging. Our customers report improvements in their order backlogs and sales activities. They are also starting to modestly reduce their internal inventories and mentioning a decline in customer inventories. That’s a promising sign. However, due to the amount of inventory present, we haven't yet seen a full recovery. I hope this helps clarify how to model these businesses. I’m optimistic that in the next quarter, we will have clearer visibility for both sectors in the second half of the year. Interestingly, carriers have started to rebound first, and we anticipate enterprise will follow, though the timing is uncertain. If you consider the carrier example, it hasn’t been about losing market share; rather, we’re actually gaining share. The environment is certainly challenging right now, but all signs indicate that we should see a return to growth, especially in the second half.

Operator, Operator

Your next question comes from Blayne Curtis of Jefferies.

Blayne Curtis, Analyst

Actually, my question was similar to Ross's, but I appreciated your explanation. Can you discuss the data center? Outside of electro-optical, we know the ASIC ramp will be what it is. I'm curious about the cyclical correction. I thought you mentioned that storage was up this year, but I believe it's an easy comparison. Looking at storage and other aspects of data centers that aren't related to AI and optical, what kind of cyclical correction is taking place? How much is down? And are you seeing any signs of improvement there as well?

Matt Murphy, Chairman and CEO

Yes, that's a great addition to the conversation. While we don't have exact breakdowns, I've reviewed our numbers leading up to this call. Year-over-year comparisons are relatively straightforward, but there is a positive trend in storage. We reached our lowest point in the first quarter last year, and we have experienced steady improvement each quarter since then. To address Ross' question, while the growth hasn't been explosive, it has been consistent. This applies to both our total storage portfolio and data center storage. All of this is recovering, which is positive news. Additionally, the feedback from end customers, particularly regarding hard drives, is quite encouraging. As they work through the inventory they previously accumulated, the market signals we're observing from the customer level are beginning to look optimistic. We are hopeful that the storage business, which primarily supports data center operations, will contribute to our expected growth in the second half of the year. However, the majority of that growth will stem from the continued ramp-up in AI. Overall, storage has been recovering steadily, and we believe it is returning to the levels we anticipate.

Operator, Operator

Your next question comes from Harlan Sur of JPMorgan.

Harlan Sur, Analyst

On the optical side, there is strong growth in 800 gigs to support various AI build-outs. The 1.6T will begin later this year with NVIDIA as a key partner. Is optical contributing to quarter-on-quarter growth in July and for the year, considering the customer profiles for GPU and compute ASIC deployments? Additionally, there are several potential drivers for optical growth. Now is the time for some cloud customers to start broad data center networking upgrades to 400 gig and 800 gig, particularly with the Teralynx 10 and Broadcom's Tomahawk 5 platforms shipping this year, which I believe will lead to incremental growth for your 800 gig DSP solutions. Moreover, you have two new customers expected to utilize your 400 ZR DCI solution. Are you beginning to see some visibility on these potential growth drivers in optical?

Matt Murphy, Chairman and CEO

I think you've actually got the narrative pretty well nailed down, but maybe some additional comments. I'd say in the short term, the way to think about the optical business into July is we're modeling it right now and our guide is flattish to slightly up. And the reason for that is we outperformed pretty big both in Q4 and Q1. In fact, I'd say since last year, once sort of ChatGPT hit and the whole AI thing hit, we've been beating those numbers every quarter. And we're positioned from a supply standpoint to do that but it's just it ramped up very fast. And it's continued to hold there and outperform. So as we look into July, we're modeling it to be flat to slightly up; it may do better, let’s see order trends come in. But year-over-year will be very strong because also in the second half to your point, those traditional standard cloud infrastructure build-outs and upgrades are going to happen. And so that's part of our model as well in the second half is seeing standard cloud infrastructure ramp on the optical business. And then we've got our switching portfolio you mentioned. And then also ZR, we've engaged with multiple customers now; that's probably more of a next year thing, but again, some contribution this year. And then we've got AECs as well. So there's a lot happening in this area. And that's why when you look at kind of Marvell in the second half of this year, we guided the whole company up 8% for Q2. And when I look at the second half, total company is going to be up more than that in Q3 and Q4 with growth accelerating, primarily driven by data center and AI and primarily driven by the trends all of which you mentioned as dynamics that we see. So yes, we see a great setup for the second half, very, very optimistic about the second half.

Operator, Operator

Your next question comes from C.J. Muse of Cantor Fitzgerald.

C.J. Muse, Analyst

I guess, Matt, I wanted to follow up on your prepared remarks where you talked about increasing optimism on the custom silicon prospects and funnel. And I guess as you think about that, is that visibility to units? Is that visibility to winning next-gen projects at existing customers? Is it selling additional silicon content to those customers? Or are you also potentially seeing greater breadth of vertical integrated players contemplating their own silicon?

Matt Murphy, Chairman and CEO

Yes, the focus was really on the current design wins we have that are moving into production this year, and they are performing better than we anticipated. Even compared to last quarter or during the AI day, all of these have improved in terms of the total revenues we expect for both this year and next year. Demand for AI remains very strong, for custom silicon, optics, and our entire portfolio. We have not seen any slowdown; instead, our customers have increased their estimates and requirements. We are collaborating with our supply chain partners to ensure we can meet this demand. Additionally, customer engagement and momentum are very robust. We are in the execution phase on several new programs that we discussed at the AI day. We are focused on driving our teams, technology, innovation, and schedules. It’s an exciting time to be part of the semiconductor market, and we have a unique role. Activity in demand, revenue, and design wins is extremely high.

Operator, Operator

Your next question comes from Tore Svanberg of Stifel.

Tore Svanberg, Analyst

I had a question on PCIe. What exactly are the company's ambitions there? I mean, it's a concentrated supplier base today. I think the largest competitor is getting into the market as well. So how big is this market? What are your ambitions from a share perspective? And when should we see the earliest revenues for PCIe?

Matt Murphy, Chairman and CEO

We see this as an additional opportunity to utilize our core capability in PAM-based DSP design. We have been aware of this market for some time, and while many are familiar with it, it's important to note that this pertains to PCIe Gen 6. There were retimers in previous generations like Gen 5, Gen 4, and Gen 3. My background in this area dates back to my time at Maxim when we worked on the early PCIe. We have been closely observing the PCIe Gen 6 transition, which is now underway with the products we recently announced are in sampling. This transition involves a shift in the modulation scheme from NRZ to PAM. Our strategy is to engage with this market at this critical juncture. I believe this market is established, and it is likely to expand from Gen 5 to Gen 6, initially driven by advancements in AI, followed by broader adoption once the standards are formalized and ratified in the coming years. We aim to be a significant player in this area, as it aligns with our strengths and expertise. Moreover, it complements our entire connectivity portfolio. We strive to be a comprehensive provider of connectivity solutions for our customers, offering a wide range of technologies and products such as optical DSPs, AECs, and retimer solutions. Our technology is well-established, and our customers are familiar with it. Although it's still in the early stages and an emerging standard, we are encouraged by the high level of customer interest, which is why we have announced these products today.

Operator, Operator

Your next question comes from Srini Pajjuri of Raymond James.

Srini Pajjuri, Analyst

Matt, my question is also about custom silicon. I understand you are ramping up quite significantly in the second half of this year, and you mentioned that the first full year of ramping will be next year. I'm curious if most of these ramps are related to 5 nanometer design wins. How long does each generation typically take to ramp? Additionally, when transitioning to the next generation, how does that process usually work? For instance, the largest GPU supplier has shifted from a two-year cadence to a one-year cadence. I'm interested in how your customers perceive the cadence of their products. How long should we expect the current generation to ramp, when will it ramp down, and how should we view the transition when the next generation starts?

Matt Murphy, Chairman and CEO

And kind of the first point you mentioned, yes, the ramp is very steep this year. We talked about it at the AI day exiting this year at a $200 million kind of plus run rate on custom. So very strong. For kind of a full year, these are probably two-plus year cycles once they hit. I would just say that without talking about specific engagements, I'd say that the custom side is as keen on making sure they're at the next node and have the latest technology just as fast as the biggest merchant suppliers; they want to complement their offerings. So that's where some of the comments I made earlier around being in execution mode on next-generation products and design activity, you're going to see that same trend. But for at least the current ones we have now, if that's part of your question, we have very strong visibility over the next couple of years on the 5 nanometer programs. The 3 nanometer design pipeline and wins have been very strong, and we're already deeply engaged on 2 nanometer. So it's almost the way it's working now: you've got five in production and three sort of in-flight and two is the next one. And how all that plays out, Srini, is still a bit dynamic, but you're going to see the same kind of intensity in terms of R&D and technology requirements on the custom side as you see on the merchant side; you just have to meet the power and TCO requirements that the market needs. And we’re well positioned to go do that and support our customers on it. They're very motivated to make that happen as a way to have both, right, in terms of their breadth of their spend, and AI is going to require them to have both types of solutions, both from the leading merchant supplier as well as augmenting with their own.

Operator, Operator

Your next question comes from Christopher Rolland of Susquehanna.

Christopher Rolland, Analyst

I wanted to follow up on the PCI retimer. If you have any insights on the total addressable market and your perspective on that sector, I would appreciate it. My main question concerns the storage, enterprise networking, and wireless carrier markets, particularly how they've been influenced by product cycles in the past, such as gaming consoles, 5G technology, campus upgrades, and near-line drives. Are there any specific product drivers in these markets that could push them beyond a cyclical recovery that you have identified?

Matt Murphy, Chairman and CEO

Let me start by noting that we haven't defined the total addressable market yet. We felt it was a bit premature to do so during our AI day. However, we believe the opportunity is significant enough to enter the market and develop our products, and we will provide more information on this in the future. There are also some strong market reports available that you may already be familiar with. In terms of product cycles, many will be driven by our own design wins. For example, we're seeing growth in carriers with additional socket installations, leading to increased content, and as the wired side of the market picks up, there will be a transition from 400 gig to 800 gig coherent. These are just two examples. As for consoles, they remain stable. In networking, we have gradually been increasing our market share and content, and I expect that to continue. Historically, we've viewed business in this area as a modest growth market, and we have the potential to perform better. In recent years, we experienced growth rates of 20% to 30%, capturing significant share. However, moving forward, we've consistently indicated that we should adopt a conservative approach, modeling the enterprise side as a mid-single-digit growth market where we can potentially outperform. This is particularly true once inventory issues are resolved. There aren't any major product cycles anticipated beyond the increase in multi-gig shipments exceeding 1 gig, which should lead to an uplift in average selling price. Additionally, as bandwidth increases on the switching side, the average selling price per port will also rise. These trends are favorable. Overall, we have established a solid market presence, and moving forward, we anticipate growth based on market expansion, our increased content, and modest share gains. With that, we have one more question before we conclude.

Operator, Operator

We will take our last question from Atif Malik of Citi.

Atif Malik, Analyst

Matt in response to Harlan's question, you talked about optical flat to slightly up on 800 gig. Curious when are you thinking about the volume adoption of 1.6T and what is holding that if it's not the DSPs? Are the lasers not ready? Or is it just waiting for the Blackwell?

Matt Murphy, Chairman and CEO

I believe the key factor here is the timing associated with our customers' system builds and their ramp schedules. Currently, we don't see significant issues, unlike past challenges like the green laser problem. Right now, everyone is quickly advancing to ramp up their products. Our module partners are aligning with our solution, and our end customers are pushing forward as fast as possible. It's primarily a timing issue where we need to integrate with the platforms as they ramp up, and we are addressing that. Expect shipments to increase in the second half of the year, leading to a more substantial impact next year during the 1.6T transition. This process is already in motion, and we have a clear strategy to support the next generation of accelerators to ship in volume with the latest optical standards. We are leading in this area. So, we anticipate some shipments later this year, with much larger volumes expected next year, which should mark a significant product cycle for us. I think with that would be the last question. So I think we can wrap up the call from here. Thanks, everybody, for your interest in Marvell and in the company, and I look forward to seeing all of you in the coming months. And I guess I'll see you probably in September at the Citi conference. So all right. Take care, everybody. Thanks.

Operator, Operator

Ladies and gentlemen, this concludes our question-and-answer session. Thank you for attending today's presentation. You may now disconnect.