Earnings Call Transcript
Marvell Technology, Inc. (MRVL)
Earnings Call Transcript - MRVL Q3 2023
Operator, Operator
Good afternoon, and welcome to Marvell Technology’s Fiscal Third Quarter 2023 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 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.
Ashish Saran, Senior Vice President of Investor Relations
Thank you, and good afternoon, everyone. Welcome to Marvell's third quarter fiscal year 2023 earnings call. Joining me today are Matt Murphy, Marvell's President and CEO; and Jean Hu, our CFO. Let me remind everyone that certain comments made today may 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. With that, I'll turn the call over to Matt for his comments on our performance. Matt?
Matt Murphy, President and CEO
Thanks, Ashish, and good afternoon, everyone. In the third quarter of fiscal 2023, the Marvell team drove revenue to $1.54 billion, a record for the company, growing 27% year-over-year and 1% sequentially. This year-over-year growth was driven by our cloud, 5G and auto business, as well as share and content gains in our enterprise networking end market. Our third quarter revenue came in towards the lower end of our guidance range, and we are forecasting a sequential decline in our fourth quarter. Early in the third quarter, we were still dealing with supply escalations. Late in the quarter, customers started requesting to push out shipments and reschedule orders to manage their inventory in a changing demand environment. In the third quarter, these inventory reductions started to manifest, and we are expecting an even greater impact in the fourth quarter. The largest impact is from our storage customers and has been widely communicated by that set of OEMs. In addition, as our Chinese customers deal with a changing macroeconomic situation, their demand for our products has come down significantly. Just to give you a sense of the magnitude of that change, we estimate that our revenue in the fourth quarter from our OEM customers based in China will decrease by over one third compared to the second quarter. We expect revenue from China OEMs will account for less than 10% of our total company revenue in the fourth quarter. I would note that to date, the restrictions of the U.S. Department of Commerce announced in October on shipments of U.S. chip technology to China have not meaningfully impacted our revenue. While the inventory correction at our customers is challenging in the near term, we believe it's prudent to work closely with them to manage the change in an orderly fashion and clear the path to a resumption of growth. Let me now move on to discussing our end markets, starting with data center. In our data center end market, revenue for the third quarter was $627 million, exceeding guidance with better-than-expected results from our cloud business. On a year-on-year basis, our data center revenue grew 26% with our cloud business driving all the growth, with multiple product lines contributing to strong results. On a sequential basis, our data center revenue declined by 3% due to softness in our on-premise business. Our storage products, including fiber channel, HDD and SSD, all saw demand decline during the quarter. However, our cloud business continued to grow sequentially, driven by strength in our electro-optics and switch products. We are seeing the growth rate of the data center end market decelerate, and customers have started adjusting their inventory to address the changing demand picture. As a result, for the fourth quarter of fiscal 2023, we are expecting our data center revenue to decline year-over-year approximately in the mid- to high teens on a percentage basis and sequentially decline in the mid-20% range. The biggest change in demand is in product lines where we are one step removed from the end customer. So when demand changes quickly, we are more exposed to the supply chain bullwhip effect. As a result, we expect the impact to be the most pronounced in our storage business, which we project will be responsible for the bulk of the overall sequential decline in our data center revenue. In particular, we are projecting a very large reduction in shipments of our HDD controllers and preamps as HDD OEMs deal with a broad-based inventory correction. The rest of our data center business is also expected to deal with inventory adjustments by our customers, but to a much lesser extent compared to our storage business. While we work through the near-term situation in the data center end market, we remain confident in our multiple long-term growth drivers. In the third quarter, we started ramping our cloud optimized silicon design wins into production and are planning to launch multiple additional products in fiscal year 2024 and 2025. Our successful execution on the first group of projects, coupled with our ongoing investments in data infrastructure, silicon IP and advanced process and packaging technologies is opening up an even larger set of opportunities with cloud customers. In the third quarter, we launched our next-generation cloud security solution, Marvell's LiquidSecurity 2 HSM adapter, the industry's most advanced solution for enabling encryption, key management and authentication in the cloud. Powered by Marvell's cloud optimized OCTEON DPU, LS 2 is a converged security platform for payment, privacy compliance, and general purpose applications. We are also making progress on two of our longer-term growth initiatives in the cloud, CXL and ADCs. In the third quarter, we announced the availability of our CXL development platform for cloud data center operators and server OEMs, enabling two key use cases: memory expansion and memory pooling. The platform pairs Marvell's advanced CXL technology with the latest CXL capable CPUs, including the new fourth-gen AMD EPYC processors demonstrating multi-host memory pooling. With this platform, cloud operators can begin to advance their infrastructure and enable their applications to take advantage of this cutting-edge technology. I'm very excited to announce that we have recently won a significant design at a Tier 1 hyperscaler projected to drive a substantial amount of revenue in aggregate over the program's lifetime. Product development activities are in full swing, and our team is driving a large and growing pipeline of CXL opportunities. In the AC market, multiple cable manufacturers have started sampling 100-gig per lane active electrical cables powered by Marvell PAM4 DSPs to cloud data center operators, which we expect will pave the way to broader adoption and expand our addressable market. Turning to our carrier infrastructure end market. Revenue was $271 million, growing 26% year-over-year and declining 5% sequentially. On a year-on-year basis, the vast majority of our growth was driven by our wireless business, which continued to benefit from the growth in 5G adoption. As you recall, the annualized revenue run rate for our wireless business crossed $600 million in the second quarter of this fiscal year. We are excited to see growth continue from that milestone. Our wired business also grew year-on-year in the third quarter driven by solid demand from metro and long-haul carrier for our market-leading coherent DSPs and accompanying TIAs and drivers. On a sequential basis, our wired business came down as expected from a very strong second quarter and more than offset growth from our wireless business. We are excited to see our 5G business continuing to flourish and are looking forward to broader deployment of 5G in multiple geographies, including the U.S., Europe, and India. In addition, we anticipate significant share in content growth ahead and new opportunities in ORAN and DRAM architectures. As you will recall, in March 2020, Nokia and Marvell announced that our companies have started working together to develop a leading 5G silicon including multiple generations of custom silicon and infrastructure processors to further expand the range of Nokia's ReefShark chipsets. Earlier this week, we announced an extension of our collaboration with Nokia to further advance their 5G chipset portfolio. Nokia will be using our new OCTEON 10 DPU, the industry's leading 5G transport processor built on Marvell's cutting-edge 5-nanometer platform and hardware acceleration technology. These high-performance and highly efficient processors will allow operators to scale rapidly and manage the dramatic increase in data traffic and performance demanded by 5G's innovative service-based architecture while reducing cost and energy consumption. We continue to expand our collaboration with Nokia and look forward to enabling their next-generation 5G platforms. There are also two key announcements from the Open RAN ecosystem. Vodafone and Nokia announced that they have agreed to work on a fully compliant Open RAN solution with Marvell. Developing cooperation with us, Nokia's ReefShark SoC boosts Layer-1 processing capability to enable Open RAN systems to reach full functionality and performance parity with traditional mobile radio networks. In another development, Vodafone and Samsung recently announced that they are jointly cooperating with Marvell to accelerate the performance and adoption of 5G Open RAN across Europe. They plan on incorporating Marvell's advanced OCTEON Fusion processor specifically designed for Open RAN into the latest off-the-shelf servers. The specialized accelerator chip also enables massive MIMO technology developed to serve many subscribers in dense urban areas. Moving on to our outlook for next quarter. For the fourth quarter of fiscal 2023, we are expecting revenue from our carrier end market to grow slightly on a sequential basis and grow year-over-year approximately in the mid-teens on a percentage basis. Moving on to our enterprise networking end market. Revenue for the third quarter was $376 million, growing 52% year-over-year and 10% sequentially. As the quarter progressed, our Chinese customers started to turn cautious due to an evolving macroeconomic environment. In response, we worked with customers realigning shipments to reflect their reduced demand. As a result, despite the strong sequential and year-over-year growth, revenue was lower than our guidance. In the fourth quarter of fiscal 2023, we are expecting revenue from the enterprise networking end market to decline sequentially in the low single digits on a percentage basis. However, we expect growth to continue year-over-year at close to 40%, reflecting our higher content and growing share. Turning to our automotive and industrial end market. Revenue for the third quarter was $84 million, growing 26% year-over-year and 1% sequentially. Revenue was lower than our forecast in industrial as well as automotive, where we continue to experience supply challenges in certain legacy nodes. We expect these supply challenges to start to improve in our fourth quarter. On a sequential basis, our auto business continued to grow, partially offset by a decline in our industrial business. On a year-over-year basis in this end market, Marvell's growth was primarily from our auto business, driven by continuing adoption of our Ethernet technology. Our auto business achieved another milestone in the third quarter with annualized revenues exceeding $200 million. As you recall, we have been accumulating platform design wins across a broad spectrum of auto OEMs. And we have generated a substantial pipeline of lifetime revenue that will benefit us over many years. Looking to the fourth quarter of fiscal 2023, we are projecting strong growth for our overall auto and industrial end market, expecting revenue to grow approximately 30% year-over-year and in the mid-20% range sequentially. Moving to our consumer end market. Revenue for the third quarter was $178 million, declining 2% year-over-year and growing 9% sequentially. Looking ahead to the fourth quarter of fiscal 2023, we are forecasting revenue to be flat sequentially and decline in the low to mid-single digits year-over-year on a percentage basis. In summary, Marvell delivered record results in the third quarter despite the macroeconomic uncertainty in the world and inventory corrections in some of our end markets. Taking stock of our progress this fiscal year, at the midpoint of our fourth quarter guidance, we are projecting full fiscal year revenue growth in the low 30% range. While we are not immune to the global slowdown impacting the semiconductor sector, we expect to finish this year growing revenue well above the industry and our long-term model, reflecting our continued focus on data infrastructure. Looking forward to the next fiscal year, we remain confident in our key growth drivers of cloud, 5G, and auto. We expect that our cloud optimized silicon programs will build from the initial ramp that started in the second half of this fiscal year and continue to grow approximately $400 million in aggregate revenue in fiscal 2024 and $800 million in fiscal 2025. Our cloud customers are relying on these chips to build incredibly efficient and optimized custom hardware to enable their key growth drivers. In addition to our cloud optimized programs, we expect that our 5G products in our automotive business will drive strong year-over-year revenue growth in fiscal 2024. Offsetting this growth to an extent, we expect a few quarters of inventory adjustments in some of our businesses as customers realign their demand. We continue to be disciplined on operating expenses. We have tightened spending and slowed our pace of hiring, focusing on critical hires for future success. At the same time, we continue to invest in our long-term growth initiatives including our 3-nanometer silicon platform, which is now available for new product designs. In addition, we are committed to executing on a number of new products, which our customers have designed into their mission-critical applications. Over the last few years, we have significantly transformed the company, creating a diversified business with growing exposure to multiple infrastructure end markets with strong secular growth drivers. Our businesses at scale, we have a growing design win funnel, leadership products and strong customer engagement. We've built an extraordinary team at Marvell with a track record of execution excellence, and we believe we are well positioned to navigate the current environment to continue to deliver strong top and bottom-line results over the long term. With that, I'll turn the call over to Jean for more detail on our recent results and outlook.
Jean Hu, CFO
Thanks, Matt, and good afternoon, everyone. I'll start with a review of our financial results for the third quarter and then provide our current outlook for the fourth quarter of fiscal 2023. Revenue in the third quarter was $1.537 billion, within our guidance range, growing 1% sequentially and 27% year-over-year, driven by growth from our data infrastructure end market. Data center accounted for 41% of revenue, enterprise networking was 24% of revenue, carrier infrastructure at 18%, consumer at 12%, and auto industrial at 5%. GAAP gross margin was 50.6%. Non-GAAP gross margin was 64% of revenue, below our guidance range primarily due to product mix. Our enterprise and auto industrial end market revenue was lower than expected, and the consumer revenue was higher than our forecast. GAAP operating expenses were $672 million. Non-GAAP operating expenses were $420 million, declining by 3% sequentially. Year-over-year, OpEx increased by 13%, growing at less than half the rate of the top-line revenue growth. OpEx was lower than guidance due to lower bonus accrual and better-than-expected NRE. Our GAAP operating income was $106 million. Non-GAAP operating profit was $564 million or 36.7% of revenue, another all-time record, demonstrating the strong leverage in our operating model. Other income expense, including interest on our debt was $41 million, higher than guidance primarily due to higher interest rate on our outstanding debt. For the third quarter, GAAP income per diluted share was $0.02. Non-GAAP income per diluted share was $0.57 within our guidance range. Earnings per share grew 33% year-over-year faster than top line revenue growth. Now turning to our balance sheet and the cash flow. During the quarter, we generated $411 million in cash from operations, reflecting our strong earnings offset by continued working capital investments to support our top line revenue growth, including $94 million in payments for long-term back-end and substrate capacity agreements. These agreements are critical to ramping our complex products in the data infrastructure market including the call to optimize the silicon solutions Matt discussed earlier. In the third quarter, we increased our inventory by $44 million or 5% sequentially. Looking at the change in demand we are forecasting in the fourth quarter, we expect our inventory level to continue to be elevated. We are focused on prioritizing new product ramps to support our customers. Most of our products have long product cycles of three to five years or even longer. We are comfortable carrying higher inventory in a dynamic supply chain environment, and we plan on reducing inventory starting next fiscal year. As of the end of the third fiscal quarter, our cash and cash equivalent was $723 million, increasing by $106 million from the prior quarter. Our total debt was $4.5 billion. Our gross debt-to-EBITDA ratio was 1.9x, and net debt-to-EBITDA ratio was 1.6x. During the third quarter, we returned $101 million to shareholders through $51 million in cash dividends and $50 million of share repurchases. In summary, in an uncertain macroeconomic environment, the Marvell team executed very well, delivering top line revenue growth and earnings expansion much faster than revenue growth. Now turning to our guidance for the fourth quarter of fiscal 2023. We are forecasting revenue to be in the range of $1.4 billion, plus or minus 5%. We expect our GAAP gross margin in the range of 48.2% to 50.2%. We project our non-GAAP gross margin will be approximately 64%. We project our GAAP operating expenses to be approximately $646 million. We anticipate our non-GAAP operating expenses to be approximately $430 million. As Matt mentioned earlier, we have proactively slowed down our pace of hiring and tightened the discretionary spending to manage our operating expenses. We have a proven track record of executing through economic and market cycles to maintain strong profitability while we continue to invest in long-term growth initiatives. As a reminder, looking ahead to the first fiscal quarter of 2024, due to the typical seasonality in payroll taxes and employee merit increase, our OpEx tends to increase from the fourth fiscal quarter in the high single digits sequentially on a percentage basis. Following the step-up in the first fiscal quarter, we are currently planning on holding our OpEx approximately flat at that level for the next few quarters. Other income and expense, including interest on our debt is expected to be approximately $44 million. We expect a non-GAAP tax rate of 6% for the fourth quarter and currently expect this to increase slightly to 7% next fiscal year. We expect our basic weighted share outstanding will be 855 million, and our diluted weighted average share outstanding will be 861 million. As a result, we anticipate GAAP earnings per share in the range of breakeven to $0.05 per diluted share. We expect non-GAAP income per diluted share in the range of $0.46, plus or minus $0.05.
Operator, Operator
Our first question comes from Blayne Curtis with Barclays.
Blayne Curtis, Analyst
Matt, I want to gain a clearer understanding of the data center situation. Storage has been underperforming for some time, and it's clear that nearline has also been weak. I'm curious about the significant decline in storage, and I'm trying to connect that with the reported weakness in China since that represents a significant figure. Could you elaborate on both aspects? When you mention weakness in China, which specific products are you referring to? Is there a way for you to provide more details on this within the data center for January?
Matt Murphy, President and CEO
Yes. Got you, Blayne. Yes. So on the first one on nearline, as you mentioned, there's been a lot of reports out there about the weakness there. We really hadn't seen that when we guided the quarter. In Q3, we started to see some weakness, but the impact is very pronounced in the fourth quarter, and that nearline weakness obviously flows into the data center end market into that bucket. When you go to China and the weakness we've seen there, that's really in the enterprise area. So while overall enterprise is hanging in there, it was slightly below in Q3. We've had some offsets to that from strength elsewhere. But the main impact of the Chinese customers has really been in enterprise for the most part.
Blayne Curtis, Analyst
I would like to follow up on your comments regarding the cloud. You mentioned that October was strong for both optical and switching. However, you also noted that the data center is experiencing a slowdown. Can you clarify how these two points relate? Are you still observing strength in the U.S. cloud while noticing weakness in other regions? Is the data center's decline primarily related to on-premises solutions? What exactly did you mean by that?
Matt Murphy, President and CEO
Yes. Great question. So let me take it from the top. So first point would be that if you look over the last few years, cloud CapEx has been on fire. It's been growing 30% plus for the last few years. This year, if you look at reports and kind of what we see is probably something in the 15% range for '22 and then it depends on who you talk to, but probably down in the low to mid-single digits or maybe mid-single digits for next year. So that's the deceleration that we're talking about. And as the macro has started to catch up even with these large cloud companies, you see them very publicly tightening their CapEx, tightening their OpEx. And they've had this supply chain built in the data center, which was geared up for a lot of growth. And so as they reset those expectations, it's not a really smooth process. Storage is the most pronounced, as I mentioned earlier. That's the majority reason code for the sequential decline. But we are seeing inventory adjustment as well to a much lesser extent, and I'd say the broader set of product lines outside of storage that we sell into data center. And so that is not a China-specific thing. That is a global comment, including U.S. cloud, seeing inventory adjustment a bit more broadly. And that's a change, certainly from where we were, say, a quarter ago when we were mired in supply escalations and expedites to an environment where it's now how do we work together to manage the inventory and manage the new reality. And so that's what you see in the guide for Q4. Hopefully, that was helpful to give you the perspective you're looking for.
Operator, Operator
Our next question comes from Vivek Arya with Bank of America.
Vivek Arya, Analyst
Matt, I'm trying to see what is the range of kind of scenarios for fiscal '24 sales growth? I understand you're not giving a specific number. It would be helpful if you give us at least kind of a range. Can Marvell grow next year? Because when I look at the three areas, cloud and 5G, and autos, I believe it's about 35%, 40% of business. Can those three areas collectively grow fast enough to offset the inventory correction in other areas? Like, so should we be thinking about flat or mid-single digit? What's the kind of range of scenarios of growth that we should be thinking about for fiscal '24?
Matt Murphy, President and CEO
Yes, that's a great question. I want to emphasize that we are operating in a very dynamic environment, and we'll provide the best insight we can. First, we are optimistic about our new products that are starting to take off, along with the growth drivers we've discussed, such as cloud optimized silicon, switching, and electro-optics in the data center, as well as 5G, which continues to gain momentum with new regions like India coming online next year and an increase in content. Automotive is also on a growth trajectory. However, we are still assessing the base business and the extent of the inventory correction we will face. We expect this correction to follow typical cycles, likely taking a couple of quarters to resolve. There are three areas I want to highlight that may serve as offsets next year. First is consumer, which has not seen significant investment and has typically been managed for cash, so we expect some decline there. Second is the on-premise data center, which likely has challenges ahead. Lastly, there may be some softness in our wired infrastructure business. Interestingly, if we look back at fiscal '22, those three areas saw considerable growth in fiscal '23, which we are currently in. Consequently, we anticipate them to revert somewhat to previous levels following the recent upcycle. In terms of timing, we believe most of the headwinds will be felt in the first half of the year as we work through inventory issues, with a recovery expected in the latter half fueled by growth drivers. Overall, while we believe we can achieve positive year-over-year growth, it may not be as high as we originally hoped just three months ago due to the scale of the inventory adjustments.
Operator, Operator
Our next question comes from Timothy Arcuri with UBS.
Timothy Arcuri, Analyst
Matt, just along the same lines of that question. I'm just kind of wondering, if you can help us figure out what a reasonable baseline is in the data center business headed into next year? If you look at storage, I mean, it must be down about 50% sequentially in January, and you were obviously over-shipping the past few quarters and you're really under-shipping now. But it seems like if you net all that out, maybe it's kind of the $600 million per quarter baseline in data center and then you can add the $400 million for the cloud optimized silicon next year. Can you sort of help us handicap what a normalized run rate might be in that business?
Matt Murphy, President and CEO
Yes. First, I think you're in the ballpark on storage. And just for a little context, the magnitude of that decline, we can't find a data point that shows it declining that quickly. Even when we look back to the reset in 2019, this is down a lot more than that in the same time frame. So you're right, a lot has come out, and so that needs to normalize. I think you've probably got the math about right if you think about sort of where is the base business at. But just to be clear, we're still in a little bit of a dynamic environment figuring out where this is going to bottom out. But if you look at how fast it's coming down, and that's kind of what we're doing, by the way, we're effectively working with our customers to make sure we deal with this quickly and efficiently and minimize any risk of building excess inventory. And that's the path we're on. So sometime in the Q4, Q1 timeframe, we think that works itself through, and then you start to kind of grow from there. But that's probably reasonable. Probably is an annualized type of run rate, maybe a little bit lower in the first half and certainly higher in the second half as the new designs really ramp up.
Timothy Arcuri, Analyst
Yes, understood. I was trying to guide people a bit regarding the non-storage aspects because there are suggestions that the problems are not limited to storage, but it appears that they are.
Matt Murphy, President and CEO
There is some clarification needed. The primary reason for the decline from Q3 to Q4 in the data center segment is related to storage, but there is also an inventory adjustment occurring due to the decrease in the CapEx curve. There has been some realignment, but it is manageable and not as significant. I want to emphasize that this issue is not solely about storage; there is a broader context of adjustment happening.
Operator, Operator
Our next question comes from Toshiya Hari with Goldman Sachs.
Toshiya Hari, Analyst
Matt, if we take your guidance for the carrier infrastructure business in Q4, I think you'll be doing about $1.1 billion in revenue in the full year, maybe a little bit below that. To level set us, how much of that is wireless? How much of that is wired? And as you look forward into fiscal year '24, how are you thinking about the 5G business? I think the market, overall, you're seeing some spots of softness potentially, but obviously, you've got idiosyncratic design wins. So how are you thinking about your business there? And then on the wired side, just given the cyclical dynamics, what sort of decline should we be expecting into fiscal '24?
Jean Hu, CFO
Toshiya, this is Jean. I'll start to answer this question, and then Matt can add. So first, on the carrier infrastructure, wireless is already more than half. We talk about the wireless revenues already running, had more than $600 million annualized run rate. So wireless is definitely more than half. Going into next year, as Matt mentioned earlier, we continue to see strong 5G adoption and our customers continue to do very well in the marketplace. So we do expect the wireless part of the business will continue to have very strong growth into next year. Of course, the wireline side is what Matt discussed. We are going to see some headwinds on the wireline side. But overall, we do expect the carrier infrastructure to continue to grow. Matt, anything you want to add?
Matt Murphy, President and CEO
No, I think that was perfect. I mean I just put a pin on it that the wireless opportunity continues to be very exciting, and I think it's going to be a very good year for wireless next year.
Operator, Operator
Our next question comes from Karl Ackerman with BNP Paribas.
Karl Ackerman, Analyst
I have two questions. First, regarding enterprise networking, you mentioned the impact from China. Outside of China, are you still experiencing growth? Some of your networking OEMs have indicated moderating orders, but last quarter, you mentioned that this segment was the most constrained. Can you clarify if that's still the case? Also, could you provide insight into the inventory levels of those customers to help us understand the demand dynamics for enterprise networking heading into fiscal '24?
Matt Murphy, President and CEO
Sure. I'll share a few thoughts, and then Jean can add more. We are seeing some positive changes in the supply environment. Part of this improvement is due to decreased demand in the China market, which has allowed us to redirect supply to other customers. Generally, aside from a few specific cases, our enterprise business primarily consists of merchant products like Ethernet switches, gigabit and multi-gigabit PHYs, and embedded processors. A decline in demand in one region helps balance things out. Overall, the supply situation has improved, which is encouraging. We also have some growth drivers that we've mentioned over the past few quarters, including new custom silicon projects that are beginning to ramp up. This is helping to counter some of the weakness we've observed. The non-China segment has performed reasonably well, but we remain cautious about our outlook for next year. The run rate we provided for Q4 should be a reliable estimate for next year, even accounting for potential weakness or inventory adjustments. We continue to see gains in content, and various factors are influencing our situation. Essentially, we’re witnessing a decline in China while gaining ground with U.S. customers through new designs, market share, and content gains, which aligns with our Q4 guidance.
Jean Hu, CFO
No.
Karl Ackerman, Analyst
Got it. No, that's helpful, Matt. As a quick follow-up, I was curious about the inventory digestion that needs to happen in certain end markets. As you think through that and plan with your foundry suppliers for next year, could you discuss the conversations you're having regarding the potential to limit some of the cost inflation from the foundry side? Additionally, can they help share that cost with you moving forward to make it easier for you to pass it along to your end customers?
Matt Murphy, President and CEO
Yes. Generally speaking, as supply becomes more abundant, that is a positive development. However, there are still certain areas facing constraints and some inflationary pressures within our supply chain that we are addressing. We're taking steps to mitigate these issues, and where we are unable to do so, we will continue our longstanding practice of passing on costs in a way that maintains our margins. The Marvell and operations teams have been proactive in establishing more sources and strategic agreements, particularly in the packaging back-end. We are focused on managing our cost base effectively as a responsible supplier. Despite our efforts, some inflation may still persist. We have forged strong partnerships with our suppliers, maintaining clear communication regarding demand, and we expect to collaborate with them as we navigate through the current downturn in the semiconductor industry.
Operator, Operator
Our next question comes from Gary Mobley with Wells Fargo.
Gary Mobley, Analyst
I had a question that kind of picks up on the last topic, and that is your purchase obligations. I know you haven't filed your 10-Q yet, but as I looked at the last your purchase obligations are expected to be about 25% of your cost of goods sold next year. And so given the current market softness, do you anticipate being able to utilize all that? Do you anticipate the possibility of any sort of inventory write-down?
Jean Hu, CFO
Gary, this is Jean. Thank you for the question. So yes, the purchasing obligation we have this quarter will not change much from the last 10-Q we filed. It's about $3.2 billion. But just remember, those purchase agreements are really for the long term. On average, it's between four to ten years. And also, our products are very complex and a lot of them have a very long manufacturing cycle. So we actually need a dedicated capacity for those complex products to support our customers, single cells, the customer, large volume, last long time. Regardless of the economic environment, we need those dedicated capacities. And frankly, our team has been very thoughtful. We only secure the capacity largely in back end and the substrate for a portion of what we need. So we feel quite comfortable. We don't have the issues on the purchasing agreement obligations or have to write off any capacity. That's not something we anticipate at all.
Matt Murphy, President and CEO
Yes, Gary, I would just add that if you look at the various obligations we have, some of them are short-term, such as prepays and others where we actually reclaim capacity. The take-or-pay portion of the long-term agreement is relatively small compared to the total. As Jean mentioned, the most strategic factor here is in the advanced technologies, particularly in complex substrates and high-end packaging, which we need to secure due to the volume increase we expect in the coming years. For instance, the $800 million in additional cloud-optimized silicon wins is all utilizing 5-nanometer technology with advanced ABS substrates and highly customized packaging. To obtain that capacity from top vendors, agreements must be established years in advance. We’ve taken these steps and feel positive about them because they directly support our committed programs. Overall, while we do have obligations, we believe they are beneficial, helping us ensure our future success and allowing us to convey a strong message to our customers regarding our ability to provide the necessary capacity and supply chain for their needs going forward.
Operator, Operator
Our next question comes from Ross Seymore with Deutsche Bank.
Ross Seymore, Analyst
I guess kind of a two-parter going back to the data center side, Matt. Could you just level set us, what percentage of the third quarter data center business was storage? And then looking forward on the more kind of constructive side of things, what's your confidence level on that $400 million in incremental cloud optimized revenue growth next year? Given the fact that you talked about a deceleration in what's happening at the cloud customers themselves, are you at all worried about that $400 million being something less than that or being pushed out? Is that at all a level of conservatism that we should consider?
Matt Murphy, President and CEO
Sure. Let me address your second question first. We are quite optimistic about that revenue stream. As you may recall, we moved from discussing targets of $400 million and $800 million to actually looking at figures above those amounts because we secured additional design wins that provide us with a buffer. Even if we encounter headwinds for next year and the volumes fall short of our expectations, we have secured an additional business that gives us reassurance. All programs are on track, and despite the shifting environment, we are actively working on launching multiple new products that need to ramp up significantly next year. I am personally engaged with our customers to meet their timelines, and we are doing everything we can to achieve that. The positive aspect is that the programs remain on schedule, which is encouraging. I believe your other question was regarding the percentage of data center revenue attributed to storage.
Ross Seymore, Analyst
Other way around, if storage falling is the headwind for data center, just to level set people, you had 30% roughly of your business in storage or in data center?
Jean Hu, CFO
Yes, Ross, I can assist you with that. Generally speaking, our storage business constitutes about one third of the total data center business, on average, though this may vary each quarter. However, as Matt mentioned earlier, during the inventory correction, this will represent the largest decline in inventory.
Operator, Operator
Our next question comes from Harlan Sur with JPMorgan.
Harlan Sur, Analyst
Matt, you talked about the impact on a more muted cloud CapEx spend on your overall data center business. Most pronounced in storage, but you do have compute, you've got networking, you've got optical products as well. And looking specifically at your cloud optical connectivity segment, which obviously is PAM4 DSP, your color solution. If I look back at the last cloud spending slowdown, which was in 2019, both of these segments combined grew about 35%, 40%, right? Granted, this was still in the early innings of the 200, 400 gig upgrade cycle. But part of it is also very strategic in nature because your customers are still trying to enable better performance through higher networking speeds. So I guess kind of two questions. Near term, is the team dealing with inventory issues in these particular optical products? And then looking into next year and the team see continued growth in cloud optical?
Matt Murphy, President and CEO
Thank you for the question, Harlan. You're correct that the current situation is different from a few years ago when the technology was still emerging. However, we are witnessing strong adoption of 800 gig and significant momentum in 400ZR within the new platform. We expect overall optics to grow next year. In the fourth quarter, some adjustments may occur in that area, but we see it as a short-term issue. Given the strategic importance, we believe optics will continue to grow, and we are actively working on new product development for the next generation of high-end 51.2T switches. This development includes a shift from 800 gigabits per second to 1.6 terabits per second. There's a lot happening in this space, which is exciting, and the environment is different from 2019 due to broader adoption, but we remain optimistic.
Operator, Operator
Our next question comes from C.J. Muse with Evercore.
C.J. Muse, Analyst
I guess, Matt, I was hoping to spend a little bit of time on the enterprise networking side of the house, roughly $1.4 billion business for the fiscal year. And you talked about a China slowdown. Is there a way to kind of parse between China and non-China and how you're thinking about the trajectory into January and all of calendar '23?
Matt Murphy, President and CEO
Yes, that's a good question. As we mentioned, China has seen a significant decline in Q4 compared to two quarters ago, which may be a bit of an overcorrection. It's difficult to gauge the situation there, including its duration and impact. Non-China markets have been performing well, thanks to our content gains and the introduction of new products with higher average selling prices, which help mitigate the decline. For Q4, we still expect enterprise networking to be down overall due to the China situation. However, if I had to predict for next year, non-China will make up a larger share of the total in fiscal '24 than China. I don't have the specific numbers at the moment, as much of this is routed through the channel, and I currently don’t have those figures available.
Operator, Operator
Our next question comes from Christopher Rolland with Susquehanna.
Christopher Rolland, Analyst
I wanted to follow up on carrier infrastructure as well. So a couple of things. I guess, first of all, your agreement with Nokia and the extension there. I was wondering if there's any economics associated with that? And then secondly, looking out into next year, there's a lot more talk about India, 5G, Nokia winning, Samsung winning there as well. What does the opportunity look like there for growth? Is this going to be sizable overall?
Matt Murphy, President and CEO
Yes, thanks, Chris. It was exciting to announce our Layer-2 transport processor partnership with Nokia. Our initial collaboration on the Layer-1 baseband processor was very successful, and it has expanded into a broader engagement. As you may be aware, the Layer-2 transport or CPU is a crucial component with significant potential moving forward. On the India front, they are preparing for an aggressive rollout next year, and some of our key customers are well-positioned to benefit from that growth. That's why we expressed confidence in our wireless segment for next year, particularly regarding our content gains and regional deployments. I expect that India will be a substantial opportunity.
Operator, Operator
Our next question comes from Tore Svanberg with Stifel.
Tore Svanberg, Analyst
Yes. I would like to ask a question that is unrelated to the upcoming quarters. This question has two parts. First, could the UCI-Express standard potentially speed up the adoption of CXL? I'm asking this because in the last call, you mentioned that CXL might not contribute to revenues for a few years, but there seems to be considerable activity that could potentially shorten that timeline.
Matt Murphy, President and CEO
Yes. The timing of CXL largely depends on the server CPU cycle, and I believe companies are preparing for that. Although it might have been overlooked, I mentioned in my prepared remarks that we have secured a significant design win in this area, and we are currently making good progress in product development. Additionally, there is a substantial pipeline of semi-custom products as well as a merchant product following that. The level of activity with our customers remains very high. However, I don’t have insight into any changes regarding when those products will ramp up. This is a crucial new area for us, and we are focused on establishing a leadership position there. Many of these products, particularly the larger pooling devices and accelerators, often incorporate multicore CPUs, operate at 5-nanometer technology, and include security features. We are adding various aspects, making them resemble highly customized SoCs that allow our customers to leverage entirely new architectures for integrating their CPU, GPU, or other processing units with memory. This will continue to be a key strategic focus for us. Securing a significant win that is committed and in progress is an encouraging development.
Tore Svanberg, Analyst
Great. And the second part of the question was related to your new product, and you did mention this earlier. So AEC, when should we expect Marvell to get some revenue contribution from AEC? Is that also sort of a few years out? Or could you already start to see some revenues next year?
Matt Murphy, President and CEO
I think we need to let that one play out a little bit, Tore. We're taking that one step at a time. I think the milestone really was lining over the last year, really getting our solution designed in across a broad array of high-volume proven cable suppliers to the largest hyperscale companies, and we've done a great job there. And we've now started sampling those, and we have a very high level of interest. But at this juncture, we haven't really sized exactly our opportunity and the timing. But we'll do that in due course as we get better visibility to the take-up of our customers that are competing in this market. But that trend is very real. The AEC trend is anyway. And we hope to be an important part of it.
Operator, Operator
Our next question comes from Ambrish Srivastava with BMO.
Ambrish Srivastava, Analyst
I just wanted to come back to the clarification for Jean. Looking at the data center business and the storage component in the last quarter that you reported that segment before changing the reporting, I see $300 million without Inphi and then you had given a number of $340 million with Inphi. And the number you just cited, a one-third of the recent quarter, it seems really low. I would mean $190 million, $200 million number rounding up. Is there something I'm missing there or a large chunk of that is now in some other business?
Jean Hu, CFO
Yes. Yes. Maybe let me just recap and clarify. I think before we change the reporting, our storage business annualized run rate is about $1.4 billion. So that's what you are mentioning before we change the reporting by end market. That's what our overall storage business. Just as a reminder, it includes flash controller preamp and also fiber channel. So it's all the different storage product lines included there. And over time, the storage has come down. The number I mentioned, one-third is not a particular last quarter. It's more generally, when you look at several quarters, on average, it's one-third. The first half definitely is much higher and now it's much lower, right? When you think about $1.4 billion storage revenue I'm talking about, about 60% is in data center. That's what we told investors during our Investor Day. So hope that's how you clarify different pieces.
Ambrish Srivastava, Analyst
Yes. No, it does. So that means it's come down from $1.4 billion annual run rate to $800 million, right?
Jean Hu, CFO
I don't think the way you can think about that. It's $1.4 billion. The first half of this year, it probably was much higher than $1.4 billion annualized run rate. And now it's dropping much lower, right? The second half of the run rate probably is very low.
Ambrish Srivastava, Analyst
Got it. That's very helpful. I have a follow-up for you, Matt. Regarding storage, I don't track the distribution guys closely, but I’ve noticed that Seagate's consensus has declined for three consecutive quarters, while WD has seen two quarters of downturn in their mass storage business. Additionally, considering the bullwhip effect, the impact appears to be greater than what consensus has predicted for these companies. Is that the correct way to view the timing, suggesting a couple of quarters until this business recovers? Also, regarding other segments within the data center, thanks for clarifying earlier that it's not solely about storage. When can we expect those businesses to show movement, especially since their decline seems less pronounced without a significant bullwhip effect? Overall, should we anticipate modeling a few quarters of sequential declines beyond December?
Matt Murphy, President and CEO
Yes. Let me break that into two parts. You are correct in highlighting the dynamics of the end customer and how they compare to ours; this embodies the bullwhip effect. You could illustrate the bullwhip and pinpoint our position on that curve. Historically, in any business where you are somewhat disconnected, there tends to be increased volatility. This is just how it works. Therefore, you can expect that. Again, we don't know the exact timing, but based on past experiences, we believe it will take a couple of quarters to navigate through that. Regarding the non-storage component, yes, it's about managing inventory levels. We have decided, Ambrish, that I have encountered various approaches throughout my career regarding how to handle situations when demand decreases. You can work with your partners to achieve a soft landing, or you can continue shipping and face significant repercussions later on. Our strategy has been to move past this period and aim for a resolution. Additionally, as your visibility improves and inventory decreases, lead times return to normal, which enhances forecast accuracy. You likely know the old saying that the least reliable forecast comes from having an entire year’s worth of orders; a more normalized environment is preferable. That is the goal we are pursuing. While there is some inventory adjustment occurring, it is relatively standard given the changes in capital expenditure patterns. We also have new products being introduced, which should help expedite this process. However, we will need to monitor how the exact timing unfolds, as the situation remains somewhat dynamic. Ashish, do we have time for one more? Should I just wrap it up with some closing comments?
Ashish Saran, Senior Vice President of Investor Relations
Yes. Go ahead, wrap it up, Matt.
Matt Murphy, President and CEO
Perfect. Yes. Well, thanks, everybody, for all the questions. Just a little bit of a few comments as we close here. Look, first, I think Q3 was a great quarter for us. I mean we're in the middle of a pretty severe macroeconomic environment. A lot of other companies have obviously seen some of this inventory digestion and impact earlier. But in Q3, we delivered record revenue, very strong operating margins. Even if you look at the fourth quarter guide and you kind of compare our second half of this year to a year ago, we're up about 15%. And when you look at sort of the rest of the market, take sort of large digital peers, that peer group is down about 5%. So we still think even with a softer Q4 guide, we continue to perform very well from a top-line perspective. I'd say also we've been disciplined on managing expenses. The pro forma FY '23 will grow about 28%. And if you look at our OpEx increase, it's about 14%. So we've been basically growing operating expenses at about half the rate of revenue growth. And we've been able to put together a world-class team as a result to execute on these massive design wins we've gotten over the last few years. And so while we're going to be disciplined in our spending, and Jean sort of gave you the model on OpEx. We feel very good about the size of the team, the resources we have, and the ability to execute, which our customers are counting on. And I believe if we do that, there's even more to come. So in conclusion, we continue to have the right strategy with really strong partnerships with key customers. We think we're in the right markets. And the growth drivers of cloud, 5G wireless communications, and automotive continue to be three of the largest growth opportunities in the semiconductor industry, and Marvell is extremely well positioned there. So thanks for all the questions. I'm sure we can be more helpful in the callbacks as well. There's a lot of moving pieces. But thank you so much for your time today.
Operator, Operator
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.