Earnings Call Transcript - MRVL Q3 2025

Operator, Operator

Good afternoon, and welcome to Marvell Technology, Inc. Third 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, 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 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 also available in our earnings press release. I am pleased to announce that our next Investor Day will be held in New York City on June 10, 2025. More details will be shared in an upcoming press release. 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 third quarter of fiscal 2025, Marvell delivered revenue of $1.516 billion, $66 million above the midpoint of guidance, growing 19% sequentially with the outperformance driven by strong AI demand and execution. As a result, our non-GAAP earnings per share of $0.43 was also well above the midpoint of guidance, growing by 43% sequentially. This earnings growth rate, which was more than double our top-line growth rate, highlights the substantial operating leverage in our business model. Stronger-than-forecasted ramp in custom silicon was a key contributor to this performance. We believe that continued success in custom silicon will help accelerate our timeline to achieve our long-term target operating margin model. On a year-over-year basis, third quarter revenue grew by 7%, marking a return to year-over-year growth for Marvell. I'm very pleased with our results and even more excited about our outlook for the fourth quarter, where we project revenue growth to accelerate to 26% year-over-year growth at the midpoint of guidance. Marvell is entering a new era of growth, driven by the substantial volume production ramp of our custom silicon programs, along with continued strong growth in optics. Yesterday, we announced the expansion of our strategic relationship with Amazon Web Services through a comprehensive multi-generational five-year agreement. This multi-generational agreement encompasses a broad range of Marvell's data center semiconductors, including custom AI products, optical DSPs, active electrical cable DSPs, PCIe retimers, data center interconnect optical modules and Ethernet switching silicon solutions. Additionally, Marvell will collaborate with AWS for EDA in the cloud, leveraging the advanced and scalable compute capabilities of AWS to accelerate silicon design. This agreement represents a significant step up in the expected volume of business between the two companies in the coming years and we look forward to working with AWS on custom AI and networking semiconductors that meet the demanding needs of accelerated infrastructure. Let me now discuss our results and expectations for each of our end markets. In our data center end market for the third quarter, we achieved record revenue of $1.1 billion, growing 98% year-over-year and 25% sequentially. These strong results were driven by a significant step-up in our custom AI silicon ramp as our customers saw increasing demand for the differentiated capabilities offered by these new custom AI chips. We are seeing strong custom AI demand continue into the fourth quarter and have secured supply chain capacity to support our customers' growth forecasts. Our success in ramping these highly complex 100 billion-plus transistor chips from initial samples to high-volume production on first-pass silicon without any discernible issues is a testament to Marvell's robust design methodology and world-class engineering team. Our seasoned operations team and deep partner relationships were key enablers of the rapid ramp we were able to drive in a constrained supply environment. The superb execution is a significant time-to-market advantage for our customers and has given them even more confidence to expand their collaboration with Marvell on their critical silicon projects. In the third quarter, we benefited from higher-than-forecasted revenue from our electro-optics products, which grew double-digits sequentially on a percentage basis. We continue to see strong bookings for our market-leading 800-gig PAM products and we also began shipments of the industry's first 1.6T PAM DSP and 5-nanometer process technology. We continue to see strong design win momentum with leading customers for this product and expect the production ramp to accelerate next year. To meet AI's insatiable need for the highest bandwidth at the lowest power, Marvell is accelerating the cadence of next-generation products. Today, we announced the industry's first 3-nanometer 1.6T DSP, featuring 200-gig per lane electrical and optical interfaces. By leveraging 3-nanometer process technology and advances in electrical and optical SerDes, this next-generation platform is designed to reduce 1.6T optical module power consumption by more than 20% compared to its predecessor, marking a significant improvement in energy efficiency. Marvell's DSP team remains laser-focused on driving best-in-class performance, schedule and time-to-market to continue to remain the leader in this large and fast-growing electro-optics market. In the active electrical cable market, we are starting to see an acceleration in the production ramp of our 100-gig per lane 800-gig DSPs with multiple module partners. We have also started sampling the industry's first 200-gig per lane, 1.6T AEC DSPs to address upcoming higher-speed, short-reach copper interconnect applications. Looking ahead to the fourth quarter of fiscal 2025 for our data center end markets, we are forecasting strong sequential growth in the low-to-mid 20% range. We expect this growth to be driven by another significant step-up in our custom AI revenue as these programs continue to ramp into high-volume production. This will be further augmented by strong growth from both our Ethernet switch products as well as our interconnect portfolio, which includes optical DSPs, TIAs, drivers, AECs and DCI products. Now, let me turn to Marvell's enterprise networking and carrier end markets. In the third quarter, enterprise networking revenue was $151 million, while carrier revenue was $85 million. We began to see a recovery in both of these end markets, with revenue collectively growing 4% sequentially. We expect the pace of recovery to accelerate in the fourth quarter with aggregate revenue from enterprise networking and carrier infrastructure forecasted to grow sequentially in the mid-teens on a percentage basis. We are pleased to see our revenue growth and order momentum continue to improve in these two end markets, although this forecast still anticipates Marvell products shipping below end market consumption. Turning to the consumer end market, revenue in the third quarter was $97 million, growing 9% sequentially. Looking ahead to the fourth quarter, we expect revenue from the consumer end market to decline sequentially in the mid-teens on a percentage basis. This is due to seasonality in gaming demand, which typically weakens in our fourth quarter, bottoms out in our first fiscal quarter and then begins to rebound in the second quarter. Turning to our automotive and industrial end markets. Revenue in the third quarter was $83 million, growing 9% sequentially as we started to see a recovery in this end market. Looking ahead to the fourth fiscal quarter, we are projecting revenue from the auto and industrial end market to grow sequentially in the low-to-mid single-digits on a percentage basis. In summary, the Marvell team delivered excellent results in the third fiscal quarter, achieving 19% sequential top-line growth and delivering both revenue and non-GAAP earnings per share well above the midpoint of guidance. For the fourth quarter, we are forecasting consolidated revenue to again grow 19% sequentially at the midpoint of guidance. AI continues to lead the way, enabling our data center revenue to almost double year-over-year in the third quarter, and we expect it to continue driving strong growth in the fourth quarter. With three quarters of strong AI results under our belt for this fiscal year and an even stronger fourth quarter forecast, we are clearly set to significantly exceed the full-year AI revenue target of $1.5 billion, outlined earlier this year at our AI event. Over the past several years, Marvell has strategically invested in technology, both organically and through acquisitions, to become a critical enabler of accelerated infrastructure. We have in place a full suite of solutions across data center interconnect, switching and compute and the ability to uniquely stitch these together into a unified platform. Marvell's data center end market has grown to account for 73% of our consolidated revenue in the third quarter, driven by AI, and we expect this percentage to increase again in the fourth quarter. Marvell has rapidly transformed into an AI-first data center semiconductor company, and we are completely focused on taking full advantage of our strong position in the AI super cycle. In the third quarter, we made decisions to further solidify and purposefully redirect our investments towards data center relative to our other end markets. These actions resulted in a restructuring charge in the third quarter, which Willem will discuss in his section. The goal of these actions is to increase our R&D intensity towards the data center, our largest and fastest growing opportunity, while continuing to drive significant operating leverage going forward. AI technology is advancing at a tremendous pace and the opportunity is expanding rapidly. We are continuing to enhance all aspects of our comprehensive technology platform, including electrical and optical SerDes, high-speed energy-efficient 2D and 3D, die-to-die interconnects, advanced packaging and silicon photonics. In addition, we are optimizing interfaces for high bandwidth memory, SOCs and compute fabrics. Our 2-nanometer platform is also progressing very well as we continue to lead the industry in cutting-edge process technology. Marvell's 2-nanometer platform includes our broad suite of internally developed best-in-class IP to enhance performance, energy efficiency, density and design flexibility. We are seeing tremendous interest from customers for next-generation 2-nanometer designs. Turning to our non-data center multimarket businesses, which include carrier and enterprise networking, we are encouraged to see the recovery starting to gain momentum. As you may remember, we had invested heavily in these end markets over a long period to successfully gain share and have built an industry-leading portfolio of products. We plan to continue investing in a targeted manner to grow revenue in these multi-market businesses. The Marvell team is firing on all cylinders and we see a very favorable setup to significantly scale up the company. In addition to strong revenue attainment, the Marvell team is also driving outstanding financial results. This fiscal year, our revenue has grown by 31% from the first quarter to the third quarter. Over that same time period, we have demonstrated tremendous operating leverage, growing our non-GAAP EPS by 79%, which is 2.5 times our top-line growth rate. We have driven strong operating cash flows, enabling us to step up our stock repurchases throughout the year. This fiscal year, we have cumulatively bought back $525 million through the third quarter and have plenty of remaining authorization. As you may recall, earlier this year, our Board authorized a $3 billion addition to our existing stock repurchase program. We are also focused on reducing our stock-based compensation expense as a percent of revenue, and we expect significant improvement in this metric going forward. Given the strong revenue outlook for the fourth quarter and our expectations for robust growth in fiscal 2026, we believe we are well positioned to deliver outstanding financial returns to our stockholders. Before I turn the call over to Willem, I would like to express my heartfelt thanks to Loi, a key member of my team and Co-Founder of Inphi. After a long and distinguished career in the semiconductor industry, Loi has announced his decision to retire in April of next year. Loi has made incredible contributions to Marvell over the past few years, including building a world-class team and deep bench of leadership talent. He was instrumental in the successful integration of Inphi into Marvell in 2021. With his characteristic integrity and thoughtfulness, Loi is already engaged in succession planning and ensuring a smooth transition. We are also looking forward to Loi staying connected with Marvell after he retires, so we can continue to benefit from his insights and expertise. We wish him the very best in his well-deserved retirement during which he looks forward to spending more quality time with his family. And 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 Marvell's financial results for the third quarter of fiscal 2025. Revenue in the third quarter was $1.516 billion, well above the midpoint of our guidance, growing 7% year-over-year and 19% sequentially. Data center was our largest end market, driving 73% of total revenue. The next largest was enterprise networking with 10%, followed by consumer and carrier infrastructure at 6% each and auto industrial at 5%. As Matt mentioned in his prepared remarks, in the third quarter, we made additional decisions to further redirect investments towards the data center. This resulted in an aggregate restructuring charge of $750 million, which is reflected in our GAAP results for the third quarter. The two largest components were impairment charges for acquired intangible assets and certain purchased technology licenses and their future contractual obligations. I would also note that approximately three quarters of these restructuring charges are non-cash in nature and that the aggregate restructuring charges are now largely behind us. These charges are a reflection of the fact that we have invested significantly in updating our enterprise and carrier product portfolios over several years and we plan on more targeted investments in these end markets going forward. Continuing to our results. GAAP gross margin was 23%. Non-GAAP gross margin was 60.5%, slightly below our guidance as we saw higher-than-forecasted revenue from custom silicon. Moving on to operating expenses. GAAP operating expenses were $1.052 billion, including restructuring costs, stock-based compensation and amortization of acquired intangible assets. Non-GAAP operating expenses were $467 million, in line with our guidance. GAAP operating margin was negative 46.4%, while non-GAAP operating margin was 29.7%. For the third quarter, GAAP loss per diluted share was $0.78. Non-GAAP income per diluted share was $0.43, $0.03 above the midpoint of guidance. Non-GAAP EPS grew by 43% sequentially, illustrative of the leverage in our business model. Now, turning to our cash flow and balance sheet. Cash flow from operations in the third quarter was $536 million, growing by a substantial $230 million from the prior quarter. Our inventory at the end of the third quarter was $859 million, increasing by $41 million from the prior quarter to support the significant growth we are seeing in our data center end market. We returned $52 million to stockholders through cash dividends. In addition, we repurchased $200 million of our stock during the third quarter, an increase of $25 million from the prior quarter. Our total debt was $4.1 billion. Our gross-debt-to-EBITDA ratio was 2.23 times and net-debt-to-EBITDA ratio was 1.76 times. As of the end of the third fiscal quarter, our cash and cash equivalents were $868 million, increasing by $59 million from the prior quarter. Turning to our guidance for Marvell's fourth quarter of fiscal 2025. We are forecasting revenue to be in the range of $1.8 billion, plus or minus 5%. We expect our GAAP gross margin to be approximately 50%. We expect our non-GAAP gross margin to be approximately 60%. For the fourth quarter, we project our GAAP operating expenses to be approximately $710 million. We anticipate our non-GAAP operating expenses to be approximately $480 million. For the fourth 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 fourth quarter. Please note that we forecast our non-GAAP tax rate in fiscal 2026 to step up to be in the range of 10% to 11% in anticipation of a meaningful year-over-year increase in our operating income. 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 income per diluted share in the range of $0.11 to $0.21. We expect non-GAAP income per diluted share in the range of $0.54 to $0.64. Marvell delivered strong third quarter results and we are guiding for significant acceleration in our year-over-year revenue growth in the fourth quarter. We see a strong setup for next fiscal year as well. We remain focused on continuing to drive strong operating leverage, expanding our operating margins, bringing down stock-based compensation as a percentage of revenue and efficient cash flow generation to continue to return meaningful cash to shareholders. I'm also pleased with our guidance to return to GAAP profitability in the fourth quarter and we are looking forward to continuing to drive improvement in this metric. Operator, please open the line and announce Q&A instructions. Thank you.

Operator, Operator

We will now begin the question-and-answer session. Your first question comes from Vivek Arya with Bank of America. Your line is now open.

Vivek Arya, Analyst

Thanks for taking my question. Matt, I was hoping you could help quantify the AI revenues for fiscal '25 overall, and then how we should start thinking about fiscal '26 given the upside in fiscal '25? And when you look at that fiscal '26 funnel, what is that determined by? Is it demand visibility? Is it supply? So, just more kind of quantification and color on these metrics would be very helpful. Thank you.

Matt Murphy, Chairman and CEO

Thank you for the question, Vivek. To give everyone some context, we held our AI Day a few months ago in April, where we discussed projections of $1.5 billion in AI revenue for this year and $2.5 billion for next year. Last quarter, we reported that we were exceeding those expectations. As reflected in our third quarter results and guidance for the fourth quarter, we are well ahead of projections for both this year and next, with gains in the hundreds of millions of dollars this year. The business has performed exceptionally well, consistently surpassing expectations each quarter. Looking ahead, we have a strong forecast for next year. Regarding your question about the sales funnel and what is driving it, it primarily stems from demand. On the supply side, we have successfully collaborated with our partners and are in an excellent position to achieve our plans and potential growth. Our team is fully committed to meeting the needs of our customers next year, which currently appears very robust, particularly in custom AI, our optical interconnect portfolio, and switching, which shows strong year-over-year growth. Everything is progressing very well, Vivek. Thank you.

Operator, Operator

Your next question comes from Ross Seymore with Deutsche Bank. Your line is now open.

Ross Seymore, Analyst

Hi, guys. Thanks for asking the question. I guess, first, congratulations to Loi on the retirement. And then, if I may, just a clarification and then the question. I guess the clarification is, Matt, obviously, you've been very successful at Marvell, but that seemingly is getting noticed in the press with some other management opportunities. So, I'll ask both questions at once, but could you comment at all on kind of your commitment to Marvell or looking elsewhere? And then, my second question is more on the customer diversification. How do we think that the business diversifies, whether it's by multiple products in the custom compute or by customers as we go through calendar '25 and '26? Is it still the same timetable that you talked about at your AI Day or have things moved around?

Matt Murphy, Chairman and CEO

Thank you, Ross, for your straightforward question. I've been the CEO of Marvell for eight years, and when I joined, we were in a significant turnaround situation. At that time, the enterprise value was around $3 billion. Over these eight years, my team and I have dedicated ourselves to transforming and growing Marvell, positioning the company for what I believe is the largest total addressable market opportunity in my career—the AI super cycle and data center. I am fully committed to Marvell. We have an exceptional team, our technology is top-notch, and I can't imagine a better workplace than Marvell. I want to emphasize, as the Chairman and CEO, I am entirely focused on Marvell. Regarding customer diversification, we are in a strong position. At our AI Day, we showcased a variety of design wins in AI accelerators, compute, and several custom opportunities. We have broad engagement across multiple customers with custom solutions, and we are presently pursuing various large volume opportunities, which were highlighted at AI Day, on both the accelerator and compute sides. Both are progressing well with two different customers, and we have additional programs slated for production next year, along with a third major customer in the pipeline. This reinforces our confidence in advancing our long-term goals in custom silicon, and everything is on track. Lastly, I mentioned in my prepared remarks that we are making significant progress on our 2-nanometer platform, which includes a complex and comprehensive suite of best-in-class IP that is garnering considerable interest from our customers, not just for their current designs but also for future projects. Thank you.

Ross Seymore, Analyst

Thanks, Matt.

Operator, Operator

Your next question comes from Harlan Sur with JPMorgan. Your line is now open.

Harlan Sur, Analyst

Hey, good afternoon, and congratulations on the strong results and outlook. Matt, great to see the strong ramp and execution on your 5-nanometer AI training custom solution at your large cloud customer. This customer has been articulating for several months now, right, the strong deployment strategy for these ASICs. That same customer today announced its next-generation custom solution at 3-nanometers, which would be ramping, according to them, end of next year, so calendar '25. Imagine, like many others, they're pulling in their AI program. So, given what appears to be strong execution of your 5-nanometer program and the total ramp by Marvell team, the multi-year agreement with this customer that was announced a few days ago, your characterization of sort of multi-generational roadmap with them, is it fair to assume that you will be the ASIC vendor supporting your customer on this next-gen 3-nanometer training ASIC targeted to ramp late next year? The only reason why I ask is because there just continues to be a lot of competitive noise out there around this 3-nanometer program.

Matt Murphy, Chairman and CEO

Thank you for the question, Harlan. We are very excited about the role of custom silicon, which has been gaining significant attention and momentum, especially since our AI Day. This supports the strategy we initiated years ago, which is now in full effect. At our AI Day, we estimated a total addressable market of $75 billion for data centers, with $40 billion attributed to custom silicon. The team set a target for a 20% market share of that $40 billion, equating to $8 billion. This year, we projected $500 million from custom silicon, growing to $1 billion next year, and we are currently exceeding those estimates. To put it simply, if you take this year’s figure of over $500 million and next year’s figure of over $1 billion, and project that towards reaching our 20% market share goal, that’s our path forward. The recent announcement with AWS is significant for both of us, as it is a five-year agreement that encompasses AI custom products and a wide range of networking products, which will generate notable revenue for us. Importantly, this agreement is designed for multiple generations. With these partnerships, we are more confident than ever in our ability to meet our goals. Thank you.

Harlan Sur, Analyst

Yeah, great insights. Thank you.

Matt Murphy, Chairman and CEO

Yeah.

Operator, Operator

Your next question comes from Toshiya Hari with Goldman Sachs. Your line is now open.

Toshiya Hari, Analyst

Hi, thank you so much for taking the question. Matt, I had a two-part question on your electro-optics business within the context of AI. I'm curious how you would characterize customer inventory levels of optical DSPs in the marketplace today? And I asked the question because I think some investors are a little worried about inventory build at your customer sites, particularly with tariff fears coming up. And then, part B is, if you can kind of speak to the 1.6T transition over the coming quarters and years and what that means for your content or your ASP expansion going forward? Thanks so much.

Matt Murphy, Chairman and CEO

Thanks. Yeah, on the inventory side, look, the dynamic right now is we continue to have very strong demand, very strong bookings and order visibility and a large quantity of orders continue to come in inside lead time. We built through the pandemic and to today, a very robust supply chain capability. And so, we're able to drive and meet the upsides of our customers. Look, on the overall picture, we always are mindful as best we can about optical module inventory. And this was even a concern if you go back a year ago as AI started to ramp, what was going to happen, were people getting ahead of their skis, et cetera. So, we continue to be diligent here and monitor, but as it appears right now, demand is strong, bookings continue to be strong, visibility is great. We expect that business to grow significantly for us. Next year, on the 1.6T as it relates to that, that will be part of the growth we see next year. We're shipping that product now into production. It will be a contributor next year, but I don't want to take away from the very strong 800-gig cycle that will continue to be driven through our fiscal '26 next year. So, so far, so good.

Toshiya Hari, Analyst

Thank you.

Operator, Operator

Your next question comes from Blayne Curtis with Jefferies. Your line is now open.

Blayne Curtis, Analyst

Hey, thanks for taking my question, and congrats on a great quarter. I actually want to ask on the enterprise and carrier. You've talked in the past, I think, about getting back to maybe a $2 billion-plus run rate. I mean, carrier has been up, I guess, with the guidance now, you're looking at double-digits two quarters in a row. So, just curious how broad-based that recovery is and you can kind of how quickly do you think you can get back to that $2 billion-plus run rate annually?

Matt Murphy, Chairman and CEO

Thank you, Blayne. We are aiming to reach the $2 billion run rate again. The timing is uncertain, but we are encouraged by the 4% growth in combined enterprise and carrier revenue in Q3. Looking ahead to Q4, we expect mid-teens growth, which is an improvement from our previous double-digit expectations. Overall, in the second half of the year, both markets have bounced back and grown faster than we anticipated, despite still being below end market consumption. This trend is likely to continue into next year, supported by inventory corrections and some growth in end markets, as well as our specific drivers, especially in the carrier segment. The enterprise side is more generalized. On the carrier side, we are not relying on a significant market recovery; rather, we are focusing on our product cycles, particularly with base stations where we are launching a new layer two processor socket that has just started production. This should contribute positively. We will continue to progress and enhance our business, and as we recover, it will bring benefits to our operating income, profitability, and revenue. We will provide quarterly updates, but things look promising, especially with our Q4 guidance of mid-teens growth.

Blayne Curtis, Analyst

Thanks, Matt.

Operator, Operator

Your next question comes from Tom O'Malley with Barclays. Your line is now open.

Tom O'Malley, Analyst

Hey, Matt. Thanks for taking the question. Congrats on the great results. I wanted to ask on some of the parts of the Amazon announcement. So, AEC was mentioned, PCIe retimers, switching products. So, you're hearing just a lot from other smaller companies that are seeing some big robust revenue ramps. Could you just do your best to maybe size how significant those are for you today? And then, when you look out kind of over the next 12 months, what area of those non-optical DSP businesses are going to be the most significant for you? Just generally, where are you going to see the most growth outside of like that core optical DSP business? Thanks, Matt.

Matt Murphy, Chairman and CEO

Yeah, thanks, Tom. Yeah. So, as part of the agreement, both the custom side and the networking side are extremely important. It's not massively swayed between the two. So, on the networking side, all those product areas are in our wheelhouse and they're all in various stages of maturity. Look, on the switching front, we had a great acquisition with Innovium. We announced our TL10, a 5-nanometer 51.2T switch, that's gone into production. Interest is very, very strong in that product, more to come there. And also our roadmap, which we think is very compelling and our team there has done an excellent job. So that one, we think has not only growth heading to next year, but on a long-term basis, we see that as being a very strong area for us. AECs is definitely a bright spot. That's an area that we're ramping now through our module partners. And we again see very strong take up of Marvell solutions into next year. And then, some of the other more emerging categories are still to come, but those are areas we're investing in. So, I think the way to think about it is a five-year type of arrangement, there's just a lot of opportunity to drive innovation together, to drive new solutions, sometimes things we haven't even thought of. We're just very excited about what the two companies can do together. And then, with us as a customer of theirs, we've just seen great success in using AWS as our supplier for EDA cloud services and it's allowed us to complete some very complex designs in very, very short time to market with very good burst capacity and performance. So, the whole relationship is really a win-win and where it's really an honor for us to be associated with them. And the final thing I would say is I think it's also a testament to the all-in data-center-first strategy that Marvell has put together and to see that get recognized with a type of landmark agreement like this, I think is really a good sign for us and for the team and for our investors.

Operator, Operator

Your next question comes from Mark Lipacis with Evercore. Your line is now open.

Mark Lipacis, Analyst

Hi, thank you for taking my question. I also have a clarification and a question. Matt, did you mention a $40 billion total addressable market for custom AI out of a $75 billion market? Does this imply that you think custom represents about half of the market, give or take? Additionally, how would you describe the competitive landscape for your custom offerings? How many companies are capable of what you are doing in the custom space? Furthermore, could you explain why custom silicon is becoming increasingly important? It seems like just five years ago, everything operated on standard x86 server chips, and now you are assisting customers with custom silicon, while NVIDIA has introduced various SKUs for Blackwell. Why is custom silicon gaining traction? Thank you.

Matt Murphy, Chairman and CEO

Thank you, Mark. Referring back to our AI Day, we outlined a $40 billion custom total addressable market, aiming for over 20% market share. Within this space, we see ourselves alongside one other major, highly capable competitor offering similar solutions. Many companies are exploring various customer approaches, and there has been considerable buzz around these opportunities and applications. However, we believe that the majority of shipments in custom silicon for accelerators will come from established companies like Marvell that have strong intellectual property, including technologies like SerDes, HBM PHYs, compute interconnects, and packaging. Execution is crucial, requiring an experienced team capable of delivering first-pass silicon, which is challenging with designs involving billions of transistors at advanced nodes. Additionally, manufacturing capacity and expertise are essential to ensure yield and quality, alongside the ability to support products in the field to meet customers' dynamic supply chain needs. Given these elements, the hurdles for entering this market are substantial, and our experience with several projects reinforces this view despite external competition. The driving force behind this trend is total cost of ownership (TCO). Implementing a custom silicon design does not necessarily eliminate the standard merchant offerings; rather, both will coexist where substantial workloads benefit from optimization, making custom solutions favorable from a TCO perspective. TCO encompasses not only the product cost and implementation but also the performance achieved. It’s important to note that custom silicon involves more than just the chip; it also includes the customer's network and their expertise in maximizing system performance where the accelerator is just one component. We aim to be the partner of choice for custom chips while providing insights on interconnects and higher-layer switching to drive TCO at minimal power consumption. These are the dynamics we observe today, and we will continue to provide updates as this trend progresses. The recent announcements indicate that the custom market is indeed growing. Next question?

Mark Lipacis, Analyst

Perfect. Thank you.

Matt Murphy, Chairman and CEO

Yeah, thanks.

Operator, Operator

Your next question comes from Tore Svanberg with Stifel. Your line is now open.

Tore Svanberg, Analyst

Yes. Thanks, Matt. Congratulations on the strong execution and also congratulations to Loi on his retirement. So, you announced the Ara 3-nanometer 1.6T DSP today. I think it's only about 18 months ago since you announced the Nova 5-nanometer. So, I was a little bit surprised about the timing there. Am I reading into too much there, or is there something going on in the marketplace where there's a big push now towards 3-nanometer and lower power? And any more color you can add on the timing of Ara would be great.

Matt Murphy, Chairman and CEO

I believe what you are observing is the growing demand for solutions with lower power consumption for various reasons, especially when considering the power usage at the data center level. However, we must operate at an extremely fast pace. To remain competitive and lead the market, we need to accelerate our time to market. In my 30 years in the semiconductor industry, I've seen that when a growth market experiences a significant shift, the company with the best technology available will prevail. It's straightforward. Our team, which is highly skilled, is focused on delivering optimal solutions with the best total cost of ownership, power efficiency, and performance using the latest process node. This commitment will continue across Marvell, particularly in the domains of DSPs, broadband analog, and the chipsets we sell, as we strive to maintain and grow our market share. It's that simple. We are moving faster.

Tore Svanberg, Analyst

Perfect. Thank you.

Matt Murphy, Chairman and CEO

Yeah.

Operator, Operator

Your next question comes from CJ Muse with Cantor Fitzgerald. Your line is now open.

CJ Muse, Analyst

Thank you for taking the question. Matt, I had a question on overall custom silicon. I was hoping you could level set us. Where are we in terms of the total business versus just AI custom silicon? And is there any way to kind of size the total and the percentage for calendar '25? And I know to an earlier question, you didn't want to give a growth rate for the AI portion, but perhaps you could speak to what kind of growth you foresee in calendar '25 and '26 for the non-AI part of the business?

Matt Murphy, Chairman and CEO

Thanks, CJ. I believe you haven't gone to Cisco since you just started a new job that you're excelling in, so congratulations on that. As for your question, I apologize, I lost track of it while trying to make a joke. Could you please repeat your question?

CJ Muse, Analyst

Total custom silicon versus AI?

Matt Murphy, Chairman and CEO

For this year, we mentioned at the AI Day that custom silicon is primarily driven by AI, making up the majority of our focus. Other programs have also made contributions, but the impact and growth potential of AI has been significantly higher. Therefore, AI will continue to dominate this year and next year. However, we also highlighted that we shouldn't overlook our other design wins, such as the custom NIC we presented with Meta at OCP, which will also contribute to our growth. As for the distinctions between AI and non-AI custom silicon for this year and next, I'm not providing specific breakdowns, but I can say that the growth rate for custom silicon will likely be higher because it's starting from a lower base and is ramping up in the second half of the year. In contrast, areas like electro-optics and switching have already been generating revenue, but both segments are expected to see significant growth next year and will contribute to our overall revenue growth.

CJ Muse, Analyst

Thank you.

Operator, Operator

Your next question comes from Chris Caso with Wolfe Research. Your line is now open.

Chris Caso, Analyst

Yes, thank you. Good evening. The question is on margins. And if you could help to level set us on the expectation for gross margins as we go into next year as that custom business ramps? And then, I guess, just as importantly on operating leverage as you go into next year, and I guess what you said in the past is that the custom business is very good on the operating margin side. How does that flow through the numbers as we go into next year?

Matt Murphy, Chairman and CEO

Yeah, great. I'll let Willem take that one. Willem, go ahead.

Willem Meintjes, CFO

Yeah, thanks, Matt. Hey, Chris. So, let me start by saying the team has done a great job driving gross margin at or above 60% here in the second half, even as we've been ramping the custom programs very significantly, right? And so, when we look out at next year, clearly, the gross margin will continue to be dependent on mix. but we continue to see very strong optics growth next year. The recovery in our non-data center businesses, the leverage that we're getting from better overhead absorption on higher revenue on the manufacturing side. And so, when you add all that together, we do see a path to continue to be about 60% through next year. Now obviously, if custom upsides even significantly more from what we're seeing today, that answer would be different. In terms of the leverage, when you look at our Q3 results, we came in at around 30% OEM. And even with gross margin guided down about 0.5%, our operating margin is actually up to 33%, so up by 3%. And so, when you look at our OpEx control, you should expect us to continue to have a very significant focus on levers through next year with the top line outgrowing OpEx right through next year. And so, really should see a very nice increase in our operating margin through next year, really starting to approach the bottom end of our long-term range towards the end of next year.

Chris Caso, Analyst

Very helpful. Thank you.

Willem Meintjes, CFO

Thank you.

Operator, Operator

Your next question comes from Atif Malik with Citi. Your line is now open.

Atif Malik, Analyst

Hi, thank you for taking my question, and congratulations on hitting the next growth phase. Matt, I was listening to the other Matt, Matt Garman, AWS CEO at re:Invent today and he mentioned that the Trainium chip can do both training and inference. So, my question to you is, has your thinking about the sales contribution mix from the two programs at this customer ramp changed from 90 days ago?

Matt Murphy, Chairman and CEO

No, we have been able to effectively plan our business with our key customers in this area, particularly where that is necessary. I would defer to Matt and the team to discuss their dynamics, but we are ready to fully support whatever they require, and that is included in our manufacturing and supply plan. We intend to proceed with it. That's about all I can share. I typically avoid providing too much detail about my customers' plans, so to speak. Thank you for the question, I appreciate it.

Operator, Operator

Your next question comes from Srini Pajjuri with Raymond James. Your line is now open.

Srini Pajjuri, Analyst

Thank you. Hi, Matt. My question is also on the ASIC side. At the Analyst Day, you talked about a third, I think you called customer C ramping sometime in 2026. And I think you alluded to that opportunity being larger, potentially larger than customer A and customer B combined. And obviously, customer B seems to be doing quite well. So, I'm just curious if there is any update on customer C, how the progress has been, and if you still expect that opportunity to be larger than the other two customers? Thank you.

Matt Murphy, Chairman and CEO

Yeah, the short answer is, yes, it continues to be the largest opportunity of the three. It's tracking well. There is great support from both teams and we're executing. And unchanged from AI Day other than I'd say just the whole in general custom silicon opportunity set just seems to have continued to gain momentum as each quarter goes on. And so, we're very optimistic about what we can go achieve with that customer and also our other two customers we have and then their next-generation concepts, a lot to go do and go execute on, Srini. Thanks.

Srini Pajjuri, Analyst

Thanks, Matt.

Operator, Operator

There are no further questions at this time. I will now turn the call over to Matt Murphy, CEO, for closing remarks.

Matt Murphy, Chairman and CEO

Great. Thank you so much. And look, everybody, I really appreciate all the thoughtful questions. Closing remarks, so as we finish the year here, we're very optimistic about our fiscal '26. As we talked about, we have a full year ramp of custom happening. You've got optics continuing to have a lot of momentum, our switching business growing, and then new areas like AECs are kind of just going into real volume production for the first time. We're also seeing a very strong recovery even in our fourth quarter in our multi-market kind of core base business, that's very encouraging in terms of profitability and top-line and EPS contributions. We have a very targeted investment plan, and we're 100% focused on this AI super cycle opportunity and then really the capital allocation framework to support it. I'm excited to have the Investor Day mid-next year to update all of you comprehensively with our updated long-term model, given the sort of new era that we're entering into. As I said in the Q&A, me and the team are all-in to drive outstanding service and support for our customers and also extremely strong financial returns for our stockholders. So, I want to wish everybody on the call, and who's listening a very happy holidays, and I look forward to seeing you all in the new year. Thanks, everybody. Take care.

Operator, Operator

Thank you for attending today's presentation. You may now disconnect.