Earnings Call Transcript
Marvell Technology, Inc. (MRVL)
Earnings Call Transcript - MRVL Q3 2024
Operator, Operator
Good afternoon, and welcome to Marvell Technology Inc. Third Quarter of Fiscal Year 2024 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 this 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 2024 earnings call. Joining me today are Matt Murphy, Marvell's Chairman and CEO; and Willem Meintjes, our CFO. Let me remind everyone that certain comments made today include forward-looking statements which are subject to significant risks and uncertainties that could cause our actual results to differ materially from management's current expectations. Please review the cautionary statements and risk factors contained in our earnings press release, which we filed with the SEC today and posted on our website, as well as our most recent 10-K and 10-Q filings. We do not intend to update our forward-looking statements. During our call today, we will refer to certain non-GAAP financial measures. A reconciliation between our GAAP and non-GAAP financial measures is available in the Investor Relations section of our website. Let me now turn the call over to Matt for his comments on this quarter. Matt?
Matt Murphy, Chairman and CEO
Thanks, Ashish, and good afternoon, everyone. For the third quarter of fiscal 2024, Marvell delivered revenue of $1.42 billion, growing 6% sequentially above the midpoint of guidance. In addition, on a non-GAAP basis, the Marvell team drove a sequential increase in gross margin, remained disciplined on operating expenses and delivered EPS of $0.41, above the midpoint of our guidance. We are pleased with our results in execution. In our data center end market, revenue for the third quarter was $556 million, well above our guidance, driven by stronger than forecasted AI revenue. We are also encouraged by revenue from cloud returning to year-over-year growth. On a sequential basis, overall data center revenue grew 21% in the third quarter, while cloud grew well in excess of 30%. As expected, revenue from the enterprise on-premise portion of our data center end market declined sequentially in the third quarter, reflecting weakening demand. Demand for data center storage also remains depressed, and industry expectations for recovery have continued to push out. In cloud, revenue from both AI and standard cloud infrastructure grew sequentially, with AI growing significantly faster. Growth was broad-based, led by our PAM4 optical products, Teralynx Ethernet switches, as well as our data center interconnect, or DCI products. Earlier today, we released a video highlighting our long-standing collaboration with NVIDIA, where using Marvell's optical interconnect technology to enable the bandwidth scale and reliability required by Generative AI. Marvell has built a broad product portfolio which our customers are relying upon to power their accelerated computing infrastructure. We are benefiting from strong demand for 800-gig PAM electro-optic products, tightly correlated to the growth of AI accelerators. In fact, we are seeing the overall attach rate of our PAM products to accelerators being higher than one-to-one in high-performance AI systems currently shipping in the market. We're also seeing strong customer traction for our next-generation 1.6T 200-gig per lane PAM platform, that we started sampling this past April. Customer qualifications have begun, and we are looking forward to ramping our 1.6T solution into production. Complementing our optical solutions, we expect our PAM DSPs for the active electrical cable, or AEC market to start ramping in our next fiscal year in Tier 1 cloud deployments. We also demonstrated our 224 gigabits per second, long-reach SerDes at the OCP Global Summit held in October. We expect that this technology will serve as a building block for our next-generation 200-gig per lane AECs. In our switching portfolio, we are making great progress on our next-generation 51.2T cloud switching platform. At OCP, we demonstrated Marvell's 51.2T solution, operating at full capacity with very low industry-leading latency running on SONiC. Our enabled Meta SONiC and agile open-source network operating system is very important for cloud customers who value the flexibility, interoperability and scalability of an open Ethernet switch ecosystem. Customers have started development on our 51.2T solution, and we look forward to ramping this platform into production. In addition, earlier this week, we announced our membership in the Ultra Ethernet Consortium. This is another step in our commitment to driving continuous innovation on an open Ethernet-based cloud fabric, which can deliver the scale and performance required for next-generation workloads including generative AI. As our 400 gig DCI modules continue to ramp, we're also seeing strong interest for our next-generation 800 gig products that we launched this past October. These modules are based on our new 5-nanometer 800 gig coherent DSP and silicon photonics, or SiPho platform, which integrates multiple discrete components within a single device. This level of integration enables the performance and packaging density required for small form factor pluggable modules to grab a high bandwidth signal across long distances between data centers. Marvell’s SiPho platform has accumulated billions of operating hours over the past seven years in DCI applications. In addition, we are starting to see emerging applications for our field-proven SiPho technology to power next-generation higher bandwidth and optical connections inside data centers. We look forward to updating investors as this opportunity unfolds over time. Cloud customers remain focused on enhancing their AI offerings by building custom compute solutions of their own, and we have already won a number of these designs. We have completed qualification of one key AI project and have started wafers under production. For another project, we have received first silicon back from the fab and the initial testing is looking positive. As a result, we expect both of these custom compute programs to start volume production next year. Turning now to our guidance for the overall data center end market. In the fourth quarter of fiscal 2024, we expect revenue from our data center end market to grow in the mid-30% range on a sequential basis. In our last earnings call, we provided a forecast for AI revenue to cross a $200 million quarterly run rate exiting this year. Since then, demand has continued to grow, and we now expect our AI revenue in the fourth quarter to come in significantly above our forecast. In addition to strong growth from AI, we also expect revenue from standard cloud infrastructure to grow sequentially in the fourth quarter. For the enterprise on-premise portion of our data center end market, we expect revenue to decline sequentially in the fourth quarter. Turning to our carrier infrastructure end market. Revenue for the third quarter was $317 million, above guidance growing 17% year-over-year and 15% sequentially. The overachievement in the third quarter was driven entirely by the wireless portion of our carrier end market. Marvell specific product cycles have enabled our wireless revenue to buck the trend of a soft end market for several quarters. However, we have been forecasting for some time that this wave of above-market wireless growth for Marvell would start to decline by the fourth quarter as the initial wave of 5G rollout completion. Additionally, demand is continuing to soften as carriers are managing CapEx in a difficult macroeconomic environment. As a result, following an extended multi-year period of strong growth, we are expecting a period of digestion. In addition, we expect revenue from the wired portion of our carrier end markets to continue to decline, reflecting weakening demand. As a result, for the fourth quarter, we expect revenue from our overall carrier end market to decline in the mid-40% range on a sequential basis. Looking longer-term as data traffic continues to grow, we expect operators will need to continue to invest in adding capacity in both the wireless and wired end markets. We also expect to benefit from share gains, including significant 5-nanometer base station design wins, which we have won but are not in production. We are optimistic that carrier CapEx will normalize over time, and our revenue from this end market will return to growth. Turning to our enterprise networking end market. Revenue for the third quarter was $271 million, declining 28% year-over-year and 17% sequentially. As we have been signaling, we see weak demand in this end market. As a result, for the fourth quarter of fiscal 2024, we project enterprise networking revenue to decline in the mid-single digits sequentially on a percentage basis. Turning to our automotive and industrial end markets. Revenue in the third quarter was $107 million, growing 26% year-over-year and declining 3% sequentially. Looking to the fourth quarter of fiscal 2024, we expect revenue from our overall auto and industrial end market to decline by approximately 20% on a sequential basis. We expect the sequential decline to come from our industrial end market, which includes aerospace and defense, where order patterns can be lumpy in any given quarter. Moving on to our consumer end market. Revenue for the third quarter was $169 million, declining 5% year-over-year and growing 1% sequentially. In the fourth quarter, we are expecting revenue from the consumer end market to sequentially decline in the mid-teens on a percentage basis. In summary, we delivered revenue and non-GAAP earnings above the midpoint of guidance for the fiscal third quarter. The diversification in our end markets is serving us well, with strong growth from AI and cloud carrying us through a softening demand environment across other end markets. Through fiscal 2024, the Marvell team has continued to execute in a dynamic environment, remaining focused on driving continuous improvement on what we can control while dealing with inventory corrections and macroeconomic-induced demand headwinds in many end markets. We reprioritized our investments to align with the highest ROI opportunities in front of us. Our team drove efficiency improvements to reduce operating expenses, and we are well on track to meet our commitment. We've worked proactively with our customers and suppliers to best manage inventory across the combined supply chain. Our operations group has rapidly responded to the increase in demand from AI. At the midpoint of our guidance for the fourth quarter, we are forecasting that our revenue for the second half of this fiscal year should grow approximately 7% over the first half. In addition, we are forecasting a 300-plus basis point sequential improvement in our non-GAAP gross margin in the fourth quarter. This projection reflects our expectation for an improving product mix as well as a multi-quarter cross-functional effort to further optimize our cost structure. Heading into next year, while we don't typically guide beyond a quarter, we expect softness in demand to impact revenue from our enterprise and carrier markets in the first quarter. We also anticipate a significant reduction in consumer end market revenue due to seasonality in demand and the completion of deliveries for an end-of-life program in the fourth quarter. Although the enterprise and carrier markets are experiencing near-term headwinds, these large and long-lasting end markets are critical to the global economy. So we expect them to recover and turn into our revenue tailwind over time. In the meantime, our data center revenue is growing rapidly, reflecting our emergence as a key enabler of accelerated computing. We project data center revenue, driven by the ongoing strength in our connectivity solutions inside and between data centers to grow to over 50% of our total revenue in the fourth quarter. Longer term, we expect additional tailwinds to data center growth from the ramp of multiple custom accelerated compute programs for AI. We are also looking forward to a number of new Marvell products entering the data center market, as I discussed earlier. With that, I'll turn the call over to Willem for more detail on our recent results and outlook.
Willem Meintjes, CFO
Thanks, Matt, and good afternoon, everyone. Let me start with a summary of our financial results for the third quarter of fiscal 2024. Revenue in the third quarter was $1.49 billion, exceeding the midpoint of our guidance, declining 8% year-over-year and growing 6% sequentially. Data center was our largest end market driving 39% of total revenue. The next largest was carrier infrastructure with 22%, followed by enterprise networking at 19%, consumer at 12% and auto industrial at 8%. GAAP gross margin was 38.9%. Non-GAAP gross margin was 60.6%, growing 30 basis points sequentially, driven by higher revenue and cost improvements. Moving on to operating expenses. GAAP operating expenses were $698 million, including stock-based compensation, amortization of acquired intangible assets, restructuring costs and acquisition-related costs. Non-GAAP operating expenses were $437 million, in line with our guidance. GAAP operating margin was negative 10.3%. Non-GAAP operating margin was 29.8%. For the third quarter, GAAP loss per diluted share was $0.19. Non-GAAP income per diluted share was $0.41, $0.01 above the midpoint of guidance. Now turning to our cash flow and balance sheet. Cash flow from operations in the third quarter was $503 million, which grew by $391 million sequentially. This significant growth was driven by our relative improvement in DSO, lower inventory along with better profitability. Our inventory at the end of the third quarter was $942 million, decreasing by $74 million from the prior quarter. Our DSO was 78 days, reducing by 4 days from the prior quarter. Our CapEx was $54 million. We returned $52 million to shareholders through cash dividends and we repurchased $50 million of our stock during the third quarter. Our total debt was $4.19 billion. Our gross debt-to-EBITDA ratio was 2.21 times and net debt-to-EBITDA ratio was 1.83 times. During the quarter, we issued new bonds and used the proceeds to pay down our upcoming debt maturities. With our investment-grade credit rating, we were able to execute this refinancing while decreasing our average interest rate on our outstanding debt balance. In addition, we increased our average debt maturity from 3.9 years to 5.3 years. As of the end of the third fiscal quarter, our cash and cash equivalents were $726 million, increasing by $202 million from the prior quarter. Turning to our guidance for the fourth quarter of fiscal 2024. We are forecasting revenue to be in the range of $1.42 billion, plus or minus 5%. We expect our GAAP gross margin to be in the range of 48.2% to 50.7%. We expect our non-GAAP gross margin to be in the range of 63.5% to 64.5%, with the midpoint projected to be back to the low end of our long-term target model. Our forecast for this large sequential improvement is driven by expectations of a significantly stronger product mix and our ongoing cost optimization activities. Looking forward, we expect that product mix as well as the overall level of revenue will remain key determinants of our gross margin in any given quarter. For the fourth quarter, we project our GAAP operating expenses to be approximately $680 million. We anticipate our non-GAAP operating expenses to be approximately $430 million. This level of operating expense reflects the completion of the cost reduction plan we communicated in our first fiscal quarter of this year. Looking ahead to the first quarter of fiscal 2025, we anticipate typical seasonality in payroll taxes and employee salary merit increases. As a result, we expect OpEx to increase by mid- to high single digits on a percentage basis. For the fourth quarter, we expect other income and expense, including interest on our debt to be approximately $50 million. We expect our non-GAAP tax rate of 6% for the fourth quarter, increasing to 7% in fiscal 2025. We expect our basic average shares outstanding to be 865 million and our diluted weighted average shares outstanding to be 874 million. We anticipate GAAP earnings per diluted share in the range of a loss of $0.08 to a gain of $0.02 per share. We expect non-GAAP income per diluted share in the range of $0.41 to $0.51.
Operator, Operator
Our first question will come from Toshiya Hari of Goldman Sachs. Please go ahead.
Toshiya Hari, Analyst
Hi, good afternoon. Thank you so much for taking the question. Matt, I had a multipart question on your data center business. It sounds like the outlook has improved since 90 days ago. Just curious how if you can size the AI business for us where you landed in the October quarter, it sounds like you'll be in excess of $200 million in Q4, but the outlook there. And then more importantly, into calendar '24, if you can speak to visibility you have across your optical business as well as the compute business that would be helpful. Thank you.
Matt Murphy, Chairman and CEO
Yes. Thanks, Toshiya, for the question. We're very pleased with the performance of our data center business that grew over 20%. In Q3, we're guiding it up 35%, in Q4, as you noted, that is driven by AI and the Q4 exit rate is well north now of $200 million. What's very encouraging as well is that the traditional cloud infrastructure piece of it is also growing nicely. That's come back very strong for us. And those two will be growth drivers for us into next year. We see continued weakness in softness, and this is a broader market statement than the on-premise piece and that probably persists for some time, but the mix now of cloud and AI is so much higher that it's driving the overall segment in a very positive trajectory, both in the third quarter and into the fourth quarter. And then as we head into next year, as you've seen, most of the strong growth we saw in the current fiscal year in AI and cloud infra for that matter has been in the optics area, but we are tracking well for growth there next year as well as the ramp of our custom silicon programs. And in my prepared remarks, I talked about the strong progress we made on new product development and starting to plan for ramps there. So while we're not resizing those specifically, the performance clearly in the fourth quarter as well as what you would how you think about next year is much, much stronger than when we first signaled the AI opportunity for Marvell a couple of quarters back. So I think things are tracking nicely. And as you said, compared to 90 days ago, I think the overall aggregate data center business, as you can see from our results, is doing quite well.
Toshiya Hari, Analyst
Thank you.
Operator, Operator
The next question comes from Tim Arcuri of UBS. Please go ahead.
Timothy Arcuri, Analyst
Thanks a lot. Matt, I also had a multipart question. So enterprise networking is going to be down about 35% from the peak in fiscal Q4. And the customers are still though reporting that their inventory levels are actually going up. So is this Marvell product? Is this product from another supplier? And can you talk about just the dynamics going on in that segment? And then also for fiscal Q1, do you still think that revenue can grow? I know you said that networking is down and carriers down. But data center would be up. Do you think that total revenue can be up? Thanks.
Matt Murphy, Chairman and CEO
Thanks, Tim. I appreciate the creativity in your two-part question, but I’ll address the enterprise side. It's challenging to give a clear comment here. If you examine the balance sheets, OEMs are still quite burdened. We've mentioned that since December of last year, we expected a decline in enterprise, and that trend has persisted. There are factors at play, such as inventory management at the OEM level and projections indicating a softer demand environment in the end market. Despite this, we remain confident in our position. Our business has grown significantly over the past few years, with strong performance in the last couple of years and the first half of this year. We’re currently experiencing a typical correction cycle in inventory, which has taken longer than anticipated. The macro environment has also deteriorated more than we expected earlier this year. We anticipate this issue will continue to affect us over the next few quarters. Regarding Q1, while we do not provide specific guidance, I understand your inquiry. It’s important to note that the Carrier segment is down following a strong performance in Q4, and it will likely remain weak. The Telco environment and capital expenditures are very limited, and end customers appear to be facing difficulties. We've discussed the decline in enterprise. Interestingly, the consumer sector performed better than expected this year, but our last time buy program will largely conclude in Q4, leading to a decline there as well. Adding this up, around half of our revenue is expected to decrease in Q1. The pivotal question remains about the data center's strength and its continuation, which is difficult to predict at this point, especially considering the significant portion of our revenue expected to decline. However, I want to highlight that the downturn in Carrier and Enterprise is cyclical. The strength we have in design wins will eventually lead to recovery, returning to a normalized growth rate over time. When that occurs, it will positively impact EPS and revenue growth, marking a return to growth for Marvell's base business. In the meantime, our diversified strategy is proving effective, especially with AI and cloud sectors performing exceptionally well. That’s a lot of information, and I hope this gives you some insights to consider for your model.
Timothy Arcuri, Analyst
Wonderful. Thanks.
Operator, Operator
The next question comes from Vivek Arya of Bank of America. Please go ahead.
Vivek Arya, Analyst
Thanks for taking my question. Matt, so I think in the data center, the value of the optics business, I think, is well understood and appreciate it. The challenge is still for us to how we value your ASIC business. So is it one or two customers? Is it more customers? How is the visibility for the next one or two years? Like are we talking $100 million to $200 million next year? Are we talking $300 million, $400 million next year? Because unless we have a good way of sizing what this business is and what the visibility and what the growth potential, it's just very hard to value and give appropriate value to Marvell for this business. So could you just help us understand what is the right way you think about your ASIC business, can the lumpiness here really swing your sales next year?
Matt Murphy, Chairman and CEO
Thank you, Vivek. There are a couple of perspectives to consider. Firstly, the customer opportunity is highly concentrated, with only a few companies capable of driving the significant silicon total addressable market (TAM) that exists. Recently, we have seen numerous announcements in the industry related to AI, including strategic partnerships and companies developing their own silicon. In many cases, there are partners involved, such as Marvell, who will play a role in this activity. One important observation is that as the TAM shifts from traditional computing architectures to accelerated computing, it is increasingly highlighting the potential for custom silicon. We believe this segment will represent a larger share of the TAM moving forward. Previously, we indicated that this year we expected to achieve around $400 million in total AI revenue, primarily driven by optics, with an anticipated increase to about $800 million next year. This was the initial target we set to provide investors with a sense of scale. Currently, the dynamics of AI are evolving more rapidly than anticipated. The optics segment is performing better, and we have made significant strides in new product development, including moving chips through production and preparing for ramping up. However, I must emphasize that we are not yet in a position to accurately predict the custom silicon opportunity for the upcoming year. It remains early, and while I understand investors are eager for clarity, neither we nor our customers fully grasp the potential scale at this moment. What I can say is that the outlook for AI has improved significantly compared to when we first discussed it two quarters ago, both in terms of custom and optics segments. I hope this provides some clarity. I appreciate the question, but the market is quite dynamic, and the encouraging news is that everything is trending positively.
Operator, Operator
The next question comes from Harsh Kumar of Piper Sandler. Please go ahead.
Harsh Kumar, Analyst
Yes. Thanks guys. Great tremendous execution and very choppy environment. So Matt, a question for you was on the carrier side, you're guiding down significantly down mid-40s on a sequential basis. And I think you mentioned both the wired and the wireless pieces are down. I was curious if you can help us think about perhaps what is taking the bigger part of the hit? And which one do you have more confidence in, in terms of returning back to growth first?
Matt Murphy, Chairman and CEO
Thank you, Harsh. As you mentioned, it is a challenging environment. We're coming off a very strong third quarter, which exceeded $300 million. If you consider the whole year, it could have approached $1 billion for Marvell, which we see as a success. We've been indicating to investors over the past few calls that the third quarter would likely be the peak for 5G, and it would take some time to process through that. We have bucked the trend with our performance. The carrier segment remains strong for Marvell and will eventually return to a normalized run rate, though it is typically lumpy and volatile. In terms of timing, both areas will return, but it's difficult to pinpoint exactly when. The predictability in this segment is challenging, so I cannot provide a clear answer on which will rebound first. The wired segment has been declining for a while, as the infrastructure build driven by the pandemic has reduced. However, our carrier 5G performance has been exceptional this year. When they do recover—both wired and wireless—we have additional design wins in these segments, including new base station content opportunities and our new 800-gig DSPs for wired infrastructure, which will drive new revenue for us upon recovery. While the timing remains uncertain, I believe this segment is a core part of Marvell that will ultimately return to a normalized run rate.
Harsh Kumar, Analyst
Thanks, Matt.
Operator, Operator
The next question comes from Tore Svanberg of Stifel. Please go ahead.
Tore Svanberg, Analyst
Yes. Thank you Matt, you mentioned the NVIDIA and Marvell partnership, and I do appreciate the video on your website, but could you add a little bit more color on exactly what this means. I assume this is a multi-year partnership. But yes, any additional color you could share with us would be great? Thanks.
Matt Murphy, Chairman and CEO
Yes. Thanks, Tore. I think yes, the video was posted today, but it really, I think, just sort of captures a very long-term working relationship between the two companies across a number of opportunities, by the way. I think we've had a complementary and very strong partnership with NVIDIA to really help enable them and their products. In the optical area, we've been working with them for some time, and this goes back even to working with Mellanox in some of their applications. So this was really a way just to, I think, highlight the years of work we've done together and also signify that there's a lot of opportunity for us to kind of double down together on this AI opportunity. So we're proud to be a partner of them and support them in their growth. That's really what's behind it. It's not a new announcement or anything per se. It's just a recognition of a long-standing cooperation between the two companies.
Tore Svanberg, Analyst
Great. Since that was kind of a soft question, I had a question on the enterprise networking business. It sounds like the sequential decline is going to be a little bit better than what we've seen lately. Is that a sign that you're starting to see stability there? Or are the order rates and the visibility still very limited?
Matt Murphy, Chairman and CEO
I would say it's still limited. I believe it's still declining. We are waiting to see when the customer balance sheets improve so we can discuss their end market demand more confidently before making any decisions. We will have to observe where enterprise IT spending truly lands next year, considering the macroeconomic situation. For now, we are taking it week by week, monitoring customer needs and examining their forecasts for the upcoming year, and planning accordingly. However, visibility for the full year is quite limited at this moment.
Tore Svanberg, Analyst
Great. Thank you very much.
Operator, Operator
The next question comes from Ross Seymore of Deutsche Bank. Please go ahead.
Ross Seymore, Analyst
Matt, I just wanted to ask about your business and perhaps a different way to split it. I think everybody is excited about the AI and the cloud is a part of it and for good reason. But if I took that out of the revenues, everything else seems to be down in your guidance, 30%, 35% year-over-year, somewhere in that range. I really just wanted to get what percentage of that, I think, is down just because of cyclicality, and it sounds like the first quarter might come down again, but should bounce back at some point versus the businesses you are just deprioritizing. So how much of a cyclical snapback whenever that happens, should we expect out of Marvell versus a focus away from some of those non-cloud areas?
Matt Murphy, Chairman and CEO
Yes. Got you, Ross. Yes, I think maybe I'll start just super fast at the high level and we'll just dive in. I'd say that this sort of supply-demand inventory cycle we've gone through in the industry has taken a lot longer than historical to play out. And its sort of the dynamic I would characterize this time is you had various end markets resetting and correcting at different times in a pretty protracted manner. And if you go all the way back to last year in 2022, it started early with PCs and what the smartphones that went to gaming and then it started with data center and cloud, and it sort of had this kind of couple year series of resets, if you will. In our business, we saw these sort of declines in that manner as you talked about earlier this year in data center as an example. And a few quarters later, it's like roaring back as we work through some of those issues. So that's the cyclicality part you're talking about. And you're asking the right question, which is, hey, over time, do these come back or not because maybe we pulled R&D or we sort of have shifted our bets. So I'd say for our business, we are committed to a diversified portfolio. We invest R&D across those various segments, including enterprise carrier. And then within the cloud, there's a number of opportunities in AI. The only one that we really have deemphasized, and this goes back five or six years ago, is consumer. And we've always projected in our models, in our Analyst Days that, that would be a declining business for us over time, both in revenue as a percent of total. But then our investments in the other areas would more than offset that. And that's proven to be the case. And so I think when you think about and model us going forward, we have R&D that's going in and will continue to be invested in kind of the core base of Marvell. And we've been able to grow that very nicely over time if you look at it on a trend line. It's really the consumer piece that is not going to come back. And just to give you an example, this year, one reason it did better is one of the programs we had, which has been in last time buy mode for several quarters. It actually outperformed during the year. Now it looks like it's not going to continue into next year. But that business is probably in like the $50 million a quarter range type of thing, and that was a design we won years and years ago, and that's just not going to repeat as an example. It's not going to come back. And that's okay because that's not something we're putting R&D into. But for the rest of the segments, we still take a long-term view that we can grow them at or above market and then, of course, take advantage of the cloud AI opportunity, which is really the big growth driver for Marvell. Hope that's helpful.
Operator, Operator
The next question comes from Matt Ramsay of TD Cowen. Please go ahead.
Matt Ramsay, Analyst
Thank you very much Good afternoon, guys. Matt, I wanted to go back to some of the custom compute and ASIC programs and maybe ask a couple of questions about that. One is, I mean it's been a heck of a year from a gen AI perspective, when you just go back 12 months, we were just starting to hear ChatGPT then the whole thing has blown up. So the customer base all had to think about that, react to that. And so I wanted to think about the programs that you have in flight and the interactions that you have with the customers and the limited set of customers in that space that are all going to be large. Have you seen them lean more into merchant, more into using ASIC houses or more into doing some of the silicon directly with the foundries themselves? There has been a change in that mix. That's the first part of the question. The second part is when you look at AI overall, the leader in that space, which you guys announced a partnership with today, leads not just because of the silicon, but hugely because of software. And I was curious as to whether with the custom programs you're doing for AI compute, are you seeing the customers invest at the scale and software that can make those programs successful at volume over time?
Matt Murphy, Chairman and CEO
Thank you, Matt. You're correct to point out how much has changed in just a year. To answer your first question, all the segments you mentioned are experiencing increased activity. The leaders' numbers and guidance reflect this, as do some reports from other companies in the ecosystem regarding ASIC and custom solutions. We've shifted from modest expectations to anticipating significant revenue growth next year. There are various business models being pursued by the larger companies to find a balance between highly specific custom solutions and capitalizing on the market opportunities created by companies like NVIDIA. This isn't a zero-sum game. Regarding customization and collaboration with hyperscalers, design activities are skyrocketing right now, generating a lot of excitement in both custom solutions and related optics and networking advancements. I may not be the best person to discuss the second part, but it's clear that these well-capitalized and intelligent companies understand their customers and will adapt their workloads and custom silicon to ensure their software and service offerings remain competitive. Both approaches will coexist. I want to emphasize that this is quite different from traditional computing, where growth is more constrained. In this emerging field, there will be many winners, and significant opportunities will arise for companies that have the right positioning, customer relationships, and IT portfolios to meet the evolving demands. It's a dynamic environment that creates a lot of opportunities for us.
Matt Ramsay, Analyst
Thanks. Appreciate the perspective.
Operator, Operator
The next question comes from Ambrish Srivastava of BMO. Please go ahead.
Ambrish Srivastava, Analyst
Hi, thank you very much. Matt, I had a question on gross margin. You surprised us negatively early in the year, and then you gave us good counsel, don't panic. And you're back at 64%. So just wanted to think through for the next year and what's the right way to think about the gross margin profile, given you have customers coming in, but typically is lower margin than the corporate and maybe it's not for you guys, but what's the right year to think about the margin profile for the company near to medium term, Matt? Thank you.
Matt Murphy, Chairman and CEO
I'll let Will take a victory lap on this one. So, Willem, go ahead.
Willem Meintjes, CFO
Yes. Ambrish, so thanks for the question. So first of all, really pleased to be guiding back to 64% at the midpoint, right? I think the team internally has done a phenomenal job controlling what we can control in a pretty volatile environment. When we look at it next year, we've been discussing some of the uncertainty on the recovery on some of our core businesses, right, enterprise networking and storage. And then also the timing and the scale of the ramp on custom. I'll just remind you, prior to this last year, we scaled our carrier and custom business very significantly while maintaining our gross margin, right? And so looking ahead at next year, if custom on a relative basis grows significantly more, yes, clearly, that would put pressure on our gross margin. However, our view is that they'll be very accretive on operating margin and on EPS. So yes, so that's how we're looking at it. Hopefully, that's helpful, Ambrish.
Ambrish Srivastava, Analyst
I have a quick clarification for you, Matt. You mentioned something about a one-to-one pull attach rate for your business. I was wondering what it was before and what has changed in the dynamic to push it to greater than one to one. Thank you.
Matt Murphy, Chairman and CEO
Thanks, Ambrish. This topic has been quite a journey. Looking back two quarters, we were still developing models to estimate the attach rate and help investors understand the potential. We initially estimated it at one to one. Since then, as we examined various factors related to the switch and the network, we realized this number needed updating and clarified that it had increased to greater than one. This was more about refining our understanding of how significant the opportunity could be, balancing it against the expected GPU shifts. I wouldn’t consider this significantly new information, as it was more about reiterating our findings. It’s important to note that the attach rate includes connections from both the accelerators to the switch and between switch layers, which was a nuance we wanted to clarify. That's the update on this.
Operator, Operator
The next question comes from Harlan Sur of JPMorgan. Please go ahead.
Harlan Sur, Analyst
Good afternoon. Thanks for taking my question. After six quarters of sequential shipment declines in nearline or capacity optimized HDDs by your customers, cloud and hyperscale excess inventory of drives appears to be normalizing. And then on top of that, you have cloud storage utilizations to keep on increasing. I think your storage customers are cautiously optimistic on sequential shipment improvements on their new 20-terabyte platforms. You guys are still shipping about half the rate of your pre-slowdown run rate on storage. I know you've been growing slightly sequentially the last few quarters. But are you guys starting to see signs of a sustainable pickup in data center stores moving into next year?
Matt Murphy, Chairman and CEO
Yes, thank you. I believe this market is one where any positive news is welcomed. It has been quite challenging for that segment of the electronics industry, and we've certainly felt the effect on our revenues. I am encouraged to see reports indicating that inventory levels are decreasing and some positive comments from end customers. However, we won't make any definitive conclusions until we observe a substantial increase in our backlog. While it has slightly improved from the lowest point, the growth is still modest and somewhat flat in terms of units. I don’t think we’re in a position to claim a robust recovery just yet. We were significantly impacted during the downturn, so we will proceed with caution as we navigate the path back to a normalized market. Nonetheless, the signs from the end market are encouraging, offering some optimism for next year. Still, we are not ready to definitively predict a recovery in that sector in terms of timing or certainty. It is encouraging that things have improved from their lowest point and continue to grow.
Harlan Sur, Analyst
Appreciate the color. Thanks, Matt.
Operator, Operator
The next question comes from Christopher Rolland of Susquehanna. Please go ahead.
Christopher Rolland, Analyst
Hey guys, thanks for the question. I'm kind of hearing mixed signals on the custom silicon opportunity. And I just wanted you guys to clarify on that. I guess, first of all, are you guys above or below $200 million expectation you guys had for the year? Second, are you expecting this to kind of double off of that $200 million or even $600 million originally that had been an $800 million number you had discussed. And then third, where are we on that $800 million long-term goal that you had? Is that like a 2025, 2026 opportunity? Or is it something beyond that?
Matt Murphy, Chairman and CEO
Got you. Yes, you're going back to the original like 2021 Investor Day, hey, here's kind of the custom silicon opportunity, which a couple of quarters back, we had reset to $200 million this year and then over time, getting to $800 million. I just want to clarify, that's what you're asking about?
Christopher Rolland, Analyst
Yes, that's right. I think that was in March. You guys talked about that $200 million for this year.
Matt Murphy, Chairman and CEO
Yes, we're currently on track to reach close to $200 million for this year. At our Investor Day, we indicated a long-term goal of $800 million, expected sometime between fiscal year '25 and '26, which you can see reflected in a slide from a couple of years ago. Recently, I mentioned that this figure is likely to increase over time due to the AI component, despite some aspects that are not AI-related shifting around. Overall, I believe we are still aligned with that timeline. We haven't committed to an exact quarter for this target, but we anticipate reaching above the previously stated $800 million in that fiscal year '24, '25, '26 timeframe. I don't see any mixed messages here or any updates, which seems to be generating some enthusiasm. Importantly, our chips are looking promising for production next year, which was a previous risk factor. As we noted earlier, these chips are very large and complex, and any redesign could lead to delays. So far, both programs appear solid. The growth we've observed in generative AI is substantial, and while we can't yet determine the exact scale, it will surpass our earlier estimates. Overall, we're tracking as expected.
Christopher Rolland, Analyst
Thank you for that, Matt. One last one on carrier. Is Q4 going to be the bottom? Or do you think there could be some more yet to drop? And then I think you have some additional content coming at one of your customers at the end of the year. Is that going to be a meaningful lift for the segment? Thanks.
Matt Murphy, Chairman and CEO
Yes. As I mentioned earlier, we anticipate continued softness in the carrier segment into the first quarter. It may take several quarters to rebound, depending on inventory levels and the capital expenditures throughout next year, as well as global spending trends among carriers. Over time, we expect to see an increase in content from additional sockets. However, it remains uncertain where market share will shift between western and Chinese suppliers in the coming years. Several factors need to be taken into account, but overall, the standard number of base stations per year is fairly predictable. Our share of content will increase, and we believe we have established a solid business from a very early stage just a few years back. It will recover and benefit from the increased content.
Christopher Rolland, Analyst
Thanks so much, Matt.
Operator, Operator
The next question comes from Srini Pajjuri of Raymond James. Please go ahead.
Srini Pajjuri, Analyst
Thank you. Matt, I have a couple of clarifications at this point. First, on the custom silicon, understanding that it's a little bit early to size the opportunity. Given the complexity of these chips and the supply chain issues that we've been hearing about on the HBM and the CoLo side, I would think that the lead times from your customers are fairly long. So my question is, when do you expect to start building inventory, I guess, in terms of wafer inventory and packaging and et cetera. What time frame should we kind of expect that if you, I guess, are looking to ramp next year?
Matt Murphy, Chairman and CEO
The planning is definitely underway, and between our team, supply chain partners, and end customers, there’s a collaborative effort to ensure everything runs smoothly. We are working together to secure the necessary capacity for wafers, packaging, and third-party components, including HBM. We have reserved capacity and are in the process of starting wafers, though each product is at a different stage. We expect to have clearer visibility around March, as that will provide a better understanding of lead times and other factors. Planning has already been completed, and we feel confident about our capacity, even though it’s tight. While we are moving forward, we won't provide specific details on when exactly we are starting wafers; instead, we will focus on sizing the opportunity for investors once we have a clearer view of potential revenue. Overall, the capacity side appears to be in good shape.
Srini Pajjuri, Analyst
That makes sense. And then my other follow-up, Matt, on your Q1 guidance. And obviously, you said half of your business is going to be down. But I would have to imagine that the data center will continue to be healthy and strong, especially kind of what your customers are talking about in terms of AI investments continuing and also NVIDIA kind of sounded fairly positive about next year as well. So my question is, given the strength that you saw in the last two quarters, I mean, are you concerned about any inventory build in your components? Or is that what's giving you pause about guiding for growth in the first quarter for the overall business? Because even if 50% of the business is down because looking at how much this business has grown in the last two quarters and if that trend continues, I would have to imagine that the total revenue should grow in Q1. So I'm just wondering what's giving you that pause looking for growth in Q1.
Matt Murphy, Chairman and CEO
Yes, yes. No, no problem. I'll maybe give you a little bit of a bad time here. I think we're trying to get to the Q4 call first. And then we could do the Q1 call, okay? So maybe first things first. So that being said, I mean, look, I think I would agree with the market commentary you gave, which is year-over-year, we do expect strong growth. I'd say on our side, if you look at kind of the growth we've seen on AI, we're having a very, very strong fourth quarter. And some of that we're catching up from the upsides we had. I mean our supply chain team has done a phenomenal job, right? So I'd just say that we're not guiding Q1, it's dynamic at this point. And I need to really see where the orders flow in and what people really need. And right now, we're just focused on executing Q4. But yes, overall demand looks good. Overall growth next year should be good. But I think trying to guide two quarters now with this precision, Srini, is just not going to be helpful for anybody given how fast things are moving. So I'd prefer to give you my Q1 guide when we guide Q1.
Srini Pajjuri, Analyst
Got it. Thanks, Matt.
Operator, Operator
Our last question will come from Chris Caso of Wolfe.
Chris Caso, Analyst
Yes, thank you. My question is about the cloud segment of the data center. It seems like that area may have surprised you a bit upon your return. Can you discuss what is driving that? Additionally, to what extent is the traditional cloud business influenced by cyclical trends or product cycles?
Matt Murphy, Chairman and CEO
Yes, thank you. Our expectation earlier this year, which has proven accurate, included many predictions, although some faced market challenges. One area that unfolded as we anticipated was the impact of the AI shift on our traditional cloud business, which we believed would not suffer and might actually benefit from it. Our perspective was that, due to our strong position in switching and optics, there would be a growing demand for enhanced networking capabilities in data centers, especially in multi-tenant data centers that needed increased bandwidth to support AI technologies, and that has indeed occurred. There have been some developments within the product cycle with new product introductions during this period. Additionally, we've seen a rise in demand, particularly for our 400 gig products and our 12.8T switches, which had faced some slowdown earlier this year due to inventory adjustments. This has been a significant positive, combining robust growth in existing products with the ramp-up of new offerings. This trend has materialized and should provide a strong impetus for us heading into next year as well.
Chris Caso, Analyst
Got it. Thank you.
Matt Murphy, Chairman and CEO
All right, fantastic. Hey, listen, I think we're pretty much at time. I'm going to conclude the call, maybe just a few words. First, I appreciate everybody's interest in the company. A couple of final comments would be despite kind of the challenging macro out there, I'm very, very pleased with the Marvell team and our performance. And I think what it shows is that even when you have a lot of volatility from a cyclical perspective in some of these end markets, right now, it's enterprise and carrier as an example, the diversified business model that we've really put together at Marvell has been able to have some strong offsets to those things. And like right now, we're seeing our data center business come roaring back with strong growth in the third quarter and then a very, very strong growth in the fourth quarter. And that's the commitment we made several years ago. It was to diversify the company by end market, focus on data infrastructure, which, in our view, is going to be probably the best TAM growth opportunity in semis. And we still believe that, and while we have some inventory digestion and end market weakness we're seeing in some segments that's going to revert over time in enterprise and carrier. And I would view that as, and describe that as kind of the core foundation of Marvell. And then you have these nice growth drivers with large TAMs on top of it in cloud, in AI, in things like automotive that are going to drive our growth over time. So I think our model is working, and we're managing in a tough environment, and we're managing what we can control at this point. And with that, I will conclude the meeting. Thanks, everybody.
Operator, Operator
The conference has now concluded. Thank you for attending today's presentation, and you may now disconnect.