Earnings Call Transcript - MRVL Q2 2025

Operator, Operator

Good afternoon and welcome to Marvell Technology, Inc.'s Second 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 second 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 precautionary 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-Q and 10-K 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. 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 second quarter of fiscal 2025, Marvell delivered revenue of $1.27 billion, above the midpoint of guidance driven primarily by strong demand from our data center end market. Higher revenue combined with disciplined expense control drove non-GAAP earnings per share of $0.30, also above the midpoint of guidance. Revenue in the second quarter grew by 10% sequentially, and we are projecting significantly higher sequential growth for the third quarter, with all our end markets expected to grow. Achieving the midpoint of our third quarter guidance would also result in a return to year-over-year revenue growth for Marvell. Let me now discuss our results and expectations for each of our end markets. In our data center end market for the second quarter, we drove record revenue of $881 million, growing 92% year-over-year and 8% sequentially. These above-guidance results were driven by strong demand for our electro-optics products, custom silicon beginning its anticipated ramp, as well as growth in our storage and switch revenue. Strong bookings continue for our market-leading 800 gig PAM products and 400ZR data center interconnect, or DCI, products, and we are looking forward to starting shipments of our next-generation 200 gig per lane, 1.6 terabit DSPs in the third quarter. As a result, we expect our electro-optics revenue will continue to grow every quarter this fiscal year on a sequential basis. We are also looking forward to addressing a number of new opportunities within the data center. We've begun initial shipments of our 100 gig per lane, 800 gig DSPs for active electrical cables for AECs. And we are anticipating the production ramp to accelerate in the second half. In addition, we recently started sampling the industry's first 200 gig per lane 1.6 terabyte AEC DSPs to address upcoming higher speed, short reach, copper interconnect applications. Accelerated servers are turning to PCIe Gen6 technology, which needs higher order PAM4 modulation. Given our leadership position in PAM technology, customers are turning to Marvell to enable this transition, and we are now sampling our new PAM4-based PCIe Gen6 retimers. As you can see, we are continuing to broaden our end-to-end product portfolio to address all the critical interconnect needs of our data center customers, positioning us to take full advantage of an interconnect TAM expected to grow at a 27% CAGR to $14 billion by calendar 2028. We are confident in our ability to continue to lead the industry in power and performance with our current optical DSP and DCI franchises, while we expand into new opportunities, including AEC DSPs, PCIe retimers, silicon photonics, and longer distance 1,000 kilometer-reach DCI modules. As a result, we expect to maintain a leadership position in this large and fast-growing interconnect market. We are making significant progress in bringing Compute Express Link or CXL technology to the market, having recently introduced two new families of CXL devices to address memory bandwidth and memory capacity challenges in next-generation servers. In our cloud security business, we were pleased that Microsoft will begin integrating Marvell's FIPS 140 Level-3 compliant liquid security hardware modules in their Azure Key Vault offerings. These products offer Azure's customers the most secure encryption and key management services in a cloud platform. Let me now turn to our custom silicon business. As investment in AI and accelerated computing continues to surge, Tier 1 cloud providers are increasingly focused on using custom silicon to improve their data center TCO and drive differentiation. AI has accelerated the cadence of new chip releases, resulting in shorter design windows and faster time to production, accompanied by significant increases in complexity with each new generation. This trend is driving cloud customers to partner with companies like Marvell, who have extensive experience in delivering multiple generations of high-volume, high-complexity, leading-edge chips developed using robust design methodologies. Additionally, cloud customers are seeking access to our differentiated and field-proven technology platform, which includes ultra-high-speed SerDes, ARM compute, optimized HBM interfaces, security, storage, die-to-die interconnects, silicon photonics, and advanced packaging. Customers are also adopting concurrent product development with staggered platform launches to produce silicon on an annual cadence. The approach reinforces the value of a trusted silicon partner like Marvell, who has decades of processor expertise and can take on greater design responsibilities. As a result, the nature of our customer engagements is shifting from point design wins to multi-generational relationships. Our AI custom silicon programs are progressing very well, with our first two chips now ramping into volume production. Development for new custom programs we have already won, including projects with a new Tier 1 AI customer we announced earlier this year, are also tracking well to key milestones. Looking ahead to the third quarter of fiscal 2025 for our data center end market, we are forecasting revenue growth to accelerate into the high teens sequentially on a percentage basis. We expect the largest contributor to this growth will be our AI custom silicon programs as they begin to ramp meaningfully in the third quarter, further augmented by ongoing growth from our optics portfolio. Now let me turn to Marvell's enterprise networking and carrier end markets. In the second quarter, enterprise networking revenue was $151 million while carrier revenue was $76 million. As expected, these end markets reached the bottom in the first half of this fiscal year, and revenue from both end markets collectively was flat sequentially in the second quarter. Looking ahead, after multiple quarters of inventory digestion, we are starting to see signs of growth for our revenue in both end markets. In the carrier end market, we have begun receiving orders for our next generation 5 nanometer-based OCTEON 10 DPUs from multiple customers. In enterprise networking, our customers have started to see growth in their orders, and we have seen increased bookings for our enterprise products. As a result, for the third quarter, we project our aggregate revenue from enterprise networking and carrier infrastructure to grow sequentially in the mid-single digits on a percentage basis. While this forecast still anticipates Marvell products shipping below end market consumption, our order momentum has picked up. On a combined basis, we expect sequential revenue growth from carrier and enterprise networking to further improve in the fourth quarter. Turning to the consumer end market, revenue in the second quarter was $89 million, growing 112% sequentially following the gaming inventory correction we expected in the prior quarter. Looking ahead to the third quarter, we were expecting revenue from the consumer market to grow slightly on a sequential basis. Over the next couple of years, we anticipate our revenue from the consumer end market to normalize at approximately $300 million annually, with the majority coming from our custom SSD controller for a leading game console platform. As a result, seasonality of gaming demand will be the primary factor driving our quarterly revenue profile for the consumer end market. Turning to our automotive and industrial end market, revenue in the second quarter was $76 million, declining 31% year-over-year and 2% sequentially. These results reflect broad inventory correction taking place across the automotive end market. Looking ahead to the third fiscal quarter, we expect growth to resume and are projecting revenue from the auto and industrial end market to grow sequentially in the mid-single digits on a percentage basis. In summary, the Marvell team executed well in the second fiscal quarter, driving 10% sequential top-line growth, delivering both revenue and non-GAAP earnings per share above the midpoint of guidance. AI led the way with data center revenue almost doubling year-over-year. Our consumer revenue recovered, more than doubling sequentially, and we believe that our enterprise networking, carrier, and auto and industrial end markets found their bottom in the second quarter. As you may recall, at the beginning of fiscal 2024, we outlined the large opportunity developing in AI and accelerated infrastructure, even as we saw a slowdown in our storage, enterprise networking, and carrier markets. We outlined our plan to aggressively reprioritize our investments toward the highest ROI opportunities, including strategic roadmap adjustments and combining some of our businesses to reflect changes in the market. This strategy has led to an expansion in our data center TAM and increased the pace of new product releases targeted at this market. As we outlined at our AI day, we plan to continue pivoting our resources toward what we believe is a once-in-a-generation opportunity. Within data center, we expect custom silicon to be the largest revenue growth driver, given the size of the opportunity in our expanding design win portfolio. We believe continued success in custom silicon will accelerate our timeline to achieve our target operating margin model. Although custom has a lower gross margin than our merchant products, it benefits from inherently lower operating expense levels given NRE offsets from customers and the sharing of IP with our merchant business. As a result, as custom silicon becomes a larger part of our overall revenue, we see a path for operating expenses as a percentage of revenue decreasing below our current target operating model. For the third quarter, we are forecasting consolidated revenue to grow 14% sequentially at the midpoint of guidance. We expect this growth to be primarily driven by data center AI and further augmented by the start of a recovery in our enterprise networking and carrier end markets. Given the strong start in the first half of the fiscal year from AI, and our expectations for accelerated growth in the second half, we remain confident in our ability to significantly exceed the full-year AI revenue target discussed earlier this year at our AI event. The Marvell team is executing on all fronts. We expect our AI custom programs to continue ramping up. Our bookings continue to strengthen and we believe that we have secured capacity and set up our supply chain to drive strong revenue growth in the fourth quarter and the next fiscal year. We are also excited to see our hard work showing up in our financials, strong cash flow generation, which is funding increased capital returns to our stockholders. 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 second quarter of fiscal 2025. Revenue in the second quarter was $1.273 billion, exceeding the midpoint of our guidance, declining 5% year-over-year and growing 10% sequentially. Data center was our largest end market, driving 69% of total revenue. The next largest was enterprise networking with 12%, followed by consumer at 7%, carrier infrastructure at 6%, and auto/industrial at 6%. GAAP gross margin was 46.2%. Non-GAAP gross margin was 61.9%. Moving on to operating expenses. GAAP operating expenses were $688 million, including stock-based compensation, amortization of acquired and tangible assets, restructuring costs, and acquisition-related costs. Non-GAAP operating expenses were $456 million, in line with our guidance. GAAP operating margin was negative 7.9%, while non-GAAP operating margin was 26.1%. For the second quarter, GAAP loss per diluted share was $0.22. Non-GAAP income per diluted share was $0.30, $0.01 above the midpoint of guidance. Non-GAAP EPS grew by 25% sequentially. Now, turning to our cash flow and balance sheet. Cash flow from operations in the second quarter was $306 million. Our inventory at the end of the second quarter was $818 million, decreasing by $8 million from the prior quarter. On a year-over-year basis, we have reduced our inventory by $198 million or almost 20%. We returned $52 million to stockholders through cash dividends. In addition, we repurchased $175 million of our stock during the second quarter, an increase of $25 million from the prior quarter. We expect to further increase repurchases in the third quarter of fiscal 2025. Our total debt was $4.13 billion. Our gross debt to EBITDA ratio was 2.29 times and net debt to EBITDA ratio was 1.84 times. As of the end of the second fiscal quarter, our cash and cash equivalents were $809 million, decreasing by $39 million from the prior quarter. Turning to our guidance for Marvell's third quarter of fiscal 2025. We are forecasting revenue to be in the range of $1.45 billion, plus or minus 5%. We expect our GAAP gross margin to be approximately 47.2%. We expect our non-GAAP gross margin to be approximately 61%. For the third quarter, we project our GAAP operating expenses to be approximately $693 million. We anticipate our non-GAAP operating expenses to be approximately $465 million. For the third 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 third quarter. Please note that we forecast our non-GAAP tax rate in fiscal 2026 to step-up to 9% 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 875 million. This outlook marks an anticipated sequential reduction in our share count, reflecting the positive impact from our ongoing stock repurchases. We anticipate GAAP income per diluted share in the range of a loss of $0.09 to earnings of $0.05. We expect non-GAAP income per diluted share in the range of $0.35 to $0.45. At the midpoint of guidance, we expect revenue in the third quarter to grow 14% sequentially. This is driven in large part from a ramp in our custom AI products. Although this is driving a sequential decline in our non-GAAP growth margin outlook, we project our non-GAAP earnings per share to grow by 33% sequentially at the midpoint, more than twice the revenue growth rate. As our custom programs expand, we expect to continue to drive substantial operating leverage to the bottom line. We are pleased to forecast sequential growth returning to all our end markets, with our AI data center revenue continuing to grow rapidly. As we drive revenue growth and operating leverage, we also remain focused on strong cash flow generation and returning increasing amounts of capital to investors through our active stock repurchase program.

Operator, Operator

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

Tore Svanberg, Analyst

The strong results. Matt, could you elaborate a little more on your comments at the end regarding the operating leverage to gross margin? We understand that the custom ASIC business has a lower gross margin, but due to the NREs, it is also very beneficial to operating margins. Could you provide more details and possibly outline some milestones, particularly concerning certain revenue run rates?

Matt Murphy, Chairman and CEO

Thanks, Tore. Hey, I'll have Willem lead off on this one and then I can comment at the end.

Willem Meintjes, CFO

I believe that when we look ahead beyond the Q3 guidance, we expect gross margin to remain in a similar range over the next several quarters. There are a few factors at play here. Firstly, we anticipate the custom programs will continue to ramp up nicely, even though they have lower gross margins. However, we expect that the recovery and growth in our core merchant products will mostly offset that. Additionally, we see significant leverage and absorption in our manufacturing overhead as revenue increases. Therefore, we believe the guidance we provided for Q3 will hold for the next few quarters.

Operator, Operator

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

Toshiya Hari, Analyst

Hi guys, thank you for taking my question. Matt, you mentioned your confidence in exceeding or significantly exceeding the full-year AI revenue target you shared a few months ago. Can you clarify if the incremental strength you're observing is coming from both custom compute and your optics business, or is it more focused on the custom compute side? Additionally, what visibility do you have for next year? I believe your target was $2.5 billion going into next year. Should we expect continued growth beyond that number as well? Thank you.

Matt Murphy, Chairman and CEO

Yeah great, thank you. Yeah, first of all the demand has been extremely strong in the AI business, as we mentioned, both in custom and in our optics business. And that's the 800 gig products as well as traditional cloud and DCI. So that's all going extremely well. And for next year, that should absolutely ripple through. We see continued strength next year above what we had communicated relative to the target for next year both in custom and in optics and the broader portfolio. So very pleased with the progress. Demand has been strong. Bookings momentum has been extremely strong and we have a great setup here in the second half that's going to lead us to what we think is going to be a very strong fiscal ‘26 for Marvell and AI.

Operator, Operator

Your next question comes from Timothy Arcuri with UBS. Your line is now open.

Timothy Arcuri, Analyst

Thanks a lot. Matt, since you're providing these AI targets, could you offer more specific numbers regarding the figures you report? What was the AI revenue in July? I think it was around $300 million, and custom was likely around $50 million. Can you confirm if that's accurate? Additionally, what are your expectations for AI in October? It sounds like custom might increase to about $100 million or $125 million quarter-on-quarter. Are those figures approximately correct?

Matt Murphy, Chairman and CEO

Yes. To address the broader investors on the call, we set targets of $1.5 billion for this year and $2.5 billion for next year. As mentioned earlier, both custom and electro-optics are contributing to these figures. At our AI day a few months ago, we mentioned that about two-thirds of the $1.5 billion was in electro-optics, with the remaining one-third in custom. Both segments are performing well, although custom is back-end loaded. Currently, we are experiencing a strong ramp. While we typically do not provide quarterly breakdowns, I can confirm that both segments have seen an increase in the total revenue we expect to achieve this year and next year, and the ramp in custom continues to be very robust. I'll leave it there for now.

Operator, Operator

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

Ross Seymore, Analyst

Hi, guys. Congrats on the strong results and guide. Willem, one potentially for you, and I appreciate the commentary on the gross margin stability at the current level through the end of this year. But could you give us an idea of what the puts and takes would be for next year? I mean we know the custom stuff carries lower margins, and it sounds like the merchant business is coming back. But I think a big concern people have is just how should we think about the revenue growth relative to the gross margin next year as accretive as it may be in most of those scenarios on the operating line either way?

Willem Meintjes, CFO

Yeah. I think the way to think about that is for that trend to really continue into next year. And so you're not guiding the full year next year. But I think it's in that similar range where we continue to see good growth from both OpEx and then the recovery in the merchant products really offsetting the continued growth in custom. And then in addition, as you see the top line growing nicely, we do continue to get that benefit from better absorption. And then overall, when you look at our OpEx management, we're going to continue to be very disciplined looking at next year. And so we do expect to drive a ton of leverage and operating margin down to the bottom line next year.

Matt Murphy, Chairman and CEO

Hey, Ross, if I could just add. As Willem said, I think the GM side needs to play out. We need to see where this non-AI data center demand recovers to. We're very pleased with the third quarter guide of mid-single. And then in enterprise and carrier, that growth improving from Q3 to Q4, so growing even a little bit faster. Bookings have picked back up, we're laying in backlog. So that's all a positive sign. And then of course, we've got to get into next year to see where those traditional core businesses really recover to. That's going to be one factor. As we said earlier as well, we anticipate a lot higher revenue next year. So that's going to help on sort of manufacturing overhead absorption. And then to the extent how much custom is really going to be, that's going to be a factor as well. So we're looking at all that. That does need to play out a bit. But as Willem said, we're very confident in our OpEx management and our plan on spending there relative to our outlook for next year. And so we're very excited and feel very confident in the path to our operating margin targets that we've set, independent of where that GM lies. So that's where we're headed right now, Ross. There'll be more to come as these markets recover. Thanks.

Operator, Operator

Your next 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 to get your views on the competitive landscape in the two parts of your AI business, so both on the DSP side and custom silicon. On the DSP side, do you see any captive or merchant competitors challenge Marvell's dominance as the industry transitions to 200 gig per lane in all these 1.60 transceivers? And then similarly, in custom compute, do you see any competitive changes from your Taiwan competitors? I know a little bit out there in ‘26 when the industry moves to the 3-nanometer zone, but I was just hoping to get your views on any changes in the competitive landscape in the next one to two years in these two important parts of your AI business? Thank you.

Matt Murphy, Chairman and CEO

Sure, Vivek. I'll divide my response into two parts. First, regarding the DSP and optics segment, it's indeed a competitive market. We entered through the Inphi acquisition, and these competitive dynamics have been present from the start. This market has grown significantly, which has only intensified competition. However, we have consistently maintained a strong market share in this area through the integration of Inphi and Marvell. This success is due to our effective engineering execution and having a comprehensive platform that encompasses DSPs and broadband analog components such as drivers and TIAs. We offer a complete architectural solution and have established partnerships with module vendors and hyperscalers. Additionally, our roadmap remains best-in-class in terms of cadence, power, and performance. We are confident in handling these transitions; for instance, we successfully navigated the 100-gig transition and are set to start shipping our 200-gig products this quarter, including the 200-gig per lane, 1.6-terabit DSPs. While the competition will be fierce, our team is genuinely excited about the potential of our platform. Now, regarding custom silicon, our strategy is proving effective given the rising complexity of these chips. Success is not merely about having a section of the process, such as design services or manufacturing; it involves a comprehensive approach. This includes having a superior technology roadmap in nanometers, advanced packaging, I/O, and the capacity to execute these products. These chips can have around 100 billion transistors, and managing their packaging, yield, and volume shipment while preparing for the next parallel is a tremendous undertaking. We believe this will be our winning strategy. In this sector, we recognize one strong competitor as well. Long-term, with the increasing activity in AI, particularly on the custom side, it will necessitate scaled-up full solution providers like Marvell to compete effectively. That summarizes the competitive landscape for those two areas. Thank you, Vivek.

Operator, Operator

Your next question comes from Matt Ramsay with TD Cowen. Your line is now open.

Matt Ramsay, Analyst

Thank you very much. Good afternoon, everyone. Matt, I wanted to ask about the long-term outlook for your custom compute business. I noticed a line in your comments about not just having single generation relationships but also multi-generation ones with some of your custom business customers. I wanted to delve into that further. We receive questions from investors regarding not only the programs that are currently ramping up but also the subsequent generations, and how confident you are in those. Could you elaborate on that? Additionally, as you're assessing custom programs in compute, this question applies to both your company and your competitors: how much visibility do you have regarding the software that will run on those compute engines once they are deployed? I believe that's crucial in determining the potential volume compared to merchant suppliers. Thank you.

Matt Murphy, Chairman and CEO

Thank you, Matt. I appreciate your question. Since we secured these designs, there has been a lot of activity from some international competitors in the custom area. However, despite any discussions that have occurred, we have successfully executed these programs. They have grown significantly since we won them, and as we indicated over the last year and a half, they are now ramping up into production. We observe a clear interest from our customers to adopt a multi-generational perspective. The effort required to complete one of these projects leads to diminishing returns if we pivot too quickly, provided we are performing well. Overall, we feel very positive about our position. We have several engagements spanning multiple generations on various types of integrated circuits for these customers. For instance, during our last AI day, we announced that we had acquired another customer for AI silicon, and these projects are progressing well. Moving forward, you should also consider our results and outlook. If you align with the idea that being a long-term reliable partner is crucial, especially over multiple generations, we believe we are very well positioned. Thank you, Matt.

Operator, Operator

Your next question comes from Christopher Rolland with Susquehanna. Your line is now open.

Christopher Rolland, Analyst

Hey, everyone. Congratulations on the results. I have a question regarding Inphi. Matt, you mentioned 1.6T, which is quite exciting. If I understood correctly, you're planning to ramp up in the third quarter. Could you share what this ramping process will look like for the third and fourth quarters and into 2025? There seems to be a lot of uncertainty about this node in the market. If you could provide some insights on that and discuss the economic implications for your team, I would greatly appreciate it. Thank you.

Matt Murphy, Chairman and CEO

Thank you, Chris. It's still early in the process. We were the first to introduce these products at OFC a year ago, and it's encouraging to see them moving into production. We'll have a clearer picture once we learn how our customers plan to implement them, but initial shipments are underway. Right now, and into next year, 800 gig will remain the primary high-volume platform. The newer launches will support both 800 gig and 1.6T. It's difficult to predict exactly how this transition will unfold, but it's certainly significant. The timing of this shift is uncertain, and we will have a better understanding as we approach the end of the year and evaluate plans for 2025 based on our customers' expectations. Regardless, we are well prepared for both opportunities next year.

Operator, Operator

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

Harlan Sur, Analyst

Good afternoon. Thanks for taking my question and good to see the strong growth outlook. We've seen multiple quarters now of strong growth in nearline HDD to the cloud. And those guys continue to expect anticipated growth sort of going forward. In addition to that, you guys have, I think, numerous next-generation PCIe Gen5 enterprise SSD platforms ramping. I know it's been a couple of years, but I think those ramps are finally starting to happen. Is this all kind of contributing to the second half strength in the data center business? And then more on the memory side, as customers are thinking about next-gen HPM for sort of these next-generation architectures, there is a potential for customization on the base advanced logic die. It's a fairly complex piece of silicon. You guys have a lot of IP here. I'm wondering if you're winning any custom ASIC opportunities for some of these upcoming programs.

Matt Murphy, Chairman and CEO

Yeah. Thanks, Harlan. Yeah, let me take the two pieces. On the first one, we're very pleased to see the recovery in data center storage. I think we're on like six quarters now of the turn, which is great. We bottomed out last year, was a pretty severe downturn that we saw. It's been growing basically every quarter, and we see this trend back over time. We had called it basically as getting back to like $200 million a quarter. It's not there yet, but it's on its way. And that's had a nice recovery. It hasn't been too spiky. It's just kind of been low and steady on the way back up as inventories consumed, that supply chain revitalizes. And quite frankly, it's great to see the market commentary because that just gives us more confidence that return over time. And then I even actually had it in my prepared remarks as one of the key offerings that we have on our ASIC and AI platform is, we think, as you mentioned, that HBM and how to stitch all that together from a memory interconnect standpoint is going to be extremely important. And it's complex and it's going to be, I think, a key part of the solution just given how memory intensive the current set of accelerators are, but also how they're looking at positioning for the next generation. So that's a key IP that Marvell is developing and that will bring to the table as part of our platform offering for AI accelerators from a custom standpoint. Thanks.

Operator, Operator

Your next question comes from Aaron Rakers with Wells Fargo. Your line is now open.

Aaron Rakers, Analyst

Yeah. Thanks for taking the question. I wanted to ask about the data center switching opportunity. Now that the 51.2T silicon is in the market, just if you could give us kind of a thought of like how we should expect that to ramp, appreciating that's more in the next fiscal year. But any kind of visibility in terms of how we should think about that opportunity to participate in these AI fabric build-outs going forward at Marvell? Thank you.

Matt Murphy, Chairman and CEO

Thank you for the question, Aaron. We discussed this opportunity during our Investor Day focused on AI. With the 51.2T cycle we're currently in, we believe we're well positioned. Our engineering team has done an excellent job getting the product to market quickly after integrating the Innovium asset into Marvell and launching it with our complete 5-nanometer platform. There is strong interest not just in the 51.2T generation, which we're beginning production on this year with a lead customer, but also in our future roadmap. Although we are a smaller player in this space right now, the interest in this platform is significant, and we see it as strategically important for Marvell in relation to our investments in custom silicon and leadership in interconnect technologies, as well as potential future advancements like silicon photonics. While we're not yet sizing the opportunity in terms of its full potential, as it is still early for full-scale production, we feel optimistic about our progress and look forward to providing updates as this develops.

Operator, Operator

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

Srinivas Pajjuri, Analyst

Thank you. My question is about the traditional businesses, Matt. It's nice to see both of them recovering and I think you're guiding for sequential growth into Q4 as well. Given that they're down so much, I think one is down 50%, the other is down almost 70% from its last year's levels. I'm just wondering how to think about the normalized run rate on a quarterly basis? And when do you think we’ll get there? And then once we get there, how do we think about, I guess, longer-term growth of these businesses? Thank you.

Matt Murphy, Chairman and CEO

Thank you for your question. You're correct that those businesses have seen significant declines compared to last year. This decline is partly due to the overshooting that happened during the post-pandemic build-out, along with the industry's dynamics related to over-ordering and excess inventory management. The positive news is that we've observed a recovery after a flat first half, with guidance indicating mid-single-digit growth for both enterprise and carrier in the third quarter, followed by even faster growth in the fourth quarter. Bookings have also improved, which is encouraging. Our objective is to revive both businesses, and we aim for each to reach about $1 billion, totaling around $2 billion to $2.2 billion in annual run rate. We’ve hit the lowest point in the first half, and we expect growth in Q3 and Q4. We're closely watching the set-up for next year, and we believe this target is quite achievable. Long term, based on our Investor Days over the past several years, we've indicated that these markets would likely grow at a low to mid-single-digit rate, with potential for even better performance through content or market share gains. 5G serves as a prime example where we had minimal content in 4G but saw significant growth in 5G, which altered our trajectory. Moving forward, you can expect the market to grow at a steady rate, and for our growth in these sectors, a mid-single-digit range seems reasonable, assuming we continue to execute well. They may not be huge growth markets, but they are very profitable and strategically important for Marvell as part of our long-term portfolio. We are investing in these areas to ensure ongoing growth. Currently, 70% of our revenue comes from the data center, where we see substantial opportunities in AI and accelerated infrastructure. Our R&D is increasingly focused in this direction, as we believe it's the best investment for generating financial returns. Overall, Marvell is set to grow in the data center while also nurturing and expanding our enterprise and carrier businesses for the long term. Thank you.

Operator, Operator

Your next question comes from Quinn Bolton with Needham. Your line is now open.

Quinn Bolton, Analyst

Hey, Matt. I'll ask a question, but if you don't answer it, maybe I'll follow up. You guys are talking about a nice upside to the $1.5 billion and $2.5 billion target for AI. Is that something you think you're closer to $2 billion than $1.5 billion when all said and done this year? I mean can you give us any sort of quantification of the upside in AI revs? And if not, I'll follow up with a product question.

Matt Murphy, Chairman and CEO

Yes, I believe we are exceeding the previously mentioned $1.5 billion estimate we provided a few months ago during our AI day. If you examine our Q3 results, you’ll see that overall company revenue is growing in the mid-teens, and we are guiding even higher for the data center, driven by AI. We expect Q4 to be exceptionally strong in both data center and AI. It's clear that we are surpassing the $1.5 billion target. Moreover, the outlook for next year is promising as we anticipate ending the fourth quarter at a robust level.

Operator, Operator

The prior question, if you don't mind answering just kind of thoughts on the latest DCI traction. I know 400 gig is ramping now, you see demand or starting to ship 800 gig ER. Of the total Electro-Optics business, is DCI kind of 10%, 20% of that total product portfolio? Or is there a different percentage you might give us?

Matt Murphy, Chairman and CEO

I can't provide an exact percentage, and to be honest, it would take some time to calculate since we have numerous franchises on this interconnect platform. However, I can say that our business has performed exceptionally well. When we acquired it, there was essentially one customer using 100 gig, and the business was around $100 million. It has grown significantly since then, as we've maintained the 100 gig while adding 400 gig customers. This has become a crucial and strategic sector for Marvell. Looking ahead, we're making substantial investments in our roadmap, both for 800 gig and for the longer-term goal of 1.6T for DCI. Our current key technologies in interconnect are thriving, and we're also investing heavily in future generations to sustain our market leadership. Thank you. I believe we have two questions remaining. Operator?

Operator, Operator

Your next question comes from Harsh Kumar with Piper Sandler. Your line is now open.

Harsh Kumar, Analyst

Hey, guys. First of all, let me just give my congratulations on a very strong guide. Stories coming along, all businesses turning. Matt, I wanted to ask you, you seem extremely enthusiastic about custom ASIC, near term as well as next year. Could you talk about some of the major drivers of major products, however you want to do it that are hitting that's giving you this optimistic viewpoint for the near, mid and call it, even the next year outlook?

Matt Murphy, Chairman and CEO

I think we've previously mentioned that we have secured several programs, particularly in custom silicon for data centers. The projects related to AI have gained significant traction, which is becoming evident in our financials. We're excited because we're seeing new bookings, have a healthy backlog, and are planning for capacity increases next year, along with discussions about the next generation of products. These projects have transitioned from initial design wins a few years back to execution, with successful chip qualifications and now they're ramping up production. It's part of our ongoing evolution, and it feels great to have a strong backlog, bookings, and positive feedback from our customers as we plan for the future together. I can't share specifics about their applications or workloads, but our customers are very committed to deploying our products aggressively, partnering with us to achieve their silicon goals while we support them from behind the scenes.

Operator, Operator

And our last question comes from Karl Ackerman with BNP Paribas. Your line is now open.

Karl Ackerman, Analyst

Yes, thank you good afternoon and thank you for fitting me in. Could you talk about the breadth of cloud titans you have ramping 800-gig electro optics that anchors your view on the second half? And given your industry-leading position in electro-optics, have you seen growing evidence that US cloud titans are seeking to diversify the procurement of optical transceivers outside of China? I ask because that would appear to be a share opportunity for you. Thank you.

Matt Murphy, Chairman and CEO

Thank you, Karl. Overall, our market share in this area is quite strong, and we are engaged with nearly everyone. The trend you mentioned regarding supply chain diversification and concerns about geopolitical risks among hyperscale customers is very real and important to them. Both international suppliers and US-based companies are making efforts to diversify their supply chains. We are open to collaborating with anyone and have built a broad ecosystem of partnerships. I don't anticipate any major shifts; these trends have been developing for years. We have effectively navigated these concerns and remain competitive and neutral, aiming to support everyone and maximize our revenue. Thank you for the question, Karl. Is there anything else, Willem or Ashish?

Willem Meintjes, CFO

Yeah, I think that's it. Thanks, Matt.

Matt Murphy, Chairman and CEO

Okay. Operator, I think we can end the call. Thanks for everybody for joining. Really appreciate it, and I look forward to all the catch-ups in the callbacks and then also when we're on the road at the conferences. Thanks, everybody.

Operator, Operator

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