This is Atif Malik. I cover U.S. semiconductors, semiconductor equipment, and networking equipment stocks at CITI. It's my absolute pleasure to welcome Matt Murphy, Chairman and CEO, Marvell, as well as Willem Meintjes, CFO. I always have to remind Matt that he started his Marvell journey at CITI Conference many years ago with Eric Hill on the stage. That's why he owes one to me every time. Right, exactly. Thank you for being here, Matt. Matt, coming out of your recent earnings call, investors are a bit concerned that something changed on the status of the two key XPU programs and that you didn't appear as confident as before on the growth from customer revenue next year. Can you clarify what you were trying to communicate to investors?
Sure. First of all, good morning, everybody. It's great to see all the folks here and also on the call. Just a quick couple of words up front, and then I'll get to your question. I think everybody's curious about my answer to that. To start off, I appreciate you hosting us here. This is CITI 10 for me. If you can believe it, back then, it was a whole different world. It was my first conference, actually, as CEO. We were just happy to get our financials on file with the SEC at that point. We had a consumer-oriented business with some enterprise, and that was about it. By the way, multiple sell ratings on the stock. Nobody wants to point the finger, but yeah, anyway, it's OK. I don't blame you. I don't blame you.
I had the pleasure of being up with Rick Hill, who was my Chairman at the time. Fast forward, here we are, you know, 2025. It couldn't be a more different picture, right, in terms of where Marvell Technology is positioned. I've been in the semiconductor industry for 31 years. I've been through all these major sort of product cycles, going back to the early to mid '90s. The AI opportunity in front of us is just massive. We found ourselves at Marvell Technology, you know, right in the middle of it. It's still early innings for us, and there's still a lot more to go. Maybe by CITI 20, it'll even be a different story. A couple of things on the call. The first is that I want to just acknowledge and recognize concerns from investors around the way the answer to some of the questions were communicated.
I want to try to be helpful here this morning so we can clear the air. The first is, as you saw, I rotated and we rotated a lot harder on the customer confidentiality side. I want to take a moment just to explain the why. It's not just like a canned response, but it's a real thing. The strategic nature now of these custom programs is such that it really is what defines the future architecture of these systems. These are fundamentally trade secrets, you know, of these companies. Being in a business like this, especially with a concentrated customer base where the stakes are so high, it's a business fundamentally about people. It's about trust. It's about long-term relationships. It's about multigenerational investments. You need to have that trust there.
That is the reason for the rotation to be a little bit harder on that front because of the concerns from our customers there. That being said, it was not our intent to signal a change in our business when we said that. Now, a couple of things on that. What I was asked to do was, you know, provide guidance for fiscal 2027, which is next year. Marvell's got this one year off. Still, I think fiscal 2027 to me sounds like a long time away. I mean, we just finished our Q2 of this year. We just reported those results. We're a ways out. The time will come when it's appropriate to do that. Once we have the visibility on the next year, you know, we'll provide that.
I mean, if you look back when we started this AI journey, really back in 2023, we've been signaling and giving information to investors to be helpful, right? If you remember, the first call we had was, I think it was May of 2023. We said, hey, we think AI is going to be like $200 million this year and $400 million the next year. That was kind of overall. It was mostly optics. Along the way, we had an AI Day. Then we had another AI Day. One of the latest updates we had given was that, you know, we had a target of like $1 billion+ for custom this year. We've been tracking, and we're actually way ahead of that. We'll continue to be helpful there. We've been planning for growth in this business. We still are. We still are. I need the time.
Once those plans, by the way, shore up and we have better visibility, then we'll communicate that. We'll communicate any change. If it's up, if it's down, we'll communicate that. That's basically how we've always been doing it. That's how I will continue to do it. That is some of the background on the why. I couldn't be more excited about where this business is going. I mean, we had the AI day. We laid out a $55 billion custom TAM, which was up from just a year prior. We actually provided the additional clarity, which maybe you'll have some questions on, that $40 billion of that was for XPU, which gets a lot of attention, obviously, and is very critical. Then $15 billion of XPU attached, which is really a growing and emerging market where there's a different set of dynamics where Marvell is also participating.
We're now up to like, you know, 18, I call it really 18+ sockets because even since the AI day, we've won additional programs. I mean, there's a lot happening right now. I guess when I just look at the trajectory and the fact that we're in the early innings of this business, it's relatively concentrated today because these are the first set of initial design wins we had that are ramping. This is, you know, we're in the early years here. If I go out to 2028 and beyond and where the TAM is and you see these 18+ programs ramping, we'll also have better diversity in the business going forward. It'll be easier to plan and communicate it. Those are some of the dynamics and challenges that we're facing.
I hope that this is helpful to investors to understand the why and a little bit more of the background.
Yeah, super helpful on the sensitivity around hyperscalers. Matt, most investors I talked to, they were super impressed by your June investor day on your IP portfolio and everything on the custom and ASIC side. Now, design cycles are long on these custom silicon projects. I tell my clients that Marvell is where Broadcom was a year ago with mostly focused on, you know, one or two sockets right now. There is a whole big pipeline that's coming and diversification will happen. You've talked about this 20% share goal in the custom market. Can you just walk us through your assumptions on TAM? You introduced XPU attached sockets as well. Just kind of walk us through how do you get to this 20% goal?
Sure. Yeah. We have a 20% goal on the overall TAM opportunity. That's the full boat Marvell, right? All the different product segments. We've also said that we believe that the custom piece can also get there, albeit we're starting a little bit later. The bulk of that is really based on the 18 wins that we outlined today. Now, there's optionality there. We said there was another 50 sockets that we're tracking worth $75 billion+ of lifetime revenue. Like I said, subsequent to the call, we've actually closed several of those. Think of that $75 billion as kind of come down because we've closed some of them. I think it's going to come back up because there's just a tremendous wave of opportunity right now in terms of the design activity with these customers.
The 20% share is really a combination of, one, our bottoms-up view of the individual opportunities. We obviously try to risk adjust and size those. Let's be clear. It's a very dynamic environment, OK? We're trying to call the ball, obviously, three years out. We're trying to call the ball for next year. Things are changing. Directionally, the good news is it's only been up. I think we'll see where it shakes out. I think the bottoms up certainly supports it.
Also, just from a top-down perspective, when we look at the TAM and the opportunity, and as you mentioned, we can go through it if you want, the key tenets of the AI Day we did in June around Marvell's leadership in process and package technology, our IP portfolio, our ability to stitch the full solution together, our ability to have a world-class, robust supply chain, deep customer partnerships, and the investment profile to invest for the future, it's resonating really well with these customers. The other angle, which is more subjective, is like, hey, tops down, why can't you guys get to this 20%? The pushback I got was, why can't it be bigger if you just look at the law of market share and if you're successful? We'll see. I think we've set a very achievable goal. It's a big number because the TAM is growing so fast.
A big part of that equation on where the net revenue lands is, obviously, does the TAM keep growing at the rate it does and how much converts to custom? We have those assumptions in there. I feel like those are pretty safe assumptions at this point. If you look at the cycle we're in, CapEx spend, design win activity, it certainly suggests that that TAM profile going forward is going to happen. Our win rate suggests that we're continuing to knock down these wins across a wide variety of opportunities. I still feel very good, very bullish on where this business is going.
All right. Matt, given how vocal some Asian companies are being about their involvement with the key customers' design, do you see, given the level of CapEx that these hyperscalers are planning, that multiple companies can either work on multiple projects or perhaps even share the same ASIC projects? Or is it a winner takes all?
Yeah, I think we started this a little bit at the first AI era event we did in 2024 and certainly followed it up just a few months ago. When we outlined the TAM, I mean, we did talk about, and I believe there is going to be diversity in there, right? The spend is so big that I think you're going to see some variety of business models that emerge. I think, and actually, the presentation we talked about in June, these different models, right, which were more on a spectrum, right? How much customer IP do they want from a company like Marvell Technology? What kind of manufacturing services do you want? How important is other kind of bespoke, unique technologies in the roadmap, like PIVR or CPO or some of these other things, right, which may cause some of those dynamics to change?
Just again, given the sheer spend, I think you're going to continue to see more SKUs, more variants, and more opportunities in diversity as we go forward. I still believe that the vast majority of the shipments long term out of the custom TAM, the majority market share will still come from what I would call full service or full turnkey providers, where if you have all the pieces and you can actually manufacture, design it together, manufacture it, yield it, ship it, move to the next generation, hit the beat rate, hit the cadence, that's where the bulk of the market will land. Certainly, there's going to be room for different models, and there should be. The spend on these things is, I mean, for example, the custom spend alone is projected to be bigger than the entire x86 CPU market by 2028.
You got to imagine there's going to be, I think, a lot of opportunities. I think that's a good thing for Marvell Technology. It's not a winner take all. It's not going to be two sockets and that's it. Whoever gets it gets it. The other one is going to be, it's not a binary market anymore. You're right. It's in the early innings, even for the large, more established providers.
All right. Willem, going back to you, in terms of gross margins, you guys have been kind of clear that the nature of the beast is that the ASIC projects have an impact on your gross margins, maybe 58%- 59% kind of range. As you look into next year and just kind of in terms of the operating margins, you've talked about the revenue and growth rate being 2x the OpEx run rate. How do you kind of position the company to expand the operating margins where you do benefit from the NRE payments from some of your customers?
Sure. I think maybe let's start with, you know, if you just go back over the last year, right? We've been signaling very consistently that as these custom programs are ramping, and you've seen that in our gross margins, right? At the same time, you can see this leverage that we've driven in operating margin, right? We just guided a quarter to like 36.2% OM, which, you know, that's really starting to approach that 38, 40% long-term target that we have, right? That model that we set out has really played out in the numbers that we've executed on so far. The one thing that we've been very consistent on is investing for growth, right? The way that we've managed the portfolio is that we had all these other products, right, where we, you know, call that the mass market or carrier enterprise where we did a refresh.
Those refresh products have started ramping. You can kind of see that in how those sort of other end markets have really recovered pretty well. The intensity of investment there has reduced quite significantly. We've sort of reallocated that to our data center portfolio. That in combination with the NRE, that's called non-recurring engineering, we recognize that as a contra OpEx. It reduces our OpEx. Think of that as an investment that our customers are making in these programs. Those two dynamics have really allowed us to continue to manage OpEx very tightly. We'll continue to do that through next year. We do recognize that this is sort of a, you know, as Matt was just saying, like a historic sort of growth opportunity. We want to make sure that we invest. I mean, these resources to go have this differentiated technology is very scarce, right?
You're seeing significant competition on those resources. We're sort of in a battle to maintain and attract those resources. We'll do what we need to do to continue to invest to drive that growth.
Yeah, but just to put a point on it, I mean, the R&D position at AI and Cloud has just been absolutely turbocharged over the last few years because, one, we've increased R&D spending, and we've been consistent on that despite the up years and down years. We've always grown our R&D. The NRE on the new programs is kicking in, so that's an additional lift that we're getting. As Willem said, the strong kind of capital allocation framework that we drive in Marvell through our strategic planning process and sort of our check-ins and really looking at where our precious R&D dollars are going. By the way, we just completed our 10th Annual Strategic Planning Review, right, which the first one was August 2016, about six weeks after I became CEO, which was our capital allocation framework that we continue today.
Now you see, you know, well over 80% of our R&D spend all in data center, and we're able to do that and still reap the benefits of the investments we made in the past on the other broad market opportunities. I think we're in a great place relative to the invest and the spend and to be able to do that at scale, which is only a handful of companies really possess the team to be able to go do this.
Great. Let's talk about the other piece of your AI sales, the optics or the DSP part of the portfolio. You talk about double-digit growth in the next quarter. Can you just share with us what you're seeing in that part of the market, why there was a slowdown in the reported quarter, and then the reacceleration to next quarter? Is it just timing?
I think some of it's timing. It's not, it's never been a completely linear business either. That one's a little bit different always by design because just for the investors to understand, in the optics area for us, there's one other step in the supply chain, which you normally don't see, which is the module manufacturing in the middle. Sometimes you can get like a quarterly fluctuation there. In general, if you just look, we've been worried about down quarters and inventory digestion and resets for, I don't know, coming up on two years. I remember back at, I think it was the end of 2023, I got a little cautious and everybody kind of freaked out because I was just saying, hey, this thing has grown at like 80%. You know, is it going to slow down? It hasn't. It's been a very, very strong performer for us.
Some of this goes through the channel. That sell-through has gone great. All the signals we're getting, which I think is a great proxy for where the AI spend is happening, if I just look at kind of what the lineup is on the go forward, a lot of strong demand signals coming through about continued future growth in that business, especially for next year. I think there's a lot of optimism. You see that in the numbers. Everybody's kind of talking about where things can go. We certainly, and I think the other thing in that business is that we've, since we acquired Inphi and integrated it, we've just absolutely maxed out on the resources assigned to that business. The team's done an excellent job on technology leadership in terms of moving ourselves and our customers to the next generation.
We see that cadence continuing, whether it was our move from 100G/lane- 200 G/lane or now 200 G/lane- 400 G/lane in the future, which translates to these other cycles of 800 G/lane , 1.6 G/lane , 3.2 G/lane . All those, we're just absolutely heads down driving that. That's going to be key to really enabling this next wave of AI growth to happen, releasing the communication and the I/O bottleneck, which we play a key role in. It's a very, very strategic business for us. The team's done an amazing job. Super proud of them. I think we've got just a great future ahead there, given our investment profile and the quality of the team we have.
Great. Let me pause here and see if there are any questions in the audience. If you have a question, please raise your hand. Yes, there's one in the back.
Some capital with the sale. Given your bullish forecast next three years, gating might be the factor. Why aren't you doing an ARS?
Yeah, Willem, you want to start with that?
Yeah, sure. Look, we've always had a balanced capital return plan, right? If you go back, I've been personally very, very focused on getting our free cash flow to be a lot more consistent. You've seen that consistency here over the last year, and that's really resulted in a step up in our capital return. This is, as you point out, a nice capital infusion here, and it gives us a lot of optionality. The other discussion we were just having is around the size of the opportunity. We're very, very pleased with our IP portfolio. This is an extremely dynamic environment, right? As we look across the ecosystem where there's potentially bolt-ons that can accelerate our growth and our portfolio, we're going to be looking at that. You should expect us to sort of step up in terms of capital returns.
At the same time, we want to keep that flexibility on potential bolt-ons.
Questions? All right. Matt, I'm kind of sticking with the hyperscalers. We have slowly seen entities like Sovereign Enterprises starting to ramp up on AI investments. I understand you're focused mostly on hyperscalers right now. Do you see your chances of getting a piece of the non-hyperscaler AI CapEx in the future?
Yeah, I think the way we broke it down, and there's different ways you can slice and dice this market, we talked about in two kind of big buckets at the AI day. One was kind of the traditional top four hyperscalers. Then we had another category called emerging, which includes Sovereign, by the way, if that's your specific question. Also, you know, companies now building their own potential cloud infrastructure and kind of that second but very important tier of cloud players that are vying for share. We have an opportunity set in all of them. Certainly, from an optics perspective, that in networking, that cuts across everywhere. We have direct engagements on almost all those companies because we have great relationships with our module partners. They're out marketing our solutions.
We're also directly engaged and have sales teams and business development and business unit coverage of those other accounts and opportunities. Increasingly, those are also driving custom silicon opportunities as well. I think more and more you're going to see that as their sort of CapEx and their spend rate goes up and their recognition, all of them, that their need to have some differentiation. Some of it's just not just to differentiate to be differentiated, but their apps are different. Their workloads are different. Their use cases are different. How they construct their data center footprint is different. Given the sheer spend, it actually opens up a lot of opportunity for us. That was when we called out at the AI day as kind of a big change over the last year, which used to look more like a standard product kind of by the generic solution business.
It looks like more and more those are going to get a little bit more bespoke and a little bit more unique. That's where we can really come in and add value.
One area of networking that we're seeing upside in for some of your peers is on kind of scale out and even scale up efforts. You guys don't really break this out. You have it in your AI sales, but can you just talk about the momentum you're seeing on the scale-up side?
Sure. Yeah. Today, we've given kind of these big buckets of our optics business, our custom business, and then the rest of it. Over time, should any of those other areas, like networking, for example, emerge to be big enough, we would start to call those out. By the way, just on the scale out, which is really where most of that spend is today, we acquired a company called Innovium back in 2021 to get us into the higher layer, high-speed cloud networking market. That's gone really well. That business has grown quite a bit since we acquired it. It's set for very nice growth over the next couple of years as product transitions happen. When we bought the asset, we got a position and a footprint in 12.8T switching. We put the whole team and the resources on 51.2T.
From a market standpoint, that adoption is starting to happen. We're going to see that business inflect as a result. The reason I bring up the scale out to start is that the same kind of fundamental architecture team we have for that is the team that's driving the scale-up solutions, which is really a combination of high-speed, low latency, low-power networking with our I/O and SerDes technology. The scale out is, well, there'll be absolutely more to come there. We're very involved in the standards around that area. We certainly are getting pulled in through our connectivity products and our XPU shots on goal as well because it all fits together. There's more to come on that one. That will be a large driver of TAM growth for us in terms of where the scale out is going to go.
I think it represents a big opportunity in the industry. We're very well positioned. We're very focused there. More to come on that one. I think it's going to be a big opportunity that really plays well to Marvell's strengths because we own our own SerDes IP. We have our own, you know, really best-in-class architecture team on high-performance switching and a very good system-level view of how the connectivity and the XPU kind of roadmaps all play together.
Willem, on the non-AI markets, the enterprise networking and carrier infrastructure, they've recovered nicely. You guys have talked about a $2 billion kind of normalized revenue run rate. How strategic are those two businesses? Are there opportunities to maybe divest other areas after the auto Ethernet sale?
Sure. Yeah, look, you know, those businesses, you know, go back, you know, we've got a very long history with those businesses, right? We've really optimized them, and they're a core part of our profitability growth engine or profitability driver. Over time, once we get to that $2 billion, we don't, we see no reason why that can't continue to grow at a similar rate as those markets. Matt mentioned our capital allocation exercise that we do every year, and we look at everything. We don't have any, you know, sort of holy cows that we're not going to touch. That business has been sort of the core profitability driver for us, and we're actually very pleased with that recovery, as you point out, right?
I think when we were sitting here, when it hit the low of, call it a $900 million run rate, and we were saying, hey, it's going to get back to $2 billion, I think there was a lot of skepticism, right, whether that even comes back. Now we've just guided $1.7 billion, right? We do expect that growth to continue. We've seen bookings be very strong and continue to be strong in those businesses.
Yeah, just to add, I think first, yeah, very pleasantly surprised with the reinflection on that business. I mean, it obviously inflected down hard. We kept wondering, what's the slope coming back? It's not been linear. It started coming back and coming back. I think I'm very pleased to see the recovery in the bookings, shipments, and kind of the demand outlook for our customers in those areas. It's not just complete inventory recovery. It's kind of tied into what I said earlier about how we've been able to start to reap some of the benefit of the prior investments in enterprise networking and carrier end markets. We had a whole five-nanometer portfolio refresh. The fleet is like state of the art. Those new products are also kicking in too. That's giving us some of the additional lift. We got a whole business group, team, division that's focused on this.
They just presented out at our strategic review. They've got a growth plan. They've got ways they're going to go drive the revenue. We're giving them investment. It's skinnier than it was. That's just because we put in a big lift up front. Automotive specifically, that was just a very different kind of business. It had its own sales team, its own quality team, its own processes. Given kind of our scale in automotive relative to what that business was going to do, it's on a great trajectory. Infineon will do great with that business. For us, when we looked at the big picture, even if it doubled from where it was, it probably wouldn't move the needle, net net over the next couple of years on where we're going on data center. It was a competitive process and the economics were right. That was the thought process on that.
That was a little different. We do want to have some balance in our portfolio. Quite frankly, this historic AI thing, we just got to go for it. It's where the TAM is going. It's a big seismic shift in the industry. I think we would be kicking ourselves if we didn't go after it. To the question earlier, which was a great one on capital return, just maintaining some flexibility at the moment because we're in this inflection to figure out what we want to do. Certainly, if we just conclude the organic stuff we're doing is great, then we'll be much more aggressive on returning capital to shareholders. We're very focused on that, not only driving our own internal free cash flow metrics, but obviously using the proceeds. More to come on that one.
Great. Just coming back to the optics, there's a kind of a nonstop discussion on technology trends and CPU and OCS and 1.6T. Nvidia talked about the use of packaged optics at the GTC earlier this year. Can you just share with us your view on where photonics market is going to go and when we're going to see volume adoption?
Yeah, it's the age-old question that we've been chasing for some time. For those of you that attend the OFC conference, this is kind of an annual discussion, right? Like when is high-volume silicon photonics really going to hit, i.e., in mass volume inside data center for things like scale-out networking or scale-up networking? There has been a big shift in the last year or so relative to some of the big players really putting serious capital investments here, committing to roadmaps, technology developments getting driven. The technologies come along. I mean, we have a strong skill set there. We're shipping relatively high volume in Sipho today. That's for between data centers, right? That's in our DCI products. It's Marvell's own silicon photonics solution. It's our own PIC. It's our own design. By the way, we designed the entire chipset around it. We actually designed the entire module.
We have a lot of experience in manufacturing and volume here. It's a bigger knee of the curve when you go inside data center. We've been showing off for the last couple of years our own integrated light engine solutions, which ultimately we can plug in and integrate with either our networking products or our ASIC products. The change I would say is that it looks a lot more positive that this kind of an impact can happen. I don't know if it's 2028 or 2029 or 2030 or how long it really takes to get mass, mass adoption. I really still think that's a ways out. I think we shouldn't all get completely over our skis there. We're going to be ready for both, OK? That's a long-term thing that we're investing in.
Just to be crystal clear, when we look at the next several years from our customers, it's all pluggables. It's how fast can we move to the next one? That's then augmented by some more unique solutions like AOCs or AECs, which we're in both of those, by the way. We have solutions for both. Linear pluggable optics, which had failed to get traction for the last couple of years, that'll start seeing some adoption. We actually have some great solutions there. We have design wins there. We're going to be in LPO. It's really like we're trying to just be the one-stop shop. You know, if you want to have a range of solutions, we don't just have religion that it has to be pluggables and it has to be the latest, greatest, and we're just going to hold our nose.
I think we can leverage our technology across all of these. I think more and more you're going to see that. In the end, it's going to be proven pluggable, swappable, kind of high-volume scalable solutions out there. Some of these things, like a lot, need to be ironed out on the CPO side first. We're not poo-pooing it at all.
Great. We're almost out of time. Matt and Willem, thanks for being here.
Yeah, appreciate it. Thank you. Thanks, everybody. We'll see you in a day.