Marvell reported Q1 FY25 financial results on May 30^th with total revenues of $1.16 billion, down 12% Year-on-Year (YoY) and 9% sequentially. As with the previous quarter, the standout business segment was the data centre business, with revenues up 87% YoY and 7% sequentially. However, Marvell posted a $216 million net loss, an increase of 28% YoY.

Data Centre Segment

Data centre revenue reached $814.4 million in Q1 FY25 driven by strong demand for its AI electro-optical products (PAM4 DSPs, TIAs and drivers) as well for its ZR Data Centre Interconnect (DCI) products. The double-digit revenue growth was driven by cloud AI as well as standard cloud infrastructure, which offset a higher than seasonal decline in on-premises enterprise data centre revenues.

In addition, Marvell booked revenues from initial shipments of its custom AI compute programs and announced three new data centre interconnect opportunities: PCIe Gen 6 retimers, AEC PAM4 DSPs and extended range coherent DSP-based DCI modules for use inside and outside data centres.

Optical Interconnects:

• 100G-lane 800G PAM4 DSPs - are the primary interconnect product for state-of-the-art AI deployments and are shipping in volumes today. Marvell announced that it has started qualifying next-generation 200G/lane 1.6T PAM4 DSP solutions, which will enable next-generation AI accelerators. Volume adoption is expected to start later this year and accelerate during CY 2025.
• PCIe Gen 6 retimers – Marvell recently announced its new PCIe Gen 6 retimer product range. PCIe Gen 6 is the first PCI standard to use PAM4 DSPs and these products are designed to help data centre compute fabrics continue to scale inside AI servers. The company is currently sampling its 8-lane and 16-lane PAM4-based PCIe Gen 6 retimer products.
• Active Electrical Copper (AEC) PAM4 DSPs – AI demands higher speeds, which is driving the need for active interconnects inside racks. Marvell has started shipping its AEC PAM4 DSPs and has secured design wins with multiple Tier-1 cloud customers.
• DCI ZR Modules - Marvell is shipping its 400G ZR products in high volumes and is seeing strong interest in its next-generation 800G ZR/ZR+ pluggable module DCI products. During the quarter, it also demonstrated the industry’s first 3D photonics engine. Marvell’s DCI customer base is expanding with design wins at multiple new data centre customers. However, revenue contribution from the 800G ZR/ZR+ DCI products is not expected to ramp up until next year.

AI clusters today are made up of thousands of GPUs within a single building. As future LLMs increase in size, clusters are expected to comprise hundreds of thousands of GPUs and will be accommodated in multiple buildings on campuses. These buildings will need to be connected so as to look like a single data centre. Marvell recently announced a new coherent DSP for use on campuses, extending the current range from less than two kilometres to 20 kilometres.

Marvell is further expanding its DCI market opportunities by introducing another coherent DSP design based on a new technology called Probabilistic Constellation Shaping (PCS), extending the reach of pluggable DCI modules from 120 kilometres to 1,000 kilometres.

Switches:

In data centre switching, Marvell expects to start production and shipments of its next-generation 51.2T Teralynx 10 switch this summer for lead customer Nvidia.

Custom compute:

Marvell’s custom compute AI programs started to ship in Q1 FY25 with a very substantial ramp-up expected in H2 FY25 followed by a full year of high-volume shipments in FY26. At its recent AI Analyst Day, Marvell revealed that it has custom compute projects with three of the four biggest US hyperscaler operators:

• Amazon – AI Trainium training accelerator (ramping up now) and AI Inferentia inference accelerator (expected CY2025 ramp)
• Google – ARM Axion custom CPU (ramping up now)
• Microsoft – AI Maia accelerator with expected ramp-up in CY2026

Marvell has also developed a custom silicon for chip start-up Groq’s first PetaOPs AI accelerator, a 700mm2 custom ASIC which is in volume production.

Marvell expects its custom silicon business to generate around $200 million by the end of 2024 and the company claims has strong visibility over its 5nm programs over the next two years. In addition, it claims that its 3nm design pipeline and wins have been very strong and is also already engaged on 2nm design work.

Exhibit 1 shows a breakdown of Marvell Q1 FY25 revenues by market segment.

Exhibit 1: Data Centre vs Enterprise, Carrier and Automotive Revenues

5G Infrastructure and Enterprise Networking

As predicted by the company last quarter, the weakness in the 5G infrastructure and enterprise network markets continued with revenues down at both business units:

• 5G Networks - revenues were $71.8 million in Q1 FY25, down 75% YoY and 58% sequentially. In the previous quarter, Marvell was expecting Q1 FY25 to be the low point with growth resuming in Q2. However, the company now expects Q2 to be flat sequentially with recovery beginning in H2 FY25 driven by the adoption of the next-generation Marvell DPUs at a Tier-1 customer, probably Nokia. Nevertheless, the company expects its 5G market share to increase as customers transition to 5nm Octeon 10 DPUs and baseband processors in H2 FY25. It claims to have won an additional socket with Nokia.
• Enterprise Networks - revenue was down 58% YoY and 42% sequentially to $153 million. Although Marvell reported that customers’ excess inventory absorption is progressing, it still expects Q2 revenue to be flat sequentially with recovery starting in H2 FY25.

Automotive/Industrial

The automotive/industrial market is another market experiencing inventory correction. Reported revenues were $78 million, down 13% YoY and 6% sequentially. However, Marvell expects growth to resume in H2 FY25 driven by an increase in Marvell Ethernet content in 2025 model year vehicles.

Analyst Viewpoint

Counterpoint Research believes that Marvell is increasingly well positioned to benefit from the burgeoning growth in AI data centre infrastructure over the next few years. However, many of its new revenues streams will only start towards the end of FY25 but will set up a solid foundation for FY26.

With two hyperscaler customer wins already ramping up, most of the growth in data centre revenue will come from custom silicon over the next two to three years. Marvell had previously pencilled in around $1.5 billion for AI revenue for FY25 (split two-thirds electro-optics, one-third custom compute) – up from $500 million in FY24. However, it now expects to exceed that number and has a target of $2.5 billion in FY26 as the custom silicon programs reach the first full year of volume shipments.

Custom silicon is a business with high barriers to entry and could be very lucrative for Marvell in the medium and long-term. To succeed, vendors need to have R&D scale, technical excellence, cutting edge IP as well as being able to operate on the latest leading-edge process node - attributes which Marvell possesses. In addition, by working closely with the hyperscalers, Marvell will gain a significant advantage as it will acquire unique insights into their next-generation architectural requirements, not only for custom silicon, but also for the connectivity, switching and other products. However, Marvell competes against Broadcom - the 800-pound gorilla of the custom silicon market - and others, including Nvidia, a recent new entrant to the custom silicon market. Over time, there is also a risk that the hyperscalers will develop their own expertise and follow the examples of Apple and Huawei and bring their custom silicon design work in-house.

The other new growth market is data centre interconnects with three new opportunities - AEC interconnects, PCIe Gen 6 retimers and pluggable DCI coherent DSPs – each of which is estimated to be a $1 billion opportunity over the long term.  However, in the non-data centre businesses, thinks are not looking quite as rosy, although there are high hopes that both the 5G infrastructure and the enterprise networking businesses have reached the bottom of their respective cycles. 5G capital spending still looks weak and growth might be delayed beyond Q4 FY25. In addition, Marvell is heavily exposed to one vendor, Nokia. Last year, AT&T, one of Nokia’s largest base station customers, switched to rival Ericsson. It will probably take quite some time for these two business units to return to their previous $1 billion per year run rates.