Astera Labs reported an impressive beat and raise in Q1, with GAAP margins strengthening as revenue continues to grow at a triple-digit rate. On top of this impressive beat, the growth story for Astera Labs is only beginning. The commentary regarding their product diversification and higher dollar content going into the second half of the year was quite clear as to the growing opportunity this company is poised to capture. 

Primarily, Astera offers unique positioning that allows them to capture both the merchant GPU market and custom silicon market across its three products lines Astera, Taurus and Scorpio. This widens the TAM and allows for steady revenue growth despite hiccups or delays from a single AI system (which we’ve seen plenty of disruption recently across those with high customer concentration with Nvidia).  

In addition to being a strong custom silicon vendor for hyperscalers, Astera will participate in Blackwell once it (finally) ships in volume as the company offers PCIe scale-out and Ethernet scale-up. Their new products Scorpio P-Series and Scorpio X-Series are fabric switches that are particularly well-suited for the immense demand that is expected for customization of racks as architectures scale-up in the second half of the year and beyond. 

Notably, Aries PCIe retimers and Taurus Ethernet smart cable modules are driving the revenue today with the Scorpio P-Series beginning to ramp. However, there are many catalysts on the horizon for Astera which adds to the trifecta of a strong growth story: 

• Serving both ASICs and GPUs greatly increases TAM and diversifies revenue; rare in the AI systems ecosystem 
• Preparing to serve the scale-out demand with increasing higher dollar content; specifically on Scorpio but also on Aries 
• Offering strong cross-sell opportunities as it aims to be the first to solve unique challenges for both GPU and custom silicon utilization – and is solving these issues in a way that avoids vendor lock-in for the large hyperscalers who want a mix of both custom silicon and merchant GPUs (Nvidia or AMD). 

Below, we look at Astera’s exceptional earnings report and provide notable commentary as to why Astera’s streak is likely to continue for some time. 

Revenue Grows 144% in Q1 

Astera Labs reported a blazing 144.3% YoY revenue growth in Q1 to $159.4 million, topping analyst estimates for $151.5 million in the quarter. Management said they witnessed strong demand for PCIe scale-up and Ethernet scale-out solutions for custom ASIC platforms, with initial shipments starting for its Scorpio P-Series and Aries 6 retimers in merchant GPUs. 

For Q2, Astera delivered a solid raise at $170 to $175 million, more than 7% ahead of the $160 million estimate. This points to YoY growth of 124.5% at midpoint, ahead of estimates for just 108% YoY.  

Astera has seen revenue growth decelerate over the past few quarters, with growth expected to continue decelerating as Astera laps its rapid ramp quarters. What’s impressive about this ramp is that Astera is guiding to deliver this 125% growth in Q2 against its 619% YoY comp (against a small base), for its seventh-straight triple-digit growth quarter.  

For the full-year, Astera did not provide a guide, though estimates heading into Q1’s report were pointing to 70.4% YoY growth to $675.2 million in revenue. However, given that Q1 and Q2 have combined for a $20 million beat compared to current estimates, it’s likely that full-year revenue estimates will likely move closer to (or above) $700 million in the coming days. This would correspond to YoY growth of nearly 77%. 

According to discussions on the call, management is being conservative in their guidance, stating they have more visibility than most as they are closer to their lead GPU customer (Nvidia) with hints that the larger systems will start shipping preproduction volumes at the end of this quarter.  “I think the — so we will always continue to be conservative, just to underline what Jitendra said. But having said that, the revenue models and the guidance that we are providing or the outlook that we're sharing comprehends all this because we are so close to this customer that we see a lot of stuff, and we're able to consider and contemplate that when we provide guidance.” 

Margins: Astera Becomes GAAP Profitable 

Astera is making considerable progress on strengthening its GAAP operating margin, having guided for a (0.2%) margin in Q1 but reporting a 7.1% margin. This also marks a strong 15 point expansion in just 2 quarters. Elevated SBC at nearly 28% of revenue in Q1 is behind the wide disconnect between GAAP and adjusted margins, though it signals strong GAAP profitability potential in the coming quarters/years as revenue continues to scale. 

• Q1 gross margin was 74.9%, ahead of guidance for 74%. 
• GAAP operating margin was 7.1%, well ahead of guidance for (0.2%) and up from 0.1% in the prior quarter. Adjusted operating margin was 33.7%, up more than 14 points from 24.3% in the year ago quarter but down from 34.3% last quarter. 
• GAAP net margin was 20%, expanding nearly 30 points in three quarters. Adjusted net margin was 37.4%, up more than 15 points from 22% in the year ago quarter but down nearly 10 points sequentially. 

Astera is guiding for margins to remain strong in Q2, with GAAP operating margin expanding. Gross margin was guided at 74% once again, while GAAP operating margin is forecast at 7.9%, up 0.8 points sequentially. Adjusted operating margin is forecast to contract 2.6 points QoQ to 31.1%.  

The company foresees gross margin being stronger in the second half, yet was careful to temper the market expectations by stating gross margin goal is to remain above 70%. “So with that wider range of margins, we still expect our longer-term gross margin targets of 70% to be the direction we're heading, not this year, but over time. So I would still encourage people to think about the margins as we grow the company to trend towards 70%.” 

EPS

Astera delivered an impressive 350% beat to GAAP EPS estimates in Q1, driven by its operating margin expansion, while forecasting EPS above estimates for Q2. 

• Adjusted EPS of $0.33 beat estimates by $0.05, representing YoY growth of 230%. 
• GAAP EPS of $0.18 beat estimates by $0.14, improving from $0.14 in Q4 and marking its second straight quarter of GAAP profitability on the bottom line. 

For Q3, Astera guided for adjusted EPS between $0.32 and $0.33, approximately flat QoQ but up 150% YoY at midpoint. GAAP EPS was guided at $0.10 to $0.11, what would be a third consecutive quarter of GAAP profitability albeit down (42%) QoQ.  

For the full-year, analysts currently expect Astera to report 50% YoY growth to $1.26 in adjusted EPS, with FY26 EPS growing 36% to $1.72. Heading into Q1’s report, GAAP EPS was expected to be $0.29 for the full-year, but considering Astera is guiding to deliver that figure in 1H, estimates are likely to move substantially higher.  

Cash Flows and Balance Sheet 

Cash flow margins expanded slightly YoY, though inventories rose and accounts receivable doubled sequentially. 

• Operating cash flow was $10.5 million for a 6.6% margin, expanding slightly from a 5.6% margin in the year ago quarter. 
• Free cash flow was $6.0 million, for a 3.7% margin, improving from a 0.3% margin in the year ago quarter. 
• Cash and equivalents increased $11.1 million QoQ to $925.4 million, while debt remained zero. 
• Inventories rose 18.2% QoQ to $51.1 million, likely driven by the ramp of Astera’s Aries 6 and Scorpio P-series products. 
• Accounts receivable surged 100.5% QoQ to $69.8 million, driven by Astera’s largest customers. Astera’s receivable balance from its top customer in the quarter rose 363% QoQ to $20.9 million, while its balances from its second and third largest customers rose 75% and 90% QoQ to $14.7 million each. Days sales outstanding also increased from 20-ish days in the past to 40 days this quarter. This is likely foreshadowing Astera is preparing for larger shipments in the next 1-2 quarters. 

Customer Concentration and China Revenue  

Astera is diversifying its customer base beyond its two largest customers, though it remains quite concentrated with its top four customers accounting for 80% of its Q1 revenue and its top two customers accounting for 49% of revenue. Although Astera does not disclose the exact customers, at one point, their largest customerwas AWS. 

SEC filings show that China revenue has been growing as a percentage of revenue from under 15% in Q3, then surged to 35% in Q4, and remaining elevated at 28% in Q1. FY24 exposure was 18.3%, up from <5% in FY23 

However, on the call, management stated it was less than 10% of revenue. Perhaps the difference being end market customer is less than 10% yet manufacturing in China represents a larger portion. Addressing this difference in the SEC filing on the call would have been ideal.  

Thomas O'Malley   Barclays Bank 

First one is for you, Mike. You mentioned that there was a China impact on your sales. It's never been a significant portion of your model. But could you give us a feeling just how large that impact was and what that impact will be over the next couple of quarters? 

Michael Tate   CFO 

Yes. So we ship into China with our retimers predominantly right now and they were attached to third-party merchant GPU systems, both were restricted hard stop during the quarter. So there was a modest impact that we have to overcome. 

China revenues, when you look at end customer demand, is less than 10% of our revenues. So it's been manageable enough and given the strength of our business and other product lines to continue to grow through this challenge. 

Earnings Call Q&A: 

Higher Dollar Content from Scorpio-X and Aries PCIe6 Retimers 

As growth investors, we are always looking for a catalyst that can sustain growth, or ideally, accelerate growth. For semiconductors and hardware components, there is no better catalyst than incoming higher dollar content for hardware companies. 

Therefore, Astera Labs used these words many times on their call. Diving into the details of this, it’s primarily two products where they are forecasting higher dollar content and average sales prices (ASPs): 

Aries PCIe6 retimers:  

The transition from PCIe5 to PCIe6 will result in higher unit growth and higher ASPs including a gearbox that improves signal quality. PCIe 6 doubles the bandwidth from the 5th generation, with up to 256 GB/s of bandwidth per lane, which will require faster supporting components, such as the retimers that Astera Labs offers. 

Here is what was stated on the call: “In fact, we have already started shipping preproduction volume for supporting some of the opportunities. And this would, again, not create an additional TAM to our Aries business because it's adding to the retimer TAM, but essentially bringing in a higher level of ASP simply because you're able to not only do retiming, but also do some of the speed matching that I noted.” 

Scorpio X-Series:  

The Scorpio P-Series is shipping this quarter and are qualified for Nvidia systems, yet the X-Series will ship in H2 with a bigger opportunity for custom silicon clusters. The Scorpio P-Series is a small chip that connects the CPU, GPU, NIC and NVMe storage. Rather than building a large switch, the company built a smaller device that is more efficient for high-speed signals to help feed GPUs with data. The fewer ports and smaller switch decrease complexity in a bid to compete against Broadcom with twice the lane count. 

The X-Series is for back-end networking in GPU-to-GPU configurations (and custom silicon configurations), and will offer a higher port count. Astera is essentially building something similar to Nvidia’s NVSwitch with the X-Series, but for PCIe-enabled GPUs and ASICs. Per the last earnings call: “And this one, like Mike noted, it's a greenfield use case, meaning if you keep Nvidia and NV Switch aside, everyone else is starting to build configurations that are obviously going to need some kind of a switching functionality, which is what we are addressing with our X Series device.”  

The X-Series improves efficiency for ever-increasing AI cluster sizes. The majority of AI clusters are in the tens of thousands GPUs, but are expected to go to the hundreds of thousands (already has with X and some other Big Tech companies), and will see AI clusters with millions of GPUs over the next couple of years. 

In an effort to identify a catalyst that can sustain Astera’s exceptional growth, it would be this product that does so. The X-series is used to interconnect GPUs for higher GPU utilization, resulting in higher ASPs. Per the call: “So to that standpoint, X-Series does bring in a lot more value, and therefore, you can assume that the ASPs tend to be significantly higher. And that's — again, there are different — the X-Series is not one device, to be very clear, there are multiple part numbers. So there would be situations where maybe one part number is not at the same level as P-Series. But in general, you can just look at it from a per lane standpoint or per port standpoint, and look at the value delivered.  And on that basis, the X-Series will always be a much more valuable, much more higher ASP product than a P-Series. 

Notably, Astera maintains their largest opportunity for the X-Series is on the custom silicon side although they foresee hyperscalers wanting to customize their racks in a way that prevents vendor lock-in from both Nvidia and Broadcom.  

“So these are fabric switches that are used to interconnect multiple accelerators together. So to that standpoint, a, it's not only a significant dollar opportunity because the ASP of this product tends to be high. But these are also products that are turning out to be anchor sockets for us. If you think of an AI rack being built, you have the accelerators and then you have the fabric that interconnects the accelerators.   

So what we are transitioning and what we're excited about is that the Scorpio X device is now translating to be an anchor socket. Think of it as like a mothership around which we are able to now add a lot more products that go along with it, whether it's the silicon level products or module or other form factors that we're considering.   

So overall, I want to say that from an opportunity space standpoint, for Astera, the custom ASIC-based implementation tends to offer a lot more opportunities.” 

We’ve covered Astera’s products more in-depth in previous analysis here and here.here and here. 

Scale-Up will Drive More Revenue 

As we’ve discussed in great detail in previous analysis on Blackwell, scale-up architectures combine many GPUs or custom chips into one system with dozens of AI accelerators and soon hundreds of AI accelerators communicating in one cluster.  

In line with Scorpio-X being a strong catalyst for the company, management double-downed on why scale-up is a massive opportunity for their products specifically, stating it will result in “hundreds of dollars per accelerator and serve as an anchor socket for integrating additional Astera Labs solutions.” They also stated “increasing accelerator cluster sizes, faster interconnect requirements and overall system complexity challenges are creating substantial dollar content opportunities.” 

Given they provided an idea as to the dollar amount per accelerator, there was a question on the call relating to this. Again, I’m pulling out this exchange because a hypergrowth stock like Astera certainly needs additional forward-looking growth opportunities to justify it being in our portfolio – of which I believe scale-up opportunities satisfies this requirement.  

Blayne Curtis   Jefferies 

I wanted to talk about scale up. You mentioned it several times. I think you even said a couple of hundred dollars per accelerator. Today, I think you're selling some retimers and then some PCIe cabling. Can you walk us through the progression of scale up in your participation and kind of can you maybe set some timing? Because I know UAL is probably later next year. So what's the scale-up opportunity for you in between now and then? 

Jitendra Mohan   Co-Founder, CEO & Executive Director 

Blayne, this is Jitendra. Scale up presents a very good opportunity for us. As you know, so far, our revenues have been driven primarily by scale-out opportunities. But for the first half, as Sanjay laid out, we have a significant contribution from scale-up.  

And the reason that's so important for us is scale up is really a very rich opportunity of high-speed interconnects that need to deliver low latency and high throughput. And that's where we play today with our Aries retimer products and starting shipments of Scorpio X family.  

And we do expect this opportunity to continue to grow as cluster sizes grow and the data rates increase. So we have significant opportunities that we are working on for PCI Express based scale-up networks based on our current Scorpio X family.  

But then it also dovetails very nicely into UAL, and we expect this to be a multibillion-dollar opportunity as we provide a full holistic portfolio of devices to address UAL infrastructure.  

And as far as the UAL itself is concerned, the spec is not final. It's been released as the 1.0 spec. And so you can imagine that the products will start to be worked on now and start to see first samples in 2026 with the revenue contribution the following year. So that is a very big opportunity that we are very well positioned to take advantage of. 

Commentary on Blackwell Delay 

I’m certainly liking Astera’s commentary a lot better this quarter than last quarter in terms of us-Nvidia bulls being closer to the bigger Blackwell moment – although I will say it’s unclear right now if Nvidia will go more directly to Blackwell Ultra and skip the more problematic Blackwell NVL system SKUs (I will cover the scenarios as to how we get to H2 pre-earnings). To provide a preview, I have zero expectations that Nvidia’s Q1 will be a good report, instead, we are looking toward the August call and the October call as the stronger moments for AI this year.  

Regardless, Astera is one to watch in terms of getting commentary on when we can expect Nvidia’s next catalyst – and we are getting a yellow light improved from a red light last quarter. I believe next quarter will be the green light: all systems go. But this requires patience as this puts us into late summer/early Fall but should be fully resolved by the Q4 time frame. 

As noted in the past, the PCIe6 retimers are especially indicative of when Nvidia’s Blackwell systems are shipping. Per our previous analysis “PCIe 6.0 was expected to ramp with support initially offered in the GB200s. Back in March, Astera demo’ed PCIe 6.0 for a wide range of Blackwell products. 

There was also indication back in the August call that Gen 6 was confirmed to be used in Blackwell’s GB200, and there were initial shipments: “We have started shipping initial quantities of preproduction orders of our PCIe Gen 6 solution, Aries 6. We ship and support our hyperscaler customers initial program developments that are based on Nvidia's Blackwell platform, including GB200.” 

The Scorpio P-Series is also integrated into Nvidia’s Blackwell MGX systems per a recent announcement. Perhaps the strongest comment on the call regarding Nvidia timing was this: “Looking ahead to Q2, we anticipate accelerated shipments of Scorpio P-Series switches and Aries 6 retimers on customized rack scale AI platform based on market-leading GPUs. Additionally, we continue to identify further opportunities for Scorpio P-Series outside of rack scale systems with multiple engagements on modular topologies that support enhanced customization.” 

In the opening remarks, it was also stated: “I'm excited to share that we will begin shipping preproduction volumes for Scorpio X-Series starting late this quarter” and later it was expanded on: 

Sanjay Gajendra   Co-Founder, President, COO & Director 

“And then on the — Yes. On the customer on the business side, just to touch on that question that you asked. The great thing about our overall revenue profile is that there are multiple ways in which we are approaching the market, the diversity across both custom ASIC-based platforms versus merchant GPU-based platforms, scale up versus scale out and the multiple product lines that we have enables us to approach the market in many different ways.  

And to that standpoint, for us, for first half, what we are expecting is that our revenue would be driven largely by the PCIe scale-up and the Ethernet scale-out opportunities along with the initial shipment of Scorpio P-Series and Aries 6 going into the customized rack.  

And second half, of course, lays nicely on top with some of the production ramps that we're expecting with the customized racks, which again, for us, is the Scorpio switches, along with the PCIe 6 retimers.  

These are now qualified. So we are starting to see that shipments start becoming significant. So that's part of the second half, and second half, of course, we have CXL initial shipments that we're expecting for production volumes and the Scorpio X switches for the scale up going into the custom ASICs.  

Those are also expected to start hitting production — initial production volumes in the second half of this year, which essentially gives us multiple ways, if you will, and sets us up nicely for future revenue growth even beyond '25.” 

Conclusion: 

The market reaction on Astera may be muted, but I’m liking this report much better than last quarter. The commentary around H2 is becoming clearer and in terms of a holding period, 6-9 months is a brief period of time to wait if the stars are aligning across the suppliers.  

I do not have high expectations (at all) for Nvidia’s Q1 but Astera is one piece of the puzzle pointing toward our AI portfolio leading again come August, and then October, and perhaps it’s a big enough splash that the streak continues into January and beyond as well. We will take this one quarter at a time, but I’m hearing what I want to hear, and that’s a sigh of relief. Keep in mind, the I/O Fund strives to be early so do not expect the market to agree with me immediately. 

Of course, the path to Q2 earnings calls in July/August and then Q3 calls in Oct/Nov will be incredibly tricky as semiconductors are in the hot seat for global tensions. I’d expect near-term volatility in AI hardware stocks that eventually resolves in our favor. While many are likely nervous about how semiconductors fare, I’m excited as we are quite clear on what to buy and I will be happy to get these stocks on discount if the market is foolish enough to give it to us. 

p.s. excuse the typos as our team is in a fast sprint covering many earnings reports this week 

Please note: The I/O Fund conducts research and draws conclusions for the Fund’s positions. We then share that information with our readers. This is not a guarantee of a stock’s performance. Please consult your personal financial advisor before buying any stock in the companies mentioned in this analysis.

Recommended Reading:

• AMD Beats in Q1 Yet Q2 Data Center to Decline due to Export Controls
• Meta Q1: Bottom Line Shines While Top Line Growth is Decelerating
• Lumentum at Inflection Point with 20% QoQ Growth in AI-Related Segment

Broadcom reported a strong Q1, with revenue topping estimates by $330 million as management noted that AI revenue rose 77% YoY in the quarter. AI revenue reached $4.1 billion this quarter, beating previous guidance of $3.8 billion. The beat was driven by strength in networking with management mentioning last quarter that custom silicon would see stronger growth in H2. It was also stated networking was 40% of AI revenue while it’s typically 30% of AI revenue (confirming the higher product mix this quarter). 

The stock was up double-digits after hours specifically when Broadcom stated next quarter AI revenue would be $4.4 billion and when management reiterated their serviceable addressable market forecast of $60 billion to $90 billion, stating “these R&D investments are very aligned with the roadmap of our three hyperscale customers as they each race towards 1 million XPU clusters by the end of 2027. And accordingly, we do reaffirm what we said last quarter, that we expect these three hyperscale customers will generate a Serviceable Addressable Market or SAM in the range of $60 billion to $90 billion in fiscal 2027.”  

Managment also mentioned there are two more hyperscalers that plan “to tape out their XPUs” this year, referencing future expansion of the quoted SAM.  

We’ve seen many AI stocks with similarly strong reports sell off this quarter, whereas the market loves Broadcom’s strong margins, its cash and the clarity management provides in terms of exact AI revenue per quarter.  

Revenue  

Broadcom’s revenue increased 24.7% YoY to $14.92 billion in its fiscal Q1, ahead of estimates for $14.59 billion due to strong AI momentum. Management guided for Q2 revenue to be flat sequentially at $14.9 billion, ahead of estimates for $14.73 billion.  

Looking ahead, growth is expected to decelerate to 19.3% in Q2, a more than 5 point deceleration from 24.7% growth in Q1. Broadcom is lapping comps that include VMWare’s acquisition, hence why there is a large QoQ deceleration in Q1.  

Most importantly, AI revenue rose 77% YoY and ~11% QoQ to $4.1 billion. For Q2, Broadcom said that it expects AI momentum to continue in Q2 “as hyperscale partners continue to invest in AI XPUs and connectivity solutions for AI data centers,” forecasting AI revenue to be $4.4 billion, up just over 7% QoQ and 44% YoY. This would put AI revenue at $8.5 billion for the first half of the fiscal year, up more than 57% from $5.3 billion in the same period last year. 

Key Segments 

Semiconductor Solutions revenue rose 11% YoY and was approximately flat QoQ at $8.22 billion, decelerating 1 point from 12% YoY growth in Q4.  

• AI revenue was $4.1 billion, ahead of management’s guidance for $3.8 billion on “stronger shipments of networking solutions to hyperscalers on AI.” Management added that they “see a steady ramp in deployment of our XPUs and networking products,” supporting its AI revenue guide of $4.4 billion in Q2. 

Non-AI semiconductor revenue was $4.1 billion, down 9% QoQ due to a seasonal decline in wireless revenue.  

• Broadband “showed a double-digit sequential recovery in Q1 and is expected to be up similarly in Q2 as service providers and telcos step up spending.” 
• Server storage “was down single-digits sequentially in Q1, but is expected to be up high-single digits sequentially in Q2.” 
• Enterprise networking is expected to remain flattish in Q1 and Q2 as customers work through inventory. 
• Wireless was flat in Q1 and expected to be flat YoY in Q2, and resales in industrial were “down double-digits in Q1 and are expected to be down in Q2.” 

Infrastructure Solutions revenue rose 47% YoY and 15% QoQ to $6.70 billion. Management said the QoQ performance was “exaggerated though by deals which slipped” from Q4 to Q1, though the strong YoY performance was driven by two factors – converting largely perpetual licenses to one full subscription, and “upselling customers to a full stack VCF, which enables the entire data center to be virtualized.” At the end of Q1, approximately 70% of Broadcom’s 10,000 largest customers have adopted VCF.  

• For Q2, Infrastructure Software revenue is expected to be $6.5 billion, up 23% YoY. 

Margins 

Margins expanded significantly across the board in Q1, with GAAP operating margin seeing the strongest expansion on a QoQ basis of 9.1 points.  

• Gross margin was 68.0% in Q1, up from 64.1% in the prior quarter as gross profit topped $10 billion for the first time. Adjusted gross margin was 79.1%, expanding from 76.9% in the prior quarter. 
• Operating margin witnessed the strongest QoQ expansion, with Broadcom reporting a 42.0% margin in Q1, up from 32.9% in Q4; this is marking a return to pre-VMWare acquisition levels. Adjusted operating margin was 65.9%, up from 62.7% in the prior quarter.  
• Net margin was 36.9% in Q1, a strong 6.1 point expansion from 30.8% in the prior quarter. Adjusted net margin was 52.4%, up from 49.6% in the prior quarter. 

Adjusted EBITDA margin also expanded nearly 3 points sequentially to 67.6%, with adjusted EBITDA surpassing $10 billion for the first time in Q1 at $10.08 billion. This also marked a strong, consistent expansion from the high-59% range at the start of FY24 when VMWare’s integration was impacting margins. Q2’s adjusted EBITDA margin was guided at 66%, a slight sequential contraction. 

EPS 

Given the strong margin expansion in Q1, Broadcom delivered a strong GAAP EPS beat of 35.7%, while its adjusted EPS beat was smaller in nature at ~6%. 

• GAAP EPS of $1.14 beat estimates for $0.84.  
• Adjusted EPS of $1.60 beat estimates for $1.51, for growth of 45.5% YoY. This is expected to be peak growth for adjusted EPS in fiscal 2025, with estimates pointing to 37% growth in Q2 below ending the fiscal year at almost 23% growth. 

Cash and Balance Sheet 

Operating and free cash flow were both strong in Q1 due to the margin strength and revenue outperformance, with both recording a margin of >40%.  

• Operating cash flow was $6.11 billion, up 9% QoQ. OCF margin was 41%, improving from 39.9% last quarter. 
• Free cash flow was $6.01 billion, up almost 10% QoQ. FCF margin was 40.3%, improving from 39.0% last quarter. 
• Inventories were $1.91 billion, increasing more than 8% QoQ. 
• Cash and equivalents totaled $9.31 billion, while debt decreased $1 billion QoQ to $66.58 billion. 

Earnings Call: 

Market Opportunity: 

The market opportunity for Broadcom is quite large – represented by SAM of $75B at the midpoint by 2028, up from a $16B run rate right now. An analyst asked a similar question in terms of chips and management reiterated their current forecast is with only three customers right now whereas two more are likely to go into volume production in the coming years. 

Timothy Arcuri: 

Thanks a lot. Hock, in the past, you have mentioned XPU units growing from about 2 million last year to about 7 million you said in the 2027, 2028 timeframe. My question is, do these four new customers, do they add to that 7 million unit number? I know in the past, you've sort of talked about an ASP of 20 grand by then. So those — the first three customers are clearly a subset of that 7 million units. So do these new four engagements drive that 7 higher, or do they just fill in to get to that 7 million? Thanks. 

Hock Tan: 

And thanks, Tim for asking that. To clarify, as I made — I thought I made it clear in my comments. No, the market we are talking about, including — when you translate the unit is only among the three customers we have today. The other four, we talk about engagement partners. We don't consider that as customers yet and, therefore, are not in a served available market. 

China Exposure: 

Management was asked how many of the hyperscalers were from China, but they declined to comment. This is a notable question given any hyperscaler from that region has a low chance of being unscathed over the next four years. There were reports earlier this week that Broadcom may be losing major customer ByteDance, for example. 

Management stated “no comment” yet it’s important to note the concern. 

Conclusion: 

Broadcom is quality and will help us hedge any anti-Nvidia narratives – which are bound to come up from time to time. As far as quality goes, you cannot find a better pair in AI (NVDA-AVGO). These are the juggernauts and we want exposure to AVGO as its empire slowly expands. Don’t forget AVGO’s AI software opportunity, which we’ve expanded on in the past. 

That’s officially a wrap for the I/O Fund earnings season!  

Regarding the AI trade falling out of favor this quarter, don’t let the market fool you for one minute – investors have never had it so good as to be able to track and verify there are hundreds of billionshundreds of billions pouring into one trend. It’ll be volatile, and it’ll be scary – and then ultimately thrilling, but this trend is bursting at the seams with demand. Supply is not merely bottlenecked; it’s dammed at the flood gates. The supply issues will work themselves out, and the I/O Fund and our Members will be well-positioned when those flood gates open.

Please note: The I/O Fund conducts research and draws conclusions for the Fund’s positions. We then share that information with our readers. This is not a guarantee of a stock’s performance. Please consult your personal financial advisor before buying any stock in the companies mentioned in this analysis.

Recommended Reading:

• Marvell Q4: Margin Expansion Yet AI Capitulation
• Nvidia Q4: Range Bound and Looking for a Catalyst
• AI Hardware Suppliers Forecast Muted H1, Strong H2 — and What it Might Mean for Nvidia
• AMD Q4 Earnings: Q1 Decline in Data Center, Mgmt Drops AI Guidance

Marvell reported in line results with Q4 revenue that grew by 27.4% YoY and 19.9% QoQ to $1.82 billion, beating estimates by 1.2%. Adjusted EPS grew by 30.4% YoY to $0.60, beating estimates by 1.6%. 

Management guided Q1 revenue of $1.875 billion, representing a YoY growth of 61.5% YoY and 3.2% QoQ at the midpoint, beating estimates modestly by 0.3% and expects adjusted EPS to grow 154.2% YoY to $0.61, beating estimates by 1.7%. 

The company’s margins have improved from negative GAAP operating margin (often double-digit negative) to 12.9% in the most recent report. The adjusted operating margin of 33.7% was flat but on higher revenue, resulting in adjusted EPS that grew 40% sequentially.  

The market is going through a phase of AI capitulation. Our site is particularly helpful here as Knox sets out price targets months in advance on his webinar for AI stocks, offering two scenarios – a pullback scenario and a breakout scenario. The AI selloff is behaving according to the scenarios he set forth months ago.  

But for now, it’s retail against the Street. The Street is confusing narratives, lowering price targets despite blowout earnings (those lowered price targets are 100% above the price in some cases), and more specifically to Marvell, stating Amazon Trainium revenue should have been higher. Management stated AI revenue was substantially above the $1.5 billion target for FY2025, and they expect to exceed the $2.5 billion target in FY2026 significantly. The overall revenue growth accelerated in the second half of the year, driven by the custom silicon program ramps along with continued strong growth in Electro-Optics. However, these numbers have not changed for a few quarters now (the above $1.5B and $2.5B) and I’m sure the Street wanted more in terms of a new number given the 5-year deal with Amazon, implying Trainium2. 

Although Marvell’s quarter was not a blowout, with some readthroughs being the Amazon deal is not as strong as expected, inventory is up 20% QoQ compared to 3% QoQ revenue guide, and management stated they are in “significant volume production ahead.” Overall, I’ve seen supply taking longer this quarter, thus within the framework of what I’ve seen, Q4 reports and Q1 guides are an air pocket of sorts across the board. Ultimately, there is $300B in capex saying the air pocket will resolve in the (patient) AI investor’s favor. 

Hopefully, the multi-dimensional approach we offer by combining fundamentals and technicals – not only for lower entries that are discussed months in advance but also going so far as to hedge up to 100% of our portfolio — has proven its value over the past few months. Marvell is the most over-sold its been in its history – that is what is meant by capitulation. A bounce in price is on the horizon. 

Revenue growth Headed to 61.5% Next Quarter

The company’s Q4 revenue grew by 27.4% YoY and 19.9% QoQ to $1.82 billion, driven by strong AI demand, beating estimates by 1.2%.  

• Management guided Q1 revenue of $1.875 billion, representing a YoY growth of 61.5% YoY and 3.2% QoQ at the midpoint, beating estimates modestly by 0.3% 
• Analysts expect revenue to grow 55.9% YoY to $1.98 billion in Q2 and 39.1% YoY to $2.11 billion in Q3. 

• FY2025 revenue grew by 4.7% YoY to $5.77 billion. 
• Analysts expect FY2026 revenue to grow 42.3% YoY to $8.21 billion and 20.5% YoY to $9.89 billion in FY2027.

Margins – GAAP Profitable

The company exceeded its margin guidance in Q4, driven by operating leverage, and achieved GAAP profitability. Management expects GAAP profitability to continue during FY2026.  

• Q4 gross margin was 50.5% compared to 46.6% in the same period last year. Gross margin was slightly above the guidance of 50%. Management guide for Q1 is 50.5%.  
• Adjusted gross margin was 60.1% compared to 63.9% in the same period last year. Management guide for Q1 is 60%. 
• Q4 operating margin was 12.9% compared to (-2.3%) in the same period last year. It was above the guidance of 10.6%. Management guide for Q1 is 12.5%.  
• Adjusted operating margin was 33.7% compared to 33.8% in the same period last year. Managment guide for Q1 is 34%. Management expects strong operating leverage to continue in FY2026 and expects to make significant progress towards the long-term non-GAAP operating margin target of 38% to 40%.  
• Q4 net income was $200.2 million or 11% of revenue compared to a net loss of ($392.7 million) or (-27.5%) of revenue in the same period last year. Adjusted net income was $531.4 million or 29.2% of revenue compared to $401.6 million or 28.2% of revenue in the same period last year.  
• The difference in the GAAP net income and non-GAAP net income was due to stock-based compensation of $147.6 million or 8.1% of revenue and amortization of acquired intangible assets charge of $169.5 million or 9.3% of revenue. 

Adj.EPS grew by 30.4% YoY and 39.5% QoQ 

Q4 GAAP EPS was $0.23 compared to (-$0.45) in the same period last year. Q4 adjusted EPS grew by 30.4% YoY and 39.5% QoQ to $0.60 driven by operating leverage, beating estimates by 1.6%. 

• Management expects Q1 GAAP EPS of $0.19 and adjusted EPS to grow 154.2% YoY to $0.61, beating estimates by 1.7%. 
• Analysts expect Q2 adjusted EPS to grow 121.6% YoY to $0.66 and 69.5% YoY to $0.73 in Q3. 
• Analysts expect FY2026 adjusted EPS to grow 77.5% YoY to $2.79 and 31.8% YoY to $3.67 in FY2027.  

Cash Flow and Balance Sheet

The company’s cash flow margin was lower due to the increase in inventories to support the strong expected growth.  

• Q4 operating cash flow margin was 28.3% compared to 38.3% in the same period last year.
• Q4 free cash flow margin was 24.4% compared to 32.6% in the same period last year. 
• Cash was $948.3 million and debt of $4.06 billion compared to $868.1 million and $4.1 billion at the end of Q3.  
• The company paid $52 million in dividends and repurchased shares worth $200 million in Q4. 

Management mentioned that they received an upgrade to investment grade credit rating from Fitch which is positive as it helps the company to refinance its high debt with better terms in the future. The company’s CFO Willem Meintjes said in the earnings call, “We were pleased to receive an upgrade to our investment grade credit rating from Fitch in January, citing their positive outlook on Marvell's strong operating momentum from robust data center demand, structurally improved leverage metrics, strong market position and strengthened cash flow profile.” 

• Inventories increased to $1.03 billion from $859 million in Q3, up 19.9% sequentially to support the strong expected growth. 

Key Segments 

Data Center 78% YOY and 24% QOQ

The company achieved record Q4 revenue of $1.37 billion, growing 78% YoY and 24% QoQ. The strong results were driven by the custom AI silicon programs ramping to high volume production. Additionally, the company also benefited from strong shipments of Electro-Optics products and Teralynx Ethernet switches with revenue from both product lines growing double-digits sequentially on a percentage basis. Management pointed toward the 800G PAM4 products as being the workhorse in its electro-optics products. Marvell is also at the leading edge of 1.6T PAM DSPs and will be first to introduce the 3nm 1.6T DSP with 200G per lane. 

AI Revenue Commentary 

Management mentioned that AI revenue was substantially above the $1.5 billion target for FY2025, and they expect to exceed the $2.5 billion target in fiscal 2026 significantly. The overall revenue growth accelerated in the second half of the year, driven by the custom silicon program ramps along with continued strong growth in Electro-Optics. 

Here is what was said in the opening remarks: 

“We ended the year with our AI revenue substantially above our $1.5 billion target from April 2024's AI Day and we also expect to very significantly exceed our $2.5 billion target in fiscal 2026.” It was later stated: “Last year, we had talked about $1.5 billion. We blew through that — this year, again, we anticipate being substantially above that. I'm not putting a number on it just yet. I think that there's a lot to go here in terms of the momentum in the business and the opportunity set in front of us. And so we're, right now, we're kind of keying off the last update we did, which was in the AI Day from last year and then we'll find the right appropriate time in the future.” 

Carrier Infrastructure 

Carrier Infrastructure Q4 revenue was down (-38%) YoY and up 25% QoQ to $105.8 million. Revenue accelerated from the (-73%) YoY decline and 12% sequential growth in Q3. 

Enterprise Networking  

Enterprise Networking Q4 revenue declined by (-35%) YoY and up 14% QoQ to $171.4 million. Revenue accelerated from a decline of (-44%) YoY and flat QoQ in Q3. The company witnessed continued recovery in both Carrier Infrastructure and Enterprise Networking with revenue collectively growing 18% sequentially. Management expects aggregate revenue from enterprise networking and carrier infrastructure to grow sequentially by approximately 10% in Q1. 

Consumer End Market 

Q4 Consumer End Market revenue declined by (-38%) YoY and (-8%) QoQ to $88.7 million. For Q1, due to seasonality in gaming demand to expected to drive a sequential decline of (35%) in the consumer end market. Over the next several years, management expects the consumer end market revenue to be approximately $300 million on an annual basis. 

Automotive/Industrial 

The automotive/industrial revenue grew by 4% YoY and 3% QoQ to $85.7 million in Q4. The management expects continued sequential growth in the automotive end market. However, this growth will be more than offset by a decline in revenue from the industrial end market, where order patterns can be lumpy in any given quarter. As a result, they expect the overall revenue from the auto and industrial end market to decline sequentially in the high-single-digits on a percentage basis for Q1.

China Revenue 

Marvell has a high China revenue concentration. It constituted 43% of revenue in Q3 and 45% for the nine months ending Q3. There was no mention of China during the recent earnings call, and we need to wait for the 10-K report to know the latest percentage of revenue from China. The high revenue concentration is a concern, notably since the recent tariffs increased from 10% to 20%. 

Earnings Call: 

XPU Design Discussions (Likely Amazon)

Regarding the custom design projects, Marvell stated the following in the opening remarks: “Let me now turn to our current custom silicon programs. Marvell has successfully ramped highly complex 100 billion plus transistor XPUs and CPUs from initial samples to high volume production on first pass silicon […] As I mentioned, our two leading AI custom programs are in high volume production, and we expect growth to continue. One of these is a custom ARM CPU, which we expect we'll see expanding adoption in our customers' data centers. The second program is for a custom AI XPU, which is also performing extremely well with significant volume production ahead. In parallel, we are fully engaged with this customer on the follow-on generation of this XPU and planning for a production ramp once it completes its sampling and qualification cycles. As a result, we expect our revenue from custom XPUs for this customer to not only grow this year, fiscal 2026, but continue to grow next year fiscal 2027 and beyond.” 

There is a second hyperscaler, perhaps Meta, with potential “to start production in calendar 2026.” 

In the call, analysts asked more about the lead customer. From the Q&A discussions below, I did not have a readthrough that Marvell lost Amazon’s Trainium2 business: 

Harlan Sur 

Hey, good afternoon guys. Thanks for taking my question. Great to see that you captured the follow-on AI XPU program after your current XPU program, which is ramping now with your major cloud and hyperscale customer. Matt, just to clarify. So is the new follow-on XPU program, a training XPU as well? Is that a calendar '26 ramp? And is that at 5-nanometer or 3-nanometer? Any more color there would be helpful. And then for Willem, your inventories were up 20% sequentially, which in a strong demand and product cycle environment like typically implies strong future growth, but you compare that to the 3% sequential total revenue guide for April. There seems to be some disconnect. So the way to interpret this is that the 20% sequential growth in inventories is more reflective of the AI strong growth profile ahead for the team? 

Matt Murphy 

Yes, I'll start off, Harlan. So, yes, so couple of things. So again given the confidentiality wrapper we've got, here we go. The first is you should assume this is a — it's a very high volume program and it's a continuation of what we're doing. It on the — and you should assume just in general, on every next generation type of device, you're going to see no transitions and technology advancements as you go forward. So you should assume that. And then also on a timing perspective, all I can say there is we'll be ready to ramp when it's time, and we'll manage that transition. We're very confident in our ability to manage that transition successfully with our customer, but that timing is something that we're just going to have to see when that's ready and we'll time it around that. And I can't really comment on what my customer plans are in this kind of detail, they just don't like it, and I don't blame them. And I'll give — I'll let Willem take the inventory question. Thanks. 

Note: the answer above is about the next program which management is reluctant to discuss due to confidentiality 

While the above quote was clear that another analyst was not expressing concerns about the loss of the lead customer (quite the opposite), it was perhaps even more clear on management’s side in this fairly long exchange: 

Ben Reitzes: 

Hey, guys. Thanks for the question and thanks for the intermission there in the middle. That was a nice break. The question that I have is with regard to sequential growth, Matt, and then a long-term question. Did you clarify that AI revenue could grow sequentially through the year? And did — when Tim asked his question earlier? And if so what's your confidence? And then if you could just kind of step back also, Matt, a lot of noise due to the speculation around that customer and content there. But when you step back, you have a goal of $15 billion for the data center long-term by calendar year '28 are you seeing the progress in your custom business still to hit that number because nobody on the street is even close to that. Thanks. 

Matt Murphy: 

Yes, Ben, thanks for the questions. So, yes, on the assumptions through the year, yes, I didn't, I think what I said was in Q1 our data center business ex the on-prem stuff was going to be up double-digits, coming off of overall data center like 25% a quarter sequentially. So I didn't comment throughout the whole year, but you should just you should just assume. It's not a bad assumption, right, or would be a fair assumption to think that it's obviously going to continue given the strength in the business and the momentum that we're seeing and just from what we're looking at from a year-over-year perspective. On the long-term, I think we're tracking extremely well to our 20% market share number. When we look back to kind of calendar '23 and then '24 and '25 and you start bouncing it up against what we said at the AI day. I think it looks very favorable. We're definitely gaining share from '23 to '24 and we'll definitely gain more share from '24 to '25. And so to get to that revenue target, you got to get there both ways. You got to grow the share, right, from kind of 10%, let's call it to 20%. And then the market's got to develop, right, obviously. You got to get to the sort of $75 billion TAM, but both of those are trending in a very positive direction. In fact, certainly in '24 and even in '25 is just kind of big round numbers, it looks like both the market and our growth, if you just bounce it up against sort of what's the compounded growth rate you needed from '23 to '28, it's actually growing above that right now. So now when we're in ramp phase, but that's going to continue. So I think we're in very good shape in terms of where we're tracking from a market share perspective. And certainly, if the market, by the way, is bigger. I mean remember, we gave that point of view in April of last year. And the world has changed then since then in terms of the absolute CapEx that's being deployed, certainly, even in recent months, all of the various programs from all the different key players and the potential of what's out there, sovereign programs, government programs, programs from new entrants. So we just see this — we just see the — quite frankly the TAM and the opportunity for Marvell, if anything, being way larger than it was when we looked at it almost a year ago. So all those make me feel very good about the market size developing and then certainly our progression on the market share. And you're right, that would be, it'd be an absolute home run to get there. And that's what me and my team are absolutely driving in this company day in and day out is drive the market share and help create the market, help make the TAM happen and execute like crazy and do it in a very focused manner, which is also why we reorganized the company with a dedicated data center engineering and business group to drive it. So I think the setup is really good. Thanks. 

Networking Opportunity Expands TAM 

We’ve covered Marvell’s networking products in great detail for six years now in previous analysis – this one is the most current. It’s a toss up as to whether Marvell’s custom silicon or networking opportunity will end up being the bigger market in a few years' time. 

What was most interesting was that management discussed networking being incremental TAM to what was discussed above on custom silicon.  

“The key thing I want to stress to you and to the investors on the call is this is incremental TAM the scale-up opportunity. We flagged it a few different times is right for sort of a TAM expansion. And it looks like that's what's going to play out at some point here. So that is all incremental. That's not, hey, if that happens and all of a sudden, Marvell's DSP revenue goes down or something like the scale up and this type of connectivity that is a revenue upside, market upside type of opportunity. So that one, I think, is — we're very excited about.” 

Conclusion: 

Despite design companies being in Nvidia’s shadow, Marvell put up a decent report. The company started the year at a run rate of $4 billion-ish and is now on a $7.5 billion run rate. They stated 75% of their revenue is from data center (this includes AI and on-prem, etc). Each investor will need to decide for themselves if the commentary or fundamentals reflects a weaker lead customer (Amazon). That’s not my readthrough from this report. 

However, Marvell has higher debt and higher China revenue than our other semis, and that’s why we aren’t buying the report. We prefer to build other positions with less risk in these two areas, while acknowledging Marvell remains a strong AI contender – for both custom silicon and networking. 

With that said, Marvell has never been more over-sold (technicals-wise) and is due for a bounce. Here is the note I got from Knox this morning, he will elaborate more in today’s webinar:  

“Marvell has been trading for over 25 years. In this period, we have only seen the current level of oversold conditions 3 other times – 7/9/02, 10/9/08, 8/2/10. The first 2 were toward the tail end of bear markets: the period in 2022 period was followed by a +50% rally, before turning lower, while the period in 2008 was followed by a +20% rally in a short amount of time before eventually finding a bottom. The third period was not during a bear market and led to a +50% rally over the span of 6 months, before turning lower.”

Royston Roche, Equity Analyst at the I/O Fund, contributed to this article.

Please note: The I/O Fund conducts research and draws conclusions for the Fund’s positions. We then share that information with our readers. This is not a guarantee of a stock’s performance. Please consult your personal financial advisor before buying any stock in the companies mentioned in this analysis.

Recommended Reading:

• Credo Fiscal Q3: Hypergrowth, Strong Margins, and AI Accelerator Agnostic
• Dell Q4: Projects $15 billion in AI shipments this year
• Nvidia Q4: Range Bound and Looking for a Catalyst
• Nvidia Q4 Financials: Beat Likely for Q4; Questions Persist for Q1
• AI Hardware Suppliers Forecast Muted H1, Strong H2 — and What it Might Mean for Nvidia

Compared to any other stock on Wall Street, Nvidia reported an exceptional quarter. Yet, Nvidia’s stock is competing with itself at this point, and when compared to previous Nvidia earnings reports, Q4 and Q1 represent a pause in the fireworks. 

Nvidia reported $11 billion in Blackwell revenue, however, Huang finally admitted the NVL systems are in production (i.e., not shipping in volume). Rather, other SKUs are making up Blackwell revenue for now. According to a discussion with an analyst, Nvidia foresees NVL systems and the next generation Blackwell Ultra ramping “simultaneously” — which increases the pressure to deliver this fiscal year given there was a “couple months” delay with the NVL systems.  

Fortunately, for the I/O Fund, we use technicals to reduce risk. When there is a change in story, even if it’s transitory by a quarter or two, we rely on technicals to protect our position while maximizing the upside. As you know, we are exposed to Nvidia — yet heavily exposed when you consider its ecosystem. 

We also hold our management teams accountable, and not even Jensen Huang should get a free pass. Investors should have been provided more transparency on when the premier SKU will be shipping in volume, since it was originally slated for Q1. Below, I outline the reasons that H2 is likely to be the catalyst for the next leg higher, whereas Q1 may not have been enough to cause the stock to break out. With that said, semiconductors see intra-quarter news more frequently than software peers, and thus, this could change anytime.  

Nvidia’s valuation remains very attractive. I stated on Fox yesterday that Nvidia and its suppliers are the best trade of the year – the question that remains is timing. If the NVL systems were shipping in volume, the supply chain would be on fire right now – is what I mean by timing. I also pointed out that investors do better when proxies participate – whether that’s suppliers providing a clear, green light or an ETF like SMH, which is 14% off ATHs. 

I look at this and more below! 

Revenue Beat/Raise (Again) 

Nvidia beat consensus estimates by just $1.15 billion this quarter, its smallest beat of the last seven quarters, as it reported revenue of $39.33 billion, up 77.9% YoY and 12.1% QoQ. Management reported that Blackwell was witnessing the fastest product ramp in company history, delivering $11 billion in Blackwell revenue in Q4. 

For FY25, Nvidia reported revenue growth of 114% YoY to $130.5 billion, marking a consecutive year of triple digit growth after revenue rose 126% YoY in FY24. 

For Q1, Nvidia guided for revenue of $43 billion, +/- 2%, representing growth of 65.1% YoY and 9.3% QoQ at midpoint, slightly ahead of estimates for 61.2% YoY growth to $42 billion. As we had noted in our pre-earnings analysis, some analysts were looking for as much as $47 billion in revenue in Q1. On a sequential basis, Q1 is also estimated to see QoQ growth dip to the single-digit range at the midpoint of guidance, slowing nearly 3 points from Q4.  

Margins to Improve H2 

Margins are expected to contract sequentially in Q1 as Blackwell ramps, with management having stated in Q3 that gross margins were expected to dip to the low-70% level as Blackwell begins to ramp before returning to the mid-70% range. 

Gross margins in Q4 were in-line with prior guidance, though operating margins came in ahead of guidance as Nvidia continued to benefit from strong operating leverage. 

• Q4 GAAP gross margin was 73%, contracting from 74.6% in Q3. For Q1, GAAP gross margin is expected to contract further to 70.6%.  
• Adjusted gross margin was 73.5% in Q4, down from 75% in Q3, with management guiding for another contraction to 71% in Q1. 
• Q4 GAAP operating margin was 61.1%, contracting from 62.3% in Q3. For Q1, GAAP operating margin is expected to drop below 60%, with management’s expense guidance implying a 58.5% margin.  
• Adjusted operating margin was 64.9% in Q4, down from 66.3% in Q3, with Q1 forecast to contract further to 62.6%. 
• Q4 GAAP net margin expanded slightly sequentially to 56.2%, though Q1’s net margin is implied to be 50.1% due to the QoQ gross and operating margin contractions. 

For FY25, margins expanded on a YoY basis despite contracting in the back half of the year. FY25’s GAAP gross margin was 75%, up from 72.7% in FY24. GAAP operating margin expanded 8.3 points YoY to 62.4%, as GAAP operating income increased 147% YoY to $81.5 billion. GAAP net margin increased 7 points YoY to 55.9% with a similar 134% YoY rise in net income to $86.8 billion. 

EPS 

Q4 GAAP EPS increased 82% YoY to $0.89, beating estimates for $0.80. Adjusted EPS of $0.89 beat estimates for $0.85. Growth is expected to moderate to the ~50% range in the coming quarters, likely pressured by falling margins due to Blackwell’s ramp. 

• Q1 adjusted EPS is expected to rise 49.4% YoY to $0.91. 
• Q2 adjusted EPS is expected to rise 50.2% YoY to $1.02. 

Cash Flows and Balance Sheet 

Operating and free cash flows both decreased slightly sequentially, with management explaining that this was due to a “a higher accounts receivable balance due to shipment linearity and increased inventory to support our Blackwell product ramp.” Both inventories and accounts receivables showed strong QoQ growth. 

• Operating cash flow in Q4 was $16.63 billion, down from $17.63 billion in Q3. OCF margin was 42.2%, more than 8 points lower than Q3’s 50.3% margin. FY25’s operating cash flow was $64.09 billion, rising 128% YoY and representing a margin of 49.1%, up 3 points YoY. 
• Free cash flow was $15.52 billion in Q4, down from $16.79 billion in Q3. FCF margin was 39.5% in Q4, down from 47.9% in Q3. For FY25, free cash flow rose 125% YoY to $60.72 billion, for a margin of 46.5%, up 2.3 points YoY. 
• Cash and marketable securities totaled $43.21 billion, while debt totaled $8.46 billion. 

Inventories, accounts receivable and purchase commitments all rose quite substantially on a sequential basis as Nvidia prepares to ramp Blackwell throughout the year. 

• Inventories rose nearly 32% QoQ to $10.08 billion, representing a sequential rise of $2.43 billion.  
• Accounts receivable rose $5.4 billion QoQ to $23.1 billion. 
• Purchase commitments and obligations for inventory and manufacturing capacity rose $1.9 billion QoQ to $30.8 billion. 

Key Segments 

Data Center 

Data center revenue rose 93% YoY and 16% QoQ to $35.58 billion in Q4, driven primarily by GPUs as networking revenue was soft. Compute revenue rose 116% YoY and 18% QoQ to $32.56 billion in Q4, though Networking revenue declined (9%) YoY and (3%) QoQ to $3.02 billion. 

Management noted that they “delivered $11.0 billion of Blackwell architecture revenue in the fourth quarter of fiscal 2025, the fastest product ramp in our company’s history,” driven by major CSPs which accounted for 50% of data center revenue. Q4 growth was also aided by sequential growth for the H200. 

For Networking, Nvidia said that it is “transitioning from small NVLink 8 with Infiniband to large NVLink 72 with Spectrum X,” with growth in Ethernet and NVLink products related to the Grace Blackwell ramp. 

For FY25, data center revenue rose 142% YoY to $115.2 billion, driven by a 162% YoY increase in Compute revenue to $102.2 billion, with Networking revenue rose just 51% YoY to $12.99 billion. 

Other Segments 

• Gaming revenue declined (11%) YoY and (22%) QoQ to $2.54 billion, due to “limited supply for both Blackwell and Ada GPUs.” For FY25, gaming revenue rose 9% YoY to $11.35 billion. 
• Automotive revenue rose 103% YoY and 27% QoQ to $570 million, driven by self-driving platform sales. For FY25, automotive revenue rose 55% YoY to $1.69 billion. 
• Pro Viz revenue rose 10% YoY and 5% QoQ to $511 million, driven by a “continued ramp of Ada RTX GPU workstations for use cases such as generative AI-powered design, simulation, and engineering.” For FY25, Pro Viz revenue rose 21% YoY to $1.88 billion. 
• OEM and other revenue rose 40% YoY and 30% QoQ to $126 million. For FY25, OEM and other revenue rose 27% to $389 million.

Earnings Call:

NVL 72 Systems and Blackwell Ultra 

Of the $200 billion in revenue expected this year, roughly $100 billion is expected to come from NVL systems which comes out to 30,000 to 35,000 racks at $3 million per rack. Given there is evidence of a delay, there was bound to be a question about this on the call. Overall, the answer helps to alleviate if the systems are ready yet (they have “ramped production” but not stated they were shipping in volume).  

The remaining issue is if both Blackwell’s NVL systems and Blackwell Ultra (the next generation of GPUs) can ramp "simultaneously” (which was not the original road map). Perhaps these two can successfully ramp simultaneously, but it’s also important to acknowledge this was not the original plan. Personally, I think the hiccup discussed below should be explained more as to when the systems will ship in volume, since it was originally expected to be Q1. Judging by analyst estimates, the October quarter will see higher QoQ growth in terms of revenue at $5 billion compared to analyst estimates of $4 billion for the previous quarter.  

Harlan Sur  

Good afternoon. Thanks for taking my question. Your next-generation Blackwell Ultra is set to launch in the second half of this year, in line with the team's annual product cadence. Jensen, can you help us understand the demand dynamics for Ultra given that you'll still be ramping the current generation Blackwell solutions? How do your customers and the supply chain also manage the simultaneous ramps of these two products? And — is the team still on track to execute Blackwell Ultra in the second half of this year? 

Jensen Huang  

Yes. Blackwell Ultra is second half. As you know, the first Blackwell was we had a hiccup that probably cost us a couple of months. We're fully recovered, of course. The team did an amazing job recovering and all of our supply chain partners and just so many people helped us recover at the speed of light. And so now we've successfully ramped production of Blackwell. 

But that doesn't stop the next train. The next train is on an annual rhythm and Blackwell Ultra with new networking, new memories and of course, new processors, and all of that is coming online. We've have been working with all of our partners and customers, laying this out. They have all of the necessary information, and we'll work with everybody to do the proper transition. This time between Blackwell and Blackwell Ultra, the system architecture is exactly the same. It's a lot harder going from Hopper to Blackwell because we went from an NVLink 8 system to a NVLink 72-based system. So the chassis, the architecture of the system, the hardware, the power delivery, all of that had to change. This was quite a challenging transition. 

But the next transition will slot right in Blackwell Ultra will slot right in. We've also already revealed and been working very closely with all of our partners on the click after that. And the click after that is called Vera Rubin and all of our partners are getting up to speed on the transition of that and so preparing for that transition. And again, we're going to provide a big, huge step-up. And so come to GTC, and I'll talk to you about Blackwell Ultra, Vera Rubin and then show you what we place after that. Really exciting new products, so to come to GTC piece. 

–End Quote 

The $11 billion is likely coming from other SKUs as we pointed out in our pre-earnings analysis “There is certainly a scenario where Nvidia’s GPUs are in such high demand that other SKUs can help make up for a delay on the much-larger GB200 NVL systems.” The additional evidence of this is the QoQ decline in networking as these systems would certainly drive QoQ growth in networking, making the clear readthrough that other SKUs are driving the $11 billion. 

When asked if there were bottle necks to consider with NVL 72 systems specifically, the CEO avoided discussing NVL72 systems and redirected to a more general discussion on the Grace Blackwell architecture. He also pointed toward single use cases that have “come online” rather than a “shipping in volume” discussion: “You've probably seen on the web, a fair number of celebrations about Grace Blackwell systems coming online and we have them, of course. We have a fairly large installation of Grace Blackwell goes for our own engineering and our own design teams and software teams. CoreWeave has now been quite public about the successful bring up of theirs. Microsoft has, of course, OpenAI has, and you're starting to see many come online. And so I think the answer to your question is nothing is easy about what we're doing, but we're doing great, and all of our partners are doing great.” 

TAKEAWAY: The NVL 72 systems are probably not shipping in volume right now, but should be soon (if they’re in production). This will run close to Blackwell Ultra’s launch. Demand will not be an issue rather it’s unusual to see two generations ship this close to one another, and it will require a smooth supply chain  

Custom Silicon Not a Threat for 4 Reasons 

Concerns around timing of shipping for Blackwell SKUs will be transitory yet concerns with custom silicon are here to stay. Since the very first day of covering the AI story in 2018, I have been fielding concerns around custom silicon as Google’s TPUs were all the rage in 2018. It was actually expected at the time that Google’s TPUs would transition to merchant sales and directly compete with Nvidia. Nearly seven years later, that has not materialized. 

Below, is how Jensen Huang describes the challenges around custom silicon. He points toward custom silicon being application specific whereas GPUs are more flexible (this part is key), the software layer, as well as the fact that a lot of custom silicon does not make it to full production. Because investors will be fielding this concern into the foreseeable future, I’ve noted the response and four reasons below: 

1. General versus application specific: “NVIDIA's architecture is general whether you're — you've optimized for unaggressive models or diffusion-based models or vision-based models or multimodal models or text models. We're great in all of it […] And so by definition, we're much, much more general than narrow” 
2. Nvidia is Everywhere: “So we're general, we're end-to-end, and we're everywhere. And because we're not in just one cloud, we're in every cloud, we could be on-prem. We could be in a robot. Our architecture is much more accessible and a great target initial target for anybody who's starting up a new company. And so we're everywhere.” 
3. Performance: “And if our performance per watt is anywhere from 2x to 4x to 8x, which is not unusual, it translates directly to revenues. And so if you have a 100-megawatt data center, if the performance or the throughput in that 100-megawatt or the gigawatt data center is 4 times or 8 times higher, your revenues for that gigawatt data center is 8 times higher.” 
4. What Nvidia Does is Hard – the Hardware and the Software is hard to replicate: “And the ecosystem that sits on top of our architecture is 10x more complex today than it was 2 years ago. And that's fairly obvious because the amount of software that the world is building on top of architecture is growing exponentially and AI is advancing very quickly. So bringing that whole ecosystem on top of multiple chips is hard.”

China Increases in Geo Mix for Q1 

An analyst pointed out that China will be increasing in geographic mix for Q1.  

Here is the concern from the analyst: “And I think there is a concern about whether U.S. can pick up the slack if there's regulations towards other geographies. And I was just wondering, as we go throughout the year, if this kind of surge in the U.S. continues and it's going to be — whether that's okay. And if that underlies your growth rate, how can you keep growing so fast with this mix shift towards the U.S.? Your guidance looks like China is probably up sequentially. So just wondering if you could go through that dynamic and maybe collect can weigh in.” 

This may be a moot issue, as management stated: “China is approximately the same percentage as Q4 and as previous quarters. It's about half of what it was before the export control. But it's approximately the same in percentage” but noting the concern here that this analyst thinks USA may not be able to fully make up for a China loss if the trade war heats up. I think if the NVL systems are shipping in volume, it will not matter as China is primarily helping to make up for the lag in these systems right now for the next 1-2 quarters.  

Conclusion: 

You might be asking yourself — why is the I/O Fund so focused on something the rest of the market does not seem to care about? There are two reasons … $100 billion pointed at one SKU is unheard of. Consider the iPhone took a decade to get to that revenue. We will not lazily assume it’s coming until I get “all systems are a go” signs across the board. You can’t put $100 billion into production and ship in volume without a splash in the large supply chain that builds these AI systems. There was no splash (yet). 

Secondly, we need Nvidia to break out of the range bound price it’s been in for 9 months (between $110 and $150). While many might be saying “whew, Nvidia beat/raised,” my stance is “where’s the catalyst that’s going to take this thing higher?” I had an answer for you a few months back – it was the NVL systems, which I stated would cause “fireworks.” To be range bound trading between $110 and $150 since May of 2024 is not exactly fireworks, and thus we need to look closely at whether Nvidia’s next move is to break out or break down. As stated, by being range bound, the valuation has become more attractive, and we are watching this piece closely. This is my number one reason for seeing a breakout above $150 right now (valuation). 

While many investors will rightly hold Nvidia through ups/downs (you’ll see IOF hold for years to come), our firm is competing with the world’s best tech portfolios – which means complacency is not something you’ll see here. Our Members greatly benefit from our need to compete as we question everything – especially if we are overweight any specific outcome.  

Please reference the most up to date trading plan here.

Please note: The I/O Fund conducts research and draws conclusions for the company’s portfolio. We then share that information with our readers and offer real-time trade notifications. This is not a guarantee of a stock’s performance and it is not financial advice. Please consult your personal financial advisor before buying any stock in the companies mentioned in this analysis. Beth Kindig and the I/O Fund own shares in NVDA at the time of writing and may own stocks pictured in the charts.

Recommended Reading:

• Nvidia Q4 Financials: Beat Likely for Q4; Questions Persist for Q1
• Coinbase Posts Significant Growth Across the Board in Blowout Q4
• AI Hardware Suppliers Forecast Muted H1, Strong H2 — and What it Might Mean for Nvidia
• AMD Q4 Earnings: Q1 Decline in Data Center, Mgmt Drops AI Guidance