Marvell Technology - Earnings Call - Q2 2026

Executive Summary

• Record revenue of $2.006B (+58% YoY, +6% QoQ) and non-GAAP EPS of $0.67; data center revenue hit $1.491B (+69% YoY) with strong AI demand in custom silicon and electro-optics.
• Q3 FY26 guidance: revenue $2.060B ±5%, non-GAAP EPS $0.74 ±$0.05; GAAP EPS ~$2.03 due to ~$1.8B other income from the automotive Ethernet divestiture gain; non-GAAP opex ~$$485M and non-GAAP GM 59.5–60.0%.
• Consensus vs actual: Q2 revenue slightly below ($2.006B vs $2.010B*) and EPS in line ($0.67 vs $0.673*); Q3 Street implies $2.064B* revenue and $0.737* EPS near the company midpoint, suggesting limited estimate risk into Q3* [Values retrieved from S&P Global].
• Strategic catalysts: completed $2.5B sale of automotive Ethernet (reduces non–data center mix), announced new $5B buyback and $1B ASR, and highlighted >50 new custom AI opportunities with multi-billion lifetime potential.

What Went Well and What Went Wrong

What Went Well

• Record Q2 revenue ($2.006B) and strong operating leverage: non-GAAP operating margin 34.8% and non-GAAP EPS $0.67, up 123% YoY.
• AI-led momentum: “Marvell’s growth is being fueled by strong AI demand for our custom silicon and electro-optics products… custom AI design activity is at an all-time high, … over 50 new opportunities across more than 10 customers.” — Matt Murphy, CEO.
• End-market recovery: enterprise networking ($193.6M) and carrier infrastructure ($130.1M) up 43% YoY combined; management guides ~30% sequential growth in these two end markets for Q3.

What Went Wrong

• Custom silicon “lumpiness”: data center revenue guided flat QoQ in Q3 as lower custom revenue offsets double-digit growth in electro-optics; custom expected stronger in Q4.
• Slight top-line miss vs consensus: Q2 revenue $2.006B vs $2.010B*, despite segment strength; EPS was in line* [Values retrieved from S&P Global].
• Consumer seasonality: Q2 consumer up sharply QoQ ($115.9M), but guided down low single digits sequentially for Q3.

Transcript

Speaker 6

Good afternoon and welcome to Marvell Technology Inc.'s second quarter of fiscal year 2026 earnings conference call. At this time, all participants are in a listen-only mode. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. A question and answer session will follow the formal presentation. Please note this event is being recorded. I will now turn the conference over to Mr. Ashish Saran, Senior Vice President of Investor Relations. Thank you. You may begin.

Speaker 5

Thank you and good afternoon, everyone. Welcome to Marvell's second quarter fiscal year 2026 earnings call. Joining me today are Matt Murphy, Marvell's Chairman and CEO, Willem Meintjes, CFO, Chris Koopmans, President and COO, and Sandeep Bharathi, President, Data Center Group. Let me remind everyone that certain comments made today include forward-looking statements, which are subject to significant risk and uncertainties that could cause our actual results to differ materially from management's current expectations. Please review the cautionary statements and risk factors contained in our earnings press release, which we filed with the SEC today and posted on our website, as well as our most recent 10-K and 10-Q filing. We do not intend to update our forward-looking statements. During our call today, we will refer to certain non-GAAP financial measures. A reconciliation between our GAAP and non-GAAP financial measures is available in our earnings press release.

Let me now turn the call over to Matt for his comments on the quarter. Matt?

Speaker 4

Thanks, Ashish, and good afternoon, everyone. For the second quarter of fiscal 2026, Marvell delivered record revenue of $2.006 billion, reflecting a 6% sequential increase and strong 58% year-over-year growth. Our data center end market continued its strong momentum, growing 69% year-over-year, fueled by robust AI demand. We also saw a solid recovery in our enterprise networking and carrier infrastructure end markets, which collectively grew 43% year-over-year. We expanded our non-GAAP operating margin by 870 basis points year-over-year to 34.8% and delivered record non-GAAP earnings per share of $0.67, up 123% year-over-year. We also delivered $462 million in operating cash flow, up significantly from the $333 million in the first quarter. Robust cash flow generation is enabling us to continue to return significant capital to our stockholders. We have repurchased $540 million of stock through the first half of the fiscal year, with approximately $2 billion remaining in our authorization.

At the beginning of the third quarter, we completed the divestiture of our automotive Ethernet business in a $2.5 billion all-cash transaction at a very compelling valuation. I'm pleased with our team's execution in closing this transaction ahead of schedule. The proceeds from this transaction provide us flexibility to continue to drive our ongoing stock repurchase program and deploy capital to further bolster our technology platform. The auto divestiture aligns with our strategy to focus the company on what we expect to continue to be a massive AI opportunity in front of us, by purposefully redirecting our investments towards data center relative to our other end markets. That strategy has been very successful, with data center alone now driving three-quarters of our total revenue. The auto divestiture further reduces the relative proportion of revenue from our non-data center end markets.

As a result, starting in the third quarter, we will consolidate our non-data center end markets into a new single communications and other end market. Willem will cover this in more detail in his prepared remarks. During the quarter, we hosted a highly successful custom silicon investor event in June, where we outlined an expanded $94 billion data center TAM for calendar 2028, a 26% increase from our prior view. We also unveiled a new fast-growing custom silicon product category of XPU attach, updated our custom design win board to 18 multi-generational XPU and XPU attach sockets, and highlighted over 50 new pipeline opportunities with an estimated $75 billion of lifetime revenue potential.

Based on the sockets we have already won, we concluded with our plan to grow our data center market share from 13% of a $33 billion TAM in calendar 2024 to 20% of a $94 billion TAM in calendar 2028. Let me now take a moment to share how we are enhancing our leadership structure to further capitalize on significant opportunities in the large and fast-moving AI and cloud markets. We have promoted two exceptional leaders, Chris Koopmans to President and COO, and Sandeep Bharathi to President, Data Center Group, and consolidated substantial parts of the organization under their leadership. Their proven track record of innovation, execution, and results positions them to accelerate Marvell's growth. Chris joined Marvell nine years ago, and he has been a key enabler of our transformation to a leader in the data center market.

He has successfully led sales, our networking business, and most recently, global business operations and marketing. I'm pleased to see Chris take on sales again, along with managing our non-data center businesses and corporate development. His expanded role now encompasses end-to-end revenue execution, from go-to-market strategy and customer engagement to operations and long-term strategic planning. Sandeep joined us in early 2019 to lead our central engineering team and accelerate development of our technology platform. He was instrumental in driving Marvell's leap to five-nanometer process technology, leadership, and integrating Avera, the custom business we acquired that has since become our largest growth opportunity. Under Sandeep's guidance, our engineering teams have successfully delivered multiple highly complex custom XPU and XPU attach projects into high-volume production with first-time silicon success.

With this promotion, Sandeep now has overall responsibility for our data center business, in addition to his continued leadership of data center engineering and central engineering. This unifies full ownership of our largest and most important business under a single leader, spanning the entire product lifecycle, from technology platform, IP, and roadmap to customer engagement, product definition, and chip development. Let me now discuss our results and expectations for each of our end markets. In our data center end market, we achieved record revenue of $1.49 billion in the second quarter, growing 3% sequentially and 69% year-over-year. The strong performance was led by our custom XPU and XPU attach products, as well as our electro-optics interconnect portfolio. AI and cloud continue to be the primary drivers, accounting for over 90% of our data center revenue, with the remainder coming from the on-premise portion of our data center end market.

We expect on-premise revenue to remain stable at an annualized revenue run rate of approximately $500 million. Looking ahead to the third quarter, we expect revenue from our electro-optics products to grow double digits sequentially on a percentage basis, as we continue to benefit from our market-leading position in AI interconnect. Our custom business is also performing well and remains on track to grow in the second half of the fiscal year compared to the first. However, we expect growth to be non-linear in the custom business, with the fourth quarter substantially stronger than the third. As a result, we expect overall data center revenue in the third quarter to be flat sequentially, with electro-optics strength offset by lower custom revenue. On a year-over-year basis, we expect data center revenue to continue to deliver strong growth in the mid-30% range in the third quarter.

We are very pleased with the progress of our 18 XPU and XPU attach sockets, several of which are already in volume production. We are making excellent progress on development of the remaining sockets, with all of them expected to ramp over the next couple of years. The success of our initial wave of custom programs, combined with rapidly growing industry interest in custom silicon, has expanded our design win pipeline to over 50 new opportunities. As next-generation XPU and XPU attach products increase in complexity, we believe it will become even more critical for customers to partner with a full-service custom silicon provider like Marvell. Since our event in June, our team has won additional sockets, adding to the 18 sockets we had already discussed.

Collectively, these new wins represent multi-billion dollar lifetime revenue potential, and we remain deeply engaged in advanced architectural discussions of many of the opportunities still in the funnel. As next-generation AI data centers evolve, scale-up networks are becoming essential to tightly interconnect tens, hundreds, and eventually thousands of XPUs within and across racks. These require ultra-low latency and multi-terabit bandwidth to meet the demands of training and inference workloads. Marvell's multi-generational custom engagements with the hyperscalers give us unique visibility into upcoming XPU architectures, enabling us to design scale-up switches, supporting both open standard Ethernet and UALink fabrics purpose-built for AI. Combined with Marvell's leadership in Ethernet switching and proprietary high-speed, low-power, low-latency SerDes IP, we are strongly positioned to lead this market inflection. We are investing in developing scale-up switches tailored to each customer's protocol of choice and look forward to updating you on our progress.

Beyond switching, our interconnect portfolio extends the opportunity. While copper dominates the scale-up links today, as networks expand and bandwidth grows, optics adoption will follow. This represents a large opportunity for Marvell's full suite of interconnect products and technologies, including DSPs for active electrical cables, or AECs, and active optical cables, or AOCs, retimers for PCIe, Ethernet, and UALink, and silicon photonics for near-packaged and co-packaged XPU optics. Our AEC and AOC DSPs are already in the market, and our retimers are in customer evaluation. We have demonstrated our 6.4T silicon photonics light engines and expect our technology to be a key enabler of NPO and CPO implementations once the industry is ready to adopt. Collectively, between switching and interconnect, we see a massive scale-up opportunity for Marvell over time.

Turning to our electro-optics interconnect portfolio, our PAM and DCI franchises continue to lead the industry in enabling the build-out of AI and cloud infrastructure. Demand for 800G PAM DSPs remains strong, with a long lifecycle still ahead. We have also begun volume shipments of our next-generation 200G per lane 1.6T PAM4 DSPs to multiple customers, and we expect adoption to accelerate in the next several quarters. Looking further ahead, we are driving the next optical technology transition. At this year's Optical Fiber Conference, we demonstrated our 400G per lane PAM technology, a critical innovation and step towards enabling 3.2T optical interconnects. This milestone underscores Marvell's leadership in pushing the boundaries of next-generation optical connectivity. Our data center interconnect business also continues to expand, with adoption proliferating across large hyperscalers.

Collectively, the custom and electro-optics product line that I just described now accounts for over three-quarters of our total data center revenue. The balance comes primarily from our data center storage, switching, and security portfolios, each of which is showing solid progress. Our data center storage revenue has improved significantly, reflecting a return to health in both the SSD and HDD markets. In AI and cloud switching, our 12.8T products continue to ship in high volume, while our next-generation 51.2T switches are now ramping. Adoption is accelerating, and we expect these products to be a major driver of switch revenue growth in the next fiscal year. In the security market, we recently expanded our collaboration with Microsoft Azure on our hardware security modules, building on a longstanding and trusted relationship with this customer. Now, let me turn to our enterprise networking and carrier infrastructure end markets.

In the second quarter, enterprise networking revenue was $194 million, and carrier infrastructure revenue totaled $130 million. Combined revenue for these end markets grew 2% sequentially and 43% year-over-year. Looking ahead to the third quarter of fiscal 2026, we expect aggregate revenue from enterprise networking and carrier infrastructure to grow sequentially by approximately 30%. This growth is driven by normalizing customer inventory levels and strong adoption of our refreshed product portfolio. As a reminder, we recently migrated these products to advanced process nodes, an investment we expect to yield benefits for many years to come, given the long product life cycles in these markets. In the consumer end market, second quarter revenue was $116 million, up 84% sequentially and 30% year-over-year. Gaming demand and its seasonality continue to be the primary driver of this business.

For the third quarter, we expect consumer revenue to be down sequentially in the low single digits on a percentage basis. Turning to our automotive and industrial end market, second quarter revenue was $76 million, flat both sequentially and year-over-year. For the third quarter of fiscal 2026, reflecting the divestiture of our automotive Ethernet business, we anticipate overall revenue of approximately $35 million from this end market. This includes a mid-single-digit million-dollar contribution from our automotive Ethernet business prior to the transaction closing. In summary, in the second quarter of fiscal 2026, we continue to deliver operating margin expansion, earnings per share growth, and new revenue records. Looking ahead, we expect momentum to continue in the third quarter, with total company revenue forecast at $2.06 billion at the midpoint, representing 36% year-over-year growth.

Excluding revenue from automotive Ethernet, the implied revenue growth for Marvell's go-forward business would be closer to 40% year-over-year at the midpoint of our forecast for the third quarter. We also expect to continue driving operating leverage, with non-GAAP earnings per share forecast to grow 10% sequentially at the midpoint of guidance, more than double our projected revenue growth rate. Our second quarter results and third quarter guidance reflect robust contributions from our AI-driven data center end market, complemented by strong recovery in our enterprise networking and carrier infrastructure end markets. At the same time, our custom AI design engagements are at an all-time high, with customers showing very strong interest in our broad range of differentiated technologies.

As I discussed earlier, our team continues to accumulate new wins, and we are pleased with the strong progress across both current and next-generation custom programs, which reinforces our confidence that we can achieve our long-term custom revenue goals. In addition, our market-leading electro-optics franchises continue to see strong demand for both current and next-generation solutions, and our scale-out switching platforms are positioned for strong growth. Over time, the emergence of scale-up networking for AI infrastructure should provide another strong tailwind for Marvell. With that, I'll turn the call over to Willem for more detail on our recent results and outlook.

Speaker 5

Thank you, Matt, and good afternoon, everyone. Let me start with a summary of financial results for the second quarter of fiscal 2026. Revenue in the second quarter was $2.006 billion, growing 58% year-over-year and 6% sequentially. Data center was our largest end market, contributing 74% of total revenue. GAAP gross margin was 50.4%. Non-GAAP gross margin was 59.4%. Moving on to operating expenses. GAAP operating expenses were $721 million, including stock-based compensation, amortization of acquired intangible assets, restructuring costs, and acquisition-related costs. Non-GAAP operating expenses came in at $493 million, slightly below our guidance. Our GAAP operating margin was 14.5%, while non-GAAP operating margin was 34.8%. For the second quarter, GAAP earnings per diluted share was $0.22. Non-GAAP earnings per diluted share was $0.67, reflecting year-over-year growth of 123%, which is more than double the pace of revenue growth, demonstrating the significant operating leverage in our model.

Now, turning to our cash flow and balance sheet. Cash flow from operations in the second quarter was approximately $462 million, growing by $129 million from the prior quarter. Our inventory at the end of the second quarter was $1.05 billion, a decrease of $20 million from the prior quarter. We returned $52 million to shareholders through cash dividends. In addition, we repurchased $200 million of our stock in the second quarter. In June, we completed the public offering of notes totaling $1 billion and used most of the proceeds to repay existing debt. As of the end of the second quarter, our total debt was $4.5 billion, with our gross debt-to-EBITDA ratio of 1.63 times and a net debt-to-EBITDA ratio of 1.19 times. Our debt ratios have continued to improve as we have driven an increase in our EBITDA.

As of the end of the second fiscal quarter, our cash and cash equivalents were $1.2 billion. We recently completed the divestiture of our automotive Ethernet business in a $2.5 billion all-cash transaction. Proceeds from this sale give us flexibility to continue to drive our ongoing stock repurchase program, as well as invest further in our technology capabilities. Turning to our guidance for the third quarter of fiscal 2026, we are forecasting revenue to be in the range of $2.06 billion, plus or minus 5%. As a reminder, this forecast includes revenue in the mid-single-digit millions of dollars from the automotive Ethernet business before the completion of the divestiture. If the divestiture had not taken place and we had operated the automotive Ethernet business for the full quarter, we would have added approximately $60 million to our guidance. We expect our GAAP gross margin to be between 51.5% and 52%.

We expect our non-GAAP gross margin to be between 59.5% and 60%. Looking forward, we anticipate that the overall level of revenue and product mix will remain key determinants of our gross margin in any given quarter. For the third quarter, we project our GAAP operating expenses to be approximately $719 million. We anticipate our non-GAAP operating expenses to be approximately $485 million. For the third quarter, we expect GAAP other income and expense, including interest on our debt and the gain from the divestiture of our automotive Ethernet business, to be an income of approximately $1.8 billion. Non-GAAP other income and expense, including interest on our debt, is expected to be an expense of approximately $33 million. We expect a non-GAAP tax rate of 10% for the third quarter.

We do not expect the recently passed Tax Bill Act to have a material effect on our current year's non-GAAP tax rate. We expect our basic weighted average shares outstanding to be 863 million and our diluted weighted average shares outstanding to be 870 million. We anticipate GAAP earnings per diluted share in the range of $1.98 to $2.08. We expect non-GAAP earnings per diluted share in the range of $0.69 to $0.79. As Matt mentioned, we plan on updating our revenue by end market classification beginning next quarter. Over the past several years, our strategic focus on expanding revenue in the data center market has delivered strong results, driving significant growth in this end market.

On a relative basis, data center revenue has more than doubled as a percentage of total company revenue, from 34% in the second quarter of fiscal 2024 to 74% in the second quarter of fiscal 2026. As a result, in our most recent quarter, our four other end markets collectively represented only 26% of total company revenue. The divestiture of our automotive Ethernet business further reduces the relative contribution of our non-data center end markets. Looking ahead, we expect data center to continue outpacing all other end markets in both size and growth rate. As a result, our fiscal Q3 results will be the last quarter with the current classification, and our Q4 guide will reflect the streamlined revenue reporting. Results will be reported in two categories: data center and communications and other. The composition of our data center end market will remain unchanged.

The new communications and other end market will consolidate revenue currently reported separately from our enterprise networking, carrier infrastructure, consumer, and auto industrial end markets. We will continue to provide qualitative commentary in our earnings discussions, highlighting notable developments within sub-markets in the consolidated communications and other end market. We expect most of the revenue in the new communications and other end markets to come from our current enterprise networking and carrier infrastructure end markets, which have both continued to recover. On a combined basis for these two end markets, our guidance for the third quarter of this fiscal year implies an annualized revenue run rate of approximately $1.7 billion, compared to the low point we saw in the first quarter of fiscal 2025 of approximately $900 million. Consistent with prior comments, we expect these two end markets to collectively generate approximately $2 billion in annual revenue over time.

Additionally, as we have stated previously, we anticipate annual revenue of approximately $300 million from our consumer end market and, following the divestiture of our automotive Ethernet business, approximately $100 million from our industrial end market. In conclusion, we are executing on our strategy, driving strong revenue growth, and expanding our operating margins towards our long-term target. In addition, our balance sheet has continued to strengthen and provides a solid foundation to support our growth opportunities. With that, we are ready to start our Q&A session. Operator, please open the line and announce Q&A instructions. Thank you.

Speaker 6

Thank you. We'll now be conducting a question and answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you'd like to remove your question from the queue. In the interest of time, please restrict yourself to one question only. If you have additional questions, please rejoin the queue. At this time, we will pause momentarily to assemble our roster. Thank you. Our first question is from Ross Seymour with Deutsche Bank.

Hi guys, thanks for letting me ask a question. I want to dive into the guidance for the custom business, Matt. I appreciate the lumpiness of it, but could you give any more color on what the headwinds are in the third quarter, and then what gives you the confidence and any sort of magnitudes on the increase in the fiscal fourth quarter?

Speaker 4

Yeah, thanks, Ross, and I think you captured the right phrase, which is lumpiness. I think this is normal to see, particularly with the large hyperscale builds that happen, especially as you ramp them into production, which we've done this year on a number of programs. This is not unusual. Fortunately, our optics business is quite strong in the coming quarter, and that's growing double digits. As I said in the prepared remarks, we see a demand increase again in custom. There's nothing unique there, Ross, other than we've spent the last couple of years ramping these into production, and we've got kind of a one-quarter digestion with the recovery in Q4. I will say that overall, we expect custom to be up in the second half over the first half, and you should expect a strong fourth quarter for custom. Thanks.

Thank you.

Speaker 6

Our next question is from Tore Svanberg with Stifel.

Yes, good afternoon. This is Jeremy calling for Tori. Maybe if you could provide a little bit more clarity on the design wins that you're seeing. You know, how much of your custom products revenue that you expect in the second half is coming from some of these new programs, and how much is coming from some of your existing design wins? Any kind of color or clarity you can provide would be very helpful.

Speaker 4

Yeah, hey, thanks, Jeremy. Good to hear from you. I'll actually turn this one over to Chris to talk about the design win momentum we're seeing and the opportunity set as it relates to your question. Thanks. Go ahead, Chris.

Speaker 1

Yeah, thanks, Matt. It's truly an exciting time to be in the custom silicon business for data center. We have a tremendous amount of design activity, more than I've ever seen in my nine years at Marvell. Ultimately, we're seeing that across XPU, XPU attach, emerging and existing hyperscalers. I should say that, even since our event in June, where we said that the XPU attach opportunities were in the sort of several hundred million dollar design win lifetime, that's grown from there. Some of the ones we're chasing now are much, much larger than that, just as these hyperscalers build out these rack scale infrastructures. Since June, the design wins that we've added, these are very meaningful. Think in the billions of dollars for the new design wins.

If you put it all together, it just gives us even more confidence in our 20% share target in this incredibly fast-growing market.

Great, thank you. Maybe a follow-up in terms of, you know, is there any impact you're seeing from supply constraints anywhere along the supply chain? Any impact from tariffs that you can see from your end? Thank you.

Speaker 4

Yeah, great. You know, Chris runs our global operations, so I'll have him cover that. Willem, maybe you can make a quick comment on the tariffs, and I'll add if needed.

Speaker 1

Sure, yeah. Certainly, the supply chain is very tight, requires very tight coordination with our customers, and very strong execution by our team. I'm very proud of our team to have met this ramp over the last year and very confident in our ability going forward. We've really been able to meet everything that our customers have needed. It is tight, and we have very strong coordination and execution.

Speaker 5

Yeah, and Jeremy, on tariffs, it remains a very dynamic environment, but really, we haven't seen any impact on our business to date. We keep tracking it very, very closely. As we look across all the different end markets that we're addressing, we really haven't seen any significant impact.

Thanks, Jeremy. Thank you very much. Thank you.

Speaker 6

Our next question is from Aaron Rakers with Wells Fargo.

Yeah, thanks for taking the question. Kind of building on the earlier question, just to level set, as we think about the lumpiness in the custom XPU business, I'm curious, you've had obviously a very talked-about lead customer. I'm curious, as you're looking at the business today, how concentrated are you amongst your lead customer? If we look out, let's say six months or even 12 months from now, how do we expect to see some of these additional design wins start to fold into the XPU revenue stream? I'm just trying to gauge the timing of some of these additional opportunities.

Speaker 4

Yeah, thanks, Aaron. I think you said it right. We had started a few, just a few years back, a couple of AI days ago, really talking about a handful of sockets that were going to be kind of our initial lead, and those have now ramped and are ramping, albeit lumpiness, we're seeing in the short term. Those are happening. On top of it, the 18 we talked about just a couple of months ago at the AI day, those are all either starting now, next year, really in the next sort of, I'd call it between now and the next 18 to 24 months, those will all start to layer in. As Chris Koopmans mentioned, we've actually secured some incremental wins. Think of it as kind of 18 plus. There's a journey there from a handful to 18 plus to beyond.

That's really what we're focused on, driving our market share from where we were just a couple of years back at 10% share in 2023, 13% the year after, and driving to 20% over time. We're certainly getting a lot of confidence in that with just the recent design activity that Chris Koopmans talked about. It's kind of unprecedented. It's almost episodic right now. Thanks.

Yep. As a quick follow-up, I know NVIDIA this week talked about scale out or scale across networks. I'm curious how Marvell sees this opportunity, moving from just not scale out and scale up, but scale across DCI. Any framing of how big of an opportunity that might represent for Marvell?

Yeah, maybe I'll comment and Sandeep will comment. It's certainly something we're aware of. There's a number of different opportunities that keep layering in that would leverage our networking and our connectivity technology. Sandeep, I don't know if you have any additional thoughts. This is something that is relatively new. Sandeep, go ahead if you've got some thoughts.

Speaker 5

Yeah, thank you, Matt. In terms of scale-up opportunities, there is certainly, aside from, you know, the lead GPU player who has its own proprietary scale-up fabric, a huge demand for Ethernet and purpose-built fabrics such as the UALink. We see a lot of traction over the next couple of years for the scale-up requirements. We are investing heavily to bring our scale-up switches to the market, and we see momentum in the next couple of years. We will have standard products using our state-of-the-art low latency scale-up switching IP portfolio, some of which we acquired from Inovium, which has been a great asset for us. We are very confident of scale-up switches being a key growth driver for us in the next couple of years.

Speaker 4

Yeah, more to come in the future, Aaron, on the other type of opportunities. Thanks for covering that, Sandeep. Appreciate it.

Speaker 6

Our next question is from Vivek Arya with Bank of America.

Thanks for taking my question. Just a near and longer-term question on your custom business. Just near term, Matt, do you think Q4 your data center growth can accelerate year on year from the Q3 levels that you gave, just so that we kind of level set our models? As we look at 2026, you know, one of your XPU competitors has suggested their business can grow 60%. I think yesterday Jensen kind of threw a 50% or so. Whatever industry growth rate seems to be in this 50% or so zip code for next year, do you think Marvell has the visibility today around, you know, timing and magnitude of your large projects to kind of say that, you know, your business can sort of grow in line with what industry expectations are, or are there other puts and takes we should keep in mind? Thank you.

Speaker 4

Yeah, thanks, Vivek. Yeah, a couple of things. I think one is our custom. You know, we don't do an annual guide. We typically just guide, you know, a quarter at a time. I'll get to Q4 in a minute, but just as a baseline. I would say on the annual stuff, we've only done that very, very rarely, and that's typically been later in the year as we have more visibility. Just to set the stage, I think the overall momentum in the business has been very strong for several quarters now. I think I gave you some of the data points, which is that, you know, custom would be up in the second half versus the first half. You can look at our optics performance, you know, Q2, Q3, especially the Q3 up double digits.

Obviously, when you look at the big picture, we're very pleased, which no one's asked a question about yet, but it layers into the big picture on overall Marvell Technology performance, is the very strong recovery in the core business and enterprise networking and carrier. Just for reference on that business, you know, we hit a low point during the inventory recovery cycle at about a $900 million annualized run rate. Implied in our Q3 guide, this business goes back up at like a $1.7 billion run rate. Very, very strong recovery both on inventory as well as on new programs that are kicking in and new products that are in the next technology node. That's all a positive in terms of the setup for Q3 and Q4.

Thank you.

Thanks.

Speaker 6

Our next question is from Tom O'Malley with Barclays.

Speaker 1

Hey guys, thanks for taking my question. Matt, I'm going to hit on the ASIC topic again, so apologies, just want to dive in for a little more clarity. When you look at what the digestion that's occurring in the October quarter is, is that one project winding down while another is then winding back up in the fourth quarter? Is that just a temporary pause? Any color on what's happening there? Is that just traditionally you see certain pockets where customers take product and then they stop? Is there anything to do with a product transition there as well? Any help there would be useful.

Speaker 4

Yeah, thanks Tom. No problem for the question. Yeah, no, at a high level, these are existing programs and it's really just a timing issue in terms of how we deliver the product and when the customers' builds are occurring and when they want the product from us. Given that this is, you know, as I said earlier, we're in the early stages of custom, this is really our first big, first year with the handful of sockets that will translate over to many more. It's really just a timing issue between the quarters. It's just more apparent. Now over time, we do see, you know, a lot more diversity in this part of the business in Marvell as additional programs ramp, but obviously we were starting from a pretty low base just a couple of years back. Thanks.

Speaker 1

Helpful. Just as a follow-up on the optical business, you're going to double-digit growth in the October quarter. You've heard others during this earnings period talk about supply constraints, particularly on the laser side. You're obviously a component provider that's going into these modules, but in terms of the ecosystem, are you seeing any stops and starts there in terms of product ramps as well? Are you hearing about any component issues or are you relatively immune from that in your ramp?

Speaker 4

Yeah, I'll lead off and I'll let Chris comment if it's appropriate. I mean, look, I think we've ramped this optics business just massively over the last few years and very successfully, by the way. I want to just echo what Chris said. Our business unit team, sales team, and operations team have done a great job. We have deep partnerships up and down the supply chain and with the key module companies to really plan our business together. There seems like there's always something going on, but I think we've been able to just manage through it and continue to grow quite dramatically if you look at the ramp over the last few years. I think there's always noise in the system, Tom, relative to different pieces of it, but I'd say overall we're tracking really well. Chris, do you have anything to add or did I capture that?

Speaker 1

I think you captured it. Just very strong partnerships with our customers and trying to stay one step ahead of all the changes and executing very well.

Speaker 6

Our next question is from Timothy Arcuri with UBS.

Thanks a lot. Matt, you're guiding data center flat and optics is up double digits. Since you're guiding optics up double digits, can you give us a sense of what the baseline is for the optics business? I know you did provide that the AI revenue would cross over half of the total company revenue. Is that happening as soon as fiscal Q3? Is optics plus custom at 50% of the total company revenue? I'm just kind of wondering because you're guiding optical, I'd like to see if you can give us some sense of what the baseline was coming off fiscal Q2.

Speaker 4

Yeah, let me just start off real quick and I'll see if Willem wants to add. I mean, we haven't updated that number, I don't think, since Q4 where optics was about half, custom was about a quarter, and then other was about 25%. Obviously, optics and custom have both come up since then, but we haven't exactly put a bead on that and updated that exact mix. Willem, anything, and any commentary that would be helpful? It's obviously something, Tim, we're probably not going to update on a quarterly basis. I totally get the question, but Willem, anything to add?

Speaker 5

No, that's the right framework and exactly what Matt said, right? Take that guidance we gave in Q4 and, you know, you can apply your growth rates and, you know, it's just not a number we're going to be sharing every quarter. That should give you a good sense of what it is.

Okay, is the total, just because Matt, you did say last quarter that the total AI number would be half the company before the end of the fiscal year. I mean, can you at least provide a sort of a milepost that is that happening in fiscal Q3 or will that happen more in fiscal Q4?

Speaker 4

I think I'd have to give you a follow-up, Tim. I don't have the spreadsheet right in front of me on that. It's clearly, I mean, with the puts and takes, custom up second half over first, strong optics, I don't have that number right at the tip of my fingers. It's definitely trending the same way. I wouldn't say there's any directional change there.

Yeah, okay. Awesome. Thank you.

Yeah, thanks.

Speaker 6

Our next question is from Harsh Kumar with Piper Sandler.

Yeah, hey guys, I had a question on the scale of the AI business. I think you mentioned you had 18 minutes before you might have picked up. I think you suggested a couple of more wins. I wanted to understand, of all the custom and attached chips that Marvell is working on, how many of them are actually producing revenues today? I want to understand kind of like where we are today because we understand that you are aiming for 20% of $94 billion by 2028. I'm trying to understand where we stand today and kind of, you know, knowing where we're headed to.

Speaker 4

Yeah, thanks, Harsh. Chris, you want to give some commentary on that one?

Speaker 1

Sure. Yeah, certainly there are multiple, you know, several that are in production today and have been since late last year. Of those 18, they're all either sort of, they're all either going to production now or have gone to production this year or into next year. What you're seeing is pretty much every quarter you're seeing new parts of those programs moving into production. Ultimately, we see that just continuing to grow over time.

Okay, maybe broadly, very broadly, help us understand, and I'm not asking for any customer-specific customer, if most of your wins or all of your wins, largely speaking, are on track. The reason why I'm asking is when we talk to clients, investors, there's just a lot of controversy. Any kind of statement that you can make would be helpful.

Speaker 4

There is always controversy. I mean, I think that's why, at the end of the day, that was a big motivation for us with respect to you guys and the broader investor community around our AI day, really trying to frame where we're driving the business, what the technology differentiation is, what the opportunity set is, breaking it down actually in a lot more granularity than I think we've done before relative to hyperscale versus emerging XPU, XPU attach, the relative size of those opportunities. We gave some commentary today just that we're tracking against those and have now closed some. That is going to be the focus of how we think about the go-forward. Given the design win momentum we're seeing, clearly we're continuing to garner new incremental business from really across the board, the traditional big hyperscalers as well as the emerging generation. Hopefully that's helpful. Thanks, Harsh.

Yeah, thanks for having us, Chris.

Speaker 6

Our next question is from Jim Schneider with Goldman Sachs.

Good afternoon, thanks for taking my question. I was wondering if you could maybe address capital allocation from a high level for a moment. If you look at your automotive Ethernet business, that's a very attractive price you're able to get from that. Maybe you can talk a little bit about the intended use of the proceeds, whether your bias is more towards tuck-in acquisitions that allow you to pursue the AI strategy even faster or buybacks. More broadly, are you open to the potential sale of other components of the business at the right price, whether that be carrier, consumer, or otherwise? Thank you.

Speaker 4

Yeah, thanks, Jim. It's a thoughtful question and I'll up-level it just for a second. This is a driving force, our capital allocation framework on how we run the company and it, you know, the automotive divestiture and then the proceeds are just kind of an output of that. In a minute, I'll just have Willem comment on that. As a background, you know, we have run since August 2016, so basically, you know, six weeks after I became CEO, we implemented a strategy process, which was really our capital allocation framework on how we think about investing our R&D dollars primarily. At that time, too, there were some opportunities around buybacks and so forth, given where Marvell was at that time. Primarily, we drive it from the strategy first. Our vision since, and by the way, we just completed our 10th strategic review a couple of weeks ago.

We've been doing this kind of year in and year out. What you've hopefully seen is that over time, we've continued to evolve the company from really a consumer enterprise kind of focused company to a data center AI-first company. I'd say even in the last few years, as we made the pivot, we've now got our R&D spending, you know, well north of 80% of our total spending in AI and data center. That number has come up probably from, I don't know, 60% just a few years ago. Way back when, it was almost nothing because we had no business there. Around your question then, you know, when we looked at automotive as an example, it was just, it was a great business. We had built it up from scratch. It continued to stay a small portion of our total revenue.

As the AI thing took off, it became even smaller. We had this opportunity to give it a great new home in Infineon, which they found. For Marvell, we obviously got significant and compelling valuation for that. We have the proceeds. Now we're looking at, you know, how to deploy those. I think it's going to be some, you know, it's not decided at the moment. We just closed this. By the way, great job to the team. I think this was, we had said end of the year and we closed it in early August. That was a huge, huge win for everybody involved. I'll let Willem comment in a moment, but I think the answer is probably some of both. We're definitely going to keep looking at our organic investments to figure out how to differentiate and win in AI.

If there are tuck-ins and things we can do, that's obviously on the table. We've been consistent, really since, for probably the last four or five years, which was, you know, we invested early and heavy in M&A to build the portfolio we wanted. We've done a lot organically to build up our capability. We're in great shape there, but we're always going to look. Willem, maybe a little bit to add to this. I know it's a long answer, but I think it's helpful for investors to know how we think. Willem, anything to add?

Speaker 5

I'll just add a couple and also call out to the team for doing a phenomenal job on getting this deal closed in effectively four months. A deal of this size and complexity is just a phenomenal job. When you look back at the last couple of quarters here, we've really driven an increased level of buybacks, really through much more consistent execution in our free cash flow. As a basis, you should expect for us to continue to drive that and having a focus on very consistent free cash flow execution, driving a higher level of buybacks. As Matt mentioned, I think this additional cash flow really gives us a lot of flexibility around being opportunistic on doing more buybacks.

At the same time, we're at this historic moment in terms of the size of the AI market and where we do see tuck-ins that can accelerate our roadmap towards addressing that. We'll take advantage of that.

Speaker 6

Our next question is from Harsh Kumar with JP Morgan.

Good afternoon, guys. Thanks for taking my question. This goes back to one of the previous questions. The noise level out of Asia on your lead customers' follow-on three-nanometer XPU program continues at a deafening pace, right? With your Asia competitor, they're essentially claiming victory on three nanometers. What's the update with Marvell's three-nanometer XPU follow-on program with your lead customer? I think last earnings call, Matt, you talked about securing three-nanometer wafer capacity, packaging capacity for production in calendar 2026. Is this program still tracking? What's the confidence level on this program still driving growth next year? Maybe just an update on your third XPU customer win at three nanometer, which was supposed to ramp back half of calendar 2026. How is this program tracking as well?

Speaker 4

Yeah, thanks, Harlin. I appreciate the question. I understand the noise. As I said in my answer to the earlier question, we're at a point where the initial programs and wins we have are ramping. We've increased our opportunity set pretty significantly to, you know, from a handful of sockets to this 18 plus. We're really driving to the market share targets in the future. Given the massive sort of focus in this area and sensitivity, commenting on just the individual sockets at this point is only probably increasing the noise level. What we're really focused on is winning incremental designs, executing on the ones we've got, and driving the business forward, ultimately trying to get 20% of a $90+ billion TAM in the future. That's where that's at.

Speaker 6

Thank you. Our last question is from Quinn Bolton with Needham & Company.

Hey guys, thanks for squeezing me in. Matt, I wanted to follow up just kind of on the scale-up switch fabric opportunity. It seems like it's, you know, a bigger part of the XPU attach market and, you know, there are different flavors, Ethernet, UALink. Just wondering, can you give us a sense when Marvell may have its first products, you know, ramping to revenue? Is that a calendar 2026 event or is it going to be more UALink-based and more likely a calendar 2027 event? I've got to follow up.

Speaker 4

Yeah, thanks, Quinn. I think maybe I'll have Sandeep add a little bit more, but I think he did a good job framing it. I will just say, to maybe up-level it for a second, I think on the scale-up, it really is a great combination of key Marvell IPs all into one, especially our low latency switching IP, our SERDes, and just the ecosystem we're living in relative to XPUs. This being a key XPU attach, that's fundamentally almost a chipset type of a decision. Sandeep, anything else to add on that? I think we haven't really articulated a lot yet publicly on what we're doing, but there's a huge amount of momentum here and we're engaged very broadly in this area. Sandeep, any thoughts and closing remarks on this one?

Speaker 5

Thank you, Matt. We are definitely investing to bring UALink and Ethernet-based products as we engage with our customers and working very closely with our customers' timeline. What I would say is product introductions in the UALink and Ethernet space for scale-up specifically will be in the next two years. Certainly with the assets that we have, not only are we looking at UALink-based products in interconnect, we're already starting to see the use of AECs in the near term and AOCs, which is active electrical cables and active optical cables, positioning us to participate in these markets. For UALink and Ethernet-based specifically, it'll be in the next two years.

Got it. Thank you. I just wanted to ask, you know, you guys obviously have a very substantial business in the DSP-based optical modules. A few of your peers have started to note that I believe three hyperscalers are beginning to ramp LPO modules. Can you just kind of frame for us, do you think that the, you know, are there substantial LPO developments beginning to occur? Are they pretty niche applications? I mean, just any sense of LPO penetration of the overall optical transceiver market? Is it, you know, likely to stay in the low single-digit %? Do you see it getting bigger than that over a couple of years? Just, you know, like to hear your thoughts since you guys are obviously the incumbent.

Speaker 4

Yeah, thanks, Quinn. It's happening at a smaller scale. By the way, we're in some of those too. We have active, you know, wins and we're going to production in those types of modules as well. Just given the sheer scale of the DSP-based plugables, it just ends up being a very small number and more of a niche use case, but a valuable one if the customer really needs it and can implement it and get it working in production, it can be a benefit. The vast majority we see today still is, and for the foreseeable future, is plugables.

Got it. Thanks, Matt.

Yep, cool. All right, operator, I think that's it. I'm just going to make some closing remarks. Okay, so anyway, thanks everyone for joining. I appreciate all of your interest in Marvell and joining the call and listening in. Just a couple of points. I think the first is, as I indicated and Chris and also Sandeep talked about, the design win momentum in custom has been very, very strong even since the AI day. I feel really good about that $75 billion pipeline that we're really bringing to close some of those key opportunities within that. I think that pipeline, by the way, from what we can see, is probably going to just keep growing. By the way, this is across XPU, XPU attach. It's at the large hyperscalers and then continuing to increase around the emerging. Optics continues to be very strong.

We're managing the execution quite well and growing the business there. The core business, which was a point of consternation in the past about when would that come back and what would that ramp look like, it's nice to see in Q3 the strong sequential in enterprise networking and carrier. I think it's like 30% sequential and 80+% year over year. Very strong recovery there. Finally, it's showing up in the numbers. We're getting a lot of leverage here. I looked at Q2 EPS, it's up like 123% year over year. In Q3, if you look at the guide, EPS would be up like 70%. Much faster than revenue. Same thing on the sequential. Overall, we're very pleased with the performance of the company. We see a massive opportunity ahead. I appreciate everybody's interest in Marvell. We'll talk to you all soon. Thank you so much.

Speaker 6

Ladies and gentlemen, thank you for your participation. This does conclude today's conference. Please disconnect your lines and have a wonderful day.