Marvell Technology (MRVL) Q2 FY2026 Earnings Call Transcript

Date: August 28, 2025 | Source: Investing.com (earnings call transcript) / company press release

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Conference Operator: Good afternoon, and welcome to the Marvell Technology Inc. Second Quarter of Fiscal Year 2026 Earnings Conference Call. At this time, all participants are in a listen only mode. 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.

Ashish Saran (SVP of Investor Relations, Marvell Technology): 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 risks and uncertainties. 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-Ks and 10-Q filings. We do not intend to update our forward-looking statements. During our call today, we will refer to certain non-GAAP financial measures. A reconciliation between our GAAP and non-GAAP financial measures is available in our earnings press release. Let me now turn the call over to Matt for his comments on the quarter.

Matthew Murphy (Chairman and CEO, Marvell Technology): Thanks, Ashish. Good afternoon, everyone. For the second quarter of fiscal 2026, Marvell delivered record revenue of $2,006 million, 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 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 purposely 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. 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.

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. 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.

In our data center end market, we achieved record revenue of $1,490 million in the second quarter, growing 3% sequentially and 69% year over year. The strong performance was led by our custom XPU and XPU-attached 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. Looking ahead to the third quarter, we expect revenue from our electro-optics products to grow double-digit 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, 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.

In our enterprise networking and carrier infrastructure end markets, 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%. In the consumer end market, second quarter revenue was $116 million, up 84% sequentially and 30% year over year. Gaming demand and its seasonality continues to be the primary driver of this business. 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, reflecting the divestiture of our automotive Ethernet business, we anticipate overall revenue of approximately $35 million from this end market.

In summary, we expect momentum to continue in the third quarter, with total company revenue forecast at $2,060 million 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. With that, I'll turn the call over to Willem for more detail on our recent results and outlook.

Willem Meintjes (CFO, Marvell Technology): 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 million, 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%. 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.

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 $1,050 million, 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. 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. 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.

Turning to our guidance for the third quarter of fiscal 2026, we are forecasting revenue in the range of $2,060 million, plus or minus 5%. 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%. We anticipate our non-GAAP operating expenses to be approximately $485 million. We expect a non-GAAP tax rate of 10% for the third quarter. 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 fiscal 2024 to 74% in fiscal 2026. Our fiscal Q3 results will be the last quarter with the current classification, and our Q4 guide will reflect the streamlined revenue reporting, with results reported in two categories: data center and communications and other. With that, we are ready to start our Q&A session. Operator, please open the line.

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Questions & Answers

Ross Seymore (Deutsche Bank): 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?

Matthew Murphy (Chairman and CEO): Yes, thanks, Ross. 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 and especially as you ramp them into production, which we've done this year on a number of programs. Fortunately, our optics business is quite strong in the coming quarter and that's growing double digits. And then, as I said in the prepared remarks, we see a demand increase again in custom. So 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 so you should expect a strong fourth quarter.

Jeremy (Stifel): Maybe if you could provide a little bit more clarity on the design wins that you're seeing. 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?

Matthew Murphy (Chairman and CEO): I'll actually turn this one over to Chris to talk about the design win momentum we're seeing.

Chris Koopmans (President and COO, Marvell Technology): 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. And ultimately, we're seeing that across XPU, XPU attach, emerging and existing hyperscalers. 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, because these hyperscalers build out these rack-scale infrastructures. Since June, the design wins that we've added are very meaningful, thinking 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.

Aaron Rakers (Wells Fargo): As we think about the lumpiness in the custom XPU business, I'm curious how concentrated are you amongst your lead customer? And if we look out, let's say, months or even twelve months from now, how do we expect to see some of these additional design wins start to fold into the revenue stream?

Matthew Murphy (Chairman and CEO): We had started, just a few years back, talking about a handful of sockets that we're going to be kind of our initial lead, and those have now ramped and are ramping, albeit with the lumpiness we're seeing in the short term. And then 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 18 to 24 months those will all start to layer in. And then, as Chris mentioned, we've actually secured some incremental wins, think of it as kind of 18-plus. 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 to 20% over time.

Vivek Arya (Bank of America): Just a near and longer-term question on your custom business. Do you think Q4 your data center growth can accelerate year on year from the Q3 levels that you gave? And as we look at 2026, do you think Marvell has the visibility today around timing and magnitude of your large projects to say that your business can grow in line with what industry expectations are?

Matthew Murphy (Chairman and CEO): I think the overall momentum in the business has been very strong for several quarters now. Custom will be up in the second half versus the first half. You can look at our optics performance, Q2, Q3, especially the Q3 up double digits. And then, when you look at the big picture, we're very pleased with the very strong recovery in the core business in enterprise networking and carrier. For reference on that business, we hit a low point during the inventory recovery cycle at about a $900 million annualized run rate. And implied in our Q3 guide, that business goes back up to like a $1.7 billion run rate. So very, very strong recovery, both on inventory as well as on new programs that are kicking in.

Harlan Sur (JPMorgan): The noise level out of Asia on your lead customer's follow-on 3-nanometer XPU program continues at a deafening pace, with your Asia competitor claiming victory on 3 nanometers. What's the update with Marvell's 3-nanometer XPU follow-on program with your lead customer?

Matthew Murphy (Chairman and CEO): Thanks, Harlan. I appreciate the question. I understand the noise. We're at a point where the initial programs and wins we have are ramping. We've increased our opportunity set pretty significantly, from a handful of sockets to this 18-plus. And we're really driving to the market share targets in the future. Given the massive focus in this area and sensitivity, commenting on just the individual sockets at this point is probably only 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, and ultimately trying to get 20% of a $90-plus billion TAM in the future.

Quinn Bolton (Needham): I wanted to follow up on the scale-up switch fabric opportunity. Can you give us a sense when Marvell may have its first products ramping to revenue?

Matthew Murphy (Chairman and CEO): 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 the ecosystem we're living in relative to XPUs. Sandeep, thoughts in closing remarks on this one?

Sandeep Bharathi (President, Data Center Group, Marvell Technology): Definitely we are investing to bring UALink and Ethernet based products. As we engage with our customers and work very closely with our customers' timelines, product introductions in the UALink and Ethernet space, for scale-up specifically, will be in the next two years. In interconnect, we're already starting to see the use of AECs in the near term and AOCs, positioning us to participate in these markets.

Matthew Murphy (Chairman and CEO): Okay, so anyway, thanks everyone for joining. I appreciate all of your interest in Marvell. 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 bringing to close. Optics continues to be very strong. And then the core business, it's nice to see in Q3 the strong sequential in enterprise networking and carrier, up like 30% sequentially and 80% plus year over year. And finally, it's showing up in the numbers. Q2 EPS is up like 123% year over year, and Q3, if you look at the guide, EPS would be up like 70%, so much faster than revenue. Overall, we're very pleased with the performance of the company. We see a massive opportunity ahead. Thank you so much.

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