Marvell Technology (MRVL) Q3 FY2026 Earnings Call Transcript

Date: December 2, 2025 | Source: StockAnalysis.com (full transcript) / company IR

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Operator: Good afternoon and welcome to the Marvell Technology Inc.'s third 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.

Ashish Saran (SVP of Investor Relations, Marvell Technology): Thank you and good afternoon, everyone. Welcome to Marvell's third quarter of 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. As we discussed in our second quarter earnings call, going forward, we are consolidating our non-data-center end markets into a single new communications and other end market. Please note that today's call will be longer than typical as we will be discussing the acquisition announced today in addition to a number of extensive updates on our business. Let me now turn the call over to Matt for his comments on the quarter.

Matthew Murphy (Chairman and CEO, Marvell Technology): Yeah, hey, thanks, Ashish. And good afternoon, everyone. Settle in, okay? We have a lot of good stuff to talk about today. For the third quarter of fiscal 2026, Marvell delivered record revenue of $2.075 billion, reflecting a 3% sequential increase and strong 37% year-over-year growth. Revenue was above the midpoint of guidance driven by stronger-than-forecast demand in our data center end market. As a result, non-GAAP earnings per share of $0.76 exceeded the midpoint of guidance by $0.02. Excluding revenue from the divested automotive Ethernet business, the implied revenue growth for Marvell's go-forward business was approximately 6% sequentially and 41% year-over-year. Momentum in our data center business remained strong, with revenue growing 38% year-over-year, fueled by robust AI demand. We also saw a strong recovery in our communications and other end market, where revenue grew 34% year-over-year as reported and nearly 50% year-over-year, excluding the automotive Ethernet business. We expect growth to continue in the fourth quarter, with total company revenue forecast at $2.2 billion at the midpoint.

Before discussing our end markets, I'm excited to share details on the strategic acquisition we announced today of Celestial AI, which brings an entirely new disruptive technology, a photonic fabric platform purpose-built for next-generation scale-up interconnect. This acquisition is the latest in a series of decisive moves to further strengthen our data center portfolio. Since 2019, we have continued to increase our focus on data center, divesting our Wi-Fi business and acquiring Avera, Aquantia, Inphi, and Innovium. These transactions have driven significant revenue growth and scale. This year, following the divestiture of our automotive Ethernet business, we are continuing to double down on data center with the acquisition of Celestial AI. The acquisition is expected to close in the first quarter of next year, subject to customary closing conditions, including regulatory reviews in the United States.

AI is reshaping data center architecture at an unprecedented speed. Next-generation accelerated systems are evolving into multi-rack scale-up fabrics that connect hundreds of XPUs in a high-bandwidth, ultra-low-latency any-to-any fashion. Industry analysts are forecasting the merchant portion of the scale-up switch market to approach $6 billion in revenue in 2030. On the interconnect side, we are seeing the dollar content for optics of the same magnitude as a scale-up switch. As the optical interconnect attaches to both the XPU and the switch, the opportunity actually doubles, meaning over $10 billion. Celestial AI's Photonic Fabric technology platform was purpose-built for this inflection. It enables large AI clusters that scale both within and across racks using a high bandwidth, low latency, low power, and cost-effective optical fabric, with greater than two times the power efficiency of copper interconnects. Celestial AI's first-generation product is a photonic fabric chiplet, or PF chiplet, delivering an unprecedented 16 TB per second of bandwidth in a single chiplet, 10 times the capacity of today's state-of-the-art 1.6T ports. Celestial AI has already secured a major design win with one of the world's largest hyperscalers. After close, we expect meaningful revenue contributions from Celestial AI to begin in the second half of fiscal 2028. Our base case forecast shows Celestial AI's revenue reaching a $500 million annualized run rate in the fourth quarter of fiscal 2028, doubling to a $1 billion run rate by the fourth quarter of fiscal 2029.

Now let me transition back to Marvell's current business and outlook. As you may recall, on September 24th, I hosted a virtual call with investors where I outlined a framework for Marvell's revenue growth for fiscal 2027. Since then, Cloud CapEx growth expectations have increased to over 30%. As a result, our outlook for next fiscal year is even stronger. We expect our interconnect business, which is roughly half our overall data center revenue, to continue growing faster than Cloud CapEx next year. We expect our custom business, roughly a quarter of our overall data center revenue, to grow by at least 20% next year. For the remaining quarter of our data center business, which includes storage, switching, and other products, we now expect revenue to grow by at least 15% next year, up from our prior expectation of 10% growth. Adding all of this up, we now expect Marvell's data center revenue to grow year-over-year by more than 25% next fiscal year. Please note that this forecast does not include any revenue from the pending acquisition of Celestial AI. And for our communications and other end market, we continue to expect 10% revenue growth next year.

In our data center end market, we delivered record third-quarter revenue of $1.52 billion, representing 2% sequential growth and 38% year-over-year growth. Revenue exceeded our guidance for flat sequential performance, driven by increased demand across our networking portfolio. Our industry-leading PAM DSPs, TIAs, and drivers continue to see strong demand, with revenue from our optical interconnect businesses growing by double digits sequentially. As expected, this strength was partially offset by a sequential decline in our custom revenue due to lumpiness in demand. Looking ahead to the fourth quarter, we expect revenue growth from our data center end market to accelerate, growing sequentially in the high single digits on a percentage basis and approximately 20% year-over-year, driven by a rebound in custom and continued growth in interconnect, switching, and storage.

Now, let me highlight broader trends in our data center businesses. As our PAM DSP products enter into their fifth year of 800-gig production, demand for our solutions continues to accelerate. We are enabling volume production of pluggable 1.6T transceivers across the industry. We began shipping our 1.6T products in the second half of this fiscal year and are seeing exceptionally strong demand heading into next year. We have already demonstrated at the Optical Fiber Conference 400-gig per lane technology to drive the next industry transition to 3.2T. We introduced our 1.6T Coherent Light solution last year; we expect to start shipping next year, and we are on track to deliver our 3.2T solution the year after. Our PCIe Gen 6 retimers are also gaining broad traction. We are currently engaged with more than 30 customers and partners, and we expect our AEC and retimer revenue in aggregate to more than double from this year to next year.

Turning to our data center switching business, we expect revenue to exceed $300 million this fiscal year. We've begun shipping our next-generation 51.2T products with a strong ramp expected next year. We now expect our data center switch revenue to surpass $500 million next fiscal year, faster than what I had indicated last quarter. We are also accelerating our scale-up switch efforts. We are on track to sample our UALink 115T and 57T solutions in the second half of fiscal 2027, with volume production expected in fiscal 2028. Turning to our custom business, at our custom event in June, we disclosed a total of 18 XPU and XPU-attached socket design wins. Since that event, our team has secured additional custom sockets, which represent more than 10% of the $75 billion lifetime revenue opportunity funnel we outlined in June. These new wins include multiple XPU-attached sockets, an XPU win at an emerging hyperscaler, and most recently, a design win for an electrical I/O chiplet inside an XPU. We now have more than 15 XPU-attached wins. For the NIC and CXL use cases, we have line of sight to revenue exceeding $2 billion by fiscal 2029 and a significantly higher forecast in the following years.

Now let me move to our communications end market, where we delivered $557 million in third-quarter revenue, which grew 8% sequentially and 34% year-over-year. Excluding revenue from the divested automotive Ethernet business, the implied revenue growth for Marvell's communications end market for the third quarter would be closer to 20% sequentially and 50% year-over-year. We expect the enterprise networking portion of our communications end market to reach an annualized revenue run rate of approximately $1 billion in the fourth quarter, which would reflect the complete normalization of customer inventory levels in that business.

In summary, during the third quarter of fiscal 2026, we continue to expand operating margins, grow earnings per share, and set new revenue records. We executed our $1 billion accelerated stock repurchase program in addition to repurchasing $300 million of stock through our ongoing buyback program. Looking ahead, we expect momentum to continue in the fourth quarter, with total company revenue forecast at $2.2 billion at the midpoint, representing 6% sequential and 21% year-over-year growth. We see a path for our data center revenue growth in fiscal 2028 to accelerate meaningfully above the 25% growth we expect in fiscal 2027. First, we have activated Marvell's M&A playbook and expect to close the transformational acquisition of Celestial AI in the first quarter of next fiscal year. Second, our interconnect business is firing on all cylinders. Finally, when you put it all together, we are positioned for several years of exceptional performance, building on this fiscal year's projected revenue growth of more than 40%. With all of 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. Revenue in the third quarter was $2.075 billion, growing 37% year-over-year and 3% sequentially. Data center was our largest end market, contributing 73% of total revenue. Our communications and other end market contributed the remaining 27% of revenue. GAAP gross margin was 51.6%. Non-GAAP gross margin was 59.7%, an increase of 30 basis points sequentially. GAAP operating expenses were $712 million. Non-GAAP operating expenses came in at $485 million, in line with our guidance. Our GAAP operating margin was 17.2%, while non-GAAP operating margin was 36.3%, a 150 basis point sequential increase. For the third quarter, GAAP earnings per diluted share was $2.20, including the gain from the divestiture of the automotive Ethernet business. Non-GAAP earnings per diluted share was $0.76, reflecting year-over-year growth of 77%, more than double the pace of revenue growth. Non-GAAP earnings per diluted share increased 13% sequentially.

Cash flow from operations in the third quarter was a record $582 million, growing approximately $121 million from the prior quarter. Our inventory at the end of the third quarter was $1.01 billion, a decrease of $37 million from the prior quarter. During the quarter, we executed our $1 billion accelerated repurchase program. In addition, we repurchased $300 million of our stock through our ongoing capital return program and returned $51 million to shareholders through cash dividends in the quarter. As of the end of the third quarter, our total debt was $4.5 billion, with a gross debt-to-EBITDA ratio of 1.47 times and a net debt-to-EBITDA ratio of 0.58 times. As of the end of the third fiscal quarter, our cash and cash equivalents were $2.7 billion, an increase of $1.5 billion from last quarter, reflecting the addition of proceeds from the divestiture of our automotive Ethernet business.

Turning to our guidance for the fourth quarter of fiscal 2026, we're forecasting revenue in the range of $2.2 billion, plus or minus 5%. We expect our GAAP gross margin to be between 51.1% and 52.1%. We expect our non-GAAP gross margin to be between 58.5% and 59.5%. We anticipate our non-GAAP operating expenses to be approximately $515 million. We expect a non-GAAP tax rate of 10% for the fourth quarter. We anticipate GAAP earnings per diluted share in the range of $0.31 to $0.41. We expect non-GAAP earnings per diluted share in the range of $0.74 to $0.84. Looking ahead to fiscal 2027, we intend to continue to invest in growing our business while driving operating leverage, and expect our non-GAAP operating expenses to increase at roughly half the rate of the revenue growth next fiscal year. Regarding taxes, we expect our non-GAAP tax rate to move to approximately 12% next fiscal year. Post-closing, we expect the addition of Celestial AI to add approximately $50 million in annual operating expenses. We expect Celestial AI to start generating meaningful revenue in the second half of fiscal 2028, at which point it is expected to become accretive to our non-GAAP earnings. We plan to fund the acquisition through a combination of stock and cash on hand and do not intend to take on additional debt. Operator, please open the line and announce Q&A instructions. Thank you.

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Questions & Answers

Ross Seymore (Deutsche Bank): If I run through those numbers, it sounds like you're implying somewhere around $10 billion in revenue for next year. Is that in the right ballpark? And how does what you're looking for next year get you aligned to your long-term targets?

Matthew Murphy (Chairman and CEO): You're absolutely in the ballpark when you add up the numbers I gave you on $10 billion for next year. That's a great target, actually, by the way, that is motivational for us as a team to go drive. Just as a reminder, this is just based on the Marvell organic plan, no M&A contribution. We do expect sequential revenue growth next year every quarter, and the second half of the year is stronger than the first with a really compelling exit rate to fiscal 2027. On custom, we quadrupled that business from calendar 2023 to 2024, doubled it from 2024 to 2025, we're saying it's going to be up about 20% this next year. But then in fiscal 2028 we see the custom business actually doubling off of 2027, with all this goodness from XPU attach plus a new meaningful XPU socket ramping. On interconnect, we expect that business should continue to outgrow CapEx. And so when you add all that together, you come up with a number bottoms up, which looks more like 40% growth in data center in fiscal 2028. And then if you plug in comms and other growing at GDP for fiscal 2028, you basically get Marvell growing like another 30% in fiscal 2028.

Harlan Sur (JPMorgan): Your lead AI customer announced their next-generation 3-nanometer AI XPU product, and I think you just said you have secured purchase orders for this program for the entirety of next year. Can you give us an update on your sub-3-nanometer design win pipeline?

Matthew Murphy (Chairman and CEO): In the spirit of customer confidentiality, you can't go into too much. But our product transition from where we are today with our lead XPU customer to the next one is baked into all the numbers I gave you. I got the backlog, I got the orders, we got great visibility there. On the 2-nanometer, there are a number of programs that we're working on in this area, and that's going to be a workhorse process technology for us. The design funnel keeps increasing there, and the power benefits you see are compelling. We do see strong product ramps coming over this time period, especially into fiscal 2028, where you'll start seeing some of the 2-nanometer products ramp.

Vivek Arya (Bank of America): Given the magnitude of the Celestial AI acquisition and your capex plans, can you help frame the revenue outlook and margin trajectory?

Matthew Murphy (Chairman and CEO): We are looking at this as a rack-level solution in totality. We're the one-stop shop, from AECs, traditional DSPs, retimers, LPOs, photonic fabrics, and then scale-up and scale-out switching and XPU-attached sockets. We absolutely have a rack-scale vision, and this is where Celestial AI really fits in. We don't have any system-level revenues comprehended in anything I've talked to you about over the next two years. But certainly, from a strategic standpoint, it's imperative that we go to market in a very comprehensive way and not in a point-solution way.

Christopher Rolland (Susquehanna): I think your main competitor in ASIC has moved to providing racks, not just silicon. With this acquisition, might you be moving to systems and then perhaps even rack-level solutions as well?

Matthew Murphy (Chairman and CEO): We are very much looking at this as a rack-level solution in totality. That is all the various flavors of optical interconnect. Most of the people we're working with have that capability themselves today. But we also add quite a bit of value in how to think about how to pull it all together. We absolutely have a rack-scale vision, and this is where Celestial AI really fits in.

Matthew Murphy (Chairman and CEO) (closing): I think this was the world record for the longest prepared remarks I've ever done. There really is a lot of great things happening with Marvell. We have a phenomenal setup for next year. We are playing offense in this company. We're out doing strategic acquisitions like Celestial AI. I think our future is very bright where we're headed. Thank you, everybody. Have a great day.

Operator: Thank you. This concludes today's conference. You may disconnect your lines at this time.