Marvell Technology Group Ltd ($MRVL) Q2 2026 Earnings Call

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. 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, Marvell's senior vice president of investor relations. Thank you. You may begin.

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 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 filings. We do not intend to update the 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.

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 22 cents. Non-GAAP earnings per diluted share was 67 cents, 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 markets 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 submarkets in the consolidated communications and other end market. We expect most of the revenue in the new communications and other end market 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're 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.

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, 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 wanted to dive into the guidance for the custom business that I appreciate the lumpiness of it, but can 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?

Thank you.

Our next question is from Tore Svanberg with Stifel.

Yes, good afternoon. This is Jeremy calling for Tore. 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? Any color or clarity you can provide would be very helpful.

Yeah, thanks, Matt. So yeah, 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 9 years at Marvell. And ultimately, we're seeing that across XPU, XPU attached, emerging and existing hyperscalers. And I should say that, you know, even since our event in June where we said that the XPU attached 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. And yeah, 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. And maybe a follow-up in terms of, 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.

And I'll add a few.

Great. Thank you very much.

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 XP business, I'm curious you've had 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? And 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 trying to gauge the timing of some of these additional opportunities.

Yep.

And then 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 not just scale out and scale up, but scale across DCI. Any framing of how big of an opportunity that might represent for Marvell?

Yeah, thank you, Matt. In terms of scale up opportunities, aside from the lead GPU player who has its own proprietary scale up fabric, there's a huge demand for Ethernet and purpose built fabric such as UALink. We see a lot of traction over the next couple of years for all 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 Inphi, 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.

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. 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 we can have a level set on our models. And then as we look at 2026, one of your XPU competitors has suggested their business can grow 60%. I think yesterday Jensen kind of threw out 50% or so. So whatever industry growth rate seems to be in the 50% zip code for next year. Do you think Marvell has the visibility today around timing and magnitude of your large projects to kind of say that your business can grow in line with industry expectations, or are there other puts and takes we should keep in mind? Thank you.

Thank you.

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

Hey guys, thanks for taking my question. 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 the digestion that's occurring in the October quarter, is that one project winding down while another is winding back up in the fourth quarter? Is it a temporary pause? Any color on what's happening there? Is it traditionally you see certain pockets where customers take product and then they stop, but is there anything to do with a product transition there? Any help would be useful.

Okay, Paul. And then just as a follow up on the optical business, you're guiding double digit growth in the October quarter. You heard others during this earnings period talk about supply constraints, particularly on the laser side. You're obviously a component provider going into these modules. In terms of the ecosystem, are you seeing any stops and starts there in terms of product ramps, or are you hearing about any component issues, or are you relatively immune from that in your ramp?

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.

Our next question is from Timothy Carey 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 the baseline 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? So is optics plus custom at 50% of total company revenue? I'd like to see if you can give us some sense of the baseline coming off fiscal Q2.

No, that's the right framework. To make clear what Matt said: take that guidance we gave in Q4 and you can apply your growth rates. It's just not a number we're going to be sharing every quarter, but that should give you a good sense of what it is.

Okay. But Matt, you did say last quarter that the total AI number would be half the company before the end of the fiscal year. Can you at least provide a milepost? Is that happening in fiscal Q3 or will it happen more in fiscal Q4?

Yeah. Okay. Awesome. Thank you.

Our next question is from Harsh Kumar with Piper Sandler.

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

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

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

Our next question is from Jim Schneider with Goldman Sachs.

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

Yeah, I'll just add a couple things. Also call out the team for doing a phenomenal job getting this deal closed in 54 months. A deal of this size and complexity is just phenomenal. When you look back at the last couple of quarters, we've already driven an increased level of buybacks through much more consistent execution on our free cash flow. As a basis, you should expect us to continue driving that and having a focus on very consistent free cash flow execution, driving higher buybacks. And as Matt mentioned, this additional capital gives us a lot of flexibility to be opportunistic on buybacks, but at the same time we're at a historic moment in the size of the AI market, and where we see tuck ins that can accelerate our roadmap towards addressing that, we'll take advantage.

Our next question is from Harlan Sur 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 customer's follow on 3 nanometer XPU program continues at a deafening pace. Your Asia competitor is essentially claiming victory on 3 nanometer. What's the update with Marvell's 3 nanometer XPU follow on program with your lead customer? Last earnings call, Matt, you talked about securing 3 nanometer wafer capacity, packaging capacity, production in calendar 2026. Is this program still tracking? What's the confidence level on this program driving growth next year? And maybe an update on your third XPU customer win at 3 nanometer, which was supposed to ramp back half of calendar 2026. How is that program tracking?

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

Hi guys, thanks for squeezing me in. Matt, wanted to follow up on the scale up switch fabric opportunity. It seems like it's a bigger part of the XPU attach market. There are different flavors: Ethernet, UALink. Can you give us a sense when Marvell may have its first products ramping to revenue? Is that a calendar 2026 event, or more UALink based and more likely calendar 2027? And then I have a follow up.

Yeah, thank you, Matt. We are investing to bring UALink and Ethernet based products as we engage with our customers, working very closely with their timelines. Product introductions in the UALink and Ethernet space for scale up specifically will be in the next two years. With the assets we have, we're not only looking at UALink based products. In interconnect, we're already starting to see the use of AECs and AOCs, which are active electrical cables and active optical cables, positioning us to participate in these markets. So for UALink and Ethernet specifically, it will be in the next two years.

Got it. Then just wanted to ask: you guys have a very substantial business in DSP based optical modules. A few of your peers have noted that I believe three hyperscalers are beginning to ramp LPO modules. Can you frame for us: do you think there are substantial LPO developments occurring? Are they niche applications? Any sense of LPO penetration of the overall optical transceiver market? Is it likely to stay in low single digit percentages, or do you see it getting bigger over a couple years? I'd like to hear your thoughts since you're the incumbent.

Got it. Yeah, thanks.

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