Marvell Technology, Inc. (MRVL) Q3 2026 Earnings Call Transcript
Access earnings results, analyst expectations, report, slides, earnings call, and transcript.
Overview
The earnings call summary and Q&A indicate strong financial performance, with record revenue and EPS growth, improved margins, and effective inventory management. Positive guidance and strategic partnerships, like the one with Amazon, further bolster sentiment. The Q&A reveals confidence in achieving ambitious revenue targets, with strong growth expected across various segments. Despite some management evasiveness, the overall outlook is optimistic, suggesting a strong positive impact on the stock price.
Key Financial Performance
Revenue Marvell delivered record revenue of $2.075 billion, reflecting a 3% sequential increase and strong 37% year-over-year growth. 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. The growth was driven by stronger than forecasted demand in the data center end market and robust AI demand.
Data Center Revenue Record third quarter revenue of $1.52 billion, representing 2% sequential growth and 38% year-over-year growth. Revenue exceeded guidance due to increased demand across the networking portfolio, including strong demand for PAM DSPs, TIAs, and drivers, as well as double-digit sequential growth in data center storage and switch businesses.
Communications and Other End Market Revenue Revenue grew 8% sequentially and 34% year-over-year to $557 million. Excluding revenue from the divested Automotive Ethernet business, the implied revenue growth was closer to 20% sequentially and 50% year-over-year. Growth was driven by normalizing customer inventory levels and strong adoption of the refreshed product portfolio.
Non-GAAP Gross Margin 59.7%, an increase of 30 basis points sequentially. The improvement reflects better product mix and operational efficiencies.
Non-GAAP Operating Margin 36.3%, a 150 basis point sequential increase, driven by revenue growth and operational leverage.
Non-GAAP Earnings Per Share (EPS) $0.76, reflecting year-over-year growth of 77% and a 13% sequential increase. The growth was driven by strong revenue performance and operating leverage.
Cash Flow from Operations A record $582 million, growing approximately $121 million from the prior quarter, reflecting strong operational performance.
Inventory $1.01 billion, a decrease of $37 million from the prior quarter, indicating improved inventory management.
Debt Ratios Gross debt-to-EBITDA ratio of 1.47x and net debt-to-EBITDA ratio of 0.58x, showing continued improvement due to increased EBITDA.
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Operating Highlights
Celestial AI Acquisition: Marvell announced the acquisition of Celestial AI, introducing a photonic fabric platform for next-gen scale-up interconnect. This acquisition is expected to close in Q1 of next year and will remain independent through regulatory processes. Celestial AI's technology is designed to address the limitations of copper-based interconnects, offering higher bandwidth, lower latency, and better power efficiency. The acquisition is expected to contribute $500 million in annual revenue by Q4 FY2028, doubling to $1 billion by Q4 FY2029.
Data Center Products: Marvell's data center revenue grew 38% YoY, driven by AI demand. The company is expanding its interconnect, switching, and storage product lines, including advancements in PAM DSPs, TIAs, and drivers. New products like 1.6T Coherent lite solutions and PCIe Gen6 retimers are gaining traction. The data center switching business is expected to surpass $500 million in revenue next fiscal year.
Data Center Market Expansion: Marvell's data center revenue reached $1.52 billion in Q3, representing 73% of total revenue. The company expects data center revenue to grow by more than 25% next fiscal year, driven by increased cloud CapEx and demand for AI infrastructure. The interconnect business is expected to grow faster than cloud CapEx, with custom business growth of at least 20%.
Communications Market Growth: Revenue from the communications end market grew 34% YoY in Q3, driven by enterprise networking and carrier infrastructure. Excluding the divested Automotive Ethernet business, growth was closer to 50% YoY. The enterprise networking segment is expected to reach a $1 billion annualized revenue run rate in Q4.
Revenue and Profitability: Marvell achieved record revenue of $2.075 billion in Q3, a 37% YoY increase. Non-GAAP gross margin was 59.7%, and non-GAAP operating margin was 36.3%. Non-GAAP EPS grew 77% YoY to $0.76.
Stock Repurchase and Dividends: Marvell executed a $1 billion accelerated stock repurchase program and returned $51 million to shareholders through dividends in Q3.
Focus on AI and Data Center: Marvell is doubling down on AI and data center opportunities, divesting non-core businesses like Automotive Ethernet and acquiring assets like Celestial AI. The company is aligning its product roadmap with AI-driven demand and cloud CapEx growth.
Long-term Growth Strategy: Marvell expects strong growth in fiscal 2027 and 2028, driven by AI, data center, and communications markets. The company is investing in new technologies and expanding its addressable market through strategic acquisitions and product innovations.
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Risk or Challenges
Regulatory Reviews for Acquisition: The acquisition of Celestial AI is subject to customary closing conditions, including regulatory reviews in the United States. This could delay or potentially block the acquisition, impacting Marvell's strategic plans to strengthen its data center portfolio.
Copper-Based Interconnect Limitations: Copper-based interconnects in scale-up systems are approaching their fundamental limits in reach and bandwidth, creating a compelling need for optical solutions. Failure to transition effectively to optical solutions could hinder Marvell's ability to meet market demands.
Customer Dependency in Custom Business: The custom business remains tied to a few specific sockets, and any disruption in these relationships or transitions to next-generation XPUs could create revenue volatility.
Economic Uncertainties: Economic uncertainties could impact cloud CapEx growth, which is a key driver for Marvell's data center revenue. A slowdown in cloud CapEx could adversely affect revenue growth.
Supply Chain Challenges: Marvell's ability to meet strong demand signals and execute on long-term technology roadmaps depends on coordinated capacity planning. Any disruptions in the supply chain could impact product delivery and revenue.
Technological Transition Risks: The transition to next-generation technologies like 1.6T and 3.2T solutions requires significant investment and execution. Delays or failures in these transitions could impact Marvell's market leadership and revenue.
Integration Risks for Celestial AI: Post-acquisition, integrating Celestial AI into Marvell's operations could pose challenges, including cultural integration and alignment of strategic goals, potentially delaying expected revenue contributions.
Market Competition: Marvell faces competitive pressures in its interconnect and data center businesses. Failure to maintain technological leadership could result in loss of market share.
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Guidance & Outlook
Revenue Growth: Marvell expects total company revenue to grow to $2.2 billion in Q4 FY2026, representing 6% sequential and 21% year-over-year growth. Excluding the divested Automotive Ethernet business, the implied year-over-year revenue growth is approximately 24%. For FY2027, data center revenue is expected to grow by more than 25%, with overall company revenue growth driven by strong demand across the portfolio.
Data Center Business: Data center revenue is forecasted to grow by more than 25% in FY2027, with interconnect business growing faster than cloud CapEx, custom business growing by at least 20%, and other data center products (storage, switching) growing by at least 15%. Revenue growth is expected to accelerate in FY2028, driven by strong demand for AI-related products and new product cycles.
Acquisition of Celestial AI: The acquisition is expected to close in Q1 FY2027, with meaningful revenue contributions starting in the second half of FY2028. Revenue from Celestial AI is forecasted to reach $500 million annualized run rate by Q4 FY2028 and $1 billion by Q4 FY2029. The acquisition positions Marvell to capitalize on the $10 billion scale-up interconnect market opportunity.
Communications End Market: Revenue from the communications end market is expected to grow by 10% in FY2027, with enterprise networking reaching a $1 billion annualized revenue run rate in Q4 FY2026. Carrier business recovery is expected to continue, aligning with carrier CapEx growth.
Capital Expenditures and Operating Expenses: Non-GAAP operating expenses are expected to increase at roughly half the rate of revenue growth in FY2027. The acquisition of Celestial AI will add approximately $50 million in annual operating expenses post-closing.
Long-Term Growth Drivers: Marvell anticipates strong market tailwinds and new product cycles to drive significant growth in FY2028 and beyond. Data center revenue growth is expected to accelerate meaningfully above 25% in FY2028, supported by AI capacity expansion and customer partnerships.
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Shareholder Return Plan
Cash dividends: Returned $51 million to shareholders through cash dividends in the third quarter.
Accelerated stock repurchase program: Executed a $1 billion accelerated stock repurchase program in the third quarter.
Ongoing buyback program: Repurchased $300 million of stock through the ongoing buyback program in the third quarter.
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Key Q&A
Q:Is the $10 billion revenue target for next year accurate, and how does it align with long-term targets for fiscal '29?
A:Yes, the $10 billion revenue target for next year is accurate and motivational for the team. The company expects sequential revenue growth every quarter next year, with stronger growth in the second half. For fiscal '28, the custom business is expected to double off fiscal '27, and data center growth is projected at 40%. This trajectory aligns with long-term growth targets for fiscal '29.
Q:Can you provide an update on the sub-3 nanometer design win pipeline, including XPU and XPU attach programs, and their production timeline?
A:The product transition from the current lead XPU customer to the next generation is incorporated into the numbers provided. The 2-nanometer design is progressing well, with strong product ramps expected in fiscal '28. The team is executing effectively across core IP, nodes, and packaging.
Q:Does the $500 million to $1 billion target for Celestial AI include only PF Link products or other potential businesses?
A:The revenue targets include Celestial AI in totality, but the PF chiplet is expected to drive the initial revenue build in fiscal '28 and fiscal '29.
Q:What is the breadth of the revenue ramp for Celestial AI at the end of fiscal '28 and beginning of fiscal '29?
A:The engagement is broad, but the initial ramp will involve a few large companies, including a Tier 1 hyperscaler. The company expects broader adoption beyond this initial phase.
Q:What is the expected growth rate for the custom business in fiscal '27, and what is the visibility on long-term revenue materializing?
A:The custom business is expected to grow at least 20% in fiscal '27, with stronger growth in the second half. The company has strong visibility into long-term revenue due to customer planning and multiyear cycles in AI infrastructure.
Q:Is Amazon the lead customer for photonic fabric, and what is the status of the relationship?
A:Yes, Amazon is the lead customer for photonic fabric, as indicated by the warrant agreement and strategic arrangement. The relationship is expanding, and the company is optimistic about the technology's potential.
Q:Why is the optics business correlated to cloud CapEx rather than AI accelerator growth?
A:The optics business is fundamentally driven by AI and AI acceleration, which is growing faster than CapEx. However, CapEx was used as a broad proxy for modeling purposes.
Q:Will the company move to providing systems or rack-level solutions?
A:The company has a rack-scale vision and provides end-to-end solutions, but no system-level revenues are included in the next two years' projections.
Q:Review of Unclear Management Responses
A:Management avoided providing specific details about the second customer in the custom business and their ramping history. Additionally, they did not disclose customer names for Celestial AI's revenue ramp or provide granular details about the sub-3 nanometer design pipeline.
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Earnings Word Cloud
The most frequently occurring keywords in this quarter's earning call
AI fabric
Automotive Ethernet
CXL
Celestial AI
Ethernet Marvell
PF chiplets
TIAs
XPU attach
XPUs scale
XPUs switch
acquisition Celestial
capacity
communication end
die
edge
fabric technology
forward
inflection
latency
memory expansion
network
package
partner
portfolio
purpose
road map
run rate
scale interconnect
scale switch
socket
speed
storage
switching
use case
world
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Marvell Technology's earnings call reveals strong strategic initiatives, including expanding data center capabilities and leveraging SRAM-based IP for design wins. The company projects revenue growth, improved margins, and increased capital expenditures, indicating a positive outlook. The Q&A section highlights Marvell's competitive position and growth potential, particularly in the XPU market. While management was vague on some details, the overall sentiment is positive with optimistic guidance, strong market trends, and a real CECL opportunity, suggesting a positive stock price movement in the coming weeks.
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Despite the revenue decline and margin pressure, Marvell's optimistic guidance for future growth in data center and 5G markets, along with strategic initiatives and a robust share buyback program, balance the negative aspects. The market's reaction is likely to be neutral, as the positive long-term outlook offsets short-term financial challenges.
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