Marvell reported strong Q2 FY2025 results. The company beat the revenue consensus estimates by 1.5% and non-GAAP EPS estimates by 2.3%. Revenue grew 10% sequentially, and the guide for the next quarter beat estimates by 2.8%. The guide suggests the company returns to growth from FQ3.
AI led the way, with data center revenue growing 92% YoY. The consumer segment revenue recovered, more than doubling sequentially, and management believes that enterprise networking, carrier and auto and industrial end markets have bottomed in the second quarter. All the end markets are expected to grow in Q3.
Revenue
FQ2 revenue declined by (5.1%) YoY and grew by 10% sequentially to $1.27 billion, primarily due to solid growth in the data center end market led by AI. This compares to a (-12.2%) YoY decline in FQ1. Next quarter, management has guided for a revenue to accelerate to 2.2% YoY growth to $1.45 billion at the midpoint. This beat the consensus estimates by 2.8% and the positive price action further implies we will see analysts raise consensus.
Matt Murphy Chairman and CEO said in the earnings call, “For the third quarter, we are forecasting consolidated revenue to grow 14% sequentially at the midpoint of guidance. We expect this growth to be primarily driven by data center AI, and further augmented by the start of a recovery in our enterprise networking and carrier end markets.”
Margins
Margins are improving. The higher custom ASIC revenue will weigh on the gross margins. However, operating leverage and non-recurring engineering (NRE) cost benefits will help to improve the bottom line, particularly the management pointed to the next fiscal year.
- The gross margin was in line with the guide at 46.2%, up from 38.9% in the same period last year and 45.5% in the previous quarter. Management has guided for 47.2% in the next quarter.
- Adjusted gross margin is 61.9%, up from 60.3% last year and down from 62.4% in the previous quarter. The management guide for the next quarter is 61%, down sequentially primarily due to the lower margins for custom ASIC business.
- The operating margin was (-7.9%), up from (-15.3%) last year and (-13.1%) in the previous quarter. The management guide for the next quarter is (-0.6%). Adjusted operating margin was 26.1%, down from 26.9% in the last year and up from 23.3% in the previous quarter. It beat the guide marginally by 0.5%. The guide for the next quarter is 28.9%. The improvement in margin is due to operating leverage and also non-recurring engineering (NRE) cost benefits.
- Net loss was ($193.3 million) or (-15.2%) of revenue compared to a net loss of ($207.5 million) or (-15.5%) of revenue in the same period last year. Adjusted net income was $266.2 million or 20.9% compared to $290.2 million or 21.6% last year.
EPS
- Adjusted EPS was $0.30, beating estimates by 2.3% compared to $0.33 in the same period last year. The management GAAP loss per share guide for the quarter is ($0.09) +/- $0.05 and adjusted EPS guide is $0.40 +/- $0.05, representing a YoY decline of (-2.4%).
- Analysts expect adjusted EPS to accelerate to 5.2% growth in Q4 and 108.7% in Q1 FY2026.
Cash Flow and Balance Sheet
The cash flows have improved when we compared to last year. This is positive particularly since the company has high debt.
- Operating cash flow was $306.4 million or 24.1% of revenue compared to $112.5 million or 8.4% of revenue in the same period last year and 28% in the previous quarter.
- Free cash flow was $253 million or 19.9% of revenue compared to $1.2 million or 0.1% in the same period last year and 20% in the previous quarter. The cash flows were lower in the last year due to higher days sales outstanding of 82 days compared to 76 days in the recent quarter and also higher severance-related cash restructuring charges last year.
- Cash was $808.7 million and debt of $4.13 billion compared to $847.7 million and $4.15 billion in the previous quarter.
- Inventory was $818 million compared to $826 million in the previous quarter.
- The company paid $52 million in dividends and repurchased shares worth $175 million. The company expects to increase share repurchases further in FQ3.
Key Segments
Data Center
Data Center end market grew by 92% YoY and 8% sequentially to $880.9 million led by strong AI revenue.
Matt Murphy said in the earnings call, “These above-guidance results were driven by strong demand for our electro-optics products, custom silicon beginning its anticipated ramp, as well as growth in our storage and switch revenue. Strong bookings continue for our market leading 800 gig PAM products and 400ZR data center interconnect, or DCI products, and we are looking forward to starting shipments of our next-generation 200 gig per lane, 1.6 terabit DSPs in the third quarter. As a result, we expect our electro-optics revenue will continue to grow every quarter this fiscal year on a sequential basis.”
The management also highlighted that custom silicon business is moving in the right direction and custom silicon customers are here to stay. “Our AI custom silicon programs are progressing very well with our first 2 chips now ramping into volume production. Development for new custom programs we have already won, including projects with the new Tier 1 AI customer we announced earlier this year, are also tracking well to key milestones.
Looking ahead to the third quarter of fiscal 2025 for our data center end market, we are forecasting revenue growth to accelerate into the high teens sequentially on a percentage basis. We expect the largest contributor to this growth will be our AI custom silicon programs as they begin to ramp meaningfully in the third quarter, further augmented by ongoing growth from our optics portfolio.
Although custom has a lower gross margin than our merchant products, it benefits from inherently lower operating expense levels, given NRE offsets from customers and the sharing of IP with our merchant business. As a result, as custom silicon becomes a larger part of our overall revenue, we see a path for operating expenses as a percentage of revenue decreasing below our current target operating model.”
Carrier Infrastructure
Carrier Infrastructure revenue declined by (-72%) YoY and up 6% sequentially to $75.9 million. Management expects aggregate revenue from carrier infrastructure revenue and enterprise networking to grow sequentially in the mid-single digits in the next quarter and further improve in the fourth quarter.
Enterprise Networking
Enterprise Networking revenue was down (-54%) YoY and (-1%) sequentially to $151 million. Management expects aggregate revenue from carrier infrastructure revenue and enterprise networking to grow sequentially in the mid-single digits in the next quarter and further improve in the fourth quarter. After several quarters of inventory correction, the company is seeing signs of growth in both Carrier Infrastructure and Enterprise Networking.
Consumer
Consumer end market was down (-47%) YoY and up 112% sequentially to $88.9 million following the gaming inventory correction. Management expects revenue to grow slightly on a sequential basis in the next quarter.
Automotive/Industrial
The automotive and industrial end markets revenue declined by (-31%) YoY and (-2%) sequentially to $76.2 million due to the broad inventory correction in the automotive end market. Management expects auto and industrial end market to grow sequentially in the mid-single digits in the next quarter.
Earnings Call:
No Update on AI Revenue:
The CEO had stated the following at the beginning of the call: “Given the strong start in the first half of the fiscal year from AI and our expectations for accelerated growth in the second half, we remain confident in our ability to significantly exceed the full year AI revenue target discussed earlier this year at our AI event” – yet, there was no update to the $1.5 billion floor provided for this year and the $2.5 billion floor for AI revenue provided for next year. Analysts poked quite a bit to get an update, but to no avail, with the CEO stating: “we're not calling those numbers out typically by quarter.”
Here is an example of what transpired in the Q&A, to where the CEO insisted the number was higher yet did not provide specifics:
Question
Quinn Bolton (Analysts)
Matt, I'll ask a question, but if you don't answer it, maybe I'll follow up. You guys are talking about nice upside, the $1.5 billion and $2.5 billion target for AI. Is that something you think you're closer to $2 billion than $1.5 billion when all is said and done this year? I mean, can you give us any sort of quantification of the upside in AI revs? And if not, I'll follow up with a product question.
Answer
Matthew Murphy (Executives)
Yes. I don't think we're — we're sort of fresh off the $1.5 billion update from a few months back when we had our AI day. But I think if you look at the — even like Q3, right, where overall revenue for the whole company is growing in mid-teens and then obviously guiding up data center much higher than that with AI driving it and then saying also Q4 is going to be extremely strong in data center and AI, you can probably draw a line of sight to it. But we're clearly, clearly exceeding the $1.5 billion. That's for sure. And then again, the [indiscernible] for next year is really good, because from an exit standpoint, we'll be at a very healthy level by the fourth quarter.
1.6T Transceivers Ramping in Q3:
The earnings report provided a surprise in terms of the 1.6T transceivers ramping in Q3. We covered this recently here (and a few other times in archived Marvell analysis on our site). Per our previous analysis: “Marvell offers 200-gig, 400-gig and 800-gig PAM-based electro-optics. The 800-gig is the primary interconnect for AI deployments. The company is qualifying a 1.6T solution with 200-gig per lane for the next leg up in AI acceleration. For the 1.6T solution, Nvidia will be a lead partner.”
Here is an update from the call which points toward next year being a big year for Marvell on electro-optics:
Question
Christopher Rolland (Analysts)
Congrats on the results. I have an Inphi question primarily. And Matt, you talked about 1.6T. That's pretty exciting that, if I understood that correctly, you're going to be ramping in 3Q. Perhaps you can talk about the profile of this ramp, what it looks like in 3Q, 4Q and into '25. I think The Street's all over the place on this node. But if you could talk about that and maybe even the economics, what it means for you guys, that would be fantastic.
Answer
Matthew Murphy (Executives)
Yes. Thanks, Chris. Yes, it's still early. We were first to market in this area, having introduced these products at OFC a year ago. It's great to see that they're going into production. We'll know a lot more when we start to see how our customers are planning to deploy it. But we are seeing initial shipments now. The way I would think about it though is 800 gig right now and into — and through next year is still going to be the workhorse high-volume platform. And even some of the newer launches that are coming, as an example, are going to still support 800 gig as well as 1.6T.
So it's really hard to call exactly. It's going to be an important transition. There's no question. The only question is the timing of which. And Chris, I think we'll be in a better position to comment on that probably as we get closer to the end of the year, we start looking at the setup for calendar '25 and what our customers are thinking. But either way, we're going to be well positioned for both of those opportunities for next year.
– End Quote
Conclusion:
Marvell is bottoming and we are looking for an entry. We can’t say right now if we will enter this quarter or enter closer to calendar year 2025. Although the rebound is a step in the right direction, the lack of an update on AI revenue leads us to the assumption there isn’t much of an update to report. Today there are stronger AI stories, whereas next year Marvell could rival some of the AI stories we own today.
Royston Roche, Equity Analyst at the I/O Fund, contributed to this article.
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