Marvell reported impressive Q3 results that beat revenue estimates by 4% and adjusted EPS estimates by 5.5%, led by strong AI demand. The Q4 guide was an outlier, as it beat revenue estimates by 9.1% and adjusted EPS estimates by 13.5%. Management expects to significantly exceed the full year AI revenue target of $1.5 billion and set the tone the company will easily beat the FY2026 AI revenue target of $2.5 billion.
Marvell also announced an expanded five-year partnership with AWS this week to supply the cloud infrastructure giant with custom Trainium and Inferentia chips. The deal is “multi-generational,” implying Marvell will continue to supply the Trainium2 5nm (Trn2) being released for general availability this week while also supplying the newly-announced Trainium3 (Trn3) on the 3nm process node expected to ship at the end of 2025. Amazon is an investor in Anthropic with plans to build a supercomputing system with “hundreds of thousands” of Trainium2 chips called Project Rainier.
The CEO stated the following when asked for more details on the expanded AWS partnership in the Q&A: “And the announcement we made with AWS is very significant for both companies. For us as a supplier to them, as you pointed out — first of all, it's a five-year agreement. It covers AI custom products as well as a broad range of networking products. It's significant in its — in the revenue that it's going to drive for us. And most importantly, it is multi-generational in nature. So, with this agreement and with these kinds of relationships that we're building with these customers, we have even more confidence than before to achieve our goals that we're driving.”
Financials:
Revenue: 19% Sequential Growth in Q3 and Q4
FQ3 revenue accelerated to 6.9% YoY and 19.1% QoQ growth to $1.52 billion, helped by stronger than expected ramp in the AI custom silicon business. For the next quarter, management expects revenue to grow to 26.2% YoY and 18.7% QoQ to $1.8 billion at the midpoint.
The CEO Matt Murphy said, “The exceptional performance in the third quarter, and our strong forecast for the fourth quarter, are primarily driven by our custom AI silicon programs, which are now in volume production, further augmented by robust ongoing demand from cloud customers for our market-leading interconnect products. We look forward to a strong finish to this fiscal year and expect substantial momentum to continue in fiscal 2026."
Margins:
The gross margin needs to be watched closely as a higher mix of custom silicon will result in a lower gross margin. However, there was a question about this on the call and the CFO remained confident the operating margin will expand. He also stated to expect strong optics and networking growth next year, which are accretive to margins.
There were restructuring charges that weighed on the GAAP metrics. Non-GAAP metrics are more important in this case. Reference the additional paragraph on the restructuring charges below.
- Q3 adjusted gross margin was 60.5% compared to 60.6% in the same period last year, yet missed the guide of 61% due to higher-than-expected revenue from custom silicon. Management guide for the next quarter is 60% and expects to be about 60% through next year.
- Q3 operating margin was (-46.4%) due to the restructuring charges discussed below. Management guide for Q4 is 10.6%.
- Adjusted operating margin was 29.7% compared to 29.8% in the same period last year. It was better than the management guide of 28.9%. Management guide for Q4 is 33%.
- Net loss was ($676.3 million) or (-44.6%) of revenue compared to ($164.3 million) or (-11.6%) of revenue in the same period last year. The company reported restructuring charges of $715 million.
- Adjusted net income was $373 million or 24.6% of revenue compared to $354.1 million or 25% of revenue in the same period last year.
The CFO also pointed to improvement in the bottom line in the coming quarters. “We see a strong setup for next fiscal year as well. We remain focused on continuing to drive strong operating leverage, expanding our operating margins, bringing down stock-based compensation as a percentage of revenue and efficient cash flow generation to continue to return meaningful cash to shareholders. I'm also pleased with our guidance to return to GAAP profitability in the fourth quarter and we are looking forward to continue to drive improvement in this metric.”
EPS: 43% Growth QoQ
The company beat on adjusted EPS by 5.5% at $0.43 compared to $0.41 expected. The Q4 GAAP EPS is expected to be $0.16 +/- $0.05 and the adjusted EPS is expected to be $0.59 +/- $0.05.
Per the opening remarks: “As a result, our non-GAAP earnings per share of $0.43 was also well above the midpoint of guidance, growing by 43% sequentially. This earnings growth rate, which was more than doubled our top-line growth rate, highlights the substantial operating leverage in our business model.”
As we look further out, the analyst estimates for fiscal year EPS is expected to grow 75% from FY2025 to FY2026 and then grow another 33% into FY2027.
Restructuring Charges:
The company reported restructuring charges of $715 million in Q3. Management mentioned that restructuring charges are essentially behind them now and that these investments are aimed at focusing on the fast-growing AI data center segment.
The CEO said in the earnings call, “In the third quarter, we made decisions to further solidify and purposefully redirect our investments towards data center relative to our other end markets. These actions resulted in a restructuring charge in the third quarter. The goal of these actions is to increase our R&D intensity towards the data center, our largest and fastest growing opportunity, while continuing to drive significant operating leverage going forward.”
The CFO further said, “As Matt mentioned in his prepared remarks, in the third quarter, we made additional decisions to further redirect investments towards the data center. This resulted in an aggregate restructuring charge of $715 million, which is reflected in our GAAP results for the third quarter. The two largest components were impairment charges for acquired intangible assets and certain purchased technology licenses and their future contractual obligations.
I would also note that approximately three quarters of these restructuring charges are non-cash in nature and that the aggregate restructuring charges are now largely behind us. These charges are a reflection of the fact that we have invested significantly in updating our enterprise and carrier product portfolios over several years and we plan on more targeted investments in these end markets going forward.”
Cash Flow and Balance Sheet
Operating cash flow margin of 35.4% is flat YoY with $536.3 million in operating cash flow this quarter. The free cash flow of $460.8 million resulted in margin of 30.4%. The company has $868 million in cash on its balance sheet and $4.1 billion in debt.
Inventory decreased from 98 days to 67 days for total inventory of $859 million.
Key Segments
Data Center
Data center revenue of $1.1 billion grew 98% YoY and grew 25% sequentially. Management stated: “We are seeing strong custom AI demand continue into the fourth quarter and have secured supply chain capacity to support our customers' growth forecasts.”
Marvell’s data center revenue accounts for 73% of revenue and the CEO stated he “expects this percentage to increase again in the fourth quarter.”
Per the opening remarks: “AI continues to lead the way, enabling our data center revenue to almost double year-over-year in the third quarter, and we expect it to continue driving strong growth in the fourth quarter. With three quarter of strong AI results under our belt for this fiscal year and an even stronger fourth quarter forecast, we are clearly set to significantly exceed the full year AI revenue target of $1.5 billion, outlined earlier this year at our AI event.”
Marvell’s AI Market Opportunity: Back in April at the company’s AI Day, Marvell laid out a TAM of $42 billion for custom silicon by CY2028, of which the CEO believes Marvell will take 20% market share. This totals about $8 billion for its custom silicon AI opportunity. Assuming that materializes, the CEO is essentially forecasting 700% growth in custom silicon if we assume $1 billion is from ASICs and $500 million is from networking. Earlier, the CEO stated it was roughly half-and-half between their two AI-related segments. There is a significant customer expected to ramp in 2026, and I suspect we will see a new forecast when the company can more openly talk about an official announcement. On the networking side, the TAM is another $31 billion.
Here is an analyst note that echoes how Marvell’s current TAM forecast may be too low:
“Oppenheimer analyst Rick Schafer thinks that each of Marvell’s four custom chips could achieve $1 billion in sales next year. Production is already ramping up on the Trainium chip for Amazon, along with the Axion chip for the Google unit of Alphabet. Another Amazon chip, the Inferentia, should start production in 2025. Toward the end of next year, deliveries will begin on Microsoft’s Maia-2, which Schafer hopes will achieve the largest sales of all.”
Enterprise Networking and Carrier Infrastructure:
The carrier infrastructure segment saw revenue of $84.7 million, and was down (73%) YoY yet was up 12% QoQ. Enterprise networking was down (44%) YoY and was flat QoQ.
Per the opening remarks: “We began to see a recovery in both of these end markets, with revenue collectively growing 4% sequentially. We expect the pace of recovery to accelerate in the fourth quarter with aggregate revenue from enterprise networking and carrier infrastructure forecasted to grow sequentially in the mid-teens on a percentage basis.”
Consumer End Market:
Consumer was down (43%) yet was up 9% QoQ. Next quarter, the forecast is weak due to gaming: “Looking ahead to the fourth quarter, we expect revenue from the consumer end market to decline sequentially in the mid-teens on a percentage basis. This is due to seasonality in gaming demand, which typically weakens in our fourth quarter, bottoms out in our first fiscal quarter and then begins to rebound in the second quarter.”
Automotive/Industrial:
The automotive/industrial segment was down (22%) yet was up 9% QoQ. The segment is expected to grow sequentially in the low-to-mid single digits next quarter.
Earnings Call:
Newly Launched 3nm 1.6T DSP (Nvidia Supplier):
The new 3nm Ara PAM4 DSP was announced this week with Marvell being first-to-market with a 3nm 1.6T interconnect. This follows Marvell being the first-to-market with a 5nm 1.6T interconnect. Overall, these interconnects help to reduce power requirements by 20% while enabling higher bandwidth and performance. This is especially important as data centers are currently power constrained. In the press release, the company stated: “We anticipate unit shipments of PAM4 DSPs will more than triple from 2024 to 2029 to nearly 127 million units a year and remain the primary optical technology for connecting assets inside data centers for the foreseeable future.”
As discussed in our July write-up (worth a read under the Quick refresher on Marvell’s Products): Nvidia is a lead partner on the 1.6T solution with the 1.6T being an upgrade from the 800GB, driven by AI workloads needing higher bandwidth: “Artificial intelligence and machine learning drive demand for the 800-gig PAM to increase the speed of input-output and to process the data flows. This doubles the throughput (bandwidth) due to an 8x100Gpbs optical transceiver for inside and between AI clusters.”
In the earnings call, there was an inspiring moment when the CEO was asked how Marvell is able to put be first-to-market with Ara, after being first to market with Nova the 5nm 1.6T electro-optic eighteen months ago. This is what he said:
“And I can tell you, when you enter an inflection in a growth market, the company with the best and leading technology that's available, you can sample it, it works, is going to win. It's that simple.
And so, our team, which is the best in the world at what they do, is heads down focused on driving best possible solutions, the best TCO, the best power and highest performance in the latest process node. And you're going to see that continue across Marvell, but particularly in this area of DSPs and broadband analog and the chipsets that we sell, we intend to maintain our market-share leadership and extend that and be the supplier of choice. So that's — it's as simple as that. We're going faster.”
There was a question from an analyst on tariffs, but the CEO shrugged off the concern and stated the 1.6T DSPs and the 800GB DSPs will continue to be a strong contributor next year.
“So, we continue to be diligent here and monitor, but as it appears right now, demand is strong, bookings continue to be strong, visibility is great. We expect that business to grow significantly for us. Next year, on the 1.6T as it relates to that, that will be part of the growth we see next year. We're shipping that product now into production. It will be a contributor next year, but I don't want to take away from the very strong 800-gig cycle that will continue to be driven through our fiscal '26 next year.”
Margins:
It’s no secret that Marvell is weaker on margins than its peers. As custom silicon ramps, this will weigh on the gross margin. However, the CFO pointed out the company has plans to increase its operating leverage next quarter to minimize the impact. It was also pointed out that the optics business is expected to help offset some of the gross margin weakness from the custom program.
Here is what was said regarding operating margins:
“In terms of the leverage, when you look at our Q3 results, we came in at around 30% OEM. And even with gross margin guide down about 0.5%, our operating margin is actually up to 33%, so up by 3%. And so, when you look at our OpEx control, you should expect us to continue to have a very significant focus on levers through next year with the top-line outgrowing OpEx right through next year. And so, really should see a very nice increase in our operating margin through next year, really starting to approach the bottom end of our long-term range towards the end of next year.”
Conclusion:
Nobody deserves a win on Marvell more than the I/O Fund. We have tracked this stock closely, counting 15 analyses in the last five years. We foresee Marvell becoming a larger position in 2025, and we foresee that position increasing in our portfolio again come 2026. Marvell is a market leader in electro-optics, which should become more evident as Blackwell ships in volume next year. In custom silicon, the company is certainly the underdog when it comes to heavyweight Broadcom, yet there will be diversification across AI suppliers with Marvell being a smaller, lesser-known stock sitting on an immense AI opportunity.
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