Marvell's 2026Q2 Earnings Call: Contradictions in Custom Business Growth, Optics Market Share, and XPU Targets

The above is the analysis of the conflicting points in this earnings call

Date of Call: August 28, 2025

Financials Results

• Revenue: $2.006B, up 6% Q/Q and 58% YOY
• EPS: $0.67 non-GAAP per diluted share, up 123% YOY (GAAP EPS $0.22)
• Gross Margin: 59.4% non-GAAP (GAAP 50.4%); no prior-year comparison provided
• Operating Margin: 34.8% non-GAAP, up 870 bps YOY (GAAP 14.5%)

Guidance:

• Q3 revenue expected at $2.06B ±5% (midpoint ~+36% YOY).
• Data center Q3 flat Q/Q; mid-30% YOY growth; electro-optics up double-digit Q/Q; custom down Q/Q with stronger Q4; 2H custom > 1H.
• Enterprise networking + carrier to grow ~30% Q/Q in Q3.
• Consumer Q3 down low single-digit % Q/Q.
• Auto & industrial Q3 ≈$35M following auto Ethernet divestiture.
• Non-GAAP gross margin 59.5%-60%; GAAP gross margin 51.5%-52%.
• Non-GAAP opex ≈$485M; GAAP opex ≈$719M; non-GAAP tax rate 10%.
• Non-GAAP EPS $0.69-$0.79; GAAP EPS $1.98-$2.08.
• GAAP other income ≈$1.8B (divestiture gain); non-GAAP other expense ≈$33M.

Business Commentary:

* Revenue Growth and Data Center Dominance: - Marvell Technology reported record revenue of $2.006 billion for Q2 FY2026, reflecting a 6% sequential increase and 58% year-on-year growth. - The growth was driven by the strong momentum in the data center end market, with robust AI demand, and a solid recovery in enterprise networking and carrier infrastructure.

• Operating Margin and Earnings Expansion:
• Marvell expanded its non-GAAP operating margin by 870 basis points year-over-year to 34.8% and delivered record non-GAAP earnings per share of $0.67, up 123% year-on-year.

• This was attributed to operational efficiencies and strong revenue growth, particularly in the data center segment.

• Custom Silicon and Optics Performance:

• Custom silicon products performed well, with expectations for growth in the second half of the fiscal year, despite nonlinear growth in Q3.

• The company's optics business grew double digits in Q3, driven by strong demand for its PAM and DCI franchises, including 800-gig PAM DSPs and 200-gig per lane PAM DSPs.

• Automotive Ethernet Divestiture:

• Marvell completed the divestiture of its automotive Ethernet business for $2.5 billion, aligning with its strategy to focus on the AI opportunity in the data center.
• The transaction provided flexibility to continue stock repurchase programs and invest in the technology platform.

Sentiment Analysis:

• Record revenue $2.006B (+58% YOY) and non-GAAP EPS $0.67 (+123% YOY). Non-GAAP operating margin expanded 870 bps to 34.8%. Q3 revenue guided to $2.06B midpoint (~+36% YOY) with electro-optics up double digits Q/Q and enterprise/carrier up ~30% Q/Q. Data center to grow mid-30% YOY in Q3; custom expected to be higher in 2H vs 1H. Strong cash flow ($462M) and capital return; $2.5B auto Ethernet divestiture completed.

Q&A:

• Question from Ross Clark Seymore (Deutsche Bank): What are the headwinds for custom in Q3 and why confidence in a stronger Q4?
  Response: Custom is experiencing normal lumpiness with a one-quarter digestion; optics grows double digits in Q3 and custom rebounds, making 2H custom revenue higher than 1H.

• Question from Jeremy Lobyen Kwan (Stifel): How much second-half custom revenue comes from new programs vs existing wins?
  Response: Design-win momentum is accelerating across XPU and XPU attach with newly added multi-billion-dollar sockets, reinforcing the path to 20% share; revenue is driven by both existing ramps and new wins beginning to layer in.

• Question from Jeremy Lobyen Kwan (Stifel): Any supply constraints or tariff impacts?
  Response: Supply is tight but being met through close customer coordination; no material tariff impact observed.

• Question from Aaron Christopher Rakers (Wells Fargo): How concentrated is custom with the lead customer and when do additional wins contribute?
  Response: Initial sockets have ramped and 18+ sockets begin layering over the next 18–24 months, broadening diversification and supporting the path to ~20% share.

• Question from Aaron Christopher Rakers (Wells Fargo): How big is the scale-up/scale-across networking opportunity for Marvell?
  Response: Marvell is investing in scale-up switches (Ethernet and UALink) leveraging low-latency switching and SerDes IP, viewing it as a significant multi-year growth driver.

• Question from Vivek Arya (BofA Securities): Can Q4 data center growth accelerate and can FY26 growth track industry ~50% next year?
  Response: No annual guide; near term, custom is up 2H over 1H, optics strong, and enterprise/carrier recovering sharply, supporting continued momentum into Q4.

• Question from Thomas James O'Malley (Barclays): Is the Q3 custom softness a project wind-down or a temporary pause?
  Response: It’s a timing issue within existing programs; broader program ramps will reduce lumpiness over time.

• Question from Thomas James O'Malley (Barclays): Any optical supply constraints impacting ramps?
  Response: Despite ecosystem noise, strong partnerships and planning have enabled Marvell to meet demand and sustain growth.

• Question from Timothy Michael Arcuri (UBS): What’s the optics baseline and when does AI exceed 50% of company revenue?
  Response: Prior mix was optics ~50%, custom ~25% (Q4 reference); both have grown, but the company isn’t updating precise mix quarterly; AI mix continues to trend higher.

• Question from Harsh V. Kumar (Piper Sandler): How many of the ~18+ custom/attach wins are producing revenue and are programs on track?
  Response: Several are in production since late last year, with the rest moving through 2025–2026; programs are progressing and new wins continue.

• Question from James Edward Schneider (Goldman Sachs): How will you deploy auto Ethernet proceeds and are more divestitures possible?
  Response: Proceeds provide flexibility for higher, consistent buybacks and selective AI-focused tuck-ins, guided by a data center-first capital allocation framework.

• Question from Harlan L. Sur (JPMorgan): Update on 3nm XPU follow-on and third XPU customer timing into CY26?
  Response: No socket-level updates; focus remains on executing current ramps, adding wins, and achieving ~20% share of a growing TAM.

• Question from Nathaniel Quinn Bolton (Needham & Company): Timing for scale-up switch products (Ethernet/UALink) and outlook for LPO modules?
  Response: Scale-up products will be introduced over the next two years (CY26–27); LPO ramps are niche and small relative to DSP-based pluggables, where Marvell remains dominant while also participating in LPO.