Marvell Technology Inc. (NASDAQ:MRVL) released its second-quarter results after Thursday’s closing bell.

Below are the transcripts from the second quarter earnings call.

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OPERATOR

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-0 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, Senior Vice President of Investor Relations. Thank you. You may begin.

Ashish Saran (Senior Vice President of Investor Relations)

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 Menkes, CFO Chris Koopman, President and COO and Sandeep Bharati, 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 filing. We do not intend to update our 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 Murphy (Chairman and CEO)

Matt thanks Ashish and good afternoon everyone. For the second quarter of fiscal 2026, Marvell delivered record revenue of $2.006 billion, reflecting a 6% sequential increase and strong 58% year over year growth. Our data center end market continued its strong momentum, growing 69% year over year fueled by robust AI demand. We also saw a solid recovery in our enterprise networking and carrier infrastructure end markets which collectively grew 43% year over year. We expanded our 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 over year. We also delivered 462 million in operating cash flow, up significantly from the 333 million in the first quarter. Robust cash flow generation is enabling us to continue to return significant capital to our stockholders. We have repurchased 540 million of stock through the first half of the fiscal year with approximately 2 billion remaining in our authorization. At the beginning of the third quarter, we completed the divestiture of our automotive Ethernet business in a 2.5 billion all cash transaction at a very compelling valuation. I’m pleased with our team’s execution in closing this transaction ahead of schedule. The proceeds from this transaction provide us flexibility to continue to drive our ongoing stock repurchase program and deploy capital to further bolster our technology platform. The auto divestiture aligns with our strategy. To focus the company on what we do best. Expect to continue to be a massive AI opportunity in front of us by purposefully redirecting our investments towards data center relative to our other end markets. That strategy has been very successful with data center alone now driving three quarters of our total revenue. The auto divestiture further reduces the relative proportion of revenue from our non data center end markets. As a result, starting in the third quarter we will consolidate our non data center end markets into a new single communications and other end market. Willem will cover this in more detail in his prepared remarks during the quarter. We hosted a highly successful custom Silicon Investor event in June where we outlined an expanded $94 billion data center TAM for calendar 2028, a 26% increase from our prior view. We also unveiled a new fast growing custom silicon product category of XPU Attach, updated our custom design win board to 18 multi generational XPU and XPU attached sockets and highlighted over 50 new pipeline opportunities with an estimated 75 billion of lifetime revenue potential based on the sockets. We have already won. We concluded with our plan to grow our data center market share from 13% of a $33 billion TAM in calendar 24 to 20% of a $94 billion TAM in calendar 28. Let me now take a moment to share how we are enhancing our leadership structure to further capitalize on significant opportunities in the large and fast moving AI and cloud markets. We have promoted two exceptional leaders, Chris Koopmans to President and COO and Sandeep Bharathi to President Data Center Group and consolidated substantial parts of the organization under their leadership. Their proven track record of innovation, execution and results positions them to accelerate Marvell’s growth. Chris joined Marvell nine years ago and he has been a key enabler of our transformation to a leader in the data center market. He has successfully led sales, our networking business and most recently global business operations and marketing. I’m pleased to see Chris take on sales again along with managing our non data center businesses in corporate development. His expanded role now encompasses end to end revenue execution from go to market strategy and customer engagement to operations and long term strategic planning. Sandeep joined us in early 2019 to lead our central engineering team and accelerate development of our technology platform. He was instrumental in driving Marvell’s leap to 5 nanometer process Technology leadership and integrating Avera, the custom business we acquired that has since become our largest growth opportunity. Under Sandeep’s guidance, our engineering teams have successfully delivered multiple highly complex custom XPU and XPU attached projects into high volume production with first time silicon success. With this promotion, Sandeep now has overall responsibility for our data center business in addition to its continued leadership of data center engineering and central engineering. This unifies full ownership of our largest and most important business under a single leader spanning the entire product lifecycle from technology platform, IP and roadmap to customer engagement, product definition and chip development. Let me now discuss our results and expectations for each of our end markets. In our data center end market we achieved record revenue of 1.49 billion in the second quarter, growing 3% sequentially and 69% year over year. The strong performance was led by our custom XPU and XPU attached products as well as our Electro Optics Interconnect portfolio. AI and Cloud continue to be the primary drivers accounting for over 90% of our data center revenue with the remainder coming from the on premise portion of our data center end market. We expect on premise revenue to remain stable at an annualized revenue run rate of approximately 500 million. Looking ahead to the third quarter, we expect revenue from our Electro Optics products to grow double digits sequentially on a percentage basis as we continue to benefit from our market leading position in AI interconnected. Our custom business is also performing well and remains on track to grow in the second half of the fiscal year compared to the first. However, we expect growth to be nonlinear in the custom business with the fourth quarter substantially stronger than the third. As a result, we expect overall data center revenue in the third quarter to be flat sequentially with Electro Optics strength offset by lower custom revenue on a. Year over year basis, we expect data. Center revenue to continue to deliver strong growth in the mid 30% range in the third quarter. We are very pleased with the progress of our 18 XPU and XPU attached sockets, several of which are already in volume production. We are making excellent progress on development of the remaining sockets with all of them expected to ramp over the next couple of years. The success of our initial wave of custom programs combined with rapidly growing industry interest in custom silicon has expanded our Design Win pipeline to over 50 new opportunities. As next generation XPU and XPU attached products increase in complexity, we believe it will become even more critical for customers to partner with a full service custom silicon provider like Marvell. Since our event in June, our team has won additional sockets, adding to the 18 sockets we had already discussed. Collectively, these new wins represent multibillion dollar lifetime revenue potential and we remain deeply engaged in advanced architectural discussions of many of the opportunities still in the funnel as next generation AI data centers evolve, scale up networks are becoming essential to tightly interconnect tens, hundreds and eventually thousands of XPUs within and across racks. These require ultra low latency and multi terabit bandwidth to meet the demands of training and inference workloads. Marvell’s multi generational custom engagements with the hyperscalers gives us unique visibility into upcoming XPU architectures, enabling us to design scale up switches supporting both open standard Ethernet and UA link fabrics. Purpose built for AI Combined with Marvell’s leadership in Ethernet switching and proprietary high speed low power low latency SERDES IP, we are strongly positioned to lead this market inflection. We are investing in developing scale up switches tailored to each customer’s protocol of choice and look forward to updating you on our progress beyond switching. Our interconnect portfolio extends the opportunity While copper dominates the scale up links today, as networks expand and bandwidth grows, optics adoption will follow. This represents a large opportunity for Marvell’s full suite of interconnect products and technologies including DSPs for active electrical cables or AECs and active optical cables or AOCs retimers for PCIe Ethernet and UA link and Silicon Photonics for near packaged and co packaged XPU optics. Our AEC and AOC DSPs are already in the market and our retimers are in customer evaluation. We have demonstrated our 6.4 T silicon photonics light engines and expect our technology to be a key enabler of NPO and CPO implementations. Once the industry is ready to adopt collectively between switching and Interconnect, we see a massive scale up opportunity for Marvell over time. Turning to our Electro Optics Interconnect portfolio, our PAM and DCI franchises continue to lead the industry in enabling the build out of AI and cloud infrastructure. Demand for 800 gig PAM DSPs remains strong with a long life cycle still ahead. We have also begun volume shipments of our next generation 200 gig per lane 1.6 TPAM DSPS to multiple customers. We expect adoption to accelerate in the next several quarters. Looking further ahead, we are driving the next optical technology transition. At this year’s Optical Fiber Conference we demonstrated our 400 gig per lane PAM technology, a critical innovation and step towards enabling 3.2T optical interconnects. This milestone underscores Marvell’s leadership in pushing the boundaries of next generation optical conductivity. Our data center interconnect business also continues to expand with adoption proliferating across large hyperscalers. Collectively, the custom and electro optics product lines I just described now account for over three quarters of our total data center revenue. The balance comes primarily from our data center storage, switching and security portfolios, each of which is showing solid progress. Our data center storage revenue has improved significantly, reflecting a return to health in both the SSD and HDD markets. In AI and cloud switching, our 12.8T products continue to ship in high volume While our next generation 51.2T switches are now ramping. Adoption is accelerating and we expect these products to be a major driver of switch revenue growth in the next fiscal year. In the security market, we recently expanded our collaboration with Microsoft Azure on our hardware security modules, building on a long standing and trusted relationship with this customer. Now let me turn to our enterprise networking and carrier infrastructure end markets. In the second quarter, enterprise networking revenue was 194 million and carrier infrastructure revenue totaled 130 million. Combined revenue for these end markets grew 2% sequentially and 43% year over year. Looking ahead to the third quarter of fiscal 2026, we expect aggregate revenue from enterprise networking and carrier infrastructure to grow sequentially by approximately 30%. This growth is driven by normalizing customer inventory levels and strong adoption of our refresh product portfolio. As a reminder, we recently migrated these products to advanced process nodes, an investment we expect to yield benefits for many years to come given the long product life cycles in these markets. In the consumer end market, second quarter revenue was 116 million, up 84% sequentially and 30% year over year. Gaming demand and its seasonality continues to be the primary driver of this business. For the third quarter, we expect consumer revenue to be down sequentially in the low single digits on a percentage basis. Turning to our automotive and industrial end market, second quarter revenue was 76 million flat both sequentially and year over year for the third quarter of fiscal 2026, reflecting the divestiture of our automotive Ethernet business, we anticipate Overall revenue of approximately 35 million from this end market. This includes a mid single digit million dollar contribution from our automotive Ethernet business prior to the transaction closing. In summary, in the second quarter of fiscal 2026 we continued to deliver operating margin expansion earnings per share growth and new revenue records. Looking ahead, we expect momentum to continue in the third quarter with total company revenue forecast at 2.06 billion at the midpoint, representing 36% year over year growth excluding revenue from automotive Ethernet. The implied revenue growth for Marvell’s go forward business would be closer to 40% year over year at the midpoint of our forecast for the third quarter. We also expect to continue driving operating leverage with non GAAP earnings per share forecast to grow 10% sequentially at the midpoint of guidance, more than double our projected revenue growth rate. Our second quarter results and third quarter guidance reflect robust contributions from our AI driven data center end market complemented by strong recovery in our enterprise networking and carrier infrastructure end markets. At the same time, our custom AI design engagements are at an all time high with customers showing very strong interest in our broad range of differentiated technologies. As I discussed earlier, our team continues to accumulate new wins and and we are pleased with the strong progress across both current and next generation custom programs which reinforces our confidence that we can achieve our long term customer revenue goals. In addition, our market leading Electro Optics franchises continue to see strong demand for both current and next generation solutions and our scale out switching platforms are positioned for strong growth over time. The emergence of scale up networking for AI infrastructure should provide another strong tailwind for Marvell. With that, I’ll turn the call over to Willem for more detail on our recent results and outlook.

Willem Menkes (Chief Financial Officer)

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. Datacenter 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 $0.22. 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 0.19 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 market. 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 market 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 markets 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 are 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 and A session. Operator, please open the line and announce Q and A instructions. Thank you.

OPERATOR

Thank you. Will now be conducting a question and answer session. If you would like to ask a question, Please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You May Press Star 2. If you’d like to remove your question from the queue. In the interest of time, please 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 Seymore with Deutsche Bank.

Deutsche Bank Analyst

Hi guys. Thanks for letting me ask a question. I want to dive into the guidance for the custom business Matt, I appreciate the lumpiness of it, but could 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?

Matt Murphy (Chairman and CEO)

Yeah, thanks, Ross. And I think you captured the right phrase, which is lumpiness. I think this is normal to see. Particularly with. The large hyperscale builds that happened that happen and especially as you ramp them into production, which we’ve done this year on a number of programs. So this is not unusual. Fortunately, our optics business is quite strong in the coming quarter and that’s growing double digits. And then as we said, as I said in the proposal remarks, we see a demand increase again in customs. So yeah, there’s nothing unique there, Ross, other than we’ve spent the last couple of years ramping these into production and we’ve got kind of a 1/4 digestion with the recovery in Q4. I will say that overall we expect custom to be up in the second half over the first half and so you should expect a strong fourth quarter for custom.

Deutsche Bank Analyst

Thanks. Thank you.

OPERATOR

Our next question is from Tore Svanberg with Stifel.

Stifel Analyst

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. You know, 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 kind of color or clarity you can provide would be very helpful. Yeah.

Matt Murphy (Chairman and CEO)

Hey, thanks, Jeremy. Good to hear from you. And yeah, I’ll actually turn this one over to Chris to talk about the, the design win momentum we’re seeing in the opportunity set as it relates to your question. Thanks. Go ahead, Chris.

Chris Koopmans

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 nine years at Marvell. And ultimately we’re seeing that across xpu, XPU Attach 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 built out these rack scale infrastructure, so. And yes, 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.

Stifel Analyst

Great, thank you. And maybe a follow up in terms of is there any impact that you’re seeing from supply constraints anywhere along the supply chain, Any impact from tariffs that you can see from your end? Thank you.

Matt Murphy (Chairman and CEO)

Yeah, great. Chris runs our global operations, so I’ll have him cover that. And then Willem, maybe you can make a quick comment on the tariffs and. I’ll add a few. Sure, yeah.

Chris Koopmans

Certainly the supply chain is very tight, requires very tight coordinations with our customers and very strong execution by our team. I’m very proud of our team to have met this ramp over the last year and very confident in our ability going forward. We’ve really been able to meet everything that our customers have needed, but it is tight and we have very strong coordination and execution.

Willem Menkes (Chief Financial Officer)

Yeah, and Jeremy, on tariffs, it remains a very dynamic environment, but really we haven’t seen any impact on our business to date. We keep tracking it very, very closely, but as we look across. All the. Different end markets that we’re addressing, really haven’t seen any significant impact.

OPERATOR

Our next question is from Aaron Rakers with Wells Fargo.

Wells Fargo Analyst

Yeah, thanks for taking the question. Kind of building on the earlier question. You know, just a level set. As we think about the lumpiness in the custom XPU business, I’m curious, you’ve had obviously a very talked about lead customer. I’m curious, as you’re, 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.

Matt Murphy (Chairman and CEO)

Yeah, thanks, Aaron. And I think you said it right. We had started just a few years back, a couple of AI days ago, really talking about a handful of sockets that were going to be kind of our initial lead. And those have now ramped and are ramping, albeit lumpiness, you know, we’re seeing in the short term. But those are, those are happening. And then on top of it, the 18 we talked about just a couple of months ago at the AI day, those are all either starting now, next year, you know, really in the next sort of, I’d call it between now and the next 18 to 24 months, those will all start to layer in. And then as Chris mentioned, we’ve actually secured some incremental wins. So think of it as kind of 18 plus. So there’s a journey there from a handful to 18 plus to beyond. And that’s really what we’re focused on, is driving our market share from where we were just a couple years back at 10% share in 2313 the year after and driving to 20 over time. And we’re certainly getting a lot of confidence in that with just the recent design activity that Chris talked about. It’s kind of unprecedented. It’s almost episodic right now.

Wells Fargo Analyst

Thanks. 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, you know, moving from just not scale. Out and scale up, but scale across dci. Any framing of how big of an opportunity that might represent for Marvell?

Matt Murphy (Chairman and CEO)

Yeah, maybe I’ll comment and Sandeep will comment. You know, it’s certainly something we’re aware of. There’s a number of different opportunities that keep layering in that would leverage our networking and our connectivity technology. Sandeep, I don’t know if you have. Any additional thoughts, but this is something that is relatively new. But Sandeep, go ahead if you’ve got some thoughts.

Sandeep Bharathi (President, Data Center Group)

Yeah, thank you, Matt. So in terms of scale up opportunities, that is certainly aside from the lead GPO player who has its own proprietary scale up fabric, there’s a huge demand for Ethernet and purpose built fabrics such as the UA link and we see a lot of traction over the next couple of years for the scale scale up requirements and we are investing heavily to bring our scale up switches to the market and we see momentum in the next couple of years. So we will have standard products using our state of the art, low, latency scale up switching IP portfolio, some of which we acquired from Innovium, which has been a great asset for us. So we are very confident of scale up switches being a key growth driver for us in the next couple of years.

Matt Murphy (Chairman and CEO)

Yeah. And then more to come in the future. Aaron, on the other type of opportunities, but thanks for covering that scene.

Wells Fargo Analyst

Appreciate it.

OPERATOR

Our next question is from Vivek Arya with Bank of America.

Bank of America Analyst

Thanks for taking my question. Just a near and longer term question on your custom business. So just near term, Matt, do you think Q your data center growth can accelerate year on year from the Q3 levels that you gave just so that. We can level set 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 a 50% or so. So whatever industry growth rate seems to be in this 50% or so 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 sort of grow in line with what industry expectations are or are there other puts and takes we. Should keep in mind?

Matt Murphy (Chairman and CEO)

Thank you. Yeah. Thanks, Vivek. Yeah, a couple things I think one is our custom. You know, we don’t do an annual guide and we typically just guide, you know, a quarter at a time. I’ll get to Q4 in a minute, but just as a baseline. And then I would say on the annual stuff, we we’ve only done that very, very rarely and that’s typically been later in the year as we have more visibility. So just to set the stage, look, I think the overall momentum in the business has been very strong for several quarters now. And I think I gave you some of the data points which is that, you know, custom would be up in the second half versus the first half. You know, you can look at our optics performance, you know, Q2, Q3 and especially the Q3 up double digits. And then obviously when you look at the big picture, we’re very pleased, which no one’s asked a question about yet. But it layers into the big picture. On overall, Marvell performance is the very strong recovery in the core business in enterprise, networking and carrier. I mean, just for reference on that business, you know, we hit a low point during the inventory recovery cycle at about a $900 million annualized run rate. And implied in our Q3 guide, this business goes back up at like a 1.7 run rate. So very, very strong recovery both on inventory as well as on New programs that are kicking in and new products that are in the next technology node. So that’s all a positive in terms of the setup for Q3 and Q4.

Bank of America Analyst

Thank you. Thanks.

OPERATOR

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

Barclays Analyst

Hey guys, thanks for taking my question. And Mal, I’m going to hit on the ASIC topic again, so apologies. Just want to dive in for a little more clarity. But when you look at what digestion. That’S occurring in the October quarter is. Is that one project winding down while another is then winding back up in the fourth quarter, is that just a temporary pause, like any color, on what’s happening there? Is that just. Traditionally you see certain pockets where customers. Take product and then they stop. But is there anything to do with. A product transition there as well? Any help there would be useful. Yeah.

Matt Murphy (Chairman and CEO)

Thanks, Tom. No problem for the question. Yeah, no, at a high level, these are existing programs and it’s really just a timing issue in terms of how we deliver the product and when the customer’s builds are occurring and when they want the product from us. So given that this is, you know, as I said earlier, we’re in the early stages of custom. This is really our first big first year with the handful of sockets that will translate over to many more. It’s really just a timing issue between the quarters. So it’s just more apparent now over time. We do see a lot more diversity in this part of the business in Marvell as additional programs ramp. But obviously we were starting from a pretty low base just a couple of years back.

Barclays Analyst

Thanks, Helpful. And then just as a follow up. On the optical business, you’re going to. Double digit growth in the October quarter. You’ve heard others during this earnings period talk about supply constraints, particularly on the laser side. You’re obviously a component provider that’s going into these modules, but in terms of. The ecosystem, are you seeing any stops. And starts there in terms of product ramps as well? Are you hearing about any component issues. Or are you relatively immune from that in your ramp?

Matt Murphy (Chairman and CEO)

Yeah, I’ll lead off and I’ll let Chris comment if it’s appropriate. I mean, look, I think we’ve ramped this optics business just massively. Okay. Over the last few years and very successfully, by the way. So I wanted to echo what Chris said. Our business unit team, sales team and operations team have done a great job. We have deep partnerships up and down the supply chain and with the key module companies to really plan our business together. So there seems like there’s always something going on, but I think we’ve been able to just manage through it and continue to grow quite dramatically if you look at the ramp over the last few years. So I think there’s always noise in the system, Tom, relative to different pieces of it, but I’d say overall we’re tracking really well. Chris, do you have anything to add. Or could I capture that? 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.

OPERATOR

Our next question is from Timothy or Keri with UBS.

UBS Analyst

Thanks a lot, Matt. So you’re guiding data center flat and optics is up double digits. Since you’re guiding optics of double digits, can you give us a sense of sort of what the baseline is 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 the total company revenue? I’m just kind of wondering because you’re guiding Optical. I’d like to see if you can give us some sense of what the baseline was coming off fiscal Q2. Yes.

Matt Murphy (Chairman and CEO)

Let me just start off real quick and I’ll see if Willem wants to add. I mean we haven’t updated that number, I don’t think since Q4 where optics was about half, custom was about a quarter and then other was about 25%. Obviously optics and custom both come up since then, but we haven’t exactly put a bead on that and updated that exact mix. Willem, anything and any commentary that would be helpful. It’s obviously something Tim, we’re probably not going to update on a quarterly basis. I totally get the question, but. Willem, anything to add? No, that’s the right framework and exactly what Matt said. Right. Take that guidance we gave in Q4 and you can apply your growth rates and it’s just not a number we’re going to be sharing every quarter, but that should give you a good, good sense of what it is.

UBS Analyst

Okay, but is the total just because Matt, you did say last quarter that the total AI number would be half the company before the end of the fiscal year? I mean, can you at least provide a sort of a milepost that. Is that happening in fiscal Q3 or will that happen more in fiscal Q4?

Matt Murphy (Chairman and CEO)

Yeah, I think it’s. I think I’d have to give you a follow up, Tim. I don’t have the spreadsheet right in. Front of me on that, but it’s clearly, I mean the, the Yeah, I think with the puts and takes, custom up second half over first. Strong optics. Yeah, I don’t have that number right at the tip of my fingers, but it’s definitely trending the same way. I wouldn’t say there’s any directional change there.

UBS Analyst

Yeah. Yeah. Okay. Awesome. Thank you.

Matt Murphy (Chairman and CEO)

Yeah, thanks.

OPERATOR

Our next question is from Harsh Kumar with Piper Sandler.

Piper Sandler Analyst

Yeah. Hey, guys, I had a question on. The scale of the AI business. I think you mentioned you had 18 minutes before you might have picked up. I think you suggested a couple of more wins. So I wanted to understand of all the custom and attached chips that Marvell is working on, how many of them are actually producing revenues today? I want to understand kind of like where we are today because we understand that you are aiming for 20% of 94 billion by 2028. So I’m trying to understand where we stand today and kind of, you know, knowing where we’re headed to.

Matt Murphy (Chairman and CEO)

Yeah, thanks, Harsh. Chris, you want to give some commentary on that one?

Chris Koopmans

Sure, yeah. So certainly there are multiple, you know, several that are in production today and have been since late last year. And of those 18, they’re all either sort of. 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 you’re seeing new parts of those programs moving into production. And ultimately we see that just continue to grow over time.

Piper Sandler Analyst

Okay. And then just maybe broadly, very broadly, help us understand. And I’m not asking for any customer, specific customer, but if most of your wins or all of your wins, largely speaking, are on track. And the reason why I’m asking is when we talk to clients, investors, there’s just a lot of controversy. So any kind of statement that you. Can make would be helpful.

Matt Murphy (Chairman and CEO)

Well, there’s always controversy. I mean, I think that’s why, you know, at the end of the day, that was a big motivation for us with respect to you guys and the broader investor community around our AI Day was really trying to frame where we’re driving the business, what the technology differentiation is, what the opportunity set is, breaking it down, actually, in a lot more granularity than I think we’ve done before relative to hyperscale versus emerging xpu. XPU attach. The relative size of those opportunities. And so that’s. That’s. And we. And we gave some commentary today just so we’re. We’re tracking against those and have now closed some. So that’s. That’s going to be the focus of how we Think about the go forward. But given the design win momentum we’re seeing clearly, we’re continuing to garner new incremental business from really across the board, the traditional big hyperscalers as well as the emerging generation. So hopefully that’s helpful. Thanks. Harsh. Yeah, thanks, Matt and Chris.

OPERATOR

Our next question is from Jim Schneider with Goldman Sachs.

Goldman Sachs Analyst

Good afternoon. Thanks for taking my question. I was wondering if you could maybe address capital allocation from a high level for a moment. If you look at your automotive Ethernet business, that’s a very attractive price you’re able to get from that. Maybe you can maybe talk a little bit about the intended use of the proceeds, whether your bias is more towards tuck in acquisitions that allow you to pursue the AI strategy even faster or buybacks. Then 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.

Matt Murphy (Chairman and CEO)

Yeah, thanks, Jim. It’s a thoughtful question and I’ll uplevel it just for a second. So, yeah, this is a driving force, our capital allocation framework on how we run the company and the automotive divestiture and then the proceeds are just kind of an output of that. And in a minute I’ll just have Willem comment on that. But as a background, we have run since August 2016. So basically six weeks after I became CEO, we implemented a strategy process which was really our capital allocation framework on how we think about investing our R and D dollars primarily at that time too, there was some opportunities around buybacks and so forth given where Marvell was at that time. But primarily we drive it from the strategy first first and our vision since. And we, and by the way, we just completed our 10th strategic review a couple of weeks ago. So we’ve been doing this kind of year in and year out. And what you’ve hopefully seen is that over time we’ve continued to evolve the company from really a consumer enterprise kind of focused company to a data center AI first company. And I’d say even in the last few years as we made the pivot, we’ve now got our R and D spending well north of 80% of our total spending in AI and data center. And that number has come up probably from, I don’t know, 60% just a few years ago. And then way back when it was almost nothing because we had no business there. So that, and so around your question then. And when we looked at automotive as an example, it was just, it was a great business. We had built it up from scratch. It continued to stay a small portion of our total revenue. And as the AI thing took off, it became even smaller. And then we had this opportunity to give it a great new home in Infineon, which they found. And for Marvell, we obviously got significant and compelling valuation for that. We have the proceeds and so now we’re looking at how to deploy those. And I think it’s, it’s going to be some, you know, it’s not decided at the moment. We just closed this and by the way, great job to the team. I think this was, we had said. Said end of the year and we. Closed it in early August. So that was a, it was a huge, huge win for everybody involved. And I’ll let Willem comment in a moment, but I think the answer is probably some of both. I mean, we’re definitely going to keep looking at our organic investments to figure out how to differentiate and win an AI if there are tuck ins and things we can do, that’s obviously on the table. But we’ve been consistent, you know, really since for probably the last four or five years, which was, you know, we invested early and heavy in M and A to build the portfolio we wanted. We’ve done a lot organically to build up our capability. So we’re in great shape there. But we’re always going to look, Willem, maybe a little bit to add to this. I know it’s a long answer, but it’s, I think helpful for investors to know how we think. But Willem, anything to add?

Willem Menkes (Chief Financial Officer)

Yeah, I’ll just add a couple and just also call out to the team for doing a phenomenal job on getting this deal closed in effectively four months. A deal this size and complexity, just a phenomenal job. So Jim, when you look back at the last couple of quarters here, we’ve already driven an increased level of buybacks really through much more consistent execution. Execution on our free cash flow. And so as a basis, you should expect for us to continue to driving that and having a focus on very consistent free cash flow execution, driving higher level of buybacks. And then as Matt mentioned, I think this additional capital really gives us a lot of flexibility around being opportunistic on doing more buyback. But at the same time, we’re at this historic moment in terms of the size of this AI market and where we do see tuck ins that can accelerate our roadmap towards addressing that. We’ll take advantage of that.

OPERATOR

Our next question is from Harlan Sur with JPMorgan.

JPMorgan Analyst

Good afternoon, guys. Thanks for taking my question. This goes back to one of the previous questions. You know, the noise level out of. Asia on your lead customers follow on 3 nanometer XPU program continues at a. At this deafening pace. Right with your, with your Asia competitor, they’re essentially claiming victory on 3nm. So what’s the update with Marvell’s 3nm XPU follow on program with your lead customer? I think last earnings call, Matt, you Talked about securing 3 nanometer wafer capacity, packaging capacity for production in calendar 26. Is this program still tracking? What’s the confidence level on this program still driving growth next year? And then maybe just an update on. Your third XPU customer win at 3 nanometer which was supposed to ramp back half of calendar 26. How is this program tracking as well?

Matt Murphy (Chairman and CEO)

Yeah, thanks Harlan. I appreciate the question. I understand the noise. You know, as I said though in my answer to the earlier question, you know we’re at a point where, you know, the initial programs and wins we have are ramping. We’ve increased our opportunity set pretty significantly to you know, from a handful of sockets to this 18 plus and we’re really driving the, we’re really driving to the market share targets in the future. And you know, just given the massive sort of focus in this area and sensitivity, you know, commenting on the just the individual sockets at this point is only probably increasing the noise level. And what we’re really focused on is winning in criminal designs, executing on the ones we’ve got and driving the business forward and ultimately trying to get 20% of a 90 plus billion dollar TAM in the future. That’s where that’s at.

OPERATOR

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

Needham Analyst

Hi guys, thanks for squeezing me in. Matt. I wanted to follow up just kind of on the scale up switch fabric opportunity it seems like is a bigger part of the XPU attached market and there are different flavors, Ethernet, UA link. Just wondering, can you give us a sense when Marvell may have its first products ramping to revenue? Is that a calendar 26 event or is it going to be more UA link based and more likely a calendar 27 event? And then I’ve got a follow up.

Matt Murphy (Chairman and CEO)

Yeah, thanks Gwen. I think maybe I’ll have to add. A little bit more but I think. He did a good job framing it. I will just say though to maybe up level it for a second. I think on the scale up it really is a great combination of key Marvell IPs all into one especially our low latency switching IP, our Serdes and then just the ecosystem we’re living in relative to XPUs and then this being a key XPU attached, that’s fundamentally almost a chipset type of a decision. So Sandy, anything else to add on that? I think we haven’t, we haven’t really articulated a lot yet publicly on what we’re doing, but there’s a huge amount of momentum here and we’re engaged very broadly in this area. Sandeep, any thoughts and closing remarks on this one?

Sandeep Bharathi (President, Data Center Group)

Yeah, thank you, Matt. So definitely we are investing to bring UA Link and Ethernet based products as we engage with our customers and working very closely with our customers. Timeline. What I would say is product introductions in the UA Link and Ethernet space for scale up specifically will be in the next two years and certainly with the assets that we have, not only are we looking at UA Link based products in interconnect, we’re already starting to see the use of AECs in the near term and AOCs, all for which is active electrical cables and active optical cables positioning us to participate in these markets. So for Ulink and Ethernet based specifically, it will be in the next two years.

JPMorgan Analyst

Got it, thank you. And then just wanted to ask, I know you guys obviously have a very substantial business in the DSP based optical modules. A few of your peers have started to note that I believe three hyperscalers are beginning to ramp LPO modules. Can you just kind of frame for us? Do you think that the, you know, are there substantial LPO developments beginning to occur? Are they pretty niche applications? I mean, just any sense of LPO penetration of the overall optical transceiver market? Is it likely to stay in the low single digit percentages? Do you see it getting bigger than that over a couple of years? Just like to hear your thoughts since you guys are obviously the incumbent.

Matt Murphy (Chairman and CEO)

Yeah, thanks Gwynne. Yeah, no, it’s happening at a smaller scale and by the way, we’re in some of those too. We have active wins and we’re going to production and those types of modules as well. But just given the sheer scale of the DSP based pluggables, it just ends up being a very small number and more of a niche use case, but a valuable one if the customer really needs it and can implement it and get it working. And in production it can be a benefit. But the vast majority we see today still is and for the foreseeable future is pluggables.

JPMorgan Analyst

Yeah. Cool.

Matt Murphy (Chairman and CEO)

All right, operator, I think that’s it. I’m just going to make some closing remarks. Okay. So anyway, thanks everyone for joining. I appreciate all of your interest in Marvell and joining the call and listening in just a couple of points. I think the first is, as I indicated and Chris and also Sandeep talked about, I mean the design win momentum in custom has been very, very strong even since the AI day. I feel really good about that $75 billion pipeline that we’re really bringing to close some of those key opportunities within that. I think that pipeline, by the way, from what we can see, is probably going to just keep growing. And by the way, this is across, you know, xpu, XPU Attach, it’s at the large hyperscalers and then continuing to increase around the emerging optics continues to be very strong. We’re managing the execution quite, quite well and growing the business there. And then, you know, the core business, which was a point of consternation in the past about when would that come back and what would that ramp look like? It’s nice to see in Q3 the strong sequential in enterprise, networking and carrier. I think it’s like 30% sequential and 80 plus percent year over year. So very strong recovery there. And finally it’s showing up in the numbers. I mean we’re getting a lot of leverage here. I looked at Q2 EPS, it’s up like 123% year over year. And Q3, if you look at the guide, EPS would be up like 70. So much faster than revenue. Same thing on the sequential. So overall we’re very pleased with the. Performance of the company. We see a massive opportunity ahead and I appreciate everybody’s interest in Marvell and we’ll talk to you all soon. Thank you so much.

OPERATOR

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

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