Marvell Technology, Inc.

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. 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?

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 over the last few years and very successfully, by the way. So I want to just 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 did 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.

Our next question is from Timothy Arcuri with UBS.

Thanks a lot. Matt, so you're guiding data center flat and optics is up double digits. Since you're guiding optics up 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.

Yeah, 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 And then other was about 25%. Obviously, optics and customables have 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 know, 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 sense of what it is.

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 sort of a milepost to that? Is that happening in fiscal Q3, or will that happen more in fiscal Q4?

Yeah, 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, 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.

Yeah. Yeah. Okay. Awesome. Thank you.

Yeah, thanks.

Our next question is from Harsh Kumar with Piper Sandler.

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 attach chips that Marwa was 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.

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

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.

Okay. And then just maybe broadly, very broadly, help us understand, and I'm not asking for any 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.

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'd done before relative to hyperscale versus emerging. XPU, XPU attach, the relative size of those opportunities. And so that's – and we gave some commentary today just so we're tracking against those and have now closed some. So that's going to be the focus of how we think about the go forward. But given the design wind 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 for having Chris.

Our next question is from Jim Schneider with Goldman Sachs.

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 internet business, that's a very attractive price you're able to get from that. So 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. And 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.

Yeah, thanks, Jim. It's a thoughtful question, and I'll up-level 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&D dollars primarily. At that time, too, there were some opportunities around buybacks and so forth, given where Marvell was at that time. But primarily, we drive it from the strategy first. And our vision since – 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 and I'd say even in the last few years as we made the pivot we've now got our R&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, you know, 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 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 end of the year and we closed it in early August. So that 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 in 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&A to build the portfolio we wanted. We've done a lot organically. to build up our capabilities. 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?

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 is just a phenomenal job. So, Jim, when you look back at the last couple of quarters here, we've really driven an increased level of buybacks really through much more consistent 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 buybacks. 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 tokens that can accelerate our roadmap towards addressing that, we'll take advantage of that.

Our next question is from Harlan Sir with JP Morgan.

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 customer's follow-on three nanometer XPU program continues at this deafening pace, right? With your Asia competitor, they're essentially claiming victory on three nanometers. So what's the update with Marvell's three nanometer XPU follow-on program with your lead customer? I think last earnings call, Matt, you talked about securing three nanometer wafer capacity. Packaging capacity 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 wrap back half of calendar 26. How is this program tracking as well?

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 Just given the massive sort of focus in this area and sensitivity, commenting on 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 TAM in the future. That's where that's at.

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

Hi, guys. Thanks for squeezing in. Matt, I wanted to follow up just kind of on a scale-up switch fabric opportunity. It seems like it's 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 Morvel 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.

Yeah, thanks, Gwen. I think maybe I'll let Sandeep 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 IPs. our CERDEs, 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, Sandeep, anything else to add on that? I think 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?

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 Euralink-based products, in interconnect, we're already starting to see the use of AECs in the near term and AOCs, which is active electrical cables and active optical cables, positioning us to participate in these markets. So for Euralink and Ethernet-based specifically, it will be in the next two years.

Got it. Thank you. And then I just wanted to ask, I know you guys 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, you know, likely to stay in the low single digit percentages? Do you see it getting bigger than that over a couple of years? Just, you know, like to hear your thoughts since you guys are obviously the incumbent.

Yeah, thanks, Gwen. 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 in a production, it can be a benefit. But the vast majority we see today still is, and for the foreseeable future, is pluggables. Got it. Thank you. Yeah, cool. 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 wind 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 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 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.

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