Marvell wins new AI chip business, but at lower margins

By Arsheeya Bajwa and Stephen Nellis

(Reuters) -Marvell Technology has won new business helping large U.S.-based cloud computing firms make custom chips for artificial intelligence it said on Thursday, but noted that its custom unit carries lower margins than other lines of business.

Shares fell 2.7% after Marvell executives discussed the business during an investor presentation.

Marvell said it expects the AI chip business to hit $2.5 billion in sales by its fiscal 2026. Marvell helps customers such as design custom chips for their cloud units and competes against rivals such as Alphabet supplier Broadcomm, which has said it expects $10 billion in AI chip sales this year.

Marvell CEO Matt Murphy said during the presentation that the company has in production a custom AI chip for one cloud computing company and a central processor based on technology from Arm Holdings for another, both of which will generate revenue this year.

He disclosed for the first time that Marvell is developing an AI chip for a third customer that will go into production in 2026.

Murphy also told investors that gross margins on custom chips are lower than the company's off-the-shelf offerings, which it calls "merchant" chips.

"We always said that custom business would carry a lower gross margin than the merchant-type products. But the operating margins actually would be about on par over time," Murphy said.

As Marvell and Broadcom's custom units become a bigger share of their sales, investors are closely following the profitability of the units, which compete with AI chip leader Nvidia. Broadcom in March said its custom chip margins would be on par with its corporate average.

"While the custom AI (chip business) is expected to be a meaningful growth driver for Marvell, management is now disclosing that it will be a lower gross margin business," said Kinngai Chan of Summit Insights.

"The company is still maintaining its operating margin targets as it expects the higher revenue will offset the lower gross margin business."

(Reporting by Stephen Nellis in San Francisco and Arsheeya Bajwa in Bengaluru; Editing by Bill Berkrot)