Chipmaker Marvell Technology Inc. said today it has agreed to acquire a networking startup called Celestial AI Inc. that’s developing optical interconnect technology to enable more rapid data center communications.

The deal will see Marvell fork out at least $3.25 billion in cash and stock, and potentially up to $5.5 billion if it hits agreed revenue milestones in the coming years.

News of the acquisition came as Marvell delivered its third-quarter earnings results, beating expectations on profit and revenue.

Celestial AI’s optical interconnect technology is known as Photonic Fabric, and it’s one of a host of companies looking to enhance data center communications for artificial intelligence workloads using “silicon photonics” to connect vast numbers of high-performance computers. The deal is an aggressive bid by Marvell to increase its relevance in the AI industry. The company hopes its technology will enable it to sell more of its semiconductors at a time when large enterprises and cloud infrastructure providers are spending billions on dollars on their AI infrastructure build outs.

Marvell was once seen as one of the most promising bets outside of Nvidia Corp., and many believed it would become a major beneficiary of the AI boom. But while its business has grown over the last three years, it hasn’t been able to match the momentum of its main rivals, such as Broadcom Inc. Indeed, the chipmaker’s stock is down 15% in the year to date, while Broadcom’s shares have surged more than 64%.

Celestial AI could help Marvell to change that story. Optical interconnects are becoming vital to the AI industry, because the most advanced large language models and AI agents run on huge clusters of chips that sometimes number in their thousands. Those chips must all be connected to each other so they can relay information back and forth to perform computations in unison.

Traditional interconnects use copper wires, but optical connections have much higher bandwidth, enabling more data to travel faster. They also enable physically longer cables, which enables AI clusters to be distributed across large geographical areas.

The startup is seen as one of the most promising players in the optical interconnect segment, and was valued at $2.5 billion following its most recent $250 million funding round in March. That round saw the participation of Intel Corp. Chief Executive Lip-Bu Tan as an angel investor, and he also sits on the company’s board of directors.

Celestial AI co-founder and Chief Executive Dave Lazovsky discussed his company’s role in accelerated AI computing last year when he appeared on theCUBE, SiliconANGLE Media’s mobile livestreaming studio:

Marvell CEO Matt Murphy (pictured) said the acquisition will help the company to build on its technology leadership and enhance AI connectivity. “It broadens our addressable market in scale-up connectivity and accelerates our roadmap to deliver the industry’s most complete connectivity platform for AI and cloud customers,” he said.

One of the first applications of Celestial AI’s technology will be to connect large computing systems based on Marvell’s “XPUs,” which are customized AI processors that the company builds to order for large enterprises and cloud providers. Marvell is known to work with Amazon Web Services Inc., helping it to design and manufacture its Trainium AI accelerators, including the new Trainium3 processors announced at AWS:reInvent this week. The company may also look to integrate Celestial AI’s Photonic Fabric technology directly within its custom chips, as well as the network switches used to relay messages between them.

AWS Vice President Dave Brown praised Marvell’s decision, saying that his company believes optical interconnects will be essential for the future of AI infrastructure. “Celestial AI has made impressive progress, and we expect their combination with a large-scale semiconductor company like Marvell will help further accelerate optical scale-up innovation for next-generation AI deployments,” he added.

The initial $3.25 billion will be paid once the transaction has been approved by regulators, expected early next year. Marvell said the maximum payout of $5.5 billion will be triggered if Celestial AI manages to generate $2 billion in cumulative revenue by the end of Fiscal 2029.

There’s a good chance it will reach that target, for Marvell told shareholders it expects to see meaningful revenue contributions resulting from the deal. It forecasts the company to reach a $500 million annualized revenue run rate by the end of fiscal 2028, rising to $1 billion by the end of the following year.

News of the acquisition overshadowed a solid earnings and revenue beat for Marvell in its latest results, but its guidance seemed to worry some investors. The company reported third-quarter earnings before certain costs such as stock compensation of 76 cents per share, ahead of Wall Street’s forecast of 73 cents.

Revenue jumped 37% from a year earlier to $2.08 billion, beating the consensus estimate of $2.07 billion. Net income for the quarter came to $1.9 billion, improving drastically on the company’s year-ago performance, when it posted a net loss of $676.3 million.

Although the results were decent, Marvell’s guidance was somewhat muted. The company said it’s looking for fourth-quarter earnings of 79 cents per share, which was in line with the Street’s forecast. Revenue is expected to come to around $2.2 billion, plus or minus 5%, which is only just ahead of the Street’s target of $2.18 billion.

Investors seemed uncertain about how to react to today’s developments. The company’s stock initially declined more than 5% in the after-hours trading session, before rebounding strongly for an 8% gain as executives discussed the Celestial AI acquisition in detail during a conference call.

Murphy also told analysts that the company expects to grow its data center revenue by 25% during the next fiscal year. That number doesn’t include any contributions from Celestial AI, he said, hinting that growth could possibly even exceed that figure.

Photo: Marvell Technology