Tuesday, July 3, 2007

Marvell's New Clothes

Marvell (MRVL) is one of the many technology companies that has been under a cloud due to stock option dating issues. The cloud for investors, in most cases, has not been so much the risk of an SEC investigation or related train-wreck scenarios. Rather, while the companies do their accounting restatement investigations they do not release information that make informed investing possible. They do not release earnings; they don't file 10-Q's or 10-K's with the SEC.

On July 2nd Marvell made some of its tardy filings with the SEC. They had already announced the completion of their restatement investigation back in May. The filings included a 10-K covering fiscal 2007 through January 30, 2007. The most recent 10-Q was for fiscal Q3 2007. What we really want to see, of course, are the numbers for the quarter (Q1 2008) that ended April 28, 2007 (See my summary of the May 17 analyst conference for what we know so far).

Still, there is a lot of grist for analysis in the 10-K. For starters, for all practical purposes Marvell made no profit for its year. Out of annual revenues of $2.24 billion (well up from $1.67 billion in fiscal 2006), it lost $12 million, or $0.02 per share. In 2006 it had profits of $199 million, or $0.32 per share.

Time to flee the stock? Sorry, too late. The share price topped out at over $38 back at the beginning of 2006; it ended today at $18.32, and has been as low as $15.25 this year.

Let's try another reality check, since revenues have risen rapidly while earnings have fallen. What happened to cash?

In fiscal 2007 net cash provided by operating activities fell, but not as precipitously as earnings. It was $402 million in 2006, then $337 million in 2007. There was a serious cash outflow, but it was for acquisitions, not for operations.

Marvell made two big acquisitions in 2007: Avago (chips for printers) for $262 million in May and Intel's cell-phone (XScale) microprocessor division for $600 million in November. These acquisitions had serious one-time costs and the Intel division in particular had major ongoing net losses when it was transferred.

Marvell also acquired UTStarcom in February 2006 for about $40 million. According to a neat little chart on page 126 of the 10-K, the acquired businesses, if they had been bought at the beginning of fiscal 2007, would have created an overall loss of $475 million for the year, while bumping up overall revenue to $2.6 billion.

Are these guys stupid? Did the people who created Marvell out of some analog chip designs and built it to a $1 billion business in a few years lose their minds? I don't think so.

They did load up heavily on risk. A good way to get a sense of risk, which is mainly from the Intel purchase, is to use your find function on the 10-K with "Intel" as the search string.

To get back to being heroes for their stock holders Marvell employees have to turn the acquired companies to profitability while continuing to grow their more established business lines. The big bear here is the XScale application processor. Under Intel its revenues were growing, but R&D costs were high compared to revenues, resulting in division losses. Marvell intends to move production from Intel's fabs to its fabless (outsourced) model by mid-2008. That will allow some cost reductions. But mainly Marvell has to rapidly increase sales while keeping prices firm.

These XScale processors go mainly into high-end (3G) cell phones and combine well with Marvell's analog technologies. So Marvell has bought into the cell phone market in a major way. But many other firms, like Texas Instruments and Motorola, are also gunning for the high-margin, high end of that market. The market is expected to grow rapidly, spurred on by the introduction of the iPhone.

Do I know if Marvell can succeed in this market? No, I just don't know. They have a great track record. If they can ramp the XScale business and decrease costs, today's stock price may look way low a year from now. But if XScale tanks, which is a distinct but hard-to-quantify possibility, then today's stock price will seem to have been based on optimism, not solid value.

I own Marvell stock, but I acknowledge the future is hard to see. It would really help if management would break out revenues and costs by division at the next analyst conference.

More data:

Marvell investor relations page
my Marvell page


  1. Hi - I am a recent college grad and just got hired into Marvell. I will be working on the xscale division acquired from Intel. I was doing some research on Marvell and stumbled upon your blog. Can you share some thoughts on whether accepting Marvell's offer is a right decision based on the facts you mentioned in your column. Everyone I talked to at Marvell were upbeat but would like an outside view to take a more informed decision. Since I am starting my career and new to the industry in general, would welcome any comments. Thanks.

  2. I don't know what your other options are or if you are an engineer or were hired for some other purpose.

    But if you want to work for a large corporation, you might as well work for one that is innovative and growing rapidly.

    I'm glad to hear Marvel is making new hires in XScale. Clearly they intend to expand the business and think the opportunity for expansion is out there.

    Based on what little you said, I'd take the job. But then I'm not you.