Monday, March 8, 2010

Marvell Sees Inflection Point

Marvell Technology Group, Ltd. (MRVL) is led by Sehat Sutardja, who built the company on his invention of a better chip to enable hard disk drives. Marvell has been the leading (by market share) supplier of hard drive controller chips for years, and this segment still represented 50% of revenue for the latest quarter. Marvell has also branched out to a variety of newer areas, based on its ability to combine analog functions and digital functions on a single chip (called SoC, for System on Chip).

Marvell was hit hard by the recession: in fiscal Q4 2009, ending January 30, 2009, it had $512 million in revenues, down from a peak of $843 million in the quarter ending August 2, 2008.

Last week Marvell reported for fiscal Q4 2010, ending January 30, 2010, revenues of $842 million. GAAP net income was an amazing $205 million; cash flow from operations was $281 million.

But the future, while speculative, could be even more amazing. Sehat referred to a coming inflection point. An inflection point on a curve can be from going down to up or vice versa, but in this case he is talking about a dramatic increase is Marvell's revenue growth rate.

As I have pointed out in the past, Marvell spent a lot of money on research and development in the earlier part of this decade, and only cut back a little during the recession. This year new products that were sampled in 2009 are ramping into volume production, and new products sampling this year are going to ramp in 2011. What are those new products?

Most notable are "communication processors" for smart phones, particularly the oPhone beginning to be sold in China. In order to get a price point low enough for mass marketing in China, more features than ever before had to be integrated into a single semiconductor chip. Marvell is unique in being able to offer general application and signal processing, Wi-Fi, Bluetooth, graphics, and cellular modem. Over 90% of oPhone models (there are several companies building them) use Marvell chips.

This alone could be sufficient to cause the inflection point. While the oPhones are far less expensive than models sold in the U.S., Marvell gets very good profit margins on the chips it makes for them. Start multiplying these per-chip margins by the 100s of millions of likely oPhone buyers in China, and you can see the potential.

But there is more. Marvell has become an increasingly prominent player in high-speed Internet switching chips. The competition there is intense, but intense competition has not impeded Marvell for very long in other fields it has chosen to enter.

Many of the newer products will be based on a microprocessor line called Armada. The thing about Marvell is that unlike Intel, they usually don't just make a microprocessor and sell it to customers who put it in a socket. Marvell works with manufacturers to integrate exactly what they need for their products on a single chip that incorporates the microprocessor. This gives faster execution and communication times and reduces costs, while leaving Marvell an ample profit margin.

Expect new products to be announced based on Marvell technology all though 2010 and 2011 (and likely well beyond).

While competition is intense and there are many pitfalls, it looks to me like Marvell is going to become the very center of the semiconductor chip industry during this decade. Of course others have already entered the SoC business, and stand-alone chips will continue to be manufactured for equipment with volumes insufficient to justify an SoC design. I'm not saying the engineers at Intel, AMD, NVIDIA, Broadcom, Microchip, etc. are not very good, and all these companies have plenty of financial ability to compete however they like. But Marvell seems to have found how to

I have owned Marvell stock since January 2005.

For detailed results from Marvell's latest reported quarter, see my

Marvell Technology (MRVL) Q4 2010 analyst conference summary

See also

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