Wall Street was not suprised at the short fall because the PC supply chain was believed to have hit the pause button in July. Marvell's biggest product segment is semiconductor chips that go into hard drives (HDDs) for data storage. HDD revenue was 15% down sequentially from Q1. There had been supply constraints over the last year, and as a result HDD manufacturers had overbuilt inventory preparing for back to school sales. This was largely from the Europe economic effect, not so much an actual downturn in demand in Europe as cautious inventory control by spooked CEOs. Marvell management believes consumption of excess inventory is mainly behind, as orders rose again towards the end of July.
Making Q2 not such a bad quarter was the long-promised ramping of Marvell products for the mobile/wireless markets. This segment saw an over 50% sequential jump (and up 140% y/y) as silicon was shipped for a number of new products that consumers (mostly in Asia) will see in Q3. About 15% of sequential growth was due to to an Armada based product, with a single customer getting ready for a game product introduction. 30% of sequential growth was due to a cell phone processor for a customer ramping a new product. 55% of sequential growth was for embedded Wi-Fi, which is a market the Marvell has been successful in for some time, and is still building on that success. Management believes it will see 15% to 20% sequential growth in Q3 in the mobile and wireless segment.
Earlier this decade Marvell made very large commitments to R&D and also made some acquisitions that analysts questioned at the time [See Marvell's Huge Research and Development Budget August 24, 2007]. Now we are seeing fear in the hearts of competitors in a slew of fields that Marvell did not even play in five or ten years ago.
Take one known example from the mobile device market. Hawang has been producing eReaders for the Chinese market since 2008. The Marvell based model is due out by September. According to Hawang it offers "better performance at a better price ... true mass market pricing." This is possible because of Marvell's intellectual property and ability to put many functions on a single chip. Notably this single chip solution (SoC - System on a Chip) includes an integrated e-Paper Display (EPD) controller. It can display standard pdf documents and requires very little power. I also expect we will see OEM announcements of tablet computers that are based on Marvell chips as we progress through the year. These may be in Asian markets, but some should be available in the U.S. Keep in mind that this is a very competitive market. In addition to Apple's internally developed A4 chips (which almost certainly won't be sold to competing OEMs), top competitors include Broadcom, Qualcomm (Snapdragon chips), Intel, TI, and Freescale.
With its low-power application processors, cell phone modems, wi-fi and bluetooth technologies, all possibly on a single chip, Marvell has apparently won a leading position in China's new Ophone (smartphones for new cellular signal standard) production, which should begin ramping around the beginning of 2011. That, in itself, will be a huge business.
Another space that Marvell is already competive in and may dominate sooner than you think is Ethernet switching. This has become increasingly important with the proliferation of datacenters and cloud computing.
Most intriguing is the idea that Marvell is going to use products intially developed partly using the Intel division it acquired to go after the server market. Marvell is not the only company that can see using ARM architecture to design servers that sip power, but it does bring a formidable amount of talent to the table. Let's see: really fast, very low power consumption processors, networking chips, and storage chips. Sounds like the makings of a cloud datacenter to me.
Probably my favorite thing about Marvell managment is that they think long term. They have proven they can take a concept, get out a product a few years later, and dominate a market a few years to a decade after that. You might want to take notice of Marvell now, because by 2012 everyone will be noticing.
Resources:
Marvell fiscal Q2 2011 analyst call summary
My Marvell analysis page
Marvell and Hawang E-Reader [Marvell release June 1, 2010]
Marvell Moby Technology site
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