Marvell Technology Sees Higher Q2

Marvell Technology (MRVL) makes semiconductor chips for hard disk drives, cell phones, networking and telecommunications. Recently the going has been rough for Marvell stockholders, as reflected in its stock price. After a high of $22.87 in April 2010, the stock hit a 52-week low at $13.87. After the Marvell analyst conference call, on Friday the stock jumped 11%, from the Thursday May 26 close of $14.56 to the Friday close of $16.17. So is that it for Marvell, or are we starting a new ramp?

Marvell's management described the results for Q1 fiscal 2012 ending April 30, 2011 as a low point in their cycle. Partly this was the usual seasonality as consumer end products build in Q2s and Q3s. But it also reflected poor sales to RIM for Blackberry models, a slow growth rate in the hard disk drive market, and slow new product ramps. In each case Marvell makes one or more mixed digital and analog chips for the end products.

Revenue for Q1 was $802.4 million, down 11% sequentially from $900.5 million and also down 6% from $855.6 million in the year-earlier quarter. Revenue was at the very low end of guidance. I think the stock had been shorted on the theory they would actually miss guidance, and they did miss Street estimates.

However, Marvell reported that things are already picking up in Q2 and the long-promised Marvell Inflection Point may finally make an appearance in Q3. Q2 revenues are now expected between $870 to $910 million, with non-GAAP EPS of about $0.37, which would support a stock price far higher than Friday's close.

The change in fortunes has several factors. Marvell is leading (or certainly one of the top 2 leaders) in the Solid State Drive market, which is ramping pretty nicely as prices drop and people see the advantages of SSDs. It is also a leader in chips for high-end networks. In the smartphone market we know the competition is intense, but Marvell providing the core chips for the Chinese TD-SCDMA standard based OPhone market. While OPhones started to be available in 2010, they are expected to ramp quickly as 2011 progresses. We are talking potentially 600 million OPhone customers, which makes the fight over American market share seem like a global side show.

Marvell is also sampling solutions for the LTE smartphone market. Again, expect fierce competition, but Marvell should win a share of slots in 2012.

I own Marvell stock and understand the risk of competing against the talented people at other semiconductor companies.

See also:

http://www.marvell.com/
My May 26, 2011 Marvell (MRVL) analyst call summary
My March 2011 Marvell (MRVL) analyst call summary

Applied Materials Rocks Q2

Applied Materials, the semiconductor capital equipment maker, reported stronger than expected revenues and earnings for its second quarter of fiscal 2011 ending May1. The stock traded down on Friday based on management's cautious guidance for the remainder of 2011.

Prior guidance had been for Q2 sequentially flat to up 5% from Q1 revenues of $2.69 billion, with non-GAAP EPS of $0.34 to $0.38. Instead revenues came in at $2.86 billion, up 7% sequentially from $2.69 billion, and up 25% from $2.30 billion in the year-earlier quarter. Non-GAAP EPS was at the high end of guidance, $0.38.

Prior guidance on full fiscal 2011 revenues was over $11 billion and non-GAAP EPS was over $1.50. Management now said that is the high end of a range that depends on demand in Q3 and Q4.

The dividend is now 8 cents per quarter, 32 cents per year. There is a lot of room for growth given EPS, but acquiring Varian Semiconductor will eat up much of Applied's $4.6 billion cash and investment balance. Once Varian is digested the dividend could start growing again. At Friday's closing stock price the current dividend is a healthy 2.35%.

Within the semiconductor equipment and servicing industry Applied Materials serves a variety of segments. Variations in the demand cycles in segments and sub-segments account both for the stellar quarter and for the cautious guidance. The solar power division set a record, but revenues exceeded new orders as there are questions about end demand in Europe. Orders exceeded sales in the largest segment, silicon semiconductor manufacturing equipment, but the orders are mostly in new process modes (40 nm and under), driven by mobile end market demand. Large panel display capacity is plentiful, so most orders are to make small panels for smartphones and tablets.

My own view is that there is mainly upside. The Varian Semiconductor acquisition will make Applied very close to a full service provider for foundries. Despite uneveness, we are still in a global economic ramp with billions of consumers set to acquire smartphones in the next 3 years (600 million in China alone). Everyone wants devices that do more with less power, and the only way to get that is with new semiconductor manufacturing capabilities. It does not matter who wins the smartphone race; everyone needs the kind of semiconductor solutions Applied Materials provides.

For more details about Q2 results, including questions by analysts, see my Applied Materials Q2 2011 Analyst Call summary.

I own Applied Materials (AMAT) stock. See also the Applied Materials web site.

See also: http://www.appliedmaterials.com/

NVIDIA Explains Smartphone and GPU Strategies

The NVIDIA (NVDA) analyst call on Thursday was characterized by a relatively short presentation and long question and answer session. Analysts pressed a variety of concerns while management explained their view of the technology space and their strategy for increasing revenue and profits. [See also call details at Nvidia Q1 fiscal 2012 analyst call news summary.]

The explaining was necessary because revenues were $962.0 million, up 8.5% sequentially from $886.4 million, but down 4% from $1.002 billion in the year-earlier quarter. GAAP net income was $135.2 million, down 21% sequentially from $171.7 million, and down 2% from $137.6 million year-earlier. GAAP EPS (earnings per share) were $0.22, down 24% sequentially from $0.29, and down 4% from $0.23 year-earlier. Those numbers include a $40 million payment from Intel for intellectual property (really, to keep NVIDIA a strong ally against AMD); take that out, and the y/y comparisons look worse, while Q1 last year was nothing to shout about either.

So what are the issues? NVIDIA is exiting the motherboard chip set business, which originally became necessary because of a dispute with Intel. AMD has cut heavily into NVIDIA's former dominance in the discrete GPU (graphics) chip and card business. NVIDIA's supercomputer graphics business actually shrank a bit, though management argued it would expand down the road.

That leaves the savior of the moment, Tegra, a chip that runs cell phones and tablets. The newest one is Tegra 2, which everyone admits is a big improvement over the original Tegra. Tegra chips generated $122 million in the quarter, which is a lot of money, until you compare it with losses from the humble chip set business, or the bulk of NVIDIA's revenue, or smartphone chip revenue of some competitors.

NVIDIA claims they are going to take market share in the discrete graphics chips for notebook computers segment. Their only real competitor, AMD, says the same thing. But the good thing about discrete GPU chip competition is there are just those two players. The competition between them is intense, but at least it is somewhat predictable.

In smartphones and tablet computers, however, almost everyone is licensing the core processor design from ARM and adding graphics, Wi-Fi, and cellular modems as best they can. The competition is multifold. Qualcomm was the pack leader two years ago, and still outsells NVIDIA heavily. TI is very competive and believes it now is closer to the heart of Google (maker of the Android smartphone operating system) than NVIDIA, 2010's sweetheart. Apple makes its own ARM based processor for the iPhone and iPad. If they all disappeared there would be Marvell, which dominates the hard drive chip sector and has slots in a number of phones, including the new OPhones in China. There are other players in Korea, Japan, and China. Then there are the non-ARM entries, mainly for tablets but eventually for smartphones, from AMD and Intel.

And anyone can license the intellectual property to make a smartphone chip. In other words, there could be more players in 2012, not less.

Which is too many players. Consolidation will take place, probaby around 2013 when smartphones have completed replacing the bulk of not-so-smart cell phones. While the competition so far has been on technology, with points for speed, usability, and low-power consumption, at some point price will become an important issue. Profit margins will be squeezed.

I certainly believe NVIDIA is as competitive as any of the other companies I named. But there are going to be losers. There will have to be losers. It is next to impossible to predict who they will be.

Given that, investors might want to think about going lower down the food chain, to the companies that make semiconductor manufacturing equipment like Applied Materials or printed circuit boards for smartphones like TTM Technologies.

Of the companies named above, I currently own stock in Applied Materials, TTM Technologies, Marvell, and AMD. In the past I owned stock in NVIDIA.

See also NVIDIA

Keep diversified!

Cisco Systems Rearranges Itself

Cisco Systems CEO John Chambers, once a hero to tech sector investors, now has serious credibility problems. During the recession, as Cisco struggled along with most other companies, he promissed that investments made during that period would result in a rapid growth of the company post-recession. He repeatedly stated that the growth in data transfers on the Internet, driven largely by the increase in collaboration and video content, would drive a rapid growth in sales of Cisco's routers and switches. In addition, Cisco would enter new areas, "market adjacencies," that would further power revenue and profit growth.

It sounded reasonable. Cisco, led by Chambers, had done it before. It could still happen, but the horizon keeps receding.

Reporting fiscal Q3 (ending April 30) results at the analyst conference call Wednesday, Chambers did not sound as confident as in the past. GAAP EPS of $0.33 was down 11% from year-earlier; non-GAAP EPS of $0.42 was flat y/y. He admitted to problems, but his description of rearanging the management structure of Cisco was not very confincing.

Ethernet switches are a lagging performer. Switch revenue was down 9% from year earlier. That was a year in which the economy expanded, and many companies did very well turning datacenters into "cloud" stuff.

Government ("public sector") purchases were weak. Tax increases, anyone? Without tax revenue, governments are constrained in how much they can buy from companies like Cisco. More money might end up in consumer pockets, but consumers don't by industrial strength 10 gigabyte switches. There is a lot of competition in switches. With Cisco trying to scoop up datacenter server spots from HP, it looks like HP did a better job scooping up switch spots from Cisco. Another example of ruinous competition.

More generally, there are always two tides running at cross currents in the technology sector. If Internet usage doubles, but switch technology improves so that the cost per unit of bandwidth halves, the overall switch manufacturing sector will stand in place. We have certainly seen this with PCs. You just don't need that expensive of a PC anymore to send an email, or even to watch HD video.

I don't own Cisco stock despite following the company for years. I've considered buying, but have always been attracted to companies with lower P/E ratios or higher growth rates. Now might actually be a good time to buy Cisco. Despite its troubles it had $1.8 billion in GAAP net income in the quarter. It had $43.4 billion in cash at the end of the quarter. The stock price is reasonable, if you believe Cisco can continue to compete.

In the past I watched people who buy enterprise switches and routers buy Cisco equipment as the safe, can't get fired for that decision alternative. Now things are more up in the air. Cisco may not be able to get the default victor pricing premium.

Keep it factual for a while, John. Don't be promising investors utopias you can't deliver. Focus on introducing great products, focus on engineering, focus on sales. Even that may not be enough to maintain Cisco's position in this highly competitive neighborhood, but it will do a lot for Cisco's credibility.

For more details on the call, see my Cisco Q3 2011 Analyst Call News Summary.

See also http://www.cisco.com/

TTM Technologies (TTMI) Grows with Smartphones, Tablets

TTM Technologies (TTMI) makes the printed circuit boards (PCBs) that are the backbones of electronic devices; it is the largest PCB manufacturer based in the United States. Last year it acquired a Hong Kong based company with multiple manufacturing facilities in China. Most U.S. PCB manufacturing is now for prototypes and relatively small runs for low-volume end products. By designing and prototyping in the U.S. and doing full-scale runs in China, TTM has created a lot of utility for U.S. based technology companies. It has been running at near capacity, while continuing to expand capacity.

One of the main drivers of increased capacity is tablet computing devices, following the leading edge created by smartphones. This is not just a matter of increased volume. All the electronics have been shrunk, meaning the PCBs themselves involve a higher level of technology than they did a decade ago. This has been good for TTM since many smaller players have been unable to invest in the newest technologies, and TTM gets better profit margins on the higher-technology boards.

With the Chinese acquisition TTM's business has become somewhat more seasonal. The U.S. business was (and still will be) affected by summer vacations and December holidays. Since it is mainly about prototyping and low volume runs for medical, industrial, and aerospace devices, it was not much affected by the Q3 bulge seen in many consumer oriented electronics companies. In China, however, there is a slowdown during the Lunar New Year, and since much of the work is for consumer smartphones, computers, and tablets, there will by Q3 bulges.

Last Thursday, reporting for Q1 2011 ending March 31, 2011, results were solid once seasonality is accounted for. Revenues were $342.8 million, down 8% sequentially from $373.4 million, but up 148% from $138.2 million year-earlier. GAAP Net income was $29.1 million, down 20% sequentially from $36.5 million, but up by a factor of 6 from $4.5 million year-earlier. GAAP EPS (earnings per share) were $0.33, down 20% sequentially from $0.41, but up 230% from $0.10 year-earlier.

Guidance was for Q2 revenue between $350 and $370 million. GAAP EPS $0.28 to $0.37; non-GAAP EPS $0.36 to $0.45.

TTM has a strong cash position at $202 million, and is rapidly paying off its $321 million debt. It is also investing in more equipment in China to keep up with the pace of producing PCBs for iPhones, iPads, and other smartphones and

I own TTM stock, and believe it was a good strategic acquisition for my portfolio (I bought it cheap during the recession). I did not want to try to pick a winner among Apple, Google & partners, etc., for the smartphone/tablet computer revolution. But companies like Applied Materials (AMAD) and TTM provide the infrastructure for the revolution, no matter who wins what market share. There are some exceptions, of course, and plenty of competition in the PCB and semiconductor capital equipment spaces, but so far the strategy has worked pretty well.

For more details on TTM's recent performance, see my TTM Technologies Q1 2011 analyst call summary. One notable fact from management answering analyst questions was that labor costs, per hour, have increased 18% recently. This does not put much pressure on TTM margins, since the factories are highly automated. It does indicate that China is moving to a internal-consumption economy. The rich there are buying all the iPhones Apple can supply, and for middle management and the the working class there are now OPhone type smartphones available at a far lower cost.

See also TTM Technologies

Dot Hill Does Well By HP, Looks For More Partners

Dot Hill (Nasdaq: HILL), a data storage equipment manufacturer, had a very interesting analyst call reporting Q1 2011 results last Thursday. Until December NetApp had been Dot Hill's second largest customer. But profit margins for that particular relationship for Dot Hill were negative, and negotitions with NetApp were not fruitfull. So Dot Hill dropped NetApp.

The result was a pretty steep drop in revenue to $49.2 million, down 25% sequentially from $65.4 million in Q4, and down 18% from $60.0 million year-earlier. Q1 is typically the slowest quarter for Dot Hill. However, the profit hit was much less. GAAP Net income was negative $1.2 million, down sequentially from $0.3 million, but up from negative $6.4 million year-earlier. Non-GAAP net income was $0.1 million for EPS of $0.00, better than I expected.

HP, which buys storage arrays from Dot Hill and resells them under its own brand, was responsible for 76% of Hill's revenues in the quarter. Sales to HP grew 20% y/y. But Dot Hill knows the danger of manufacturing mainly for one customer. They used to make equipment almost exclusively for Sun Microsystems. That business disappeared several years ago.

In fact Hill already supplies to several other major players including Lenovo and Samsung. But in none of these cases is it the exclusive storage supplier. It also sells through a large number of smaller systems integrators, but in the quarter that only amounted to $1.2 million in revenue.

There are three relatively large opportunies for Dot Hill going forward, aside from just selling more through HP. LSI's storage division Engenio is being acquired by NetApp. Some of LSI's Engenio clients are NetApp competitors. Some have begun discussions with Hill about switching to Hill as a first or second source. The second opportunity is selling more software with its hardware solutions, which brings higher profit margins. The third is the industry is consolidating, and Hill is an attractive acquisition candidate, although no discussions have been announced.

Q2 is looking better than Q1, partly due to orders late in Q1 that did not ship until Q2. Revenues for Q2 are projected at between $49 and $53 million, with non-GAAP net income and EPS expected in the vicinity of break-even. When Hill takes on new major OEM clients it does customization for them, which incurs increased engineering costs.

It is notable that GAAP gross margins increased from 13.5% year-earlier to 24.6% in Q1. This was partly from dropping NetApp, partly from a higher-margin mix in the rest of the business, and partly from increasing sales of storage management software.

For a greater level of detail see my Dot Hill Q1 2011 analyst call summary.

I own Dot Hill stock.

See also www.dothill.com

Hansen Medical Ships Just 2 Sensei Systems in Q1

Hansen Medical, maker of robotic controlled catheters for surgery, showed one-time GAAP net income for its first quarter of 2011, reporting results to the analyst conference call on May 4th.

A $23 million sale of intellectual property to Philips medical division was the cause of the profit. Hansen (HNSN) is still essentially in start up mode, losing money each quarter while further developing its Sensei systems for catheter based surgery.

In the quarter Hansen shipped only two new Sensei systems, but it recognized revenue on five systems. Hansen only recognizes revenues on a system when it has been installed, surgeons have been trained, and the system is in actual use. At the end of the quarter there wree 13 systems that had been shipped but not booked for revenue.

Two systems is a slow pace, but shipments have been slow lately. Since each procedure requires a new catheter, it is notable that 693 catheters were shipped in the quarter, up 4% from Q4 and 9% from year-earlier. Most catheters are used for electrophysiology (EP) measurements, until recently the only use approved by the FDA and EMA. However, sale of Lynx catheters for ablation (purposeful destruction of neurons to correct irregular heartbeats) have begun in Europe. I would expect more Sensei systems to sell this year than in 2010 now that ablation can be performed as well as EP.

Management mentioned that one system had already been shipped to a U.S. destination in Q2, and the U.S. sales force has been restructured.

The Philips payment left Hansen with $45 million in cash at the end of the quarter. With the new vascular surgery robots likely (but not certain) to be approved by the FDA and EMA this year, this is plenty of cash to keep the company running until unit sales ramp up, which should lower costs on a per robot basis and allow for sustained profitability.

See my Hansen Medical Q1 2011 analyst conference call summary for a greater level of detail.

I own Hansen Medical stock.

Keep diversified.

See also: Hansen Medical home page

Onyx Pharmaceuticals Sees Future Growth

Onyx Pharmaceuticals (ONXX) reported its first quarter (Q1) 2011 results and held its analyst call on Wednesday.

I like companies that invest in the future with healthy R&D spending, but usually a biotechnology company won't spend more than 100% of its revenue on operating expenses, unless it is in startup mode.

Onyx has had revenues from its liver and kidney cancer drug Nexavar for several years now. Bayer actually distributes Nexavar; Onyx revenues are from Bayer, so there is no cost of goods sold. Revenues were $67.1 million, down 4% sequentially from $70.0 million but up 7% from $62.9 million year-earlier.

But operating expense were $108.5 million. R&D was bad enough, at $62.5 million, but they spent $34.5 million on selling, general, and administrative expenses. Since Bayer does their selling, that seems like a lot. It appears they (management) are paying themselves in advance for carfilzomib.

Carfilzomib is an admittedly promising drug for multiple myeloma, but it has not been approved by the FDA yet. Onyx has a lot of cash (not generated by Nexavar, but put in by investors), so there is little to make management act frugal. Management, being management, thinks it is their cash.

On the plus side, because Onyx keeps failing the profitability test, the stock is cheap (but not dirt cheap), on the assumption (be careful here) that carfilzomib will become a profit-generating multiple myeloma blockbuster.

Another plus is ramping Nexavar sales in Asia, where there is a much higher incidence of liver cancer than in Europe and America. With some care, Onyx could have been managed to profitability in each of the four trailing quarters. The stock price would be higher, and I suspect the carfilzomib story would not be any different.

Thankfully I am a long term investor. Right now long-term means at least two years. But keep in mind we have a pattern developing. What should happen is that combined carfilzomib and nexavar sales in 2012 should be doable with less operating expense than we are seeing in 2012. Then the stock will start pricing at actual profitability, not the cautious prices that are fair when you show losses and FDA approval is still in question. What could happen, instead, is that management will find new indications for the drugs and spend all revenues on clinical trials for new indications, or even pick up the spending pace on other drugs in the pipeline. Managing to more losses.

A biotechnology company can grow quickly and profitably. Hopefully soon the FDA will approve carfilzomib and Onyx will shift to that ideal.

Another reminder to myself and all of you to: keep diversified.

For more insight see my Onyx (ONXX) Q1 2011 analyst call summary.

See also Onyx Pharmaceuticals

SGI Beats Expectations with fast start to 2011

SGI (Silicon Graphics International) got of to its fastest start ever in Q1 of 2011. Revenues were $143.7 million , down 19% sequentially from $177.5 million, but up 33% from $107.8 million in the year-earlier quarter. Because SGI's computer systems are large ticket items, and many of its customers are government agencies, the slide from Q4 to Q1 is not unusual. The real trend to watch was the 33% uptick from Q1 2010.

The Altix UV supercomputer line introduced in 2010 continues to sell well. Recent initiatives are helping, notably UV systems running the Windows operating system and SQL Server. The storage side of the business did well. The two largest customers of SGI are Amazon.com and the U.S. government.

SGI is the result of the acquisition of the old SGI, Silicon Graphics, by Rackable Systems, which specialized in racked server systems designed for power savings. In the analyst conference call on May 3rd, management said exactly what I had been hoping for when the companies merged. The old Silicon Graphics made great computers, but never showed any concern for returns for shareholders, and finally went bankrupt in 2009.

The new SGI retained the tradition of making great computers for technical computing, but has been keeping costs down with an eye on making profits for stockholders. This is great!

For details see my summary, SGI Q1 2011 Analyst Conference. Note this was actualy fiscal Q3 for SGI.

See also Silicon Graphics International

Disclaimer: I own SGI stock.

Keep diversified!

Dendreon On Plan for Q1, full 2011

Yesterday Dendreon held its analyst conference call and released its Q1 2011 results. The key take away is that everything is going according to plan. For a company that spent years in the wilderness wondering if they would ever get FDA approval of Provenge active immunotherapy for prostate cancer, making and staying on plan seems to be an obsession.

Dendreon is a long way from profitability as it ramps up its Provenge system. The GAAP net loss for the quarter was $111.8 million, or $0.77 per share on revenue of $28 million.

Provenge is a process in which a prostate cancer patient's blood is activated to get the immune system to attack the cancer. Some blood is withdrawn at a clinic, flown to the New Jersey manufacturing facility, treated at a workstation, and then flown back to be infused in the patient. The initial launch was done with just 12 workstations. In Q1 the FDA approved an additional 36 workstations for New Jersey, but the ramp up did not come until near the end of the quarter. In April, however, more of the machines were working, so the revenue run rate grew to $15 million for the month. On average in Q2 Dendreon expects to run 24 machines.

The new machines can take on a higher flow of patients, which in turn means allowing more doctors and clinics to provide the therapy. Two additional manufacturing facilities, near Los Angeles and Atlanta, hope to be approved by the FDA this summer and fall.

Guidance remains that for full 2011 revenue will run $350 to $400 million. Half that will come in Q4, if workstations in all 3 facilities are available. My read on that is not that $200 million per quarter is the top run rate. All machines will not be online at the beginning of Q4 and their will be room for higher run rates as the machines are made more efficient and run multiple shifts per day.

Apparently men with (the appropriate stage of) prostate cancer want to try Provenge, which has few side effects.

Global expansion will take years, but Dendreon is already spending money to get ready for a European launch. A global trial of Provenge will also get underway this year.

See my Dendreon Analyst Call for Q1 2011 notes more detail.

See also: Dendreon

And keep diversified!