Marvell Technologies (MRVL) jumps on LTE wins in China

New article at Seeking Alpha:

Marvell Technologies Will Ramp Smartphone Chip Profits In 2014

I started writing this article yesterday because of an announcement last week of an LTE smartphone win in China. When I got up this morning to finish the article the stock was up quite a bit, and there were more announcements of 4G LTE wins in China. So I finished the article, and fortunately the turn-around time at Seeking Alpha was quick.

I have held Marvell since around 2006. I paid too much for it in the early years, but also built up a position over time during dips. I have taken notes on every quarter's analyst conference since 2006. You can see my notes at:

Marvell Technology Analyst Conference Call Notes

It is getting harder to find undervalued stocks. I believe that MRVL is currently undervalued, but as always that is contingent on it having a growth trajectory more or less in line with my expectations.

I have enough Marvell stock that if momentum players push the price up too high too quickly (above $20 per  share in the next few months) my portfolio rules would require me to sell a portion of it. I try to keep the market value of each of my stocks to no more than 10% of my entire portfolio.

Marvell Technology (MRVL) Elbows Out

Marvell Technology Group (MRVL) reported results above expectations for the quarter ending April 28 (Q1 fiscal 2013) last Thursday. I was delighted that CEO Sehat Sutardja strayed from his usual dry, careful observations to take on some negative Street views of his company.

Revenue was $795.4 million, up 7% sequentially from $742.7 million, but down 1% from $802.4 million year-earlier. That may not seem stellar, but some rival semiconductor companies and some analysts had been predicting considerably worse. Essentially the rumors were that a competitor was finally besting Marvell in the hard drive controller market and that Marvell was also failing in the Chinese smartphone market.

Marvell stock ended Thursday, before results were released, at $13.3. Today it closed at $12.99, for a market capitalization of $7.4 billion. Clearly the news that Marvell is back on the success track has not yet sunk in, with overall market turmoil probably not helping.

For investors the last few year with Marvell have been tough. After splitting in 2004 and again in 2006, the stock price entered 2007 at well over $20 per share. At the 2008 bottom it hit a low around $4.48. More recently Marvell's 52-week high was $16.86, low was $11.23.

The real long-term value in any technology company is as much in what is going on in its R&D department today as what last-quarter's results were. R&D spend in the latest quarter was a healthy $256 million. Marvell does not give a breakdown of R&D spend, but a lot of it had to go to two crucial areas where Marvell leads competitors: TD smartphones for the Chinese market and next generation storage devices, including both HDD (hard disk) and SDD (flash memory based).

The main good news for Q1 was the continued rapid ramping of sales of Marvell-processor based TD-SCDMA smartphones in China. Marvell's chips not only include the processor, but most of the functions needed to run a smartphone (graphics, cellular modem, wi-fi, bluetooth). The middle-class masses are buying Android based smartphones that run on a this new 3G high-speed, invented-in-China protocol. Revenue from these chips was up 25% from Q4. Usually, for its mobile sector, Marvell sees a seasonal decline from Q4 to Q1, and indeed overall the sector was down 1% sequentially. Even then Marvell's mobile segment revenue was up 14% from year-earlier Q1.

Marvell has not competed very successfully for silicon in smartphones in the U.S. or Europe. It has space in some RIM Blackberry phones. When RIM tanked analysts predicted Marvell would have to abandon the space. Instead Marvell is turning its clear victory in China to its advantage in the global competition for the next generation of smartphones. Qualcomm's control of CDMA patents may be history as LTE becomes the new standard. I don't see Marvell beating out Qualcomm in the U.S. or Europe in the next few years, but its design philosophy is enabling it to turn the flank in China, much of Asia, and Africa.

In the hard drive space Sutardja specifically took on the claims of its chief competitor (LSI) about capturing market share, claims that have been echoed by several Wall Street analysts without fact checking. Marvell's storage sector revenue was up over 20% sequentially, in what is usually a seasonally sequentially down quarter. This sequential growth was only partly due to industry recovery from the Thailand floods.

After the floods Marvell's market share did drop to 56%, according to Sutardja. But that was based on which HDD makers were hurt worst by the flooding, not by the competitiveness of Marvell's controller chip rival. In Q2 quarter Marvell's market share should return to about 60%. The disruption of the industry in 2011 meant people produced whatever capacity drives they could. This quarter will see return to normalcy, which means favoring higher-capacity drives for any units that can be produced. Marvell leads in controller chips for high-capacity drives, including the new 500 GB/platter mobile drive solution, which is expected to ramp revenue another 50% in the current quarter. Sutardja also pledged to gain unit and revenue share going forward based on next-generation designs.

There are a lot of other pieces to the Marvell enterprise, but a good summary would be the guidance issued for fiscal Q2 2013 end July, 2012: 6 to 12% sequential revenue increase, or $840 to $890 million. A bit above the upper end of the range would put Marvell flat y/y.

While revenue has flattened since 2010, profit generation has been very healthy at these levels. As a result Marvell initiated a $0.06 per share per quarter dividend. $500 million was added to the share repurchase program. The cash balance was $2.2 billion.

Marvell would be able to buy back a substantial portion of its shares at its current share price.

The usual risks apply. Marvell faces competition in every market it serves, in particular chips for smartphones. My best guess, however, is that over the long run Marvell will continue to do what it did after its founding: take market share from rivals. It will also continue its expansion into new sectors.

Disclaimer: I am long Marvell. I seldom trade the stock and won't for a week after this article is published.

TTM Technologies (TTMI) Sees E-Reader PCB demand

TTM Technologies (TTMI) makes PCBs (printed circuit boards) for the communications, industrial, medical, and consumer electronics industries. It owns plants in the U.S. and in China. The U.S. facilities generally do small runs of PCBs for prototypes and specialized, low volume products. Chinese facilities do larger PCB runs for computer and communications equipment, cell phones including smartphones, and more recently tablet computers and e-readers.

Q3 2011 was a no-growth quarter. Revenues were $358.3 million, down 2% sequentially from $366.1 million, and about flat against $356.8 million in the year-earlier quarter. GAAP net income was $24.5 million, up sequentially from negative $20.3 million, but down 16% from $29.1 million year-earlier. Q2 profits were hit by a one-time non-cash accounting charge for writing off some obsolete factory equipment. So, switching to a non-GAAP view of net income, we have: Q3 2011 $31.0 million, Q2 2011 $32.9 million, Q3 2010 $35.0 million.

While growth has been stagnant this year, profits have remained healthy. Annualizing Q3 non-GAAP EPS gives a P/E ratio is about 7.2 at today's closing price of $11.01 per share.

Because TTM has a broad array of end customers and a global presense, to a large extent its fortunes reflect those of the electronics industry as a whole. For that industry Q3 was a slow quarter in a slow year. Everyone is worried about end demand because of the economy. I believe TTM's ability to make a profit in this environment means it is a reliable cash generator. If the electronics industry picks up again in 2012, there is upside potential.

In the Q3 conference call on November 2nd management noted that some orders were pushed out past the end of the quarter. Cash flow from operations was $42.6 million. The cash and equivalents balance ended at $207.7 million. Long term debt ended at $366.7 million. TTM made capital expenditures of $28.3 million, mostly for new high-end manufacturing equipment in China.

It is notable that debt still exceeds cash. The debt was used to build and expand plants in Asia. So far it has been a good use of debt, but it does create some risk if there is an extreme economic slowdown. Paying down debt has been a priority use for cash.

TTM tracks end markets into 5 segments. For the quarter aerospace and defense was below trend. Cell phones were strong, particularly smartphones. Computers and related were weak and are expected to continue to be weak in Q4. The medical and industrial segment was flat. Networking and communciations, which accounted for 38% of revenue, is expected to be soft in Q4. There is also an "other" category, which saw growth because they are producing the PCBs for a new e-reader for an unspecified customer.

The top five customers were: Apple, Cisco, Ericsson, Huawei and ZTE. Only one of them accounted for more than 10% of revenue.

I believe that as the global electronics industry recovers TTM will continue to pay off debt and eventually be better positioned to use cash for buy-backs and dividends.

Disclaimer: I am long TTMI. I have no plan to change my position this quarter.

Keep diversified!

TTM Technologies (TTMI) Expands to Meet Demand

TTM Technologies (TTMI) makes PCBs (printed circuit boards) for the communications, industrial, medical, and consumer electronics industries. It is a U.S. corporation, but in 2010 bought a Chinese PCB manufacturer. The U.S. facilieis generally do small runs of PCBs for prototypes and specialized, low volume products. Chinese facilities largely do larger PCB runs for computer and communications equipment, cell phones including smartphones, and more recently tablet computers.

TTM is a value plus growth proposition, but let's start with the caveats. The Chinese segment, formerly Meadville, had borrowed substantial amounts of money to buy capital equipment to serve the rapidly expanding market. TTM took over those debts. As of the latest quarter reported, long term debt was $432.3 million. On the other hand the cash and equivalents balance was $235.9 million, giving net debt of about $196 million. Cash flow from operations was $67 million, but capital equipment is still being purchased to meet demand (and replace obsolete equipment). Capital expense was $44 million. So it will take some time to pay off the debt, which fortunately carries a low interest rate.

Given the debt, a serious slowdown in demand for PCBs would set back TTM, but with so much cash on hand they should be able to get through a slow period better than most businesses, including much of their PCB competitors.

On the positive side TTM has a great model within its industry. It is one of the largest players in the world. It also specializes in the very highest end PCB technologies, the ones needed to create ever-smaller, more powerful devices. This involves, for instance, drilling holes for component connections with lasers, from computer-generated designs. Increasingly prototypes will be engineered and tested in the U.S. When production runs are large, they can be done in China. Clients like this model, and TTM is likely to pick up more clients over time.

While there are a few big players at the global scale, much of the PCB competition in the U.S. consists of much smaller businesses that can't afford to buy the capital equipment necessary to make high tech PCBs. One notable competitor at the high end in the U.S. is DDi Corporation.
In the last year, one of little growth in the U.S. economy, TTM revenues for Q2 2011were $366.1 million, up 18% from $310.2 million in the year-earlier quarter. Non-GAAP EPS was $0.40 per share. When you analyse TTM be sure to note that revenues are somewhat seasonal.
Aside from the recent general stock market turmoil, TTM had a stock price drop based on a one-time non-cash charge of $48.1 million for obsolete equipment. Also, management honestly does not know what the effect of the current macroeconomic uncertainty will be on end demand. However, if demand slacks they can stop adding capital equipment, so they have plenty of a cash flow cushion in that scenario.

I have been observing TTM's management for years now. They appear to be honest, smart, and hard-working. I take notes on their analyst conference calls, which you can find at TTM Technologies analyst call summaries. If you go back to 2008 you can see how they managed their way through the last recession.

Keep diversified!

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/

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

Marvell Technology: What Inflection Point?

Marvell Technology (MRVL) makes semiconductor chips for hard disk drives, cell phones, networking and telecommunications. Although for the most part Marvell has had a brilliant run since it was founded in 1995, recently the going has been rough, as reflected in its stock price. After a 52-week high of $22.87 last April, the stock closed at $15.81 yesterday, then bounced back a bit today. The release of quarter results on Thursday (the 3rd) and the analyst conference call caused a big sell off Friday, to $16.13, after closing Thursday at $18.22.

Should Marvell be abandoned, or is this a buying opportunity?

First, keep in mind that Marvell has a fiscal year that ends on January 30th. Their Q4s are typically seasonally slower than their Q3s because shipments of chips going into devices sold over the holidays typically are made in Q3. Q1 fiscal 2012 will end at the end of April; Q2 at the end of July; Q3 at the end of October.

On the other hand, a technology company with rapidly ramping revenues can sometimes overcome seasonal declines. Marvell has lined up two sequential q/q declines. In Q2 revenues were $896.5 million; in Q3 $959.3 million; in Q4 $900.5 million; and for Q1 guidance is for $800 to $850 million. That is worse than normal seasonality.

Last year Marvell CEO Sehat Sutardja, at the Marvell March 4, 2010 analyst conference call, predicted that Marvell would reach an "upward inflection point" within the next twelve months. We seem to be in a downward deflection point instead. Now Mr. Sutardja is saying that revenues (and profits) will ramp again in the second half of this year (more precisely, the second half of fiscal 2012). Should we discount his prediction, given he made it before and reality proved him wrong?

Let's look at why the prior inflection point prediction went awry. The hard drive market was not as robust as expected, mainly because global PC sales did not grow much in 2010. Marvell already has more than half of the market for the controller and other chips in hard drives, and in the latest quarter those still accounted for almost half of Marvell's revenue. Even with new products ramping up, the decline in hard drive chip revenue put a big dent in projections. Marvell is competitive in controllers for solid state drives too, but is not dominant there.

The other problem was Research in Motion (RIM), although Sehat did not mention them by name, everyone knew which customer he was talking about. It isn't that RIM (maker of Blackberry phones) is itself in trouble, despite competition from Apple and Android-based devices. Marvell makes chips for only a couple of RIM models. For those models there was an inventory issue, not with too much inventory, but with a change that results in Marvell holding inventory for RIM. The main issue is that in many developing nations RIM is moving 2.5G phones, and Marvell does not have a chip for 2.5G. However, Marvell should have such a chip later this year.

So two major sources of revenue Marvell counted on were down in Q4 and will continue to be down in Q1. But the big issue, the lack of an inflection point, has to do with OPhones in China. These phones sold slowly late in 2010. Sehat believes that is mainly a matter of introducing them and prices that were too high on the original models. During 2011 a number of Marvell based OPhones will be introduced in China at far more attractive prices, yet which maintain Marvell's own profit margins.

Hence, still an upward inflection point. I don't blame potential Marvell investors to take a wait and see approach. The problem (with not buying at today's stock price) is that Marvell, even in these "bad" quarters, is generating a lot of cash. The low price/earnings ratio for the stock reflects the "show me" attitude about OPhones. If you wait for the revenue ramp to be in the rear-view mirror, the stock is going to be a lot more expensive.

So watch for OPhone news out of China. Maybe consumers there will want iPhones or other alternatives instead. But if hundreds of millions buy the new Marvell-based OPhones, Sehat and crew are going to look a lot more far-sighted than they do right now.

I own Marvell stock and understand the risk of competing against the talented people at Qualcomm, NVIDIA, Apple, etc. Right now I would not sell my Marvell stock for less than $30 per share. Come this fall, depending on the OPhone ramp, I may need to change my estimate of its value.

See also:

http://www.marvell.com/

My March 2011 Marvell (MRVL) analyst call summary

TTM Technologies (TTMI) New China Model

On August 5, 2010 TTM Technologies (TTMI) reported its second quarter results. TTM is the American leader in printed circuit board (PCB) manufacturing. And for the quarter, because of its acquisition of (or merger with) Meadville, its revenues more than doubled since Q1.

For the actual numbers and management's comments see my TTM Technologies Q2 analyst call summary.

Like many technologies, the making of PCBs is rapidly changing. Components are becoming smaller. The number of interconnections has been increasing geometrically, requiring multiple layers of conductors to get the job done. Manufacturing has changed too. For instance, mechanical drills are being replaced by lasers. Just a couple of decades ago engineers designed a system around its electronic components, with the PCB that held them almost an afterthought. Now PCB engineering is critical to the success of high frequency, low voltage devices.

Global manufacturing of electronics is also changing. You may be surprised to learn that many electronic devices are still made in the United States. The change is that these are made in relatively low volumes; they are typically specialty devices for the industrial market. Most high-volume consumer devices are made in lower cost nations like China, where the creation of PCBs and loading them with components are crucial steps.

For years TTM's management has talked about buying an Asian company to complement their business. Typically TTM, like other companies, did prototype PCBs. If a company was making only 1000 or maybe 10,000 devices (say a medical laboratory device), it would probably have the actual production runs done by TTM in addition to the prototypes. But at some scale it made sense to take a PCB board proofed by TTM to China to do a large production run. Of course TTM wanted to capture this missed profit opportunity, but it made no economic sense to build large production run PCB plants in the U.S.

Meadville, meanwhile, had a very successful business, headquartered in Hong Kong but with factories in mainland China, doing large scale production runs. Meadville borrowed large sums of money to build its production capacity over the past decade. For the most part this was not low-end stuff. For instance, one of Meadville's largest clients was Apple.

The combination makes a lot of sense. The most advanced technologies quickly become consumer technologies because consumer devices are migrating to being mobile and handheld, requiring shrinking the entire system. TTM, with its experience with high-end technology prototypes, can take a global manufacturer through the entire process now. They help design and debug prototype PCBs, can do small production runs in the U.S. If a company needs a million devices per month, there will be a smooth transition to Asian manufacturing.

It will probably take about a year for this model to show its stuff. Rapid as technological change is, it can take a year or two for a specific device to go from the design stage to the production stage. Also TTM's China facilities are already running at near capacity. They need even more high end PCB production equipment to keep up with demand. Capital expenses can easily be paid out of cash flow, which is very healthy. TTM has gone from being almost debt free to having substantial debt, but the financing terms from Hong Kong banks are liberal. I believe TTM will be able to rapidly pay down the debt.

Of course this is a competitive area, and things could go wrong, but it looks like the right strategy for the PCB industry. In the U.S., in particular, the industry is consolidating because many of the smaller companies can't afford to invest in new equipment like automated laser drilling machines. TTM is likely to pick up market share both in the U.S. and China.

See also: TTM Technologies and Meadville

Marvell Tablet Computers on Way

As a brand, Marvell Technology Group is little known to the general public. Yet if you own a hard drive, odds are better than even that it has a Marvell chip in its interface. In fact Marvell is a key supplier of many semiconductor devices that go into cell phones, wireless and hardwired networking equipment, and printers.

Marvell executives have been talking about tablet computers built around their chips for a while. Yet while they are willing to talk about the superiority of their technology solutions, they often don't say who their OEM partners are, much less pre-announce the end products. Now, however, we are beginning to see the veil of secrecy lift. Most notably we have an announcement of a new eReader by Hawang and the adoption of the Marvell platform for One Laptop Per Child.

Within a few years China will be the biggest national market for both smartphones and tablet computers. Future smartphones in China means OPhones, and Marvell is dominating in design wins for OPhones. For tablets Marvell's design platform is called Moby. For One Laptop Per Child the result would cost in the range of $100. Commercial products will have many variable in their end price, notably the size of the screen and whether it is grayscale like a Kindle or color like an iPad.

In between smartphones and tablets in size are book readers. 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.

Marvell's chips can include application processing, digital signal processing, video processing, and wireless technologies like cell phone modems, Wi-Fi, and Bluetooth. Everything needed for tablet computing.

The iPad tablet computer is a nifty device. We know Apple is famous for its high markups, so there is already room for iPad price drops. But the average American employee cannot afford an iPad (it represents a week's take home pay), much less the average Chinese or developing nation employee. Give them the functional equivalent at $100 to $200, however, and my guess is they will snap up tablets. With the kinds of volumes we are looking at in the China market alone, their should still be reasonable profit margins for Marvell and its OEM partners.

I expect we will see OEM announcements of tablets that are based on Marvell chips as we progress through the year.

Keep in mind that this is a very competitive market. In addition to Apple's internally developed chips (which almost certainly won't be sold to OEMs), top competitors include Broadcom, Qualcomm (Snapdragon chips), Intel, TI, and Freescale.

Resources:

One Laptop Per Child's Next Move [New York Times, May 27. 2010]

Marvell and Hawang E-Reader [Marvell release June 1, 2010]

One Laptop Per Child and Marvell Join Forces [Marvell release May 27, 2010]

Marvell Moby Technology site

Marvell fiscal Q2 2010 results release

Alice in Wall Street Land

Today it was announced that the government of China tightened up on lending by increasing the reserve requirements of banks.

Stocks fell in most of the world and in the United States.

And yet we should be celebrating that the Chinese government, unlike the American government, has at least a vague sense of sound capitalist economics. We really don't want the Chinese economy to overheat and then crash. We want to see sustainable growth. Even with that goal, we would expect to see more cyclic activity than is desirable.

China has become the engine of the world economy. Just as Great Britain was in the 19th century and the U.S.A. was in the 20th century. What is good for China is good for the world. China is one of the largest national markets for many of the stocks I own or follow like Marvell Technologies (MRVL) and Microchip (MCHP). Even my biotechnology companies are selling rapidly increasing volumes of their products to Chinese end markets.

The rest of the world, particularly the United States, needs to catch up to China in this cycle. It helps us if China taps the breaks a bit. We need to improve our competitiveness and absorb our own excess capacity.

Selling stock because China tightens its credit policies, this early in a recovery cycle, is just stupid.

Professionals on Wall Street may have a lot of competitive advantages over individual investors, but on the whole they are a narrow-minded, stupid and cowardly lot. It's hard to match the top 10% of Wall Street guys, but beating the average is not very tough if you do your homework, analyse situations carefully, and don't get emotional.

Choosing individual stocks is still where the competitive advantage is for smaller investors. It does not take very much research to know more about a particular company than most brokers and professional traders. You can even beat computerized trading programs simply by taking a long view; they aren't programmed to understand companies or markets, they seldom trade well on time frames of over a week.

Markets should be cheering the Chinese government. Investors should be pressuring the Federal Reserve to raise interest rates to a defined point like 0.25% or $0.50% to signal that credit generation will not be allowed to get out of hand in this cycle, the way it was in the last two cycles.

Marvell Technology (MRVL) Blows Past Competitors

Even non-engineers can appreciate the engineering of Marvell Technology Group (MRVL). After making a number of technological break-throughs in 2008 and earlier in 2009, revenues are ramping very quickly as products containing their semiconductor chip systems are being built.

For an overview of Marvell technology, see Marvell Under the Hood. For my past analyst conference summaries, see Marvell Analyst Conference Summaries.

Revenue for the quarter ending October 31, 2009 was $803.1 million, up 25% sequentially from $640.6 million and up 2% from $791.0 million year-earlier.

Net income of was $201.6 million, up 245% sequentially from $58.5 million and up 183% from $70.9 million.

EPS (earnings per share) were $0.31, up 244% sequentially from $0.09 and up 181% from $0.11 year-earlier.

Cash and equivalents ended at $1.46 billion. Cash flow from operations wa $203.5 million. $196 million free cash flow. Inventories rose to $239 million to deal with areas of tight supply. Long term liabilities are $174.3 million.

Non-GAAP, which excludes $34.4 million in stock-based compensation, $26.5 million amortization, $1.9 million restructuring, but adds back in the $32.6 million tax benefit: net income $231.8 million. EPS $0.35.

Guidance for fourth fiscal quarter 2010 was $802 to $850 million in revenues. Networking and storage sequential growth, with normal seasonal slowdown of wireless. 58.5% non-GAAP gross margin. $235 million non-GAAP operating expenses. $254 million operating profit. Other income $1.5 million. Tax $12 million. 670 million diluted shares. $0.33 to $0.39 non-GAAP EPS. $150 million free-cash flow. GAAP EPS about $0.09 less than non-GAAP.

Analyst Questions and Answers (summary):

Hard drive market dynamics? First quarter 2010 should continue to be helped by low cost of PCs. Our hard drive customers are optimistic.

Gross margin improvement and mix? We don't provide gross margin by end-market segments. Mobile and wireless end markets experienced very good growth, and your margin estimates for that segment may be off.

China Mobile processor market size? PXA920 is very specific, high volume, high performance for standards of China market. It is state-of-the art smart phone solution, but also cost effective enough for the mass market. Our aspiration is higher than any number anyone is throwing out yet.

Sustainability of gross margins? Semiconductor business gross margins should be on high end as prices go down, to offset other expenses. This is a fundamental shift. The numbers we have are fair numbers and we plan to maintain them as long as we can, and best-in-class semiconductor companies will need to achieve this range.

Are your customers in hard drives adding to inventories? We are on a consignment basis, so they do not need to build inventories of our chips. Full feature PCs, even laptops, are now under $500, which is building demand, especially in emerging economies.

Dividends? We do not believe we are out of the economic downturn, so it is too soon to talk about distribution of cash. Our bias is to have more cash than we need in order to not be at the mercy of banks.

China business going forward? We are optimistic about our work for China Mobile; we have been working with them for 2 years. PDS/CDMA 3G is the pride of China. We believe it will be the main technology in China going forward, so we expect a very strong second half of next year.

Visibility is much improved. Inventory is leaner. We have had some shortages and longer lead times, so customers are giving us more visibility.

O-phone success detail? PXA920 will be used by many OEM cell phone makers for the China market; not all of them will be O-phones. The main chip is the most highly developed ever, but we also have the chip set solutions (power, wi-fi, etc.) that go with this. Revenues will start to ramp in the second half of next year; not contributing yet.

Bluetooth Wi-Fi combo part growth? We are very happy with traction with this device is finally taking off. The ramp now is the first generation device, a second generation is in design now. Any device requiring Bluetooth and WiFi is a potential market.

Reviewed how integration of systems on a chip help everyone, including the OEMs and end customers, while lowering everyone's costs despite increasing Marvell's gross margin.

ARMADA initial end markets? Across the board. Chips range from low end to high end. The run on all the ARM software in the market. So the market is any consumer device from HDTV decoders to picture frames to Internet portals like netbooks to automotive display consoles.

Onyx Pharmaceuticals Chooses the Long Run

Onyx Pharmaceuticals (ONXX) disappointed biotechnology investors with short time horizons when management announced that most of this year's potential profits from cancer drug Nexavar will be reinvested in research and development.

Nexavar (Sorafenib) has been approved by the FDA as a therapy for liver cancer (aka HCC) and kidney cancer (aka RCC). It is marketed through a partnership with Bayer. Under this arrangement Bayer sells the drug and tracks expenses for marketing and research and development costs. The net proceeds after costs are split, with Onyx receiving 50%. Until this year the revenues from Nexavar did not cover the costs, so Onyx received nothing. In addition Onyx had costs of its own, so it reported net losses.

However, global Nexavar sales for Q2 were $168.5 million, more than doubling Q2 2007 sales of $81.3 million. Mostly this reflects Nexavar being approved for use with liver cancer, in addition to its prior approval for kidney cancer. On a global scale most major nations now allow Nexavar for kidney cancer, but it is still being rolled out for liver cancer. All indications are that sales will continue to grow rapidly well into 2009.

Onyx received $30.2 million from Bayer, down from Q1 despite increased sales because of increased joint expenses. GAAP net income was reported as $4.5 million, because Onyx racked up $28.4 million in operating expenses outside the Bayer partnership. It also had some interest and investment income.

Today Onyx, with a stock price of $39.55, has a market capitalization of about $2.2 billion. That is a lot of market capitalization for $4.5 million net income in a quarter. If anything goes wrong (like serious, previously undetected adverse reactions), a lot of that value could disappear.

But Nexavar could also become a blockbuster. It is the first drug to show good results against HCC. It attacks cancer metabolic pathways at multiple points. Chances are good (but not certain) that it will have some effectiveness against a variety of cancers beyond liver and renal. Under FDA rules clinical tests have to be done for approval for each cancer type.

Of course Nexavar could fail with other cancers, either overall or by not doing as well as other therapies. So investing in R&D presents a risk, the possibility that profits from already-approved indications will mostly be drained away for further research.

On the other hand, a good result in a common form of cancer, say one of the common types of breast cancer, would propel the value of Nexavar through the stratosphere.

So I own some Onyx stock, but I realize it is a risky deal. All the more reason to keep a portfolio within the pharmaceutical or biotechnologies segments diversified.

It may be 2010 or later before Nexavar is approved for more cancer types. In the meantime the ramp for liver cancer should result in improved financial numbers. HCC is rare in the United States, where most liver cancer actually started as a different type of cancer. But it is one of the most common types of cancer in China and some other Asian nations. Approval to market Nexavar in China was recently granted.