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.
Showing posts with label Sehat Sutardia. Show all posts
Showing posts with label Sehat Sutardia. Show all posts
Tuesday, May 22, 2012
Thursday, November 29, 2007
Marvell Technology (MRVL) Valuation
Marvell (MRVL) management, employees and long-term investors were probably shocked by the huge drop in the stock price yesterday, the day following release of Q3 data (really fiscal Q3 2008, the 3 months ending October 27, 2007). While there are specific reasons that make a valuation of Marvell's stock widely open to interpretation, for the most part the drop reflects Wall Street trading program and analyst focus on short-term profits being mismatched with Marvell's strategy for long term growth.
I'm assuming you've have some background on Marvell Technology, which I've followed for a number of years and which I own stock in. If not you might want to check the following before reading further:
my Marvell page at Openicon (which has links to my prior articles on Marvell and to my summaries of Marvell analyst conferences).
www.marvell.com
No one is disputing, now, that Marvell is able to grow very quickly, both growing its interal divisions and by making strategic acquisitions. Q3 revenues were $758.2 million, up 15% sequentially and 46% from the year-earlier quarter. They were also well above guidance management gave at the beginning of the quarter. That is exceptionally fast growth for a company of Marvell's size. But it is just getting back to trend for Marvell. Here are annual revenue figures for the past few years:
2002 $505 million
2003 $819 million
2004 $1,224 million
2005 $1,670 million
2006 $2,238 million
The current annual run rate is $3,032 million. Call that $3 billion. Six times 2002 revenues.
But where's the beef? Using GAAP Marvell lost $6.4 million in Q3. And I like to use GAAP. On the other hand I like companies that make short-term sacrifices in order to be able to dominate an industry in the long run. The semiconductor chip industry is very diverse. What Marvell has done successfully is pick an area, become dominant, then pick a new area (or two or three) to compete in. Marvell always starts at the high end of the markets it chooses, introducing revolutionary technologies. Then it gains market share as these technologies spread to the middle market and then to the low-priced market segment.
Wall Street is mad because Marvell invests a lot of money in research. Not me. This investment is going to bear fruit.
Unless we enter a global recession 2008 is going to be a year of good profitability, on top of continued revenue growth, for Marvell. Here's why.
First, the profit figure is not as bad as the GAAP figure indicates. Marvell also released a non-GAAP figure, which was a Q3 profit of $86.2 million. This figure eliminates (from the GAAP numbers) $37 million in amortization expense and $56 million in stock-based compensation expense, which is a non-cash expense.
Well, GAAP requires stock-based compensation to have a $ equivalent because it dilutes shares. It is non-cash, and I believe in giving employees a stake in the company. The amortization expense is real too.
Keeping that firmly in mind, nevertheless on a cash basis Marvell was up $33 million. So they are cash flow positive. They also increased inventories in line with business to the tune of $85 million.
Going forward, Marvell announced a decrease in headcount of 400 workers or 7% of the workforce. In Q4 there will be a $8 million one time charge and about $4 million of benefit. In Q1 benefit shoud rise to around $10 million.
In addition, revenues (which are somewhat seasonal in semiconductors) should rise at least $30 million in Q4, which was management guidance. With operating expense being held nearly flat, and cost of goods sold should increase less than $15 million, a good guess is that net income will icnrease by about $15 million.
So at very least I expect GAAP net income to be in the black in Q4, with rapid acceleration upward after that.
There are a number of other factors that should accelerate profit growth. One is that the former-Intel application (cell phone) processor division's costs are set to go down as Marvell will no longer have to buy the processors from Intel at contracted prices. Instead they will be made in an Asian fab, which has already made sample chips and will be gearing up in 2008.
Marvell Technology has also had a large number of design wins that are going to ramp up revenue in 2008. They have introduced advanced video processing chips that will go into an increasing number of flat panel displays. They also announced breakthroughs in a Green technology for analog power supplies that are the result of 5 years of research and development.
Marvell could please the nearsighted wage-slave analysts of Wall Street by drastically cutting back on research and development ($252 million in Q3) and just marketing the hell out of the technologies they already have. Short-term traders would love that. But with a $3 billion revenue run rate, $1 billion a year in R&D begins to look reasonable. If Marvell cuts back R&D slightly and hits a $4 billion a year revenue run rate by the end of 2008, everyone will be heaping praise on CEO Sehat Sutardia and his team for their wisdom and perseverance.
All stocks are risky. At $15 a share today, I don't think Marvell has much risk left in it, aside from macroeconomic risk, but always diversify your portfolio and remember, if you don't buy low you can't sell high.
I'm assuming you've have some background on Marvell Technology, which I've followed for a number of years and which I own stock in. If not you might want to check the following before reading further:
my Marvell page at Openicon (which has links to my prior articles on Marvell and to my summaries of Marvell analyst conferences).
www.marvell.com
No one is disputing, now, that Marvell is able to grow very quickly, both growing its interal divisions and by making strategic acquisitions. Q3 revenues were $758.2 million, up 15% sequentially and 46% from the year-earlier quarter. They were also well above guidance management gave at the beginning of the quarter. That is exceptionally fast growth for a company of Marvell's size. But it is just getting back to trend for Marvell. Here are annual revenue figures for the past few years:
2002 $505 million
2003 $819 million
2004 $1,224 million
2005 $1,670 million
2006 $2,238 million
The current annual run rate is $3,032 million. Call that $3 billion. Six times 2002 revenues.
But where's the beef? Using GAAP Marvell lost $6.4 million in Q3. And I like to use GAAP. On the other hand I like companies that make short-term sacrifices in order to be able to dominate an industry in the long run. The semiconductor chip industry is very diverse. What Marvell has done successfully is pick an area, become dominant, then pick a new area (or two or three) to compete in. Marvell always starts at the high end of the markets it chooses, introducing revolutionary technologies. Then it gains market share as these technologies spread to the middle market and then to the low-priced market segment.
Wall Street is mad because Marvell invests a lot of money in research. Not me. This investment is going to bear fruit.
Unless we enter a global recession 2008 is going to be a year of good profitability, on top of continued revenue growth, for Marvell. Here's why.
First, the profit figure is not as bad as the GAAP figure indicates. Marvell also released a non-GAAP figure, which was a Q3 profit of $86.2 million. This figure eliminates (from the GAAP numbers) $37 million in amortization expense and $56 million in stock-based compensation expense, which is a non-cash expense.
Well, GAAP requires stock-based compensation to have a $ equivalent because it dilutes shares. It is non-cash, and I believe in giving employees a stake in the company. The amortization expense is real too.
Keeping that firmly in mind, nevertheless on a cash basis Marvell was up $33 million. So they are cash flow positive. They also increased inventories in line with business to the tune of $85 million.
Going forward, Marvell announced a decrease in headcount of 400 workers or 7% of the workforce. In Q4 there will be a $8 million one time charge and about $4 million of benefit. In Q1 benefit shoud rise to around $10 million.
In addition, revenues (which are somewhat seasonal in semiconductors) should rise at least $30 million in Q4, which was management guidance. With operating expense being held nearly flat, and cost of goods sold should increase less than $15 million, a good guess is that net income will icnrease by about $15 million.
So at very least I expect GAAP net income to be in the black in Q4, with rapid acceleration upward after that.
There are a number of other factors that should accelerate profit growth. One is that the former-Intel application (cell phone) processor division's costs are set to go down as Marvell will no longer have to buy the processors from Intel at contracted prices. Instead they will be made in an Asian fab, which has already made sample chips and will be gearing up in 2008.
Marvell Technology has also had a large number of design wins that are going to ramp up revenue in 2008. They have introduced advanced video processing chips that will go into an increasing number of flat panel displays. They also announced breakthroughs in a Green technology for analog power supplies that are the result of 5 years of research and development.
Marvell could please the nearsighted wage-slave analysts of Wall Street by drastically cutting back on research and development ($252 million in Q3) and just marketing the hell out of the technologies they already have. Short-term traders would love that. But with a $3 billion revenue run rate, $1 billion a year in R&D begins to look reasonable. If Marvell cuts back R&D slightly and hits a $4 billion a year revenue run rate by the end of 2008, everyone will be heaping praise on CEO Sehat Sutardia and his team for their wisdom and perseverance.
All stocks are risky. At $15 a share today, I don't think Marvell has much risk left in it, aside from macroeconomic risk, but always diversify your portfolio and remember, if you don't buy low you can't sell high.
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