I originally studied Dot Hill (HILL) when I was asked to report on Crossroads (CRDS) back around 2002. I was looking for comparisons in the data storage markets. I bought some Dot Hill and have owned it ever since, but traded in and out of it more than most of my stocks.
When I saw a press release about a comparison of Nimble Storage (NMBL) and Dot Hill products I was already planning to write an update on Dot Hill for Seeking Alpha. Dot Hill has been one of my best performing stocks because I bought most of what I own at between $1 and $2 per share and it is now over $7.
The result was:
Dot Hill and Nimble Storage: Comparing Growth and Risk
I have long found it interesting how stocks pushed by the larger Wall Street banks/brokerages can carry higher valuations than otherwise similar companies. Also how a good story about future profits can clash with actual returns when the future arrives. This story fits both criteria, but has a positive ending, since Nimble will probably grow into its current market valuation over the next 2 to 3 years. The firms that helped it with its recent IPO will continue to advise their clients to buy it, so you cannot count on a dip in price between now and whenever actual profits get to the point of justifying the stock price.
If demand for data storage slows or is disrupted, of course both Dot Hill and Nimble will suffer. But right now they look like growth stories within the storage equipment market.
Showing posts with label data storage. Show all posts
Showing posts with label data storage. Show all posts
Wednesday, May 27, 2015
Friday, September 19, 2014
Dot Hill Inflection Point Coming?
My newest Seeking Alpha article:
Dot Hill Nears Inflection Point
I have been invested in Dot Hill since 2004; the company has had some major ups and downs in that time. My first buy was at $7.18, and yesterday HILL closed at $3.84 and is down so far today. So you might think it has been one of my worst investments (if you don't follow me, I am known for being an early advocate for the Gilead, Celgene, Biogen triad that has been so successful since 2008).
In fact HILL has been one of my best investments. While my basic strategy is long term, buy and hold, I do sell stocks, or portions of my positions in them, when I think the market has become over-enthusiastic. And I try to accumulate when the market is overly pessimistic. And I pay close attention: you can view a decade of my Dot Hill notes if you want.
Dot Hill is now, as a % of my investment, the third largest stock in my portfolio (after GILD and CELG). This is not just a bet on the future, it is a result of investing in HILL in the past, typically at $2 to $3 per share, but for instance I bought shares on 6/11/2012 at $1.13 per share. Others must have done better, because I recall HILL dipping under $1 briefly once or twice.
Of course I could be wrong, Dot Hill might not hit an inflection point, it might run into another rough spot. Competition is fierce in the data storage industry.
But what is interesting about opportunities like this is that so few people monitor these stocks. Not many professional analysts, not many individual investors. Of course there are thousands of micro cap and small cap stocks out there; who has the time to look at them all? I encountered HILL when I was researching another data storage stock for an investor, using it as a comparison to the company he ended buying into.
Data storage is pretty unglamorous, and since Dot Hill does not make consumer products, and most of its sales are through OEMs that rebrand the products, it has almost no name recognition.
And because Seeking Alpha pays contributors on a per-view basis, I seldom write about it. An article on a better-known stock takes about the same time to write, but can pay 2 to 10 times as much as an article on Dot Hill, or other micro caps I have in my portfolio or follow.
Dot Hill Nears Inflection Point
I have been invested in Dot Hill since 2004; the company has had some major ups and downs in that time. My first buy was at $7.18, and yesterday HILL closed at $3.84 and is down so far today. So you might think it has been one of my worst investments (if you don't follow me, I am known for being an early advocate for the Gilead, Celgene, Biogen triad that has been so successful since 2008).
In fact HILL has been one of my best investments. While my basic strategy is long term, buy and hold, I do sell stocks, or portions of my positions in them, when I think the market has become over-enthusiastic. And I try to accumulate when the market is overly pessimistic. And I pay close attention: you can view a decade of my Dot Hill notes if you want.
Dot Hill is now, as a % of my investment, the third largest stock in my portfolio (after GILD and CELG). This is not just a bet on the future, it is a result of investing in HILL in the past, typically at $2 to $3 per share, but for instance I bought shares on 6/11/2012 at $1.13 per share. Others must have done better, because I recall HILL dipping under $1 briefly once or twice.
Of course I could be wrong, Dot Hill might not hit an inflection point, it might run into another rough spot. Competition is fierce in the data storage industry.
But what is interesting about opportunities like this is that so few people monitor these stocks. Not many professional analysts, not many individual investors. Of course there are thousands of micro cap and small cap stocks out there; who has the time to look at them all? I encountered HILL when I was researching another data storage stock for an investor, using it as a comparison to the company he ended buying into.
Data storage is pretty unglamorous, and since Dot Hill does not make consumer products, and most of its sales are through OEMs that rebrand the products, it has almost no name recognition.
And because Seeking Alpha pays contributors on a per-view basis, I seldom write about it. An article on a better-known stock takes about the same time to write, but can pay 2 to 10 times as much as an article on Dot Hill, or other micro caps I have in my portfolio or follow.
Thursday, March 6, 2014
Dot Hill Declines Despite Strong Q4 Results
Dot Hill is down over 19% so far today despite strong Q4 results. Hill was (in my view) clearly undervalued and overlooked as late as January of 2014, when it could be bought in the $3 range. But then momentum players and sell-side (Wall-Street brokerage house) analysts got wind of its success, driving it to a 52-week high of $6.06 yesterday.
My last article at Seeking Alpha on Dot Hill was: Nearly Quadrupling In 2013, Dot Hill Still Has 2X Potential In 2014 posted on December 29. I meant double by the end of 2014, not by March. Of course all stock prices are dependent on actual ability to generate profits, which is notoriously hard to predict.
Given that the 52-week low is still $0.9125 (March 15, 2013), only the most idiotic momentum players got burned. I still think $6 to $7 per share by the end of 2014 is not unreasonable, unless something goes wrong on the execution side. There is upside to that if more clients (OEMs who resell HILL's storage equipment) sign up in time to ramp some revenue in 2014.
The details are worth paying attention to, so start with my summary of the quarter and the analyst call today:
Dot Hill Q4 2013 Results and Conference Call notes
There are a lot of interesting comments on the data storage industry in general in the call, including on Lenovo's purchase of IBM's server business.
I am a long-term holder of HILL. Due to its run up in 2013 it is currently my largest holding. I reserve the right to buy more if the price drops enough, and to sell some of my holdings if I think it has become overvalued. I also own some Seagate stock, the disk drive maker.
Be sure to check the SEC filings and make sure you understand the company before buying.
Keep diversified!
My last article at Seeking Alpha on Dot Hill was: Nearly Quadrupling In 2013, Dot Hill Still Has 2X Potential In 2014 posted on December 29. I meant double by the end of 2014, not by March. Of course all stock prices are dependent on actual ability to generate profits, which is notoriously hard to predict.
Given that the 52-week low is still $0.9125 (March 15, 2013), only the most idiotic momentum players got burned. I still think $6 to $7 per share by the end of 2014 is not unreasonable, unless something goes wrong on the execution side. There is upside to that if more clients (OEMs who resell HILL's storage equipment) sign up in time to ramp some revenue in 2014.
The details are worth paying attention to, so start with my summary of the quarter and the analyst call today:
Dot Hill Q4 2013 Results and Conference Call notes
There are a lot of interesting comments on the data storage industry in general in the call, including on Lenovo's purchase of IBM's server business.
I am a long-term holder of HILL. Due to its run up in 2013 it is currently my largest holding. I reserve the right to buy more if the price drops enough, and to sell some of my holdings if I think it has become overvalued. I also own some Seagate stock, the disk drive maker.
Be sure to check the SEC filings and make sure you understand the company before buying.
Keep diversified!
Thursday, August 8, 2013
Dot Hill analyst call notes posted
I have posted notes on this morning's Dot Hill Q2 2013 analyst call
While HILL did better than guidance and increased 2013 EPS guidance, I guess traders were hoping for better because it dropped on the news. If, like me, you are in for the long term, the overall picture is quite good. I am still expecting HILL to top $3 per share in 2013 and go to $5 or more in 2014, which of course depends on execution, competition, and the economy. I own HILL stock and won't buy or sell any for 3 days; probably will just hold what I have until at least 2014 unless there is some major price movement.
UPDATE
Seeking Alpha selected my Dot Hill Likely To Reach $4 Per Share In 2014 as a Small-Cap Insight article. It is the first time I've had that honor. I am very pleased. Nevertheless, keep in mind that predictions about the future can be wrong ... so Keep Diversified!
While HILL did better than guidance and increased 2013 EPS guidance, I guess traders were hoping for better because it dropped on the news. If, like me, you are in for the long term, the overall picture is quite good. I am still expecting HILL to top $3 per share in 2013 and go to $5 or more in 2014, which of course depends on execution, competition, and the economy. I own HILL stock and won't buy or sell any for 3 days; probably will just hold what I have until at least 2014 unless there is some major price movement.
UPDATE
Seeking Alpha selected my Dot Hill Likely To Reach $4 Per Share In 2014 as a Small-Cap Insight article. It is the first time I've had that honor. I am very pleased. Nevertheless, keep in mind that predictions about the future can be wrong ... so Keep Diversified!
Monday, April 8, 2013
Dot Hill Ups Guidance, Announces Quantum Parntership
Dot Hill's stock price shot up today on a series of announcements about partners and future guidance, as well as holding its annual analyst day. The last 5 years have been rocky for HILL despite gradual acquisitions of new customers since in lost Sun. In 2012 Dot Hill was developing products that it said would attract new customers [See Dot Hill's 2013 Hopes]. Today was delivery day.
New guidance was given for Q1 2013, Q2 2013, full year-2013, and (tentatively) 2014.
A recap of Q4 2012 provides perspective: revenues were $44.1 million, down 6% from year earlier. Non-GAAP earnings per share (EPS) were negative $0.03, down from $0.00 year-earlier. Not a great quarter.
Prior guidance for Q1 2013 was revenue between $43 and $46 million, with a non-GAAP EPS loss between $0.02 and $0.04.
Today's guidance for Q1 (which should be pretty close, given that the quarter is over) is revenue of $44 to $45 million, narrowing but not increasing the range, with EPS as low as negative $0.02 and as high as $0.00.
$0.00 non-GAAP EPS may not seem like much to get excited about, but that includes research and development costs for new products as well as startup manufacturing costs in costs-of-goods sold. With higher revenue and flat or lower R & D costs going forward, we get to the prettier picture for the future:
Q2 2013 guidance is for revenues between $47 and $53 million, up about 12% sequentially. Non-GAAP EPS estimated range is negative $0.01 to $0.02 per share.
For the full year 2013 revenues are estimated between $205 and $227 million. Non-GAAP EPS should be positive $0.02 to $0.10. That would be great if it happens.
For the full year 2014 revenue estimates are between $231 and $301 million and non-GAAP EPS could be $0.11 to $0.40.
While such long-term predictions should be taken with a healthy spoonful of the salt of cynicism, consider the value of HILL stock if it hit the $0.40 per share top of guidance in 2014. That would likely more than restore investor confidence, so let's give a PE ratio of 15. That would bring the stock to $6 per share. As I write it is trading at $1.53. There are a lot of hoops to jump between $1.53 and $6.00, but there are some reasons to not entirely discount the top range of estimates.
The world of data storage has been evolving rapidly. HILL does not sell disk drives. It sells storage systems for small, medium, and increasingly enterprise businesses. It used to make storage systems for Sun Microsystems until Sun brought a competitor in house. It then picked up HP and NetApp as OEM clients, plus some smaller players and system integrators. Dot Hill dumped NetApp because the margins in the deal was bad, and that made its revenues slump. But all the while it used its substantial cash to develop better systems. Now we are seeing the payoff.
The big announcement today is that Quantum is selling systems, its new QX family, supplied by Dot Hill. A rep from Quantum, at today's Hill analyst conference, reviewed how Quantum has been addressing the rapidly evolving data storage market and how Hill's new products fit into the picture. The amount of data stored in the world is climbing rapidly, largely to accommodate video, full time data feeds, and the mining of big data. Verticals with particular needs to expand their disk drive farms rapidly include entertainment, government, life sciences, and resource extraction (geology). In entertainment many company are rapidly expanding their incoming video feeds, and need all that video instantly for editing and pushing out to consumers. Clients need cheap, reliable storage, and that is what Dot Hill has been developing and is now shipping.
HP, which has provided the bulk of HILL revenues these last few years, has committed to continue using Hill as a supplier of their lower-end, mass market products, the MSA line, the market share leader in its class. While no specifics were mentioned, HP indicated a product refresh is on the horizon. HP has noted Dot Hill systems value, reliability, and interoperability (ability to work with most hardware and software).
The new data storage workloads that are driving the adoption of Hills (patented) technologies are described as a randomized sequential workload. In other words, a lot of data has to be quickly available, and it is hard to predict which data will be needed. However, in a VMWare environment, the new Dot Hill systems were shown to be rock solid reliable and capable of learning about the data demands so as to increase spread over time. With SSD still expensive and tape still much cheaper (using less electricity) than disk drives, the ability to load balance between various media has become a necessity, and Dot Hill does that well.
Also notable is that Dot Hill has greatly increased its addressable market by moving to the higher-end of the data storage market. It is also bringing high-end capabilities to the midrange and even lower range business markets, which makes all of its offering attractive at their price points.
It is an exciting time to be an owner of Dot Hill, but the usual cautions apply: data storage is highly competitive, margins could be better, and the global economy is always an issue.
So keep diversified! And congratulations if you already own HILL stock.
Disclaimer: I own HILL stock. I won't trade HILL stock for at least 3 days from the first publication of this article.
See also:
My Dot Hill main page.
My Q4 2012 Dot Hill conference notes
and of course www.dothill.com
New guidance was given for Q1 2013, Q2 2013, full year-2013, and (tentatively) 2014.
A recap of Q4 2012 provides perspective: revenues were $44.1 million, down 6% from year earlier. Non-GAAP earnings per share (EPS) were negative $0.03, down from $0.00 year-earlier. Not a great quarter.
Prior guidance for Q1 2013 was revenue between $43 and $46 million, with a non-GAAP EPS loss between $0.02 and $0.04.
Today's guidance for Q1 (which should be pretty close, given that the quarter is over) is revenue of $44 to $45 million, narrowing but not increasing the range, with EPS as low as negative $0.02 and as high as $0.00.
$0.00 non-GAAP EPS may not seem like much to get excited about, but that includes research and development costs for new products as well as startup manufacturing costs in costs-of-goods sold. With higher revenue and flat or lower R & D costs going forward, we get to the prettier picture for the future:
Q2 2013 guidance is for revenues between $47 and $53 million, up about 12% sequentially. Non-GAAP EPS estimated range is negative $0.01 to $0.02 per share.
For the full year 2013 revenues are estimated between $205 and $227 million. Non-GAAP EPS should be positive $0.02 to $0.10. That would be great if it happens.
For the full year 2014 revenue estimates are between $231 and $301 million and non-GAAP EPS could be $0.11 to $0.40.
While such long-term predictions should be taken with a healthy spoonful of the salt of cynicism, consider the value of HILL stock if it hit the $0.40 per share top of guidance in 2014. That would likely more than restore investor confidence, so let's give a PE ratio of 15. That would bring the stock to $6 per share. As I write it is trading at $1.53. There are a lot of hoops to jump between $1.53 and $6.00, but there are some reasons to not entirely discount the top range of estimates.
The world of data storage has been evolving rapidly. HILL does not sell disk drives. It sells storage systems for small, medium, and increasingly enterprise businesses. It used to make storage systems for Sun Microsystems until Sun brought a competitor in house. It then picked up HP and NetApp as OEM clients, plus some smaller players and system integrators. Dot Hill dumped NetApp because the margins in the deal was bad, and that made its revenues slump. But all the while it used its substantial cash to develop better systems. Now we are seeing the payoff.
The big announcement today is that Quantum is selling systems, its new QX family, supplied by Dot Hill. A rep from Quantum, at today's Hill analyst conference, reviewed how Quantum has been addressing the rapidly evolving data storage market and how Hill's new products fit into the picture. The amount of data stored in the world is climbing rapidly, largely to accommodate video, full time data feeds, and the mining of big data. Verticals with particular needs to expand their disk drive farms rapidly include entertainment, government, life sciences, and resource extraction (geology). In entertainment many company are rapidly expanding their incoming video feeds, and need all that video instantly for editing and pushing out to consumers. Clients need cheap, reliable storage, and that is what Dot Hill has been developing and is now shipping.
HP, which has provided the bulk of HILL revenues these last few years, has committed to continue using Hill as a supplier of their lower-end, mass market products, the MSA line, the market share leader in its class. While no specifics were mentioned, HP indicated a product refresh is on the horizon. HP has noted Dot Hill systems value, reliability, and interoperability (ability to work with most hardware and software).
The new data storage workloads that are driving the adoption of Hills (patented) technologies are described as a randomized sequential workload. In other words, a lot of data has to be quickly available, and it is hard to predict which data will be needed. However, in a VMWare environment, the new Dot Hill systems were shown to be rock solid reliable and capable of learning about the data demands so as to increase spread over time. With SSD still expensive and tape still much cheaper (using less electricity) than disk drives, the ability to load balance between various media has become a necessity, and Dot Hill does that well.
Also notable is that Dot Hill has greatly increased its addressable market by moving to the higher-end of the data storage market. It is also bringing high-end capabilities to the midrange and even lower range business markets, which makes all of its offering attractive at their price points.
It is an exciting time to be an owner of Dot Hill, but the usual cautions apply: data storage is highly competitive, margins could be better, and the global economy is always an issue.
So keep diversified! And congratulations if you already own HILL stock.
Disclaimer: I own HILL stock. I won't trade HILL stock for at least 3 days from the first publication of this article.
See also:
My Dot Hill main page.
My Q4 2012 Dot Hill conference notes
and of course www.dothill.com
Wednesday, December 5, 2012
Dot Hill Hopes for 2013
Dot Hill (HILL) stock has been one of the worst performers in my portfolio lately. It is trading today at $0.88 per share, versus a 52 week high of $1.65 and 52 week low of $0.72. I have been invested in HILL for years, but more so than for most of my portfolio it has been a stock I have traded in, rather than just holding.
Dot Hill is a specialty data storage (SAN) solution equipment manufacturer, with many companies rebranding and selling its products, and HP as its by-far single largest customer. Looking at the past few years, management has continually indicated that prosperity (solid profits) is just around the corner, 2 or 3 quarters out, but the profits never have materialized. Hence credibility is low, and so is the stock price.
But maybe this time for sure. HILL is rolling out new products and has a number of new customers, some announced and some yet to be announced. The recent numbers look bad, however, because each customer requires some customization of the stock product. This increases R&D expense, which can only be recaptured in later years if product sales ramp and if gross and operating margins allow for it.
How could 2013 be different than 2012? Let's use Q3 2012 as a baseline. Revenues were $48.2 million, up 1% sequentially from $47.8 million, and up slightly from $48.1 million in the year-earlier quarter. GAAP net income was negative $3.0 million, improved sequentially from negative $5.0 million, and much improved from negative $12.2 million year-earlier. GAAP EPS (earnings per share) was negative $0.05, up sequentially from negative $0.09, and also up from negative $0.22 year-earlier.
Market capitalization is about $49 million, despite cash holding of $40 million, with just $2 million in debt, at the end of Q3.
Two new storage systems are sampling in Q4, the 4000 series and 5000 series. These newer systems will allow Dot Hill to serve a broader section of the market. Currently Hill's systems are used mainly for small businesses and the value end of the enterprise market.
The AssuredSAN 4000 series works with 8Gb Fibre Channel and 6Gb SAS (serial attached storage), the same as the 3000 series, but has optimized features adding extra speed for video streaming and broadcast, HPC (high performance computing), and post-production work.
The AssuredSAN Pro 5000 series works with 8 Gb Fibre Channel or 10 GbiSCSI and adds automated tiered storage software, thin provisioning, SSD acceleraton and other high-end features.
An important aspect of both new products should be improved margins, coinciding with the mid-market end use. Both build on top of the successful AssuredSAN 3000 series, which is a leader in the low-end market. The new 4000 and 5000 series are meant to be both feature and price competitive, so there is reason to hope for strong sales as 2013 progresses.
While there is a fear of investing in the hard disk drive (HDD) market right now, it is important to note that Dot Hill products are used in corporate datacenters and for cloud computing and big data. The use of smartphones and tablets is causing the need for rapid storage build out for the Internet, and the move to video is creating huge data storage demand.
Can Hill and its partners compete successfully in this market? Based on the past five years of experience, the answer would be just barely. But Hill was a train wreck when it got dumped by its biggest (then) client, Sun Microsystems. It has remained standing while a number of competitors were absorbed into larger companies. While it competes with EMC, it has an alliance with HP and a large number of smaller OEMs and value-added retailers. Dependence on HP has decreased. Autodesk is among the list of important new customers. Feedback on the new products has been very positive.
Right now HILL is more of a bottom-fishing play than anything else. To see the stock back at the $4 to $5 range management will have to deliver both improved revenues and improved margins. The possibility of achieving that makes it is a stock that is worth watching in 2013.
Disclaimer: I am long Dot Hill. I won't make HILL trades for 1 week after publishing this article. I do not have positions in any of the other companies mentioned.
See also: www.dothill.com
Dot Hill is a specialty data storage (SAN) solution equipment manufacturer, with many companies rebranding and selling its products, and HP as its by-far single largest customer. Looking at the past few years, management has continually indicated that prosperity (solid profits) is just around the corner, 2 or 3 quarters out, but the profits never have materialized. Hence credibility is low, and so is the stock price.
But maybe this time for sure. HILL is rolling out new products and has a number of new customers, some announced and some yet to be announced. The recent numbers look bad, however, because each customer requires some customization of the stock product. This increases R&D expense, which can only be recaptured in later years if product sales ramp and if gross and operating margins allow for it.
How could 2013 be different than 2012? Let's use Q3 2012 as a baseline. Revenues were $48.2 million, up 1% sequentially from $47.8 million, and up slightly from $48.1 million in the year-earlier quarter. GAAP net income was negative $3.0 million, improved sequentially from negative $5.0 million, and much improved from negative $12.2 million year-earlier. GAAP EPS (earnings per share) was negative $0.05, up sequentially from negative $0.09, and also up from negative $0.22 year-earlier.
Market capitalization is about $49 million, despite cash holding of $40 million, with just $2 million in debt, at the end of Q3.
Two new storage systems are sampling in Q4, the 4000 series and 5000 series. These newer systems will allow Dot Hill to serve a broader section of the market. Currently Hill's systems are used mainly for small businesses and the value end of the enterprise market.
The AssuredSAN 4000 series works with 8Gb Fibre Channel and 6Gb SAS (serial attached storage), the same as the 3000 series, but has optimized features adding extra speed for video streaming and broadcast, HPC (high performance computing), and post-production work.
The AssuredSAN Pro 5000 series works with 8 Gb Fibre Channel or 10 GbiSCSI and adds automated tiered storage software, thin provisioning, SSD acceleraton and other high-end features.
An important aspect of both new products should be improved margins, coinciding with the mid-market end use. Both build on top of the successful AssuredSAN 3000 series, which is a leader in the low-end market. The new 4000 and 5000 series are meant to be both feature and price competitive, so there is reason to hope for strong sales as 2013 progresses.
While there is a fear of investing in the hard disk drive (HDD) market right now, it is important to note that Dot Hill products are used in corporate datacenters and for cloud computing and big data. The use of smartphones and tablets is causing the need for rapid storage build out for the Internet, and the move to video is creating huge data storage demand.
Can Hill and its partners compete successfully in this market? Based on the past five years of experience, the answer would be just barely. But Hill was a train wreck when it got dumped by its biggest (then) client, Sun Microsystems. It has remained standing while a number of competitors were absorbed into larger companies. While it competes with EMC, it has an alliance with HP and a large number of smaller OEMs and value-added retailers. Dependence on HP has decreased. Autodesk is among the list of important new customers. Feedback on the new products has been very positive.
Right now HILL is more of a bottom-fishing play than anything else. To see the stock back at the $4 to $5 range management will have to deliver both improved revenues and improved margins. The possibility of achieving that makes it is a stock that is worth watching in 2013.
Disclaimer: I am long Dot Hill. I won't make HILL trades for 1 week after publishing this article. I do not have positions in any of the other companies mentioned.
See also: www.dothill.com
Tuesday, May 22, 2012
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.
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.
Thursday, May 10, 2012
Dot Hill Reports Q1 Bounce
Dot Hill (HILL) is up today after reporting considerably better than expected Q1 revenues. Despite that, with expected revenues of over $200 million in 2012, its market capitalization is around $74 million. Is Dot Hill an overlooked prize, or is the market right about its value?
Dot hill manufactures data storage arrays for the low-end of the enterprise market, selling to OEMs that typically rebrand the devices. A few years ago Sun was their main customer, but Sun dropped them, leading to a crisis. HP is now their main customer. Management has been building an impressive list of other customers, reducing reliance on HP.
Revenues were $54.7 million, up 16% sequentially from $47.0 million and up 11% from $49.2 million in the year-earlier quarter. Usually Q1 sees a seasonal revenue drop from Q4, so these are impressive numbers. Part of the revenue, I am guessing in the range of about $4 to $5 million, came from orders from a particular customer that provides storage solutions to the telecom market. Management mentioned this could happen when they gave Q1 guidance in March, but they clearly hedged a bit.
The year over year comparison was the first good one turned in since NetApp was dropped as a client in 2010. I believe the prior negative year/year comparisons had been depressing the stock price, despite the compelling reasons for ditching NetApp.
GAAP net income was negative $1.8 million, up sequentially from negative $6.6 million, but worse than the negative $1.3 million of the year-earlier quarter. EPS was negative $0.03, up sequentially from negative $0.12, but down a penny from negative $0.02 year-earlier.
Even if we look at non-GAAP numbers, which drop out non-cash accounting charges, while HILL got into the black it was just barely: net income was $1.9 million. EPS was $0.03.
Guidance is that Q2 will be off Q1, with revenues between $48 and $52 million and non-GAAP EPS close enough to zero that it could be a plus or minus.
That is the past, what about the future? Technology companies can't dwell in the past, as RIMM, among so many others, have demonstrated. During the crisis (losing Sun during the recession) management started making smart moves about the future of the storage market. They are competing against giants, but they sometimes cooperate with giants like HP. Their storage products have actually received quite a bit of acclaim in the industry.
Some of the Q1 revenue growth came from new clients signed in 2011. Hill was able to win these customers because they produce very reliable storage technology at a reasonable cost and work hard for their clients. Autodesk and Concurrent Computer were cited as OEMs signed in 2011 that are seeing sales ramps. Official announcements of newer customers should be coming out as 2012 progresses.
Dot Hill has mainly served the entry-level enterprise storage market. Part of their success has been from adding higher level features to entry-level designs. New storage arrays that have mid-level enterprise features should be released in the second half of the year. OEMs are already excited about them, but a significant revenue ramp of the new products is probably a q4 and 2013 story.
On the whole Dot Hill management was upbeat, particularly about the second half of 2012. With the ramping of lines at newer OEM customers, Dot Hill should be able to enter an era of sustained profitability. Given that the company is debt free and holds $41 million in cash, there is a lot of upside potential if management can execute according to plan. In terms of share prices, I would be delighted, but not overly surprised, to see shares in the $3 to $5 range by mid 2013. I am also surprised, given their patent portfolio, that Dot Hill has not been a takeover target. Of course the usual risks apply, but I think all the risk is priced in at current levels.
Disclaimer: I am long Dot Hill. I won't make HILL trades for 1 week after publishing this article. I do not have positions in any of the other companies mentioned.
See also: www.dothill.com
My Q1 2012 Dot Hill analyst call notes
Dot hill manufactures data storage arrays for the low-end of the enterprise market, selling to OEMs that typically rebrand the devices. A few years ago Sun was their main customer, but Sun dropped them, leading to a crisis. HP is now their main customer. Management has been building an impressive list of other customers, reducing reliance on HP.
Revenues were $54.7 million, up 16% sequentially from $47.0 million and up 11% from $49.2 million in the year-earlier quarter. Usually Q1 sees a seasonal revenue drop from Q4, so these are impressive numbers. Part of the revenue, I am guessing in the range of about $4 to $5 million, came from orders from a particular customer that provides storage solutions to the telecom market. Management mentioned this could happen when they gave Q1 guidance in March, but they clearly hedged a bit.
The year over year comparison was the first good one turned in since NetApp was dropped as a client in 2010. I believe the prior negative year/year comparisons had been depressing the stock price, despite the compelling reasons for ditching NetApp.
GAAP net income was negative $1.8 million, up sequentially from negative $6.6 million, but worse than the negative $1.3 million of the year-earlier quarter. EPS was negative $0.03, up sequentially from negative $0.12, but down a penny from negative $0.02 year-earlier.
Even if we look at non-GAAP numbers, which drop out non-cash accounting charges, while HILL got into the black it was just barely: net income was $1.9 million. EPS was $0.03.
Guidance is that Q2 will be off Q1, with revenues between $48 and $52 million and non-GAAP EPS close enough to zero that it could be a plus or minus.
That is the past, what about the future? Technology companies can't dwell in the past, as RIMM, among so many others, have demonstrated. During the crisis (losing Sun during the recession) management started making smart moves about the future of the storage market. They are competing against giants, but they sometimes cooperate with giants like HP. Their storage products have actually received quite a bit of acclaim in the industry.
Some of the Q1 revenue growth came from new clients signed in 2011. Hill was able to win these customers because they produce very reliable storage technology at a reasonable cost and work hard for their clients. Autodesk and Concurrent Computer were cited as OEMs signed in 2011 that are seeing sales ramps. Official announcements of newer customers should be coming out as 2012 progresses.
Dot Hill has mainly served the entry-level enterprise storage market. Part of their success has been from adding higher level features to entry-level designs. New storage arrays that have mid-level enterprise features should be released in the second half of the year. OEMs are already excited about them, but a significant revenue ramp of the new products is probably a q4 and 2013 story.
On the whole Dot Hill management was upbeat, particularly about the second half of 2012. With the ramping of lines at newer OEM customers, Dot Hill should be able to enter an era of sustained profitability. Given that the company is debt free and holds $41 million in cash, there is a lot of upside potential if management can execute according to plan. In terms of share prices, I would be delighted, but not overly surprised, to see shares in the $3 to $5 range by mid 2013. I am also surprised, given their patent portfolio, that Dot Hill has not been a takeover target. Of course the usual risks apply, but I think all the risk is priced in at current levels.
Disclaimer: I am long Dot Hill. I won't make HILL trades for 1 week after publishing this article. I do not have positions in any of the other companies mentioned.
See also: www.dothill.com
My Q1 2012 Dot Hill analyst call notes
Thursday, April 12, 2012
Opportunities in Data Storage: Seagate, Western Digital, and Marvell
Because I own stock in Marvell Technologies (MRVL), which gets about half of its revenue from sales of HDD controller chips, I read a detailed interview with Steve Luczo, the CEO of Seagate Technology (STX) [See Seagate CEO Interview at Forbes]. Seagate is one of only 2 remaining major hard disk drive (HDD) manufacturers. The other is Western Digital (WDC). While I already agreed with the overall HDD story, Steve made some very good points that I had not thought of or heard before.
In addition to MRVL and STX, I'll be discussing semiconductor manufacturing capital equipment makers Applied Materials (AMAT) and KLA (KLAC) as well as Dot Hill (HILL), EMC, AMD, and Intel (INTC).
Let's tackle the Thailand flooding aftermath before taking on long-term trends. Industry-wide, quarterly unit sales were projected to be 180 million before the floods hit. Instead Q4 2011 production was 120 million units. Q1 production rose to 140 million units, Q2 expectations are 160 million units, and Q3 should be back to 180 million. If there are still shortages, Q4 could see between 180 and 200 million units produced.
In addition, as the year progresses industry average drive capacity will increase as new, high-capacity equipment replaces older machines damaged by the flooding.
For makers of parts that go into the drives, that is good news. It is also good news for PC and server manufacturers (and suppliers like AMD and Intel (INTC)) that have been constrained by HDD shortages. In Marvell's case, they report quarters with a one-month lag and also ship pre-production. That means that Marvell is currently in a quarter that runs February to April. April chips will go in May HDDs, so run rates should be pretty good by then. It is possible that Marvell's July quarter will be back to record HDD controller chip shipments.
Overall expectations are that once we get past Q1, this should be a banner year for almost everyone in the storage industry, with good margins (because shortages will persist) and unit shipments improving markedly in the second half.
But aren't Solid State Drives (SSD's) going to replace HDDs, which are not used in tablet computers, smartphones, or possibly in thin and light notebook models? Should investors continue to flee the entire HDD industry? Why else, except investor flight, would Seagate have a forward P/E of just 4.1?
Luczo does not think so. The anti-HDD argument that has been around investor circles for some time is that as SSDs become mass-market, and technologies shrink, SSD capacities will go up, prices will come down, and HDD demand will decline in short order.
The typical counter argument is that data storage requirements are based on the expanding storage needs of the world. Storage is a volume business, so while SSDs may provide speed, HDDs need to continue to improve both capacity and units shipped just to keep up with expanding volumes of data, particularly video data. For every iPad there has to be disk capacity in the cloud somewhere, because iPads mostly need to connect to data stored on disks in the cloud to be useful.
The stronger argument is this: semiconductor fabs cannot be built fast enough to make the SSD replacing HDD dream come true, not anytime soon, if ever.
A new semiconductor fab (factory) is a very expensive investment at $10 billion. If the chips produced by the fabs (in this case mainly memory chips) are not expensive enough, building a new fab is a money loser. In effect the prices for chips are set by the capital required to build the fabs.
It is much, much cheaper to add data storage production capacity, on a byte basis, by building new HDD factories than by building new semi fabs. The same data capacity expansion could be achieved with less than $1 billion in capital, Thus HDDs will have a considerable price advantage for the reasonably visible future.
Technology investors have learned that when a technology is dying, you might as well exit. Some companies role well from one technology generation to another, as Intel has. But the point here is that the HDD industry is not dying. The SSD industry can grow rapidly for an entire decade and the HDD industry will still be far larger at the end of the decade than it is today, and than the SSD industry will be. Of course many companies will play both sides of the SSD/HDD game, and hybrid drives are already available.
But suppose Luczo is wrong in the sense that chip manufacturers do decide to invest rapidly in fabs to drive as much SSD expansion as quickly as possible. I still think Seagate is undervalued in that scenario, but there would be other winners. The obvious ones are the semiconductor equipment manufacturers whose machines make the silicon wafers and create the tiny transistors that make up Flash memory. There are still a number of companies in this category, but as capital requirements increase this segment is consolidating as well. Two big players that should gain from SSD fab accelerations are Applied Materials (which recently acquired Varian), and KLA-Tencor. Both currently have attractive P/Es that do not reflect any future boom in the SSD industry.
Meanwhile data storage equipment makers from giants like EMC and HP to specialists like Dot Hill should continue to do well, since the systems they manufacture can accommodate both SSDs and HDDs, depending on the needs of the end customers.
Disclaimer: I own MRVL, AMAT, and HILL. I do not own STX, WDS, KLA, INTC, or EMC. I won't trade in any of these stocks for 3 days after this article is published.
Keep diversified!
In addition to MRVL and STX, I'll be discussing semiconductor manufacturing capital equipment makers Applied Materials (AMAT) and KLA (KLAC) as well as Dot Hill (HILL), EMC, AMD, and Intel (INTC).
Let's tackle the Thailand flooding aftermath before taking on long-term trends. Industry-wide, quarterly unit sales were projected to be 180 million before the floods hit. Instead Q4 2011 production was 120 million units. Q1 production rose to 140 million units, Q2 expectations are 160 million units, and Q3 should be back to 180 million. If there are still shortages, Q4 could see between 180 and 200 million units produced.
In addition, as the year progresses industry average drive capacity will increase as new, high-capacity equipment replaces older machines damaged by the flooding.
For makers of parts that go into the drives, that is good news. It is also good news for PC and server manufacturers (and suppliers like AMD and Intel (INTC)) that have been constrained by HDD shortages. In Marvell's case, they report quarters with a one-month lag and also ship pre-production. That means that Marvell is currently in a quarter that runs February to April. April chips will go in May HDDs, so run rates should be pretty good by then. It is possible that Marvell's July quarter will be back to record HDD controller chip shipments.
Overall expectations are that once we get past Q1, this should be a banner year for almost everyone in the storage industry, with good margins (because shortages will persist) and unit shipments improving markedly in the second half.
But aren't Solid State Drives (SSD's) going to replace HDDs, which are not used in tablet computers, smartphones, or possibly in thin and light notebook models? Should investors continue to flee the entire HDD industry? Why else, except investor flight, would Seagate have a forward P/E of just 4.1?
Luczo does not think so. The anti-HDD argument that has been around investor circles for some time is that as SSDs become mass-market, and technologies shrink, SSD capacities will go up, prices will come down, and HDD demand will decline in short order.
The typical counter argument is that data storage requirements are based on the expanding storage needs of the world. Storage is a volume business, so while SSDs may provide speed, HDDs need to continue to improve both capacity and units shipped just to keep up with expanding volumes of data, particularly video data. For every iPad there has to be disk capacity in the cloud somewhere, because iPads mostly need to connect to data stored on disks in the cloud to be useful.
The stronger argument is this: semiconductor fabs cannot be built fast enough to make the SSD replacing HDD dream come true, not anytime soon, if ever.
A new semiconductor fab (factory) is a very expensive investment at $10 billion. If the chips produced by the fabs (in this case mainly memory chips) are not expensive enough, building a new fab is a money loser. In effect the prices for chips are set by the capital required to build the fabs.
It is much, much cheaper to add data storage production capacity, on a byte basis, by building new HDD factories than by building new semi fabs. The same data capacity expansion could be achieved with less than $1 billion in capital, Thus HDDs will have a considerable price advantage for the reasonably visible future.
Technology investors have learned that when a technology is dying, you might as well exit. Some companies role well from one technology generation to another, as Intel has. But the point here is that the HDD industry is not dying. The SSD industry can grow rapidly for an entire decade and the HDD industry will still be far larger at the end of the decade than it is today, and than the SSD industry will be. Of course many companies will play both sides of the SSD/HDD game, and hybrid drives are already available.
But suppose Luczo is wrong in the sense that chip manufacturers do decide to invest rapidly in fabs to drive as much SSD expansion as quickly as possible. I still think Seagate is undervalued in that scenario, but there would be other winners. The obvious ones are the semiconductor equipment manufacturers whose machines make the silicon wafers and create the tiny transistors that make up Flash memory. There are still a number of companies in this category, but as capital requirements increase this segment is consolidating as well. Two big players that should gain from SSD fab accelerations are Applied Materials (which recently acquired Varian), and KLA-Tencor. Both currently have attractive P/Es that do not reflect any future boom in the SSD industry.
Meanwhile data storage equipment makers from giants like EMC and HP to specialists like Dot Hill should continue to do well, since the systems they manufacture can accommodate both SSDs and HDDs, depending on the needs of the end customers.
Disclaimer: I own MRVL, AMAT, and HILL. I do not own STX, WDS, KLA, INTC, or EMC. I won't trade in any of these stocks for 3 days after this article is published.
Keep diversified!
Thursday, March 15, 2012
Dot Hill Expects New OEM Customers in 2012
Dot Hill (HILL) is up today after reporting a poor fourth quarter 2012 yesterday. Q4 results were in line with revised guidance given in February. Today's stock price upside came from new customer sign-ups that management hopes will provide both higher revenues and better margins in 2012.
Dot hill manufactures data storage arrays for the low-end of the enterprise market, selling to OEMs that typically rebrand the devices. A few years ago Sun was their main customer, but Sun dropped them, leading to a crisis. HP is now their main customer. While they are happy with the HP relationship, which was extended for five years last year, management has been building an impressive list of other customers, reducing reliance on HP.
Revenue in Q4 was $47.0 million, down 2% sequentially from $48.1 million and down 28% from $65.4 million year-earlier. Part of the y/y decline resulted from the purposeful ditching of NetApp as a client because NetApp would not allow Dot Hill workable margins.
HP represented 67.5% of revenue in Q4. In Q1 2011, after NetApp dropped out, HP accounted for 76% of revenue. Partly there was a drop in revenue from HP, but mainly their share shrank because Hill's sales to smaller, Tier 2 OEMs grew 40% y/y.
Q4 revenue was also hurt by the Thailand flooding and resulting shortage of disk drives. Hill did not raise its prices in Q4, but did raise prices in February largely because of the higher prices of disks due to the shortage. They estimated they could have generated another $4 million in revenue in Q4 if not for the disk shortages. Q1 also has seen supply shortages, but drives are generally available except for the highest-capacity, newest technology drives. The disk supply issue should be over by Q3.
Autodesk and Concurrent Computer were cited as OEMs signed in 2011 that are seeing sales ramps. Official announcements of newer customers should be coming out as the year progresses.
Finally, new storage arrays that have mid-level enterprise features should be released in the second half of the year. OEMs are already excited about them, but a significant revenue ramp of the new products is probably a 2013 story.
Earnings were disappointing. GAAP net income was negative $6.6 million, non-GAAP net income was negative $1.6 million, but some of the charges were non-cash. Cash flow from operations was positive by $1.1 million.
On the whole Dot Hill management was upbeat, particularly about the second half of 2012. The hope would be that with no disasters, a reasonably healthy global economy, and the ramping of lines at newer OEM customers, Dot Hill will be able to enter an era of sustained profitability. Given that the company is debt free and holds $46 million in cash, and that its market capitalization today is just $82.6 million, Dot Hill is highly speculative, but has a lot of upside potential if management can execute according to plan.
Disclaimer: I am long Dot Hill, and sometimes actively trade in the stock. I won't make HILL trades for 1 week after publishing this article. I do not have positions in any of the other companies mentioned.
Dot hill manufactures data storage arrays for the low-end of the enterprise market, selling to OEMs that typically rebrand the devices. A few years ago Sun was their main customer, but Sun dropped them, leading to a crisis. HP is now their main customer. While they are happy with the HP relationship, which was extended for five years last year, management has been building an impressive list of other customers, reducing reliance on HP.
Revenue in Q4 was $47.0 million, down 2% sequentially from $48.1 million and down 28% from $65.4 million year-earlier. Part of the y/y decline resulted from the purposeful ditching of NetApp as a client because NetApp would not allow Dot Hill workable margins.
HP represented 67.5% of revenue in Q4. In Q1 2011, after NetApp dropped out, HP accounted for 76% of revenue. Partly there was a drop in revenue from HP, but mainly their share shrank because Hill's sales to smaller, Tier 2 OEMs grew 40% y/y.
Q4 revenue was also hurt by the Thailand flooding and resulting shortage of disk drives. Hill did not raise its prices in Q4, but did raise prices in February largely because of the higher prices of disks due to the shortage. They estimated they could have generated another $4 million in revenue in Q4 if not for the disk shortages. Q1 also has seen supply shortages, but drives are generally available except for the highest-capacity, newest technology drives. The disk supply issue should be over by Q3.
Autodesk and Concurrent Computer were cited as OEMs signed in 2011 that are seeing sales ramps. Official announcements of newer customers should be coming out as the year progresses.
Finally, new storage arrays that have mid-level enterprise features should be released in the second half of the year. OEMs are already excited about them, but a significant revenue ramp of the new products is probably a 2013 story.
Earnings were disappointing. GAAP net income was negative $6.6 million, non-GAAP net income was negative $1.6 million, but some of the charges were non-cash. Cash flow from operations was positive by $1.1 million.
On the whole Dot Hill management was upbeat, particularly about the second half of 2012. The hope would be that with no disasters, a reasonably healthy global economy, and the ramping of lines at newer OEM customers, Dot Hill will be able to enter an era of sustained profitability. Given that the company is debt free and holds $46 million in cash, and that its market capitalization today is just $82.6 million, Dot Hill is highly speculative, but has a lot of upside potential if management can execute according to plan.
Disclaimer: I am long Dot Hill, and sometimes actively trade in the stock. I won't make HILL trades for 1 week after publishing this article. I do not have positions in any of the other companies mentioned.
Tuesday, August 9, 2011
Dot Hill Continues Comeback
Dot Hill (nasdaq: HILL) is a botique designer and manufacturer of data storage equipment, most of which is resold by OEMs like HP, Lenovo, and Samsung. For background on the Dot Hill story see my Dot Hill Summary page, and for the latest results, see my Dot Hill Q2 2011 analyst conference call summary.
Dot Hill had a slightly better than expected Q2, with $53.2 million, up 12% versus comparable Q2 2010 revenues excluding NetApp. Dropping the NetApp relationship has proven to be a good idea, as new customers and improved margins have more than compensated. Non-GAAP net income was $0.4 million (EPS $0.01) compared to at EPS loss of $0.06 in Q2 2010.
Dot Hill's products are getting traction because they offer mid and high range enterprise storage features at relatively low prices. Margins are improving partly more Dot Hill storage management software is being sold along with the hardware.
Dot Hill has struggled to get on a solid footing, but now that it has done that, their are several interesting possibilities ahead. If any or all work out, revenues and profits should ramp materially. The data storage industry has been consolidating. One of Dot Hill's rivals was recently bought by NetApp, which means some OEM's now are being sourced by a competitor. Dot Hill has been in talks with multiple OEMs about switching. However, this is not news, as the situation was the same three months ago. There is no guarantee that Dot Hill will pick up one or more clients from this transition. However, if it does, that would go a long way to building new revenues and profits.
Dot Hill has a large number of patents related to storage technologies and has hired an outside contractor to investige monetizing them.
Finally, the storage management software is still a new opportunity. Feedback for customers should allow for enhancements and better bundling of with hardware. Software revenues have far higher margins than hardware revenues, so that could be quite a shot in the arm to profits.
Downside risks include the usual competition, unusual events, failure to execute, and overspending.
Dot Hill is certainly worth keeping an eye on if you are intested in the booming storage space [disclaimer: I own Dot Hill stock].
See also dothill.com
Keep Diversified!
Dot Hill had a slightly better than expected Q2, with $53.2 million, up 12% versus comparable Q2 2010 revenues excluding NetApp. Dropping the NetApp relationship has proven to be a good idea, as new customers and improved margins have more than compensated. Non-GAAP net income was $0.4 million (EPS $0.01) compared to at EPS loss of $0.06 in Q2 2010.
Dot Hill's products are getting traction because they offer mid and high range enterprise storage features at relatively low prices. Margins are improving partly more Dot Hill storage management software is being sold along with the hardware.
Dot Hill has struggled to get on a solid footing, but now that it has done that, their are several interesting possibilities ahead. If any or all work out, revenues and profits should ramp materially. The data storage industry has been consolidating. One of Dot Hill's rivals was recently bought by NetApp, which means some OEM's now are being sourced by a competitor. Dot Hill has been in talks with multiple OEMs about switching. However, this is not news, as the situation was the same three months ago. There is no guarantee that Dot Hill will pick up one or more clients from this transition. However, if it does, that would go a long way to building new revenues and profits.
Dot Hill has a large number of patents related to storage technologies and has hired an outside contractor to investige monetizing them.
Finally, the storage management software is still a new opportunity. Feedback for customers should allow for enhancements and better bundling of with hardware. Software revenues have far higher margins than hardware revenues, so that could be quite a shot in the arm to profits.
Downside risks include the usual competition, unusual events, failure to execute, and overspending.
Dot Hill is certainly worth keeping an eye on if you are intested in the booming storage space [disclaimer: I own Dot Hill stock].
See also dothill.com
Keep Diversified!
Tuesday, May 10, 2011
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
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
Monday, January 10, 2011
Dot Hill Exceeds Q4 Guidance
The price of Dot Hill stock is soaring today (up $0.46 per share to $2.35, or 24.3% as I write) after preliminary Q4 results were released that exceeded prior guidance. See my Dot Hill Q3 analyst conference call report for Q3 results and Q4 prior guidance.
Dot Hill has been trying to rebuild its data storage hardware business for years, following the demise of its relationship with it former major client, Sun. Its products are mainly sold to OEMs that relabel them or incorporate them into larger systems. Its main client is HP, but it has won a swarm of smaller OEMs and system integrators in the past 3 years. Margins, however, were a problem. Hill's second largest client, NetApp, refused to negotiate prices that allowed Hill to make a profit, so that relationship was terminated as of December 1.
Anticipation of a decline of revenues due to the NetApp termination has been a major reason for Hill's low stock price. Instead, in even with 2 final months of NetApp included in the quarter, revenues increased from $62 million in Q3 to about $65 million in Q4. Keep in mind that for enterprise data storage systems Q4 is typically the best season. Even so, Hill's new line of data storage products must be selling extremely well to hit $65 million with NetApp out of the picture.
And those sales have higher profit margins, allowing Non-GAAP earnings per share to be in the range of $0.02 to $0.04. After years in the red, this is great news for Dot Hill.
Profit margins should continue to expand in 2011 because Hill should be selling an increasing amount of software along with its hardware offerings. Software, in this case storage management software, carries much better profit margins than the hardware.
Q1, 2011, will be a bit tougher. It will be the first full quarter without NetApp revenues, and it is traditionally a seasonally weak quarter. Dot Hill has a new relationship with Lenovo which should ramp in 2011, but apparently that won't affect Q1 much.
Good work and thanks to the entire crew at Dot Hill!
See also Dothill.com
Dot Hill has been trying to rebuild its data storage hardware business for years, following the demise of its relationship with it former major client, Sun. Its products are mainly sold to OEMs that relabel them or incorporate them into larger systems. Its main client is HP, but it has won a swarm of smaller OEMs and system integrators in the past 3 years. Margins, however, were a problem. Hill's second largest client, NetApp, refused to negotiate prices that allowed Hill to make a profit, so that relationship was terminated as of December 1.
Anticipation of a decline of revenues due to the NetApp termination has been a major reason for Hill's low stock price. Instead, in even with 2 final months of NetApp included in the quarter, revenues increased from $62 million in Q3 to about $65 million in Q4. Keep in mind that for enterprise data storage systems Q4 is typically the best season. Even so, Hill's new line of data storage products must be selling extremely well to hit $65 million with NetApp out of the picture.
And those sales have higher profit margins, allowing Non-GAAP earnings per share to be in the range of $0.02 to $0.04. After years in the red, this is great news for Dot Hill.
Profit margins should continue to expand in 2011 because Hill should be selling an increasing amount of software along with its hardware offerings. Software, in this case storage management software, carries much better profit margins than the hardware.
Q1, 2011, will be a bit tougher. It will be the first full quarter without NetApp revenues, and it is traditionally a seasonally weak quarter. Dot Hill has a new relationship with Lenovo which should ramp in 2011, but apparently that won't affect Q1 much.
Good work and thanks to the entire crew at Dot Hill!
See also Dothill.com
Wednesday, September 8, 2010
Dot Hill Reacts to Storage Acquisition Events
I have been following Dot Hill since the spring of 2006. See my Dot Hill analyst summary page for everything I have written on this data storage company in the past. I have mainly accumulated, occasionally sold HILL over that period, most recently buying a chunk at August 12, 2010 at $1.05 per share. At the moment I am writing it is $1.52 per share. Yesterday it topped out at $1.65 per share.
The sudden interest (other than from those who track popping stock prices and don't care much about the underlying reasons) was the bidding war between HP and Dell for 3Par, a data storage company. HP won, if paying $2.4 billion for a company with revenues just breaking the $200 million a year level, can be considered winning. Presumably HP and Dell thought that 3Par technology is worth a lot more when integrated into their large selling machines.
By comparison Dot Hill had 2009 sales of $234 million, and most recently reported $65.5 million for its second quarter of 2010 ending June 30, 2010, an annual run rate of about $260 million. See my Dot Hill Q2 2010 analyst call summary for details on the quarter.
But there are a lot of different approaches to the storage sector, ranging from hard drive manufacturers to pure software plays. Dot Hill has mainly been the supplier to OEMs of low to mid-range enterprise-level disk storage solutions (for network attached storage (NAS) and storage area networks (SANs)). A few years ago most of Hill's business came from Sun, but they are no longer a client. The big client: HP. Next on the list: NetApp, but apparently the NetApp contract is being terminated by Hill because its profit margins did not work out.
In order to not be so subject to one or two big clients Hill has been working hard for a couple of years now to pick up many smaller OEMs. In numbers of new clients this is working out, but in the last quarter HP still accounted for 58% of revenues.
The big change, and the one that might add 3Par like value to Dot Hill, is their increased focus on software solutions that go along with their hardware. In fact, their new software solutions can work on almost any hardware platform. If anything drives profits, or makes Hill a desirable acquisition target, it is the software, which is already available from Xiotech and should become generally available from other clients in 2011. I should note that the software builds on Hill's expertise, which in turn in reflected in their large number of patents for data storage techniques.
I am not counting on Hill being acquired. I am counting on sales of storage software and hardware (less the known NetApp termination) ramping, with profit margins being higher than in the past couple of years. With a market capitalization this moment of only $84 million, and revenues as I have stated, no debt, and cash balances (end of June) at $42 million, I see Hill as a stock with tremendous upside. On the other hand, data storage is a very competitive field, and there is no guarantee that Dot Hill's software will gain the kind of traction it needs to be a major contributor to profits. It has not had a profitable quarter in quite a while.
Keep diversified!
The sudden interest (other than from those who track popping stock prices and don't care much about the underlying reasons) was the bidding war between HP and Dell for 3Par, a data storage company. HP won, if paying $2.4 billion for a company with revenues just breaking the $200 million a year level, can be considered winning. Presumably HP and Dell thought that 3Par technology is worth a lot more when integrated into their large selling machines.
By comparison Dot Hill had 2009 sales of $234 million, and most recently reported $65.5 million for its second quarter of 2010 ending June 30, 2010, an annual run rate of about $260 million. See my Dot Hill Q2 2010 analyst call summary for details on the quarter.
But there are a lot of different approaches to the storage sector, ranging from hard drive manufacturers to pure software plays. Dot Hill has mainly been the supplier to OEMs of low to mid-range enterprise-level disk storage solutions (for network attached storage (NAS) and storage area networks (SANs)). A few years ago most of Hill's business came from Sun, but they are no longer a client. The big client: HP. Next on the list: NetApp, but apparently the NetApp contract is being terminated by Hill because its profit margins did not work out.
In order to not be so subject to one or two big clients Hill has been working hard for a couple of years now to pick up many smaller OEMs. In numbers of new clients this is working out, but in the last quarter HP still accounted for 58% of revenues.
The big change, and the one that might add 3Par like value to Dot Hill, is their increased focus on software solutions that go along with their hardware. In fact, their new software solutions can work on almost any hardware platform. If anything drives profits, or makes Hill a desirable acquisition target, it is the software, which is already available from Xiotech and should become generally available from other clients in 2011. I should note that the software builds on Hill's expertise, which in turn in reflected in their large number of patents for data storage techniques.
I am not counting on Hill being acquired. I am counting on sales of storage software and hardware (less the known NetApp termination) ramping, with profit margins being higher than in the past couple of years. With a market capitalization this moment of only $84 million, and revenues as I have stated, no debt, and cash balances (end of June) at $42 million, I see Hill as a stock with tremendous upside. On the other hand, data storage is a very competitive field, and there is no guarantee that Dot Hill's software will gain the kind of traction it needs to be a major contributor to profits. It has not had a profitable quarter in quite a while.
Keep diversified!
Thursday, August 26, 2010
Marvell Technology (MRVL) Mobile Invasion
Marvell Technology Group had a mixed fiscal second quarter (Q2) 2011 ending July 31, 2010. Revenue fell below prior guidance. On the other hand it was was $896.5 million, up 5% sequentially from $856 million and up 40% from $640.6 million in the year-earlier quarter.
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:
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
Wednesday, June 16, 2010
Dot Hill, Xiotech and NetApp: new plan
Yesterday Dot Hill revealed more details of its plans for achieving profitability by the 4th quarter of 2010. The big surprise is that they may stop selling to NetApp in 2011. In another announcement, they are selling or licensing their storage software, iSN, to advanced storage provider Xiotech.
Dot Hill used to provide data storage equipment primarily to Sun Microsystems, but that segment started to go away several years ago, and is essentially gone now, representing less than 1% of revenue. In the meantime they designed new storage hardware and sold it to premier OEMs HP and NetApp for rebranding. In 2008 they looked like that strategy was going to make them profitable by 2009. Then the recession hit.
Another problem has always been profit margins. In particular, to get the NetApp business Dot Hill sold devices for less than cost. There was a small margin on the actual price of the devices over the cost of manufacturing, but it did not cover operating costs like corporate overhead, R&D, and sales. It was hoped that costs for the devices could be lowered over time, and they have been, but the profit margin is still not there. Apparently NetApp is not willing to pay more, so they will begin manufacturing the devices themselves in 2011, or discontinue that line.
In Q1 Hill reported that NetApp represented about 30% of revenue, or $18 million. It may be a big deal to give up that much revenue, but I agree that Dot Hill should not stay in the business of subsidizing a larger, profitable company like NetApp.
HP represented 50% of revenue in Q1; without NetApp, Dot Hill will be in the same position with HP that they were with Sun a few years ago. To remedy that they are both working with a large number of small, value-added data storage companies (the channel) and looking for at least one more large OEM customer. Discussion continues to be underway, but even if a deal is made it would take several months for a new OEM to introduce a new line.
The brightest part of the picture is in software. Software has far better margins than hardware, and Dot Hill's new iSN (Intelligent Storage Networking) platform is highly regarded. Dot Hill is already selling some software with its systems through HP, and of course its channel partners will sell this too. Apparently you don't need Hill hardware to run the software; it should work with most storage hardware. The hope is that the new deal with Xiotech is the first of many. Again, it takes time to get a product to market. Dot Hill's R&D costs for software have gone up, so in the short run it makes the profit line look worse, but that should improve in a quarter or two.
The main method for achieving profitability will be the classic: cutting costs. In this case salaries are being cut 5% and 10% of the work force will be laid off. Manufacturing is being consolidated.
Altogether Management (Dan Kammersgard) believes that by Q4 Dot Hill will be able to break even on a EBITDA basis with just $60 to $65 million in revenue. They are projecting Q2 revenue of $62 to $65 million. Prior to the loss of NetApp, my guess is revenue is likely to ramp to more like $70 million by Q4 because of seasonality and the general health of the data storage industry. EBITDA (earnings before interest, taxes, depreciation and amortization) is usually the lowest standard of profitability. Non-GAAP net income would be nicer, and GAAP net income is the gold standard for reporting.
I consider Dot Hill to be one of my most speculative investments. On the other hand the stock is dirt cheap today at about $1.16 per share. That gives it a market capitalization of about $64 million. They expect to have a cash balance of at least $40 million at the end of Q2.
For more data on Q1, see my Dot Hill Q1 2010 Analyst Conference Summary . For past conference summaries and my earlier commentary see my Dot Hill main page.
And of course see www.dothill.com.
Dot Hill used to provide data storage equipment primarily to Sun Microsystems, but that segment started to go away several years ago, and is essentially gone now, representing less than 1% of revenue. In the meantime they designed new storage hardware and sold it to premier OEMs HP and NetApp for rebranding. In 2008 they looked like that strategy was going to make them profitable by 2009. Then the recession hit.
Another problem has always been profit margins. In particular, to get the NetApp business Dot Hill sold devices for less than cost. There was a small margin on the actual price of the devices over the cost of manufacturing, but it did not cover operating costs like corporate overhead, R&D, and sales. It was hoped that costs for the devices could be lowered over time, and they have been, but the profit margin is still not there. Apparently NetApp is not willing to pay more, so they will begin manufacturing the devices themselves in 2011, or discontinue that line.
In Q1 Hill reported that NetApp represented about 30% of revenue, or $18 million. It may be a big deal to give up that much revenue, but I agree that Dot Hill should not stay in the business of subsidizing a larger, profitable company like NetApp.
HP represented 50% of revenue in Q1; without NetApp, Dot Hill will be in the same position with HP that they were with Sun a few years ago. To remedy that they are both working with a large number of small, value-added data storage companies (the channel) and looking for at least one more large OEM customer. Discussion continues to be underway, but even if a deal is made it would take several months for a new OEM to introduce a new line.
The brightest part of the picture is in software. Software has far better margins than hardware, and Dot Hill's new iSN (Intelligent Storage Networking) platform is highly regarded. Dot Hill is already selling some software with its systems through HP, and of course its channel partners will sell this too. Apparently you don't need Hill hardware to run the software; it should work with most storage hardware. The hope is that the new deal with Xiotech is the first of many. Again, it takes time to get a product to market. Dot Hill's R&D costs for software have gone up, so in the short run it makes the profit line look worse, but that should improve in a quarter or two.
The main method for achieving profitability will be the classic: cutting costs. In this case salaries are being cut 5% and 10% of the work force will be laid off. Manufacturing is being consolidated.
Altogether Management (Dan Kammersgard) believes that by Q4 Dot Hill will be able to break even on a EBITDA basis with just $60 to $65 million in revenue. They are projecting Q2 revenue of $62 to $65 million. Prior to the loss of NetApp, my guess is revenue is likely to ramp to more like $70 million by Q4 because of seasonality and the general health of the data storage industry. EBITDA (earnings before interest, taxes, depreciation and amortization) is usually the lowest standard of profitability. Non-GAAP net income would be nicer, and GAAP net income is the gold standard for reporting.
I consider Dot Hill to be one of my most speculative investments. On the other hand the stock is dirt cheap today at about $1.16 per share. That gives it a market capitalization of about $64 million. They expect to have a cash balance of at least $40 million at the end of Q2.
For more data on Q1, see my Dot Hill Q1 2010 Analyst Conference Summary . For past conference summaries and my earlier commentary see my Dot Hill main page.
And of course see www.dothill.com.
Wednesday, March 10, 2010
Dot Hill Potential and Pitfalls
Dot Hill, which makes data storage equipment sold by HP, NetApp, and other OEMs, is a very interesting story these days. If you were to just look at the numbers, you would think the stock price is too low. If you know its history of of always seeming to find its way to losses out of the jaws of profits, you can understant the lack of investor enthusiasm.
I think management has been making the right moves, but we probably won't see the proof (or disproof) of it until 2011.
Dot Hill makes hard disk arrays for business class data storage. This is not a high margin business. In the latest quarter ending Dec. 31, 2009 revenues were $62.6 million, but cost of goods sold was $53.6 million, leaving a gross profit of $9.0 million, or a gross margin of just 14.4% of revenue. Even though the the company is run efficiently, spending only $3.1 million on marketing, $6.8 million on research and development, and $2.6 million on general and administrative, this led to an overall GAAP loss of $5.0 million in the quarter. Take out a $1.5 restructuring charge and some non-cash costs and the non-GAAP loss was still $3 million.
As I said, this kind of near-miss has been going on at HILL for as long as I can remember. So why do I own the stock? Partly because I have been buying on dips, but there is also a long-term method to my investment.
First, Sun used to be the only major client, but Sun bought its own storage company and is now being absorbed in Oracle. Despite revenues from sales to Sun being less than 1% of revenue, this change did not lead to Hill's demise. Hill designed storage arrays that NetApp and HP are very happy with. If not for the recession, Dot Hill might have been profitable in 2009. I believe revenues will ramp in 2010, partly from more OEMs coming on board. Even if gross margins don't improve, it should become easier to cover operating costs out of gross profit.
At least as important is Dot Hill's determination to raise its gross margins. The main way this will be done is by selling software to manage the hardware along with the hardware. They have already begun doing this, but they are also acquiring Cloverleaf, which has the right software for this job.
Of course acquiring Cloverleaf will take some cash, and operating expenses will go up as well. More sales expense and more R&D expense will preceed the bulk of the software revenue. The next two quarters probably won't look that great. But hopefully by Q3 or Q4 of 2010 we will see software revenues ramping appreciably. Software revenues should have gross margins above 60%, maybe well above that by 2011.
If the scenario works out, that would change the picture entirely. Dot Hill would still have roughly $50 million in cash with no debt. It should hit a revenue run rate of over $300 million per year by the end of 2010. And with improved gross margins, it should start generating a profit. I see no reason why a 4% operating profit on revenue can't be achieved in 2011.
So what would that make the company worth? A lot more than the $81.6 million in market capitalization (at $1.51 per share) that Dot Hill ended today with.
But this scenario has its risks. Will the end users accept the software? Could HP or NetApp drop Dot Hill for a different supplier? Will more OEMs sign up? Will the economy hold up?
If you are going to invest in risky stocks, no matter how golden the upside looks, remember to:
Keep Diversified!
More data:
www.dothill.com
My Dot Hill main page
Q4 2009 Dot Hill analyst conference summary
I think management has been making the right moves, but we probably won't see the proof (or disproof) of it until 2011.
Dot Hill makes hard disk arrays for business class data storage. This is not a high margin business. In the latest quarter ending Dec. 31, 2009 revenues were $62.6 million, but cost of goods sold was $53.6 million, leaving a gross profit of $9.0 million, or a gross margin of just 14.4% of revenue. Even though the the company is run efficiently, spending only $3.1 million on marketing, $6.8 million on research and development, and $2.6 million on general and administrative, this led to an overall GAAP loss of $5.0 million in the quarter. Take out a $1.5 restructuring charge and some non-cash costs and the non-GAAP loss was still $3 million.
As I said, this kind of near-miss has been going on at HILL for as long as I can remember. So why do I own the stock? Partly because I have been buying on dips, but there is also a long-term method to my investment.
First, Sun used to be the only major client, but Sun bought its own storage company and is now being absorbed in Oracle. Despite revenues from sales to Sun being less than 1% of revenue, this change did not lead to Hill's demise. Hill designed storage arrays that NetApp and HP are very happy with. If not for the recession, Dot Hill might have been profitable in 2009. I believe revenues will ramp in 2010, partly from more OEMs coming on board. Even if gross margins don't improve, it should become easier to cover operating costs out of gross profit.
At least as important is Dot Hill's determination to raise its gross margins. The main way this will be done is by selling software to manage the hardware along with the hardware. They have already begun doing this, but they are also acquiring Cloverleaf, which has the right software for this job.
Of course acquiring Cloverleaf will take some cash, and operating expenses will go up as well. More sales expense and more R&D expense will preceed the bulk of the software revenue. The next two quarters probably won't look that great. But hopefully by Q3 or Q4 of 2010 we will see software revenues ramping appreciably. Software revenues should have gross margins above 60%, maybe well above that by 2011.
If the scenario works out, that would change the picture entirely. Dot Hill would still have roughly $50 million in cash with no debt. It should hit a revenue run rate of over $300 million per year by the end of 2010. And with improved gross margins, it should start generating a profit. I see no reason why a 4% operating profit on revenue can't be achieved in 2011.
So what would that make the company worth? A lot more than the $81.6 million in market capitalization (at $1.51 per share) that Dot Hill ended today with.
But this scenario has its risks. Will the end users accept the software? Could HP or NetApp drop Dot Hill for a different supplier? Will more OEMs sign up? Will the economy hold up?
If you are going to invest in risky stocks, no matter how golden the upside looks, remember to:
Keep Diversified!
More data:
www.dothill.com
My Dot Hill main page
Q4 2009 Dot Hill analyst conference summary
Wednesday, August 19, 2009
Dot Hill Beneath the Surface
Dot Hill makes data storage components, and they have had a rough time the last five years or so. If you just look at the bottom line, it has been a sad story. Dot Hill had (and has) a strong cash balance with no debt, and for years profitability has been just a little over two quarters away.
Yet a lot has changed. If you look under the hood, you can understand why I am not alone in thinking that Dot Hill is likely to start showing profits in Q4 2009 and then really take off in 2010. [Assuming the usual caveat: if the economy does not implode]
At the end of Q2 Dot Hill had $57. 1 million in cash (it has a $0.7 million note payable for a recent acquisition as its only debt). Revenues for the quarter were $54.3 million, barely up from Q1 and down 24% from $71.0 million in Q2 2008.
But expenses have been slashed as well. Part of this expense reduction is a response to the recession, but much of it has to do with Dot Hill's product development cycle. The heavy R&D expenses were in 2007 and 2008. Now much of the R&D expense is devoted to lowering the production costs of the current generation of data storage components.
A few years ago Dot Hill had one major customer for its products: Sun Microsytems. But Sun decided to buy a much larger data storage company, so the writing was on the wall: new products would be developed internally. Dot Hill was relegated to supplying parts for expanding or replacing its old components used by existing Sun customers. And, of course, now Sun has been eaten by Oracle (sound like a Greek myth, doesn't it?).
So Dot Hill used its cash to develop new products for new customers (equipment vendors, as opposed to end customers). Reports are the new products are very good and end customers like them. Dot Hill sells the components to an increasing number of OEMs. Sun represented only 5% of revenues in Q2. A year ago Sun repesented 28% of revenue, and two years ago that was 65%.
HP is now the single largest Dot Hill customers. The new products only became available from HP in March of 2008. In Q2 2009 they represented 51% of revenue. The next largest customer is NetApp, which represented 24% of revenue. All the remaining customers accounted for 20% of revenue.
With sales to Sun unable to drop much further, the ramping HP revenues should cause Hill revenues to ramp in coming quarters.
Dot Hill has hit an economic sweet spot with their new products, which greatly improve storage capacity, efficiency, and power savings at a very attractive price point for end customers.
To a large extent costs of goods sold will ramp along with revenues, as will some operating costs. But right at this moment Dot Hill is running a lean system, so much of the coming revenue increases should increase the bottom line. In Q2 GAAP net income was negative $4.1 million. Non-GAAP net income was negative $3.0 million. But cash flow from operations was positive $3.4 million.
Since cost of goods sold represented 85% of revenues (GAAP), it will take a considerable ramp to get to GAAP profitability. But management believes that as the product lifecyle lengthens cost of goods sold will decrease as a percentage of sales (which is typical for this type of equipment) and there will be savings as production runs scale. Also, Dot Hill (through HP) is starting to sell software to help with storage management, and that has much better gross margins.
As always, things could go wrong with the economy, with clients, or with end-customer demand. But Dot Hill management (and employees) have been through the fire and come out looking pretty good. I believe they are well tempered and able to respond rapidly to changes in technologies and economic conditions.
As always, keep diversified!
More Data:
Dot Hill web site
My summary of the Q2 Dot Hill analyst conference
Yet a lot has changed. If you look under the hood, you can understand why I am not alone in thinking that Dot Hill is likely to start showing profits in Q4 2009 and then really take off in 2010. [Assuming the usual caveat: if the economy does not implode]
At the end of Q2 Dot Hill had $57. 1 million in cash (it has a $0.7 million note payable for a recent acquisition as its only debt). Revenues for the quarter were $54.3 million, barely up from Q1 and down 24% from $71.0 million in Q2 2008.
But expenses have been slashed as well. Part of this expense reduction is a response to the recession, but much of it has to do with Dot Hill's product development cycle. The heavy R&D expenses were in 2007 and 2008. Now much of the R&D expense is devoted to lowering the production costs of the current generation of data storage components.
A few years ago Dot Hill had one major customer for its products: Sun Microsytems. But Sun decided to buy a much larger data storage company, so the writing was on the wall: new products would be developed internally. Dot Hill was relegated to supplying parts for expanding or replacing its old components used by existing Sun customers. And, of course, now Sun has been eaten by Oracle (sound like a Greek myth, doesn't it?).
So Dot Hill used its cash to develop new products for new customers (equipment vendors, as opposed to end customers). Reports are the new products are very good and end customers like them. Dot Hill sells the components to an increasing number of OEMs. Sun represented only 5% of revenues in Q2. A year ago Sun repesented 28% of revenue, and two years ago that was 65%.
HP is now the single largest Dot Hill customers. The new products only became available from HP in March of 2008. In Q2 2009 they represented 51% of revenue. The next largest customer is NetApp, which represented 24% of revenue. All the remaining customers accounted for 20% of revenue.
With sales to Sun unable to drop much further, the ramping HP revenues should cause Hill revenues to ramp in coming quarters.
Dot Hill has hit an economic sweet spot with their new products, which greatly improve storage capacity, efficiency, and power savings at a very attractive price point for end customers.
To a large extent costs of goods sold will ramp along with revenues, as will some operating costs. But right at this moment Dot Hill is running a lean system, so much of the coming revenue increases should increase the bottom line. In Q2 GAAP net income was negative $4.1 million. Non-GAAP net income was negative $3.0 million. But cash flow from operations was positive $3.4 million.
Since cost of goods sold represented 85% of revenues (GAAP), it will take a considerable ramp to get to GAAP profitability. But management believes that as the product lifecyle lengthens cost of goods sold will decrease as a percentage of sales (which is typical for this type of equipment) and there will be savings as production runs scale. Also, Dot Hill (through HP) is starting to sell software to help with storage management, and that has much better gross margins.
As always, things could go wrong with the economy, with clients, or with end-customer demand. But Dot Hill management (and employees) have been through the fire and come out looking pretty good. I believe they are well tempered and able to respond rapidly to changes in technologies and economic conditions.
As always, keep diversified!
More Data:
Dot Hill web site
My summary of the Q2 Dot Hill analyst conference
Friday, April 17, 2009
Dot Hill Data Storage Preliminary Q1 Results
Dot Hill's sales of data storage equipment fell in the March 2009 quarter more than expected. But sales did not fall off a cliff. I am still sticking with the theory that the one technology product that enterprise-sized corporations must buy this year is more storage capacity. It is the law.
Dot Hill's products are very well positioned to take advantage of enterprises needing more storage but wanting to cut back on capital expenditures. While serving only a tiny sliver of the market so far, it is clear tht Dot Hill has gained considerable market share during this last year. In the past three years it has transitioned from being highly dependent on sales to a single OEM, Sun, to having three solid large clients, Sun, HP, and NetApp, plus a host of smaller OEMs and channel distributors.
Preliminary estimates for Q1 were released on April 14, 2009 [See also Dot Hill Preliminary Q1 press release]. Revenue probably came in just below $54 million. Non-GAAP net loss should be $0.05 to $0.07. At the Dot Hill Q4 analyst conference on February 26, 2009 guidance was for Q1 2009, with admitted low visibility, was $56 to $63 million in revenue with non-GAAP EPS negative $0.06 to $0.11. So despite being somewhat below the bottom of guidance on revenue, they did well on EPS.
Management has done a great job reducing costs. Any sort of firming of the global economy should result in a revenue ramp-up that puts Dot Hill back in the black. They have a good cash reserve, about $54 million at the end of the quarter.
Market capitalization has shot up since the announcement, but it is still just $38 million as I write. If they can do a profitable quarter by the end of the year, with over $200 million a year in revenues, you can bet this stock will shoot up. I have; I own the stock (so weigh that against my obvious enthusiasm).
Aside from the possibility that this recession will last into 2010, the main potential risks for Dot Hill are price competition from competitors and the danger of being dependent on Sun, HP, and NetApp for most of their sales.
See also:
My Dot Hill main page
www.dothill.com
Dot Hill's products are very well positioned to take advantage of enterprises needing more storage but wanting to cut back on capital expenditures. While serving only a tiny sliver of the market so far, it is clear tht Dot Hill has gained considerable market share during this last year. In the past three years it has transitioned from being highly dependent on sales to a single OEM, Sun, to having three solid large clients, Sun, HP, and NetApp, plus a host of smaller OEMs and channel distributors.
Preliminary estimates for Q1 were released on April 14, 2009 [See also Dot Hill Preliminary Q1 press release]. Revenue probably came in just below $54 million. Non-GAAP net loss should be $0.05 to $0.07. At the Dot Hill Q4 analyst conference on February 26, 2009 guidance was for Q1 2009, with admitted low visibility, was $56 to $63 million in revenue with non-GAAP EPS negative $0.06 to $0.11. So despite being somewhat below the bottom of guidance on revenue, they did well on EPS.
Management has done a great job reducing costs. Any sort of firming of the global economy should result in a revenue ramp-up that puts Dot Hill back in the black. They have a good cash reserve, about $54 million at the end of the quarter.
Market capitalization has shot up since the announcement, but it is still just $38 million as I write. If they can do a profitable quarter by the end of the year, with over $200 million a year in revenues, you can bet this stock will shoot up. I have; I own the stock (so weigh that against my obvious enthusiasm).
Aside from the possibility that this recession will last into 2010, the main potential risks for Dot Hill are price competition from competitors and the danger of being dependent on Sun, HP, and NetApp for most of their sales.
See also:
My Dot Hill main page
www.dothill.com
Tuesday, March 10, 2009
Marvell Technology In Recession Mode
Marvell Technology Group (MRVL) reported revenue of $513 million for their quarter that ended January 31, 2009 (4th quarter fiscal 2009). That was not a good number for Marvell; it was down 35% from the October 2008 quarter, and down 39% from the year-earlier quarter.
I own Marvell stock. I had hoped for better, but not expected it. Since a lot of Marvell's revenue comes from the data storage sector, I hoped people's need to store ever-increasing amounts of data might partially offset the recession. As we have seen, for instance, at Dot Hill. On the other hand, I have a backup drive that once seemed capacious and now is getting pretty full, but I am delaying buying a bigger capacity drive right now; I have more pressing needs for cash. Multiply by 100 million.
Marvell is a relatively new company that grew big quickly and seems to aim at dominating the entire mixed digital analog sector. In addition to making chips for Western Digital drives, it makes processors that RIM uses in some of its Blackberry products, chips for printers, chips that combine Bluetooth and WiFi, and video processing chips. It seems to be able to move its engineering expertise from one technology arena to another, taking on the likes of TI, Motorola, Intel and Broadcom. Sometimes it takes Marvell a while to get traction in a new area, but when Sehat Sutardja says "In a year or two, " it is a good idea to take him seriously.
In a year or two, Sehat believes there will be architectural convergence for many devices, including netbook computers, smartphones, and next generation data and communication appliances. He believes Marvell has all the expertise necessary to get there with the best products at prices that enable the magic of mass consumption with good profit margins for Marvell. That looks right to me. Marvell has shown it can do ARM processors as good as anyone, and it is unrivaled at putting analog circuitry on chips.
But I would not discount, quite yet, the ability of rivals to out market, and perhaps even out engineer, Marvell. Motorolla, TI and Intel all have deep pockets and large research establishments.
Of its $513 million in revenue in the quarter, Marvell spent $208 million for research and development. Obviously they could have sent a lot of engineers home in 2008 and pleased short term investors. That is not the Marvell way.
Whether Marvell was profitable in the quarter depends on how you want to do your accounting. On a GAAP basis they lost $65 million. They claim non-GAAP net income of $32 million. On a cash basis, they had free cash flow of $95 million. They ended with $952 million in cash and equivalents, so they are well positioned to keep up their drive for industry dominance.
They have cut costs, and are reducing the work force by 15%. If I know Marvell's corporate culture, that means those lucky enough to be employed are going to work even harder and smarter, if that is possible.
For more details, see my Marvell analyst conference summary for March 5, 2009.
The current economic and stock market troubles provide for a unique opportunity to buy into Marvell, but there is risk in investing in the highly competitive semiconductor industry, so ...
Keep diversified.
I own Marvell stock. I had hoped for better, but not expected it. Since a lot of Marvell's revenue comes from the data storage sector, I hoped people's need to store ever-increasing amounts of data might partially offset the recession. As we have seen, for instance, at Dot Hill. On the other hand, I have a backup drive that once seemed capacious and now is getting pretty full, but I am delaying buying a bigger capacity drive right now; I have more pressing needs for cash. Multiply by 100 million.
Marvell is a relatively new company that grew big quickly and seems to aim at dominating the entire mixed digital analog sector. In addition to making chips for Western Digital drives, it makes processors that RIM uses in some of its Blackberry products, chips for printers, chips that combine Bluetooth and WiFi, and video processing chips. It seems to be able to move its engineering expertise from one technology arena to another, taking on the likes of TI, Motorola, Intel and Broadcom. Sometimes it takes Marvell a while to get traction in a new area, but when Sehat Sutardja says "In a year or two, " it is a good idea to take him seriously.
In a year or two, Sehat believes there will be architectural convergence for many devices, including netbook computers, smartphones, and next generation data and communication appliances. He believes Marvell has all the expertise necessary to get there with the best products at prices that enable the magic of mass consumption with good profit margins for Marvell. That looks right to me. Marvell has shown it can do ARM processors as good as anyone, and it is unrivaled at putting analog circuitry on chips.
But I would not discount, quite yet, the ability of rivals to out market, and perhaps even out engineer, Marvell. Motorolla, TI and Intel all have deep pockets and large research establishments.
Of its $513 million in revenue in the quarter, Marvell spent $208 million for research and development. Obviously they could have sent a lot of engineers home in 2008 and pleased short term investors. That is not the Marvell way.
Whether Marvell was profitable in the quarter depends on how you want to do your accounting. On a GAAP basis they lost $65 million. They claim non-GAAP net income of $32 million. On a cash basis, they had free cash flow of $95 million. They ended with $952 million in cash and equivalents, so they are well positioned to keep up their drive for industry dominance.
They have cut costs, and are reducing the work force by 15%. If I know Marvell's corporate culture, that means those lucky enough to be employed are going to work even harder and smarter, if that is possible.
For more details, see my Marvell analyst conference summary for March 5, 2009.
The current economic and stock market troubles provide for a unique opportunity to buy into Marvell, but there is risk in investing in the highly competitive semiconductor industry, so ...
Keep diversified.
Subscribe to:
Posts (Atom)
