Adobe Systems (ADBE) has been adopting a new, subscription model for its software which results in a delay in recognition of revenue. Is that really the reason for its less-than-stellar revenue growth during 2012, or is the company perhaps using this story to cover other trends?
On March 19 Adobe reported revenue for the quarter ending March 1 at $1.008 billion, down 13% sequentially from $1.153 billion, and down 5% from $1.045 billion in the year-earlier quarter. Declining revenue usually results in low P/E ratios, but as I write, at a price of $43.57 per share, ADBE's trailing PE is 30.68, which is very high for a technology stock in this market.
Perhaps earnings are improving despite the revenue downtrend? No, GAAP earnings per share (EPS) were $0.13, down 70% sequentially from $0.44 and down 65% from $0.37 year-earlier. Nor were the poor earnings from strange GAAP rules; non-GAAP EPS was $0.35, down from $0.57 year-earlier.
Surely there must be some new source of revenue and profits that has impressed sell-side analysts, that must be factored into future earnings. While Adobe's Digital Marketing segment had 20% y/y revenue growth, there are no known new initiatives that account for the optimism.
So it would seem to come down to the subscription model. In the past Adobe sold its array of software products as versions available on disk. Photoshop is its best known product, but as the Internet has become the greatest driving force in our economy a variety of products to help with Web site content production and management were introduced. Software products could be bought separately, but most designers needed multiple products, and they were packaged together in Creative Suite. Despite being sold in high volumes, Creative Suite (CS) has never been cheap. The cost of buying a full license for CS depended on the exact options chosen, but let's just ballpark it at $2000.
Over time CS improved, partly just to keep up with changes in the Internet. New versions of CS were introduced about every 2 years. If you already had a full copy of CS you could buy an upgrade for, ballpark, $1000.
With the vast majority of Web designers dependent on CS, charging them $1000 every two years for upgrades was a nice source of recurring revenue. Only many designers found they could skip upgrades at least some of the time. If they had CS 3, they might skip CS 4 and buy the CS 5 upgrade. Wait too long (typically 2 full versions), and the ability to buy at the upgrade price went away.
Meanwhile, for many customers the set of DVDs used to install CS receded into history, as the software package was downloaded from the Internet instead.
In 2012 Adobe decided to push a subscription model to replace the old system. Customers can pay a monthly fee and get upgrades automatically. Better still, instead of having to wait for 6.0 to replace 4.0, the upgrades come as they are available.
However, note the impact on cash flows. Someone who was going to buy CS 6.0 for hundreds or thousands of dollars instead starts a subscription at (rates vary) $49.99 per month.
At the end of a year the subscription client will have paid $600 to Adobe. In two years they will have paid $1200, more than the cost of an upgrade. If customers stop skipping versions, in effect the subscription systems becomes a major price increase. You see other companies doing the same thing, for instance Microsoft with Office 365. The subscription service also cuts down on pirated software.
So the theory of bullish ADBE investors is that once we go through a full subscription cycle revenue will ramp. There might even be some cost of goods sold decrease from the elimination of physical media (management says that would be quite minor).
The problem with betting on this outcome is that you are also betting on the continued dominance of Adobe in making software for Web design.
A year to two years ago investors were not so confident in Adobe, and we should recall why. Apple, a long-time Adobe ally, had refused to allow Adobe's Flash product to be used on its smartphones and tablets. In addition the industry was (and still is) making a transition to a new standard, HTML5. Since then the emergence of other mobile hardware/software platforms has Balkanized the app world, meaning just creating Web pages is not longer the prime goal of developers for the Internet.
Adobe has responded well to this challenge. The new CS, at least in theory, can create Web pages and applications that work reasonably well on multiple device form factors. Being able to design once in CS and export to multiple formats (or to include code that senses the form factor and presents the page accordingly) is a big help to Web designers.
I would still be cautious about projecting out too much. Adobe is not the only company addressing the new Internet Tower of Babel that Apple created. Just for instance, Akamai provides datacenter software that can distinguish between requests from cellphones and computers and message the outgoing data automatically. Open source software that has many of the capabilities of Adobe products is available for free. While most designers, from freelancers to large enterprise design departments, find Adobe is worth the price because of its functionality, free could become more competitive in the future. In addition several proprietary competitors exist in the Web design segment.
It is hard to imagine an Internet without Adobe, but there is danger as well as opportunity in the subscription model. Adobe management is confident that adoption will go well, and that assumption seems to already be built into today's stock price.
Disclaimer: I don't have a position in Adobe and won't take one for at least one week following the initial publication of this story. I do subcontracting work for Microsoft and am long Akamai.
See also:
www.adobe.com
My main ADBE analysis page.
My Adobe March 19, 2013 conference notes
Showing posts with label mobile. Show all posts
Showing posts with label mobile. Show all posts
Tuesday, April 2, 2013
Tuesday, March 20, 2012
Adobe Waiting for CS6
Adobe (ADBE) yesterday reported a Q1, 2012 with only a slight increase in revenue over Q1 2011, with a decline in earnings per share (EPS). I use Adobe as a proxy for the computer software industry, but in this case special factors may have contributed to the poor showing, so the industry as a whole may do better in Q1. Adobe's fiscal Q1 2012 ended March 2, 2012, so it is a frontrunner to firms that report on a regular calendar basis (Q1's ending on March 31).
GAAP revenue was $1.045 billion, down 10% sequentially from $1.152 billion but up 2% from $1.027 billion year-earlier. Net income was $185.2 million, up 7% sequentially from $173.7 million but down 21% from $234.6 million year-earlier. Earnings per share (EPS) were $0.37, up 6% sequentially from $0.35 and down 20% from $0.46 year-earlier.
At the analyst conference call management claimed the poor showing was because of customers beginning to anticipate the future release of Creative Suite 6 (CS6). Creative Suite comes in a variety of flavors incorporating a number of Adobe software products such as the well-known Photoshop and Acrobat. Because the web is transitioning to include mobile devices and a new standard, HTML5, the products for web developers (including page layout, photo, animation, and video editing) are also changing rapidly.
Because of cost issues, developers sometimes do not upgrade to each new version. This was particularly true during the recession. If is possible that management is right in believing that the number of changes has become so great that CS6 will be a must-do upgrade even for customers that have CS5.5 or CS5, much less earlier versions.
The problem for web designers is that the design standards of 3 years ago, where they could count on a (well-designed) site appearing the same to viewers no matter which browser or operating system they used. Now every mobile device has a different screen size and many device users prefer apps, using a mobile web browser only as a last resort. What designers have had to do since the iPhone introduction is either write multiple web pages (one for desktop/notebook screens and one for each mobile device) or include programming on a single page that reformats that page for various screen configurations. Plus they
Given the endless complaining I have heard from fellow designers and programmers, I expect CS6 will be a big hit if it actually delivers the ability to design once and deploy, with minimal changes, to an assortment of devices. On the other hand if they think CS6 fails in that regard, they will probably cherry pick and only upgrade the Adobe software that work well for them.
The lower profits on flat revenues is attributable to up front investment in marketing and readying CS6 for deployment.
A number of pundits declared Adobe dead when Apple refused to support Flash animation on iPhones. So far Adobe is coping well with the new environment. It is the nature of IT things to see rapid die-offs and new growth.
Another area Adobe seems to be doing well in is helping its customers with dealing with another complex area, Internet advertising. A well-designed web page that does not generate ad revenue is not a good ROI. In January Adobe closed its acquisition of Efficient Frontier, which should help keep Adobe in the forefront of this area.
Today Adobe closed down $1.35 to $33.16. Its price to earnings ration was 29.5, which is pretty steep even if you buy the back-with-CS6 story. Adobe's lack of faith in its own future is shown by it's failure to pay a dividend. On the other hand it generated $314 million in free cash flow and ended with a cash balance of $2.8 billion.
CS6 is scheduled for release in late Q2, so probably in May. We will get a little bit of revenue feedback when Q2 results are announced in June.
Disclaimer: I don't have a position in Adobe. I do use some Adobe software, and I am long in a variety of technology stocks that might have relationships with Adobe.
GAAP revenue was $1.045 billion, down 10% sequentially from $1.152 billion but up 2% from $1.027 billion year-earlier. Net income was $185.2 million, up 7% sequentially from $173.7 million but down 21% from $234.6 million year-earlier. Earnings per share (EPS) were $0.37, up 6% sequentially from $0.35 and down 20% from $0.46 year-earlier.
At the analyst conference call management claimed the poor showing was because of customers beginning to anticipate the future release of Creative Suite 6 (CS6). Creative Suite comes in a variety of flavors incorporating a number of Adobe software products such as the well-known Photoshop and Acrobat. Because the web is transitioning to include mobile devices and a new standard, HTML5, the products for web developers (including page layout, photo, animation, and video editing) are also changing rapidly.
Because of cost issues, developers sometimes do not upgrade to each new version. This was particularly true during the recession. If is possible that management is right in believing that the number of changes has become so great that CS6 will be a must-do upgrade even for customers that have CS5.5 or CS5, much less earlier versions.
The problem for web designers is that the design standards of 3 years ago, where they could count on a (well-designed) site appearing the same to viewers no matter which browser or operating system they used. Now every mobile device has a different screen size and many device users prefer apps, using a mobile web browser only as a last resort. What designers have had to do since the iPhone introduction is either write multiple web pages (one for desktop/notebook screens and one for each mobile device) or include programming on a single page that reformats that page for various screen configurations. Plus they
Given the endless complaining I have heard from fellow designers and programmers, I expect CS6 will be a big hit if it actually delivers the ability to design once and deploy, with minimal changes, to an assortment of devices. On the other hand if they think CS6 fails in that regard, they will probably cherry pick and only upgrade the Adobe software that work well for them.
The lower profits on flat revenues is attributable to up front investment in marketing and readying CS6 for deployment.
A number of pundits declared Adobe dead when Apple refused to support Flash animation on iPhones. So far Adobe is coping well with the new environment. It is the nature of IT things to see rapid die-offs and new growth.
Another area Adobe seems to be doing well in is helping its customers with dealing with another complex area, Internet advertising. A well-designed web page that does not generate ad revenue is not a good ROI. In January Adobe closed its acquisition of Efficient Frontier, which should help keep Adobe in the forefront of this area.
Today Adobe closed down $1.35 to $33.16. Its price to earnings ration was 29.5, which is pretty steep even if you buy the back-with-CS6 story. Adobe's lack of faith in its own future is shown by it's failure to pay a dividend. On the other hand it generated $314 million in free cash flow and ended with a cash balance of $2.8 billion.
CS6 is scheduled for release in late Q2, so probably in May. We will get a little bit of revenue feedback when Q2 results are announced in June.
Disclaimer: I don't have a position in Adobe. I do use some Adobe software, and I am long in a variety of technology stocks that might have relationships with Adobe.
Saturday, February 18, 2012
Applied Materials Q1 Boosted by Mobile Demand
Applied Materials (AMAT), the semiconductor capital equipment maker, reported better than expected revenue and earnings Thursday for its first quarter fiscal 2012 ending January 30, 2012. Although the stock traded up after-hours on Thursday, by the end of day Friday it closed at $12.99, down $0.22 or 1.7% from the Thursday close.
Last quarter Applied management stated they believed they were past the bottom of the order cycle, but that revenues were not likely to start increasing until the second half of 2012. The lag is because semiconductor equipment is not made until after it is ordered, and customers sometimes place orders well in advance of their required delivery times.
Prior guidance was that Q1 revenue would be down 5% to 15% sequentially. Q1 Revenue were $2.19 billion, up 0.5% sequentially from $2.18 billion. Despite that revenue was down 18.5% from $2.69 billion in the year-earlier quarter.
The difference between guidance and results was mostly because a couple of large foundries (plants where semiconductor chips are manufactured) placed unexpected orders and took delivery faster than expected on Q4 orders. Most of this unexpected bonus was to fabricate mobile application processors, which are the hearts of tablet computers and smartphones. These processors are becoming more complicated, often adding computer cores as well as peripheral functions. This means die sizes become larger, so more dies must be processed, and more equipment lines installed. The number of units of smartphones and tablets sold globally is also expanding rapidly.
Two other Applied Materials segments, display technology and solar, did poorly as expected and are not believed likely to recover much in 2012.
Which brings us back to the question of where we are in the cycle. To some extent that depends on the global economy. It is also sector-specific, as capacity utilization and end demand growth differ for sectors like RAM, Flash memory, application-specific chips and display technology. Growth comes in two forms: more equipment to pump out more units, and new equipment for chips that work with smaller transistors.
In addition to continued strong demand for mobile-specific devices, PC demand is expected to rebound in 2012 as the hard-drive shortage bottleneck disappears. In addition, Windows 8 could be a driver if it releases as expected this Fall.
While we are probably now past the bottom of the order cycle for semiconductor production equipment, the exact nature and extent of the ramp remains to be seen. Guidance for Q2 is for revenues to be up sequentially between 5% and 15%. We are far enough into Q2, and enough shipments were ordered back in Q1 or even Q4, that investors can probably count on that.
Since (at Friday's closing price) Applied pays a dividend of 2.42% ($0.08 per quarter), I see Applied Materials as one of the safest technology stocks to invest in. Earnings in Q1 were $0.09 GAAP, $0.19 non-GAAP, so even in a slow quarter there was plenty of cash generated to cover the dividend. Despite using $4.2 billion to acquire Varian in the quarter, Applied's cash balance ended near $3 billion.
Despite unevenness, we are still in a global economic ramp with billions of consumers set to acquire smartphones in the next 3 years (600 million in China alone). Everyone wants devices that do more with less power, and the only way to get that is with new semiconductor manufacturing capabilities. It does not matter who wins the smartphone race; everyone needs the kind of semiconductor manufacturing solutions Applied Materials (and its competitors) provide.
I am also excited about Applied's acquisition of Varian, but I'll save that for a different article.
For more details about Q1 results, including questions by analysts, see my Applied Materials Q1 2012 Analyst Call summary.
Disclaimer: I have a long position in Applied Materials (AMAT), with a long term view. I will not trade in AMAT for at least 7 days after this article is published.
And keep diversified!
Last quarter Applied management stated they believed they were past the bottom of the order cycle, but that revenues were not likely to start increasing until the second half of 2012. The lag is because semiconductor equipment is not made until after it is ordered, and customers sometimes place orders well in advance of their required delivery times.
Prior guidance was that Q1 revenue would be down 5% to 15% sequentially. Q1 Revenue were $2.19 billion, up 0.5% sequentially from $2.18 billion. Despite that revenue was down 18.5% from $2.69 billion in the year-earlier quarter.
The difference between guidance and results was mostly because a couple of large foundries (plants where semiconductor chips are manufactured) placed unexpected orders and took delivery faster than expected on Q4 orders. Most of this unexpected bonus was to fabricate mobile application processors, which are the hearts of tablet computers and smartphones. These processors are becoming more complicated, often adding computer cores as well as peripheral functions. This means die sizes become larger, so more dies must be processed, and more equipment lines installed. The number of units of smartphones and tablets sold globally is also expanding rapidly.
Two other Applied Materials segments, display technology and solar, did poorly as expected and are not believed likely to recover much in 2012.
Which brings us back to the question of where we are in the cycle. To some extent that depends on the global economy. It is also sector-specific, as capacity utilization and end demand growth differ for sectors like RAM, Flash memory, application-specific chips and display technology. Growth comes in two forms: more equipment to pump out more units, and new equipment for chips that work with smaller transistors.
In addition to continued strong demand for mobile-specific devices, PC demand is expected to rebound in 2012 as the hard-drive shortage bottleneck disappears. In addition, Windows 8 could be a driver if it releases as expected this Fall.
While we are probably now past the bottom of the order cycle for semiconductor production equipment, the exact nature and extent of the ramp remains to be seen. Guidance for Q2 is for revenues to be up sequentially between 5% and 15%. We are far enough into Q2, and enough shipments were ordered back in Q1 or even Q4, that investors can probably count on that.
Since (at Friday's closing price) Applied pays a dividend of 2.42% ($0.08 per quarter), I see Applied Materials as one of the safest technology stocks to invest in. Earnings in Q1 were $0.09 GAAP, $0.19 non-GAAP, so even in a slow quarter there was plenty of cash generated to cover the dividend. Despite using $4.2 billion to acquire Varian in the quarter, Applied's cash balance ended near $3 billion.
Despite unevenness, we are still in a global economic ramp with billions of consumers set to acquire smartphones in the next 3 years (600 million in China alone). Everyone wants devices that do more with less power, and the only way to get that is with new semiconductor manufacturing capabilities. It does not matter who wins the smartphone race; everyone needs the kind of semiconductor manufacturing solutions Applied Materials (and its competitors) provide.
I am also excited about Applied's acquisition of Varian, but I'll save that for a different article.
For more details about Q1 results, including questions by analysts, see my Applied Materials Q1 2012 Analyst Call summary.
Disclaimer: I have a long position in Applied Materials (AMAT), with a long term view. I will not trade in AMAT for at least 7 days after this article is published.
And keep diversified!
Sunday, August 28, 2011
Marvell Ramping TD Smartphone Revenue
Marvell Technology (MRVL) makes semiconductor chips for hard disk drives, cell phones, networking and other devices. They have long dominated the HDD market, but have struggled in the smartphone market. In their second quarter of fiscal 2011 (Q2), ending July 30th, we probably saw an inflection point for smartphones based on Marvell chips. This space should be closely watched in Q3 and Q4.
Marvell's stock price is still at bargain levels, at about 10x non-GAAP trailing earnings. Partly this is due to macroeconomic fears affecting the entire market, but more particularly Marvell fell off a recent 52-week high of $21.89 on January 18 due to poor results in Q4 of 2010 and Q1 of 2011, when revenues fell to $802 million, which was down 6% y/y. A few weeks ago it hit $11.94; Friday it closed at $12.89.
That period of weakness was partly due to slower than expected sales of chips for hard drives (HDD) and networking, but most visibly was due to slow sales of chips for RIM's Blackberries. Given that Marvell execs have talked for years about conquering the smartphone market as they once conquered the HDD market, this led many analysts to conclude that Marvell was simply out of the race to provide CPUs for smartphones.
The smartphone chip market is certainly extremely competitive, perhaps the most competitive semiconductor segment today. Marvell has been competing in the U.S. against the likes of Qualcomm (leader in CDMA technology), nVIDIA, Texas Instruments, Samsung, and Apple, which makes its own ARM-based phone CPUs. They have spent years and vast sums of money on R&D, essentially subsiding smartphone chip development with profits from their HDD chips. In the U.S. smartphone market, except for being in a couple of BlackBerry designs and sometimes supplying non-CPU chips for phones (for Bluetooth and Wi-Fi), they have been an also-ran.
Meanwhile, Marvell produced the only one-chip solution for the Chinese communication standard called TD-SCDMA. China Mobile, the largest Chinese wireless company (600 million customers), invested vast sums to develop a TD-SCDMA network, now in place in most Chinese cities. Marvell has worked closely with Chinese companies on this project, bringing about 1000 engineers to the table. Also called OPhones, these smartphones run software on top of Android. Marvell is now referring to them as TD phones. The first generation of TD phones, released in 2010, were expensive and did not sell in large numbers. Essentially they tested the system.
Q2 2011 was when TD smartphones first shipped in sufficient numbers to be meaningful for Marvell investors. Over 20 models are available from manufacturers like ZTE, Motorola, Huawei, and Samsung. TD smartphone revenue roughly doubled in Q2, causing Marvell's wireless segment revenues to increase 18% in the quarter. For Q3 double digit revenue growth for TD smartphone chips is the expectation. Marvell is also sampling solutions for the LTE smartphone market in China. Again, expect fierce competition, but Marvell should win a share of Chinese LTE slots in 2012.
Meanwhile HDD revenue may be sluggish due to the slow PC growth rate, but it generates a lot of cash. Cash flow from operations in Q2 was $263 million. Free cash flow was $235 million. Cash and equivalents balance ended at $2.40 billion, up sequentially from $2.27 billion. Marvell repurchased $136 million, or 9 million shares, in the quarter and has authorized $1.5 billion for further repurchases.
The best cure for the low stock price, to my ears, was hearing that one use for cash could be starting to pay dividends. Compare Marvell's PE ratio to a semiconductor company like Microchip (MCHP) that does pay dividends, and you can see that semiconductor investors are more interested in dividends than they were a few years ago. However, it would be a big change for Marvell, so don't count on it.
Disclaimer: I am a long-term investor in Marvell stock
See also:
http://www.marvell.com/
My August 18, 2011 Marvell (MRVL) analyst call summary
My May 26, 2011 Marvell (MRVL) analyst call summary
My March 2011 Marvell (MRVL) analyst call summary
Keep diversified!
Marvell's stock price is still at bargain levels, at about 10x non-GAAP trailing earnings. Partly this is due to macroeconomic fears affecting the entire market, but more particularly Marvell fell off a recent 52-week high of $21.89 on January 18 due to poor results in Q4 of 2010 and Q1 of 2011, when revenues fell to $802 million, which was down 6% y/y. A few weeks ago it hit $11.94; Friday it closed at $12.89.
That period of weakness was partly due to slower than expected sales of chips for hard drives (HDD) and networking, but most visibly was due to slow sales of chips for RIM's Blackberries. Given that Marvell execs have talked for years about conquering the smartphone market as they once conquered the HDD market, this led many analysts to conclude that Marvell was simply out of the race to provide CPUs for smartphones.
The smartphone chip market is certainly extremely competitive, perhaps the most competitive semiconductor segment today. Marvell has been competing in the U.S. against the likes of Qualcomm (leader in CDMA technology), nVIDIA, Texas Instruments, Samsung, and Apple, which makes its own ARM-based phone CPUs. They have spent years and vast sums of money on R&D, essentially subsiding smartphone chip development with profits from their HDD chips. In the U.S. smartphone market, except for being in a couple of BlackBerry designs and sometimes supplying non-CPU chips for phones (for Bluetooth and Wi-Fi), they have been an also-ran.
Meanwhile, Marvell produced the only one-chip solution for the Chinese communication standard called TD-SCDMA. China Mobile, the largest Chinese wireless company (600 million customers), invested vast sums to develop a TD-SCDMA network, now in place in most Chinese cities. Marvell has worked closely with Chinese companies on this project, bringing about 1000 engineers to the table. Also called OPhones, these smartphones run software on top of Android. Marvell is now referring to them as TD phones. The first generation of TD phones, released in 2010, were expensive and did not sell in large numbers. Essentially they tested the system.
Q2 2011 was when TD smartphones first shipped in sufficient numbers to be meaningful for Marvell investors. Over 20 models are available from manufacturers like ZTE, Motorola, Huawei, and Samsung. TD smartphone revenue roughly doubled in Q2, causing Marvell's wireless segment revenues to increase 18% in the quarter. For Q3 double digit revenue growth for TD smartphone chips is the expectation. Marvell is also sampling solutions for the LTE smartphone market in China. Again, expect fierce competition, but Marvell should win a share of Chinese LTE slots in 2012.
Meanwhile HDD revenue may be sluggish due to the slow PC growth rate, but it generates a lot of cash. Cash flow from operations in Q2 was $263 million. Free cash flow was $235 million. Cash and equivalents balance ended at $2.40 billion, up sequentially from $2.27 billion. Marvell repurchased $136 million, or 9 million shares, in the quarter and has authorized $1.5 billion for further repurchases.
The best cure for the low stock price, to my ears, was hearing that one use for cash could be starting to pay dividends. Compare Marvell's PE ratio to a semiconductor company like Microchip (MCHP) that does pay dividends, and you can see that semiconductor investors are more interested in dividends than they were a few years ago. However, it would be a big change for Marvell, so don't count on it.
Disclaimer: I am a long-term investor in Marvell stock
See also:
http://www.marvell.com/
My August 18, 2011 Marvell (MRVL) analyst call summary
My May 26, 2011 Marvell (MRVL) analyst call summary
My March 2011 Marvell (MRVL) analyst call summary
Keep diversified!
Monday, November 29, 2010
NVIDA Hopes for Tegra processors
Graphics chip maker NVIDIA (NVDA) has had its ups and downs these past few years, and not just because of the recession. Increased competition from AMD in the discrete graphics card market has hurt. So has the accelerating loss of its "chip set" (chips for integrating a cpu to other components) business. At the very high end NVIDIA is getting traction for its Tesla computational chips, but those revenues are not likely to make up for other losses. It is possible NVIDIA will do better in its competition with AMD in 2011, but it is telling financial analysts that Tegra chips for mobile devices are its next big thing.
At its November 11, 2010 analyst conference call and report on its third quarter (Q3, ending October 31, 2010), Tegra was touted as a replacement for lost chip set revenue and more. Note revenue were down 7% y/y to $843.9 million in a period when most semiconductor companies ramped revenues by double digits.
Note also that Tegra has been around for a number of years. What we have been promised in 2010 is a new, improved Tegra, with an improved software stack make the new devices using it something device makers feel can compete with the iPad. This has resulted in a least a half-year delay in releasing product; the products are largely a 2011 story. Management believes that touch-based systems are going to wipe out older systems, and that Tegra will make NVIDIA a serious player in the field.
Maybe, but I am not the only analyst who is a bit skeptical, and with good reason. Tegra 2 might be improved enough to be a revolutionary epicenter in 2011, but it might get lost in the forest of competing platforms. Essentially Tegra combines an ARM CPU with a GeForce GPU, in much the same way that AMD's Fusion chips combine an 8086-based CPU with a Radeon GPU. ARM is a low-power architecture that is being widely used to address the mobile device market.
The problem for NVIDIA is that lots of companies are selling ARM-based processors for mobile devices. Apple designed its own. NVIDIA's advantage would be its graphics technology, but it is not yet clear how much of an advantage they really have. Many companies are using graphics chips, or integrating graphics architecture onto a chip, that was designed, like ARM, to be low-power from the ground up.
The history of Tegra is not one of blazing success. Microsoft Zune and KIN were flops. Maybe the 2011 devices will be better than Apple, but will they sell? They won't be competing with just iPads and iPhones, but with a wide variety of devices. Note too that some of NVIDIA's competitors have huge advantages in the mobile market derived by expertise in areas like Wi-Fi and cell phone modem chips.
For device makers there are a number of competing strategies to choose from. Do you want to start with the best graphics, or perhaps the best cell phone 4G technology? Or if devices become largely indistinguishable, maybe the low price supplier is the key to success.
I have owned NVIDIA stock in the past, but right now I think there are better bargains to be had. If Tegra ramps as rapidly as management would like, then sure, today's stock price looks nice. But I believe this is a wait and see situation. The new Tegra devices may come on the market as early as Q1 2011, but I want to see how they sell through. One popular device could make Tegra viable again, but only Apple seems to be able to guarantee the popularity of its own devices. Once you step outside of Apple, what I mostly see is ruinous competition.
See also:
My NVIDIA analyst call summary for Q3 2010
http://www.nvidia.com/
At its November 11, 2010 analyst conference call and report on its third quarter (Q3, ending October 31, 2010), Tegra was touted as a replacement for lost chip set revenue and more. Note revenue were down 7% y/y to $843.9 million in a period when most semiconductor companies ramped revenues by double digits.
Note also that Tegra has been around for a number of years. What we have been promised in 2010 is a new, improved Tegra, with an improved software stack make the new devices using it something device makers feel can compete with the iPad. This has resulted in a least a half-year delay in releasing product; the products are largely a 2011 story. Management believes that touch-based systems are going to wipe out older systems, and that Tegra will make NVIDIA a serious player in the field.
Maybe, but I am not the only analyst who is a bit skeptical, and with good reason. Tegra 2 might be improved enough to be a revolutionary epicenter in 2011, but it might get lost in the forest of competing platforms. Essentially Tegra combines an ARM CPU with a GeForce GPU, in much the same way that AMD's Fusion chips combine an 8086-based CPU with a Radeon GPU. ARM is a low-power architecture that is being widely used to address the mobile device market.
The problem for NVIDIA is that lots of companies are selling ARM-based processors for mobile devices. Apple designed its own. NVIDIA's advantage would be its graphics technology, but it is not yet clear how much of an advantage they really have. Many companies are using graphics chips, or integrating graphics architecture onto a chip, that was designed, like ARM, to be low-power from the ground up.
The history of Tegra is not one of blazing success. Microsoft Zune and KIN were flops. Maybe the 2011 devices will be better than Apple, but will they sell? They won't be competing with just iPads and iPhones, but with a wide variety of devices. Note too that some of NVIDIA's competitors have huge advantages in the mobile market derived by expertise in areas like Wi-Fi and cell phone modem chips.
For device makers there are a number of competing strategies to choose from. Do you want to start with the best graphics, or perhaps the best cell phone 4G technology? Or if devices become largely indistinguishable, maybe the low price supplier is the key to success.
I have owned NVIDIA stock in the past, but right now I think there are better bargains to be had. If Tegra ramps as rapidly as management would like, then sure, today's stock price looks nice. But I believe this is a wait and see situation. The new Tegra devices may come on the market as early as Q1 2011, but I want to see how they sell through. One popular device could make Tegra viable again, but only Apple seems to be able to guarantee the popularity of its own devices. Once you step outside of Apple, what I mostly see is ruinous competition.
See also:
My NVIDIA analyst call summary for Q3 2010
http://www.nvidia.com/
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
Monday, August 16, 2010
NVIDIA (NVDA) Risks, Opportunities
Last Thursday, August 12, 2010, NVIDIA (NVDA) reported its results for the quarter ending August 1, 2010, its second fiscal quarter of 2011. The results could be taken as a glimpse into July for the semiconductor industry since most other companies in the space reported second quarters ending June 30th. There is a concern that the recent boom in chip sales could slow appreciably because of slowing (but not really reduced) end demand by businesses and consumers.
Here I want to discuss the big trends engulfing Nvidia and the future of computer processing, including graphics processing. If you are interested in details of Nvidia's 2nd quarter, see my NVIDIA Q2 Analyst Conference Call summary.
Since graphics on personal computers began to be important in the late 1980s there has been a divergence between the central processing unit (CPU) and the graphics processing unit (GPU). Fans of history may recall that before that there was a similar divergence between the CPU and the floating point processor (FPU); you could pay extra for a computer with an Intel 8087, if you wanted to do math, or use math to accelerate graphics calculations.
This divergence between general computing needs and floating point math and graphics needs is fundamental. In an era that may be coming to a close Intel and AMD (and once upon a time, Motorola) produced most of the CPUs for the industry while ATI (now part of AMD) and Nvidia made the graphics processing unit. Many computers had no GPU, allowing the graphics work to be done by the CPU, which is fine for slow work like word processing. Intel, Nvidia and AMD also all made motherboard chipsets that included some GPU capabilities. As usual, those became more capable with time. Your $1000 GPU card of 2000 is not as powerful as the lowest end Intel graphics of today. On the other hand graphics demand has gone up with both the introduction of high definition video, fast rendering needs of games, and graphic content production systems. You don't want Intel graphics for any of those.
Conversely, the powerful GPUs from Nvidia and AMD can now be used to accelerate many processes that CPUs do more slowly. Mostly scientists, engineers, and graphics designers are taking advantage of these capabilities, but they will trickle down towards the mainstream. Moms may use them to convert an HD video to lower definition, or vice-versa.
For the most part FPUs were killed when floating point processing started being integrated into CPUs like Intel's Pentium. As transistor sizes shrank, and Windows became the common operating system, that became a natural way to give users more for their dollar.
2010 is the year that GPUs and CPUs are being merged onto a single chip. Unless you are an industry insider, you won't see the products until 2011.
Because high end GPUs actually use more silicon space than the current CPUs, there will continue to be life for independent GPUs, typically on video cards, for at least a few years. Video and graphics content makers, scientists and engineers will want workstations that include both a high end GPU and a high end CPU card. But the rest of us will probably migrate to the new combined cards (AMD calls them APUs, advanced processing units) between 2011 and 2015.
While Intel might be behind AMD in graphics, I would not want to bet on its losing a lot of market share in the new combined CPU/GPU arena. Intel's profits dwarf AMD's revenues, and their R&D budget is correspondingly higher. They will find ways of keeping their market share, most likely.
For Nvidia there is a bigger problem: they don't make GPUs at all. But before addressing that, let's look at the new tide coming in: mobile processing, mostly based on ARM-based processors.
Mobile devices are rapidly becoming more powerful, as you can see from the iPad, iPhone, Droid, etc. The key is low voltages with corresponding low power consumption, plus the usual shrinking of transistor sizes making it possible to integrate more processing capabilities into the processing units.
It is conceivable that just as PCs wiped out minicomputers and even, for the most part, mainframes, the new mobile CPUs could start invading the notebook, desktop, and even server computer space. It is already being tried, the reasoning being that a swarm of small, low-energy units can make ideal virtual machines for serving web pages.
Nvidia has the Tegra platform, which you'll be seeing a lot of later this year. It integrates an ARM CPU, an Nvidia GPU, and motherboard chipset functions on a single chip. It is a beautiful piece of work.
It also appears to be winning out over AMD in the high end GPU for non-graphic computations market.
I am not ready to declare the long line of evolution from 8086 chips to be over. They may just absorb what is best, and morph to meet changing user needs. But the competitive dynamics are certainly going to change in the next few years. If Nvidia's Tegra is a competitor, so are chips from Apple, Marvell, Broadcom, Qualcomm, TI, and many others. In fact too many companies have pinned their hopes on ARM processors. Even if ARM becomes the architecture of the future, it is likely that a couple of these companies will gain a marketing or manufacturing advantage, and the field will narrow over time.
Nvidia's best hopes for future profits are probably in specialized graphics processors for high-intensity computing. These may no longer be necessary for the average person's desktop or notebook, but high-end GPUs are subject to much less competition and therefore have higher profit margins on each unit sold.
Here I want to discuss the big trends engulfing Nvidia and the future of computer processing, including graphics processing. If you are interested in details of Nvidia's 2nd quarter, see my NVIDIA Q2 Analyst Conference Call summary.
Since graphics on personal computers began to be important in the late 1980s there has been a divergence between the central processing unit (CPU) and the graphics processing unit (GPU). Fans of history may recall that before that there was a similar divergence between the CPU and the floating point processor (FPU); you could pay extra for a computer with an Intel 8087, if you wanted to do math, or use math to accelerate graphics calculations.
This divergence between general computing needs and floating point math and graphics needs is fundamental. In an era that may be coming to a close Intel and AMD (and once upon a time, Motorola) produced most of the CPUs for the industry while ATI (now part of AMD) and Nvidia made the graphics processing unit. Many computers had no GPU, allowing the graphics work to be done by the CPU, which is fine for slow work like word processing. Intel, Nvidia and AMD also all made motherboard chipsets that included some GPU capabilities. As usual, those became more capable with time. Your $1000 GPU card of 2000 is not as powerful as the lowest end Intel graphics of today. On the other hand graphics demand has gone up with both the introduction of high definition video, fast rendering needs of games, and graphic content production systems. You don't want Intel graphics for any of those.
Conversely, the powerful GPUs from Nvidia and AMD can now be used to accelerate many processes that CPUs do more slowly. Mostly scientists, engineers, and graphics designers are taking advantage of these capabilities, but they will trickle down towards the mainstream. Moms may use them to convert an HD video to lower definition, or vice-versa.
For the most part FPUs were killed when floating point processing started being integrated into CPUs like Intel's Pentium. As transistor sizes shrank, and Windows became the common operating system, that became a natural way to give users more for their dollar.
2010 is the year that GPUs and CPUs are being merged onto a single chip. Unless you are an industry insider, you won't see the products until 2011.
Because high end GPUs actually use more silicon space than the current CPUs, there will continue to be life for independent GPUs, typically on video cards, for at least a few years. Video and graphics content makers, scientists and engineers will want workstations that include both a high end GPU and a high end CPU card. But the rest of us will probably migrate to the new combined cards (AMD calls them APUs, advanced processing units) between 2011 and 2015.
While Intel might be behind AMD in graphics, I would not want to bet on its losing a lot of market share in the new combined CPU/GPU arena. Intel's profits dwarf AMD's revenues, and their R&D budget is correspondingly higher. They will find ways of keeping their market share, most likely.
For Nvidia there is a bigger problem: they don't make GPUs at all. But before addressing that, let's look at the new tide coming in: mobile processing, mostly based on ARM-based processors.
Mobile devices are rapidly becoming more powerful, as you can see from the iPad, iPhone, Droid, etc. The key is low voltages with corresponding low power consumption, plus the usual shrinking of transistor sizes making it possible to integrate more processing capabilities into the processing units.
It is conceivable that just as PCs wiped out minicomputers and even, for the most part, mainframes, the new mobile CPUs could start invading the notebook, desktop, and even server computer space. It is already being tried, the reasoning being that a swarm of small, low-energy units can make ideal virtual machines for serving web pages.
Nvidia has the Tegra platform, which you'll be seeing a lot of later this year. It integrates an ARM CPU, an Nvidia GPU, and motherboard chipset functions on a single chip. It is a beautiful piece of work.
It also appears to be winning out over AMD in the high end GPU for non-graphic computations market.
I am not ready to declare the long line of evolution from 8086 chips to be over. They may just absorb what is best, and morph to meet changing user needs. But the competitive dynamics are certainly going to change in the next few years. If Nvidia's Tegra is a competitor, so are chips from Apple, Marvell, Broadcom, Qualcomm, TI, and many others. In fact too many companies have pinned their hopes on ARM processors. Even if ARM becomes the architecture of the future, it is likely that a couple of these companies will gain a marketing or manufacturing advantage, and the field will narrow over time.
Nvidia's best hopes for future profits are probably in specialized graphics processors for high-intensity computing. These may no longer be necessary for the average person's desktop or notebook, but high-end GPUs are subject to much less competition and therefore have higher profit margins on each unit sold.
Thursday, December 3, 2009
Marvell Technology (MRVL) Blows Past Competitors
Even non-engineers can appreciate the engineering of Marvell Technology Group (MRVL). After making a number of technological break-throughs in 2008 and earlier in 2009, revenues are ramping very quickly as products containing their semiconductor chip systems are being built.
For an overview of Marvell technology, see Marvell Under the Hood. For my past analyst conference summaries, see Marvell Analyst Conference Summaries.
Revenue for the quarter ending October 31, 2009 was $803.1 million, up 25% sequentially from $640.6 million and up 2% from $791.0 million year-earlier.
Net income of was $201.6 million, up 245% sequentially from $58.5 million and up 183% from $70.9 million.
EPS (earnings per share) were $0.31, up 244% sequentially from $0.09 and up 181% from $0.11 year-earlier.
Cash and equivalents ended at $1.46 billion. Cash flow from operations wa $203.5 million. $196 million free cash flow. Inventories rose to $239 million to deal with areas of tight supply. Long term liabilities are $174.3 million.
Non-GAAP, which excludes $34.4 million in stock-based compensation, $26.5 million amortization, $1.9 million restructuring, but adds back in the $32.6 million tax benefit: net income $231.8 million. EPS $0.35.
Guidance for fourth fiscal quarter 2010 was $802 to $850 million in revenues. Networking and storage sequential growth, with normal seasonal slowdown of wireless. 58.5% non-GAAP gross margin. $235 million non-GAAP operating expenses. $254 million operating profit. Other income $1.5 million. Tax $12 million. 670 million diluted shares. $0.33 to $0.39 non-GAAP EPS. $150 million free-cash flow. GAAP EPS about $0.09 less than non-GAAP.
Analyst Questions and Answers (summary):
Hard drive market dynamics? First quarter 2010 should continue to be helped by low cost of PCs. Our hard drive customers are optimistic.
Gross margin improvement and mix? We don't provide gross margin by end-market segments. Mobile and wireless end markets experienced very good growth, and your margin estimates for that segment may be off.
China Mobile processor market size? PXA920 is very specific, high volume, high performance for standards of China market. It is state-of-the art smart phone solution, but also cost effective enough for the mass market. Our aspiration is higher than any number anyone is throwing out yet.
Sustainability of gross margins? Semiconductor business gross margins should be on high end as prices go down, to offset other expenses. This is a fundamental shift. The numbers we have are fair numbers and we plan to maintain them as long as we can, and best-in-class semiconductor companies will need to achieve this range.
Are your customers in hard drives adding to inventories? We are on a consignment basis, so they do not need to build inventories of our chips. Full feature PCs, even laptops, are now under $500, which is building demand, especially in emerging economies.
Dividends? We do not believe we are out of the economic downturn, so it is too soon to talk about distribution of cash. Our bias is to have more cash than we need in order to not be at the mercy of banks.
China business going forward? We are optimistic about our work for China Mobile; we have been working with them for 2 years. PDS/CDMA 3G is the pride of China. We believe it will be the main technology in China going forward, so we expect a very strong second half of next year.
Visibility is much improved. Inventory is leaner. We have had some shortages and longer lead times, so customers are giving us more visibility.
O-phone success detail? PXA920 will be used by many OEM cell phone makers for the China market; not all of them will be O-phones. The main chip is the most highly developed ever, but we also have the chip set solutions (power, wi-fi, etc.) that go with this. Revenues will start to ramp in the second half of next year; not contributing yet.
Bluetooth Wi-Fi combo part growth? We are very happy with traction with this device is finally taking off. The ramp now is the first generation device, a second generation is in design now. Any device requiring Bluetooth and WiFi is a potential market.
Reviewed how integration of systems on a chip help everyone, including the OEMs and end customers, while lowering everyone's costs despite increasing Marvell's gross margin.
ARMADA initial end markets? Across the board. Chips range from low end to high end. The run on all the ARM software in the market. So the market is any consumer device from HDTV decoders to picture frames to Internet portals like netbooks to automotive display consoles.
For an overview of Marvell technology, see Marvell Under the Hood. For my past analyst conference summaries, see Marvell Analyst Conference Summaries.
Revenue for the quarter ending October 31, 2009 was $803.1 million, up 25% sequentially from $640.6 million and up 2% from $791.0 million year-earlier.
Net income of was $201.6 million, up 245% sequentially from $58.5 million and up 183% from $70.9 million.
EPS (earnings per share) were $0.31, up 244% sequentially from $0.09 and up 181% from $0.11 year-earlier.
Cash and equivalents ended at $1.46 billion. Cash flow from operations wa $203.5 million. $196 million free cash flow. Inventories rose to $239 million to deal with areas of tight supply. Long term liabilities are $174.3 million.
Non-GAAP, which excludes $34.4 million in stock-based compensation, $26.5 million amortization, $1.9 million restructuring, but adds back in the $32.6 million tax benefit: net income $231.8 million. EPS $0.35.
Guidance for fourth fiscal quarter 2010 was $802 to $850 million in revenues. Networking and storage sequential growth, with normal seasonal slowdown of wireless. 58.5% non-GAAP gross margin. $235 million non-GAAP operating expenses. $254 million operating profit. Other income $1.5 million. Tax $12 million. 670 million diluted shares. $0.33 to $0.39 non-GAAP EPS. $150 million free-cash flow. GAAP EPS about $0.09 less than non-GAAP.
Analyst Questions and Answers (summary):
Hard drive market dynamics? First quarter 2010 should continue to be helped by low cost of PCs. Our hard drive customers are optimistic.
Gross margin improvement and mix? We don't provide gross margin by end-market segments. Mobile and wireless end markets experienced very good growth, and your margin estimates for that segment may be off.
China Mobile processor market size? PXA920 is very specific, high volume, high performance for standards of China market. It is state-of-the art smart phone solution, but also cost effective enough for the mass market. Our aspiration is higher than any number anyone is throwing out yet.
Sustainability of gross margins? Semiconductor business gross margins should be on high end as prices go down, to offset other expenses. This is a fundamental shift. The numbers we have are fair numbers and we plan to maintain them as long as we can, and best-in-class semiconductor companies will need to achieve this range.
Are your customers in hard drives adding to inventories? We are on a consignment basis, so they do not need to build inventories of our chips. Full feature PCs, even laptops, are now under $500, which is building demand, especially in emerging economies.
Dividends? We do not believe we are out of the economic downturn, so it is too soon to talk about distribution of cash. Our bias is to have more cash than we need in order to not be at the mercy of banks.
China business going forward? We are optimistic about our work for China Mobile; we have been working with them for 2 years. PDS/CDMA 3G is the pride of China. We believe it will be the main technology in China going forward, so we expect a very strong second half of next year.
Visibility is much improved. Inventory is leaner. We have had some shortages and longer lead times, so customers are giving us more visibility.
O-phone success detail? PXA920 will be used by many OEM cell phone makers for the China market; not all of them will be O-phones. The main chip is the most highly developed ever, but we also have the chip set solutions (power, wi-fi, etc.) that go with this. Revenues will start to ramp in the second half of next year; not contributing yet.
Bluetooth Wi-Fi combo part growth? We are very happy with traction with this device is finally taking off. The ramp now is the first generation device, a second generation is in design now. Any device requiring Bluetooth and WiFi is a potential market.
Reviewed how integration of systems on a chip help everyone, including the OEMs and end customers, while lowering everyone's costs despite increasing Marvell's gross margin.
ARMADA initial end markets? Across the board. Chips range from low end to high end. The run on all the ARM software in the market. So the market is any consumer device from HDTV decoders to picture frames to Internet portals like netbooks to automotive display consoles.
Wednesday, July 25, 2007
Semiconductors Mixed, but Texas Instruments Rebounding
When Motorolla (MOT) warned of disappointing results, and then turned in revenues that were sequentially down 7.5% and down 19% from year earlier, it created some profound worries about the health of the semiconductor industry as a whole. [See my 7/19/2007 MOT summary] Now that more companies have reported, in particular Texas Instruments (TXN) on Monday, July 23rd, it seems that on the whole the industry is not in bad shape. The inventory correction from the second half of 2006 does seem to be over, although different companies are coming out of it with different timings.
A lot of detail about the industry can be gleaned from the TXN analyst conference held July 23. Texas Instruments revenues were also down, in this case 7%, from the year-earlier. But they bounced up 7% on a sequential basis and hit the midrange of management guidance. They said they turned away some unprofitable business at the low end of the cell phone market. Motorola, of course, makes cell phones; their failure to be able to market low end phones profitably really hurt them. Texas Instruments makes parts for the phones; that is working out better, at this moment. Orders were up 8% sequentially, inventories are in good shape, and 3G (high-end) mobile phone demand is growing. In order to meet the demands of the low-end market TI has brought out LoCosta (yep!) integrated cell phone chips that should start generating revenue in 2008.
Keep in mind that Microchip warned that it would only grow 2% sequentially, Xilinx was only up 1% sequentially, Altera was up 5%, AMD and Intel had mixed results. To me the overall picture is one of recovery with a real possibility of relative strength in Q3 due to the leanness of inventories. As individual companies win and lose contracts or consumer interest there will continue to be a lot of volatility against the general trend. This is particularly true of semiconductor chips used in the telecommunications sector. Right now analog chip design needs seem to be growing at a faster pace than digital; getting all these communications protocols right seems to be tougher than moving forward in digital processing.
In fact, it is time to start worrying about 2008. I believe that growth is going to be good due to continued rapid expansion in Asia and healthy expansion in Europe. The United States market is still a concern due to issues outside of semiconductors, notably housing, employment, and consumer willingness to spend.
More data:
Motorola investor relations page
Texas Instrument investor relations
A lot of detail about the industry can be gleaned from the TXN analyst conference held July 23. Texas Instruments revenues were also down, in this case 7%, from the year-earlier. But they bounced up 7% on a sequential basis and hit the midrange of management guidance. They said they turned away some unprofitable business at the low end of the cell phone market. Motorola, of course, makes cell phones; their failure to be able to market low end phones profitably really hurt them. Texas Instruments makes parts for the phones; that is working out better, at this moment. Orders were up 8% sequentially, inventories are in good shape, and 3G (high-end) mobile phone demand is growing. In order to meet the demands of the low-end market TI has brought out LoCosta (yep!) integrated cell phone chips that should start generating revenue in 2008.
Keep in mind that Microchip warned that it would only grow 2% sequentially, Xilinx was only up 1% sequentially, Altera was up 5%, AMD and Intel had mixed results. To me the overall picture is one of recovery with a real possibility of relative strength in Q3 due to the leanness of inventories. As individual companies win and lose contracts or consumer interest there will continue to be a lot of volatility against the general trend. This is particularly true of semiconductor chips used in the telecommunications sector. Right now analog chip design needs seem to be growing at a faster pace than digital; getting all these communications protocols right seems to be tougher than moving forward in digital processing.
In fact, it is time to start worrying about 2008. I believe that growth is going to be good due to continued rapid expansion in Asia and healthy expansion in Europe. The United States market is still a concern due to issues outside of semiconductors, notably housing, employment, and consumer willingness to spend.
More data:
Motorola investor relations page
Texas Instrument investor relations
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