New article at Seeking Alpha:
Marvell Technologies Will Ramp Smartphone Chip Profits In 2014
I started writing this article yesterday because of an announcement last week of an LTE smartphone win in China. When I got up this morning to finish the article the stock was up quite a bit, and there were more announcements of 4G LTE wins in China. So I finished the article, and fortunately the turn-around time at Seeking Alpha was quick.
I have held Marvell since around 2006. I paid too much for it in the early years, but also built up a position over time during dips. I have taken notes on every quarter's analyst conference since 2006. You can see my notes at:
Marvell Technology Analyst Conference Call Notes
It is getting harder to find undervalued stocks. I believe that MRVL is currently undervalued, but as always that is contingent on it having a growth trajectory more or less in line with my expectations.
I have enough Marvell stock that if momentum players push the price up too high too quickly (above $20 per share in the next few months) my portfolio rules would require me to sell a portion of it. I try to keep the market value of each of my stocks to no more than 10% of my entire portfolio.
Showing posts with label smartphones. Show all posts
Showing posts with label smartphones. Show all posts
Monday, January 6, 2014
Tuesday, August 28, 2012
Applied Materials Q3: Trend or Dip?
Applied Materials (AMAT), the semiconductor capital equipment maker, reported worse than expected revenue and earnings for fiscal Q3 when it reported on August 15, 2012. Contrast my story about Applied's Q1, where I said results came in better than expected because "a couple of large foundries 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."
What are investors to make of such quarterly fluctuations? Is AMAT in trouble, or is was Q3 just a small bump in the road?
Capital equipment of any kind can be very cyclical and sensitive to changes in ultimate product demand. If end-market demand is not increasing factories (in this case foundries) don't need to add more equipment to keep up with demand. In semiconductors this is somewhat mitigated by the constant shrinking of transistor sizes, but that also comes in cycles, with Intel typically doing the first shrink and everyone else catching up later depending on their specific product needs, usually new product introductions.
The numbers tell the overall story of Q3 (which ended July 29). Revenues were $2.34 billion, down 8% sequentially from $2.54 billion and down 17% from $2.79 billion in the year-earlier quarter. GAAP Net income was $218 million, down 25% sequentially from $289 million and down 54% from $476 million year-earlier. GAAP EPS (earnings per share) were $0.17, down 23% sequentially from $0.22 and down 53% from $0.36 year-earlier.
Note that profits were substantial even at this level of revenue. This may not be the very bottom of the current cycle, but it is probably pretty close.
Foundries were cautious ordering in the quarter, prefering to risk not being able to produce enough chips in Q4 if demand is greater than expected. The same seems to be true throughout the semiconductor industry lately, with everyone trying to keep inventories low in case demand in Europe or China sinks further.
Management reported that much of the equipment is being sold to manufacture chips for mobile devices, but as device sales are seasonal, semiconductor fab equipment sales are starting to show more annual seasonality than in the past. The industry is moving to 28 nm based mobile devices, so even without global demand expansion 28 nm capacity has to be added (at 28 nm smartphone makers can get more computing capacity while extending battery life).
Applied Materials is also suffering from its display equipment segment, as display factories have plenty of capacity. However, new technologies will likely be introduced in 2013. Similarly its solar equipment sales were minimal as factories in China are able to meet short term demand for solar cells. Prices have dropped enough that demand should gradually pick up the slack caused by overproduction, despite new U.S. punitive tariffs. In addition, there has been talk of Applied selling its solar division. That makes no sense to me, it would make more sense to at least hold onto it until demand returns, when it would fetch a considerably better price.
One strong point for Applied during demand dips is its services division. Old equipment needs maintenance. Services revenue was $579 million, up 5% in the quarter.
Of course if the global economy melts down even bonds and gold will be worthless, but the most likely scenario for Applied Materials is for stronger growth in late 2012 and into 2013. This will be driven by returning demand for display and solar manufacturing equipment, as well as the more complicated (and expensive) equipment lines needed to manufacturer semiconductor chips and 28 nm and below.
AMAT has a number of competitors, but loss of market share has not been an issue. Applied spent $209 million on research and development in the quarter and has a healthy pipeline of new and future products.
For more details about Q3 results, including questions by analysts, see my Applied Materials Q3 2012 Analyst Call notes.
If you are a long-term investor in Applied Materials you can still do what I do, taking advantage of the mistakes of short-termers. We know revenue of from sales of expensive pieces of capital equipment will be cyclic. In the long run the cycles don't matter to much, only the long-term trend and dividends. On down legs the stock tends to be underpriced, and at least in bull markets on the upward portion of cycles the stock may get overpriced. Buy low, sell high. There are always people doing the opposite who will be happy to trade with you.
AMAT stock ended yesterday at , giving it a market capitalization near $14.3 billion. Its 52 week low was $9.70 on October 4, 2011, and its 52 week high was $13.94 on February 17. It pays $0.09 per quarter in dividends, making its yield today 3.1%.
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.
See also the Applied Materials web site.
And keep diversified!
What are investors to make of such quarterly fluctuations? Is AMAT in trouble, or is was Q3 just a small bump in the road?
Capital equipment of any kind can be very cyclical and sensitive to changes in ultimate product demand. If end-market demand is not increasing factories (in this case foundries) don't need to add more equipment to keep up with demand. In semiconductors this is somewhat mitigated by the constant shrinking of transistor sizes, but that also comes in cycles, with Intel typically doing the first shrink and everyone else catching up later depending on their specific product needs, usually new product introductions.
The numbers tell the overall story of Q3 (which ended July 29). Revenues were $2.34 billion, down 8% sequentially from $2.54 billion and down 17% from $2.79 billion in the year-earlier quarter. GAAP Net income was $218 million, down 25% sequentially from $289 million and down 54% from $476 million year-earlier. GAAP EPS (earnings per share) were $0.17, down 23% sequentially from $0.22 and down 53% from $0.36 year-earlier.
Note that profits were substantial even at this level of revenue. This may not be the very bottom of the current cycle, but it is probably pretty close.
Foundries were cautious ordering in the quarter, prefering to risk not being able to produce enough chips in Q4 if demand is greater than expected. The same seems to be true throughout the semiconductor industry lately, with everyone trying to keep inventories low in case demand in Europe or China sinks further.
Management reported that much of the equipment is being sold to manufacture chips for mobile devices, but as device sales are seasonal, semiconductor fab equipment sales are starting to show more annual seasonality than in the past. The industry is moving to 28 nm based mobile devices, so even without global demand expansion 28 nm capacity has to be added (at 28 nm smartphone makers can get more computing capacity while extending battery life).
Applied Materials is also suffering from its display equipment segment, as display factories have plenty of capacity. However, new technologies will likely be introduced in 2013. Similarly its solar equipment sales were minimal as factories in China are able to meet short term demand for solar cells. Prices have dropped enough that demand should gradually pick up the slack caused by overproduction, despite new U.S. punitive tariffs. In addition, there has been talk of Applied selling its solar division. That makes no sense to me, it would make more sense to at least hold onto it until demand returns, when it would fetch a considerably better price.
One strong point for Applied during demand dips is its services division. Old equipment needs maintenance. Services revenue was $579 million, up 5% in the quarter.
Of course if the global economy melts down even bonds and gold will be worthless, but the most likely scenario for Applied Materials is for stronger growth in late 2012 and into 2013. This will be driven by returning demand for display and solar manufacturing equipment, as well as the more complicated (and expensive) equipment lines needed to manufacturer semiconductor chips and 28 nm and below.
AMAT has a number of competitors, but loss of market share has not been an issue. Applied spent $209 million on research and development in the quarter and has a healthy pipeline of new and future products.
For more details about Q3 results, including questions by analysts, see my Applied Materials Q3 2012 Analyst Call notes.
If you are a long-term investor in Applied Materials you can still do what I do, taking advantage of the mistakes of short-termers. We know revenue of from sales of expensive pieces of capital equipment will be cyclic. In the long run the cycles don't matter to much, only the long-term trend and dividends. On down legs the stock tends to be underpriced, and at least in bull markets on the upward portion of cycles the stock may get overpriced. Buy low, sell high. There are always people doing the opposite who will be happy to trade with you.
AMAT stock ended yesterday at , giving it a market capitalization near $14.3 billion. Its 52 week low was $9.70 on October 4, 2011, and its 52 week high was $13.94 on February 17. It pays $0.09 per quarter in dividends, making its yield today 3.1%.
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.
See also the Applied Materials web site.
And keep diversified!
Wednesday, August 22, 2012
TTM Technologies Prepares for Future Mobile Device Demand
Almost every electronic device made contains at least one printed circuit board, or PCB. The leading U.S.-based manufacturer of PCBs is TTM Technologies (TTMI). Post the acquisition of a Hong Kong based PCB manufacturer, TTM is able to serve its customers with quick-turnaround, small quantity prototyping in the U.S. and low-cost mass production in China. Its five largest clients by revenue in Q2 were, in alphabetical order, Apple, Cisco, Ericson, Huawei, and IBM.
Revenues were disappointing in Q2 at $327.4 million, up 9% sequentially from $300.5 million but down 11% from $366.1 million in the year-earlier quarter. The y/y drop reflected a slowdown in the telecommunications sector. This was also reflected in Juniper and ZTE dropping out of the top-five customer list, though they remain major customers.
As one of the world's largest manufacturers of PCBs, TTM has trouble escaping fluctuations in global demand. Despite that, the industry is consolidating as smaller players, particularly in the U.S., are unable to make the capital investments necessary to create PCBs with ever-denser component layouts. In particular smartphones and tablet computers are built on PCBs with multiple layers and high-density interconnections (HDI). In 2011 and this year TTM has been investing significant cash in upgrading its Chinese factories to be able to handle more HDI work.
TTM management is expecting a surge in smartphone and tablet production for Q3 and Q4. Exactly how much of a surge depends on end consumer demand, particularly in Europe, the U.S., and China.
Even at Q2 levels of revenue TTM generated profits and cash. Non-GAAP net income was $13.6 million, down sequentially from $18.8 million and down from $32.9 million year-earlier. EPS was $0.17. EBITDA was $42.3 million, and cash flow from operations was $39 million. Capital expenditures in the quarter were $33 million.
Cash and equivalents balance ended at $248.5 million. TTM has $299.9 million net debt, reflecting the cost of acquiring and upgrading the Chinese factories.
During the quarter revenue from Chinese operations was $195.6 million, while U.S. factories generated $132.3 million.
I like TTMI partly because it is an unglamorous yet essential part of the electronics industry. While there is certainly competition in the PCB industry both in the U.S. and globally, TTMI has a strategic advantage thought it leading edge PCB manufacturing capabilities and volume production capabilities. Smartphone turnover at the consumer level is far quicker that most prior electronic devices, guaranteeing demand for HDI PCBS for the foreseeable future. I don't care who the smartphone, e-book reader, or tablet winners are, as long as they get their PCBs from TTMI.
I see TTMI finishing most of its capital buildout this year. In 2013 it should turn into a cash cow, capable of quickly paying down debt and returning cash to shareholders.
TTMI closed today at $10.20, up 1.39%. It has a 52-week high of $13.75 and low of $8.55. The trailing P/E is 15.94.
Disclaimer: I am long TTMI. I will not trade in the stock for 1 week after this is first published.
The usual risks and uncertainties apply, so keep diversified!
Revenues were disappointing in Q2 at $327.4 million, up 9% sequentially from $300.5 million but down 11% from $366.1 million in the year-earlier quarter. The y/y drop reflected a slowdown in the telecommunications sector. This was also reflected in Juniper and ZTE dropping out of the top-five customer list, though they remain major customers.
As one of the world's largest manufacturers of PCBs, TTM has trouble escaping fluctuations in global demand. Despite that, the industry is consolidating as smaller players, particularly in the U.S., are unable to make the capital investments necessary to create PCBs with ever-denser component layouts. In particular smartphones and tablet computers are built on PCBs with multiple layers and high-density interconnections (HDI). In 2011 and this year TTM has been investing significant cash in upgrading its Chinese factories to be able to handle more HDI work.
TTM management is expecting a surge in smartphone and tablet production for Q3 and Q4. Exactly how much of a surge depends on end consumer demand, particularly in Europe, the U.S., and China.
Even at Q2 levels of revenue TTM generated profits and cash. Non-GAAP net income was $13.6 million, down sequentially from $18.8 million and down from $32.9 million year-earlier. EPS was $0.17. EBITDA was $42.3 million, and cash flow from operations was $39 million. Capital expenditures in the quarter were $33 million.
Cash and equivalents balance ended at $248.5 million. TTM has $299.9 million net debt, reflecting the cost of acquiring and upgrading the Chinese factories.
During the quarter revenue from Chinese operations was $195.6 million, while U.S. factories generated $132.3 million.
I like TTMI partly because it is an unglamorous yet essential part of the electronics industry. While there is certainly competition in the PCB industry both in the U.S. and globally, TTMI has a strategic advantage thought it leading edge PCB manufacturing capabilities and volume production capabilities. Smartphone turnover at the consumer level is far quicker that most prior electronic devices, guaranteeing demand for HDI PCBS for the foreseeable future. I don't care who the smartphone, e-book reader, or tablet winners are, as long as they get their PCBs from TTMI.
I see TTMI finishing most of its capital buildout this year. In 2013 it should turn into a cash cow, capable of quickly paying down debt and returning cash to shareholders.
TTMI closed today at $10.20, up 1.39%. It has a 52-week high of $13.75 and low of $8.55. The trailing P/E is 15.94.
Disclaimer: I am long TTMI. I will not trade in the stock for 1 week after this is first published.
The usual risks and uncertainties apply, so keep diversified!
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.
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!
Wednesday, January 18, 2012
Marvell Technology Group Hones Edge
Marvell Technology Group (MRVL) was started by a young man, Sehat Sutardja, with a belief that he could make a better chip for controlling disk drives. 16 years later, Marvell dominates the market for hard disk drive controller chips, but now receives about half of its revenue from other market segments.
At the CES this year Marvell showed off some products that again put Marvell on the bleeding edge. I'll come back to those after providing some background for those of you not so familiar with the Marvell story.
For investors the last few year with Marvell have been tough. The stock pays no dividend. 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. Today it ended sharply up at $15.12 and representing a market capitalization of $8.8 billion.
These stock price gyrations exaggerated Marvell's changes in revenues and net income. Total 2006 (fiscal 2007) revenue was $2.24 billion, with slightly negative net income. Revenues for 2010 (fiscal year 2011, ending January 29) were up to $3.6 billion, with net income hitting $904 million. This fiscal year 2012 revenues are trending towards $3.45 billion, but with just $690 million net income.
A series of problems and even a catastrophe hid Marvell's growing profit potential in 2011. Aside from general global economic turmoil, one major problem was RIM's failure to recapture lost market share with its newer Blackberry smartphone models. This may or may not be temporary. Marvell makes the processors for some Blackberry models. Marvell did not get a slot in the new RIM PlayBook tablet, which sold poorly. It appears that the failures are largely RIM's, and often software related. The Marvell processors, when used, seem to work well.
The catastrophe was flooding in Thailand, which knocked HDD (hard disk drive) factories out of commission, and so the revenue for HDD controller chips will be low for the current quarter. Factories should be mostly back online by February 1 when Marvell's new fiscal year begins.
Meanwhile the main good news has been the rapid ramping of sales of Marvell-processor based 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). Thus while brand-happy Chinese are dying (almost literally) to get iPhones, the middle-class masses are buying Android based smartphones that run on a new high-speed, invented-in-China protocol, TD. The ramp in revenue from this in calendar 2012 will be substantial, and the baseline should be noted in the Q4 report due in early March.
Which brings us back to CES (and leaves out Marvell's leading enterprise-grade Wi-Fi and wired internet switch chips). I can only hit highlights, so many products were introduced.
Foremost, Google chose Marvell's ARMADA 1500 HD Media System-on-Chip (SoC) for the next generation of Google TV. While there is no guarantee that Google TV will become a mass market product, it does much to validate the hundreds of millions of dollars Marvell has invested in research and development for ARMADA and related technologies. ARMADA is ARM-based and contains many of the same technologies used with smartphones and tablets. Google has worked closely with NVIDIA, Qualcomm and other ARM-based chip designers; this is a clear sign Marvell is also in the inner circle. The ARMADA chip series has been adopted by OEMs for a wide range of consumer and business appliance applications. See also ARMADA and PXA application processors.
Plug computers are a Marvell invention: inexpensive, small but powerful computers that plug directly into electric sockets and can act as local servers. SMILE plugs are designed to connect a classroom of up to 60 students and complement the One Laptop per Child program and Marvell ARMADA based low cost, low power tablet computers. This is mainly for developing nations, but given funding shortages should be considered by U.S. schools as well.
In storage, much has been said about replacing hard drives with SSDs, and PCs with Flash-based tablets. Change has come slowly. Marvell already leads in SSD controller chips. Now it introduced a chip that attached through PCIe, an existing, faster port than the standard SATA disk port. Everyone agrees this will be popular. Alternately another chip allows for an SSD and hard drive to function together better to lower response times while keeping bulk storage costs low.
Consumer home connectivity and automation were addressed by several products. New models of Avastar wireless chips make it easier for all sorts of devices to connect, including Internet phones and video surveillance. Lighting with LEDs was specifically addressed with new, automation-ready chips. The Smart Energy Platform, a combination of a wireless microcontroller and management software, is aimed at lowering price points for energy-conscious appliances in the home.
Except for Google, OEMs will make their own announcements as branded products become available this year.
I will wait on management's Q4 fiscal 2012 in early March before trying to estimate directionality for the new year. Technology is rapidly evolving. More individual devices mean more information needs to be stored in the cloud, requiring in turn more HDD storage and connectivity. All these trends favor Marvell, but competitors will be gunning for the same revenue and profits.
What do I think would most enhance shareholder value? A dividend. As of last quarter Marvell had 2.4 billion in cash, no debt, and cash flow of $262 million. Marvell has used its cash mainly for stock buy backs, and is likely to continue to do so.
Disclaimer: I am long Marvell. I seldom trade the stock and won't for a week after this article is published.
Keep diversified!
At the CES this year Marvell showed off some products that again put Marvell on the bleeding edge. I'll come back to those after providing some background for those of you not so familiar with the Marvell story.
For investors the last few year with Marvell have been tough. The stock pays no dividend. 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. Today it ended sharply up at $15.12 and representing a market capitalization of $8.8 billion.
These stock price gyrations exaggerated Marvell's changes in revenues and net income. Total 2006 (fiscal 2007) revenue was $2.24 billion, with slightly negative net income. Revenues for 2010 (fiscal year 2011, ending January 29) were up to $3.6 billion, with net income hitting $904 million. This fiscal year 2012 revenues are trending towards $3.45 billion, but with just $690 million net income.
A series of problems and even a catastrophe hid Marvell's growing profit potential in 2011. Aside from general global economic turmoil, one major problem was RIM's failure to recapture lost market share with its newer Blackberry smartphone models. This may or may not be temporary. Marvell makes the processors for some Blackberry models. Marvell did not get a slot in the new RIM PlayBook tablet, which sold poorly. It appears that the failures are largely RIM's, and often software related. The Marvell processors, when used, seem to work well.
The catastrophe was flooding in Thailand, which knocked HDD (hard disk drive) factories out of commission, and so the revenue for HDD controller chips will be low for the current quarter. Factories should be mostly back online by February 1 when Marvell's new fiscal year begins.
Meanwhile the main good news has been the rapid ramping of sales of Marvell-processor based 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). Thus while brand-happy Chinese are dying (almost literally) to get iPhones, the middle-class masses are buying Android based smartphones that run on a new high-speed, invented-in-China protocol, TD. The ramp in revenue from this in calendar 2012 will be substantial, and the baseline should be noted in the Q4 report due in early March.
Which brings us back to CES (and leaves out Marvell's leading enterprise-grade Wi-Fi and wired internet switch chips). I can only hit highlights, so many products were introduced.
Foremost, Google chose Marvell's ARMADA 1500 HD Media System-on-Chip (SoC) for the next generation of Google TV. While there is no guarantee that Google TV will become a mass market product, it does much to validate the hundreds of millions of dollars Marvell has invested in research and development for ARMADA and related technologies. ARMADA is ARM-based and contains many of the same technologies used with smartphones and tablets. Google has worked closely with NVIDIA, Qualcomm and other ARM-based chip designers; this is a clear sign Marvell is also in the inner circle. The ARMADA chip series has been adopted by OEMs for a wide range of consumer and business appliance applications. See also ARMADA and PXA application processors.
Plug computers are a Marvell invention: inexpensive, small but powerful computers that plug directly into electric sockets and can act as local servers. SMILE plugs are designed to connect a classroom of up to 60 students and complement the One Laptop per Child program and Marvell ARMADA based low cost, low power tablet computers. This is mainly for developing nations, but given funding shortages should be considered by U.S. schools as well.
In storage, much has been said about replacing hard drives with SSDs, and PCs with Flash-based tablets. Change has come slowly. Marvell already leads in SSD controller chips. Now it introduced a chip that attached through PCIe, an existing, faster port than the standard SATA disk port. Everyone agrees this will be popular. Alternately another chip allows for an SSD and hard drive to function together better to lower response times while keeping bulk storage costs low.
Consumer home connectivity and automation were addressed by several products. New models of Avastar wireless chips make it easier for all sorts of devices to connect, including Internet phones and video surveillance. Lighting with LEDs was specifically addressed with new, automation-ready chips. The Smart Energy Platform, a combination of a wireless microcontroller and management software, is aimed at lowering price points for energy-conscious appliances in the home.
Except for Google, OEMs will make their own announcements as branded products become available this year.
I will wait on management's Q4 fiscal 2012 in early March before trying to estimate directionality for the new year. Technology is rapidly evolving. More individual devices mean more information needs to be stored in the cloud, requiring in turn more HDD storage and connectivity. All these trends favor Marvell, but competitors will be gunning for the same revenue and profits.
What do I think would most enhance shareholder value? A dividend. As of last quarter Marvell had 2.4 billion in cash, no debt, and cash flow of $262 million. Marvell has used its cash mainly for stock buy backs, and is likely to continue to do so.
Disclaimer: I am long Marvell. I seldom trade the stock and won't for a week after this article is published.
Keep diversified!
Friday, December 9, 2011
Applied Materials See Cycle Bottom
Applied Materials (AMAT), the semiconductor capital equipment maker, had a very difficult fourth quarter of fiscal 2011 ending October 30th. The stock is trading trading today around $11.20 per share, less than 8 times earnings and not that much above its 52 week low of $9.70 touched on October 4.
Yet revenue for the fiscal year set a record. Applied Materials and other semiconductor equipment makers tend to be very cyclical because demand for new equipment is only strong when semiconductor end use is ramping. It looked like calendar 2011 would continue to be part of a strong up cycle that started in 2010, but global economic turmoil and weak consumer electronics end demand has made chip makers and the foundries that serve fabless chip makers reluctant to increase capacity.
Sales continue because even during slow periods there are advantages to moving to new process technologies that put more transistors on any given area of chip surface. Applied Materials also derives considerable revenue from related services. Its services division contributed $629 million in revenue in the quarter.
Total Q4 revenue was $2.18 billion, down 22% sequentially from $2.79 billion and down 25% from $2.89 billion in the year-earlier quarter. GAAP net income was $456 million, down 4% sequentially from $476 million and down 3% from $468 million year-earlier. GAP EPS (earnings per share) were $0.34, down 6% sequentially from $0.36 and down 3% from $0.35 year-earlier.
Non-GAAP net income was $271 million, down sequentially from $467 million and also down from $476 million year-earlier. EPS $0.21. The vastly lower non-GAAP than GAAP earnings were mostly due to a $203 adjustment to the prior-year's income tax filings.
Despite the poor quarter, cash flow from operations was near $700, or about $425 million excluding the income tax refund. Cash and equivalents were over $7 billion.
The stock pays a dividend of $8 per quarter per share. Management reiterated that they are committed to increasing the dividend, but stock buy backs are the preferred method of returning profits to shareholders. The acquisition of Varian Semiconductor will put a temporary crimp in cash, but is a good long-term move.
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.
Applied Materials management has had decades of experience with these cycles. They expect the first half of their fiscal year 2012 to be difficult. In particular Q1 fiscal 2012 (ending January 30th) guidance was for revenues down sequentially another 5% to 15%. However, they believe they are already past the bottom of the order cycle. Because we are talking about capital equipment, when the order cycle starts trending upward it can be six months before actual revenues start trending back up.
Flash and mobile processor capacity utilization are already high, so any further increase in demand should generate equipment orders. However, RAM capacity is plentiful, so we probably won't see a big uptick in revenues until demand catches up to capacity in that segment, probably later in 2012.
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 provides.
For more details about Q4 results, including questions by analysts, see my Applied Materials Q4 2011 Analyst Call summary.
Disclaimer: I have a long position in Applied Materials (AMAT), with a long term view. I have no plans to change my position anytime soon.
See also: www.appliedmaterials.com
And keep diversified!
Yet revenue for the fiscal year set a record. Applied Materials and other semiconductor equipment makers tend to be very cyclical because demand for new equipment is only strong when semiconductor end use is ramping. It looked like calendar 2011 would continue to be part of a strong up cycle that started in 2010, but global economic turmoil and weak consumer electronics end demand has made chip makers and the foundries that serve fabless chip makers reluctant to increase capacity.
Sales continue because even during slow periods there are advantages to moving to new process technologies that put more transistors on any given area of chip surface. Applied Materials also derives considerable revenue from related services. Its services division contributed $629 million in revenue in the quarter.
Total Q4 revenue was $2.18 billion, down 22% sequentially from $2.79 billion and down 25% from $2.89 billion in the year-earlier quarter. GAAP net income was $456 million, down 4% sequentially from $476 million and down 3% from $468 million year-earlier. GAP EPS (earnings per share) were $0.34, down 6% sequentially from $0.36 and down 3% from $0.35 year-earlier.
Non-GAAP net income was $271 million, down sequentially from $467 million and also down from $476 million year-earlier. EPS $0.21. The vastly lower non-GAAP than GAAP earnings were mostly due to a $203 adjustment to the prior-year's income tax filings.
Despite the poor quarter, cash flow from operations was near $700, or about $425 million excluding the income tax refund. Cash and equivalents were over $7 billion.
The stock pays a dividend of $8 per quarter per share. Management reiterated that they are committed to increasing the dividend, but stock buy backs are the preferred method of returning profits to shareholders. The acquisition of Varian Semiconductor will put a temporary crimp in cash, but is a good long-term move.
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.
Applied Materials management has had decades of experience with these cycles. They expect the first half of their fiscal year 2012 to be difficult. In particular Q1 fiscal 2012 (ending January 30th) guidance was for revenues down sequentially another 5% to 15%. However, they believe they are already past the bottom of the order cycle. Because we are talking about capital equipment, when the order cycle starts trending upward it can be six months before actual revenues start trending back up.
Flash and mobile processor capacity utilization are already high, so any further increase in demand should generate equipment orders. However, RAM capacity is plentiful, so we probably won't see a big uptick in revenues until demand catches up to capacity in that segment, probably later in 2012.
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 provides.
For more details about Q4 results, including questions by analysts, see my Applied Materials Q4 2011 Analyst Call summary.
Disclaimer: I have a long position in Applied Materials (AMAT), with a long term view. I have no plans to change my position anytime soon.
See also: www.appliedmaterials.com
And keep diversified!
Monday, December 5, 2011
NVIDIA Takes Up ARMs
Back in February I warned that "at $25.48 [per share], you might want to consider that it could take NVIDIA [NVDA] a couple of years of outstanding growth to justify this price."
Maybe it is just the stock market and macroeconomic turmoil, but NVDA closed today at $15.48.
What I think about the pricing of a stock is only loosely linked to what I think of a company. As to engineering and execution, I have long believed NVIDIA is one of the best technology companies in the world. As the long-term leader in computer graphics chips (GPUs), however, it is now at a crossroads where the old rules no longer seem to apply. It is a time of both tremendous opportunity and tremendous danger, which makes predicting future profit streams mainly guesswork.
NVIDIA reported fiscal Q3 results and held its analyst conference call on November 10, 2011. Note the quarter ended October 30, so its not a calendar quarter and chips going into consumer products for the holidays pretty much had to be out the door by the end of the quarter. Q4, ending January 30th, is historically a slower quarter for NVIDIA. Note also that rivals AMD and Intel had quarters ending September 30.
Revenues were $1.07 billion, up 5% sequentially from $1.02 billion and up 26% from $840 million in the year-earlier quarter. Net income was $178.3 million, up 18% sequentially from $151.6 million and up 110% from $84.9 million year-earlier. EPS (earnings per share) were $0.29, up 16% sequentially from $0.25 and up 93% from $0.15 year-earlier.
That is pretty strong growth over the past year. However, from a licensing deal and litigation settlement with Intel, NVIDIA got roughly $60 million in royalties it did not get a year earlier (the royalties run about another 5 years). That had some impact on revenue and a huge impact on net income and EPS. It is real money, but it did not come from chips sales.
At this point NVIDIA has two games going. One is in its classic discrete GPU chips, which are now also used as math and application acceleration co-processors. Its only real rival in that market is AMD.
The other is combining its graphics engine with ARM chip designs for mobile devices. That results in a chip called Tegra. The first version was interesting but did not generate much revenue. Tegra II sold a lot better, and has powered a number of smartphones and tablets. Tegra III, or Kal-El, became available in the quarter, so a few devices are available now and it will be widely available in 2012. NVIDIA management did not break out Tegra revenue for the quarter.
The NVIDIA vision is not just to dominate the smart phone and tablet markets. Future versions of Tegra are supposed to be powerful enough to go into notebooks, desktops, and even servers.
The problem with being in the ARM market is that anyone can license the ARM design. Graphics and cell phone connectivity chips and designs are available as well. NVIDIA seems tight with Google, but any ARM-based design can run the Android software.
Competitors each have some advantages. Apple, of course, is the perceived frontrunner. There is no guarantee that the iPhone is ultimately going to be defeated by Android-based phones or less likely competitors.
When it comes to ARM based chips for tablets and phones, each competitor brings some serious advantages to the court. Qualcomm has far more extensive experience in cell phone chips than NVIDIA does; so does Texas Instruments. Among a host of other contenders, Marvell (MRVL) should be noted, since they generate a lot of cash each quarter and have a lead in China, a much bigger market to fight over than the U.S. market. Then there are the Koreans, and Japanese, and numerous small innovators.
Another problem for NVIDIA is the lack of a x86 CPU chip design. AMD and Intel both are incorporating graphics into their base designs, eliminating the need for NVIDIA's GPU chips for most users. This already appears to be hurting them in the notebook segment. It will take some time and at least a couple of die shrinks before the pure GPU chip dies (except in specialty markets), but that time is coming at a fairly predictable clip.
So far profit margins have been good at the leading edge of smartphone and tablet processors, but at some point pricing could become more competitive.
2012 is likely to be a make or break year for NVIDIA. If they are able to dominate the Android phone market they might become the dominant semiconductor company, a position Intel has had for a couple of decades now. Myself, I am not willing to make that bet, but I'll keep a close watch. However, I do believe NVIDIA's price is now pretty reasonable, everything taken into account.
See also my Q3 NVIDIA analyst call summary.
Disclaimer: I have no position in NVIDIA and will not take a position for at least 2 weeks following the publication date of this article.
Keep Diversified!
Maybe it is just the stock market and macroeconomic turmoil, but NVDA closed today at $15.48.
What I think about the pricing of a stock is only loosely linked to what I think of a company. As to engineering and execution, I have long believed NVIDIA is one of the best technology companies in the world. As the long-term leader in computer graphics chips (GPUs), however, it is now at a crossroads where the old rules no longer seem to apply. It is a time of both tremendous opportunity and tremendous danger, which makes predicting future profit streams mainly guesswork.
NVIDIA reported fiscal Q3 results and held its analyst conference call on November 10, 2011. Note the quarter ended October 30, so its not a calendar quarter and chips going into consumer products for the holidays pretty much had to be out the door by the end of the quarter. Q4, ending January 30th, is historically a slower quarter for NVIDIA. Note also that rivals AMD and Intel had quarters ending September 30.
Revenues were $1.07 billion, up 5% sequentially from $1.02 billion and up 26% from $840 million in the year-earlier quarter. Net income was $178.3 million, up 18% sequentially from $151.6 million and up 110% from $84.9 million year-earlier. EPS (earnings per share) were $0.29, up 16% sequentially from $0.25 and up 93% from $0.15 year-earlier.
That is pretty strong growth over the past year. However, from a licensing deal and litigation settlement with Intel, NVIDIA got roughly $60 million in royalties it did not get a year earlier (the royalties run about another 5 years). That had some impact on revenue and a huge impact on net income and EPS. It is real money, but it did not come from chips sales.
At this point NVIDIA has two games going. One is in its classic discrete GPU chips, which are now also used as math and application acceleration co-processors. Its only real rival in that market is AMD.
The other is combining its graphics engine with ARM chip designs for mobile devices. That results in a chip called Tegra. The first version was interesting but did not generate much revenue. Tegra II sold a lot better, and has powered a number of smartphones and tablets. Tegra III, or Kal-El, became available in the quarter, so a few devices are available now and it will be widely available in 2012. NVIDIA management did not break out Tegra revenue for the quarter.
The NVIDIA vision is not just to dominate the smart phone and tablet markets. Future versions of Tegra are supposed to be powerful enough to go into notebooks, desktops, and even servers.
The problem with being in the ARM market is that anyone can license the ARM design. Graphics and cell phone connectivity chips and designs are available as well. NVIDIA seems tight with Google, but any ARM-based design can run the Android software.
Competitors each have some advantages. Apple, of course, is the perceived frontrunner. There is no guarantee that the iPhone is ultimately going to be defeated by Android-based phones or less likely competitors.
When it comes to ARM based chips for tablets and phones, each competitor brings some serious advantages to the court. Qualcomm has far more extensive experience in cell phone chips than NVIDIA does; so does Texas Instruments. Among a host of other contenders, Marvell (MRVL) should be noted, since they generate a lot of cash each quarter and have a lead in China, a much bigger market to fight over than the U.S. market. Then there are the Koreans, and Japanese, and numerous small innovators.
Another problem for NVIDIA is the lack of a x86 CPU chip design. AMD and Intel both are incorporating graphics into their base designs, eliminating the need for NVIDIA's GPU chips for most users. This already appears to be hurting them in the notebook segment. It will take some time and at least a couple of die shrinks before the pure GPU chip dies (except in specialty markets), but that time is coming at a fairly predictable clip.
So far profit margins have been good at the leading edge of smartphone and tablet processors, but at some point pricing could become more competitive.
2012 is likely to be a make or break year for NVIDIA. If they are able to dominate the Android phone market they might become the dominant semiconductor company, a position Intel has had for a couple of decades now. Myself, I am not willing to make that bet, but I'll keep a close watch. However, I do believe NVIDIA's price is now pretty reasonable, everything taken into account.
See also my Q3 NVIDIA analyst call summary.
Disclaimer: I have no position in NVIDIA and will not take a position for at least 2 weeks following the publication date of this article.
Keep Diversified!
Monday, November 14, 2011
TTM Technologies (TTMI) Sees E-Reader PCB demand
TTM Technologies (TTMI) makes PCBs (printed circuit boards) for the communications, industrial, medical, and consumer electronics industries. It owns plants in the U.S. and in China. The U.S. facilities generally do small runs of PCBs for prototypes and specialized, low volume products. Chinese facilities do larger PCB runs for computer and communications equipment, cell phones including smartphones, and more recently tablet computers and e-readers.
Q3 2011 was a no-growth quarter. Revenues were $358.3 million, down 2% sequentially from $366.1 million, and about flat against $356.8 million in the year-earlier quarter. GAAP net income was $24.5 million, up sequentially from negative $20.3 million, but down 16% from $29.1 million year-earlier. Q2 profits were hit by a one-time non-cash accounting charge for writing off some obsolete factory equipment. So, switching to a non-GAAP view of net income, we have: Q3 2011 $31.0 million, Q2 2011 $32.9 million, Q3 2010 $35.0 million.
While growth has been stagnant this year, profits have remained healthy. Annualizing Q3 non-GAAP EPS gives a P/E ratio is about 7.2 at today's closing price of $11.01 per share.
Because TTM has a broad array of end customers and a global presense, to a large extent its fortunes reflect those of the electronics industry as a whole. For that industry Q3 was a slow quarter in a slow year. Everyone is worried about end demand because of the economy. I believe TTM's ability to make a profit in this environment means it is a reliable cash generator. If the electronics industry picks up again in 2012, there is upside potential.
In the Q3 conference call on November 2nd management noted that some orders were pushed out past the end of the quarter. Cash flow from operations was $42.6 million. The cash and equivalents balance ended at $207.7 million. Long term debt ended at $366.7 million. TTM made capital expenditures of $28.3 million, mostly for new high-end manufacturing equipment in China.
It is notable that debt still exceeds cash. The debt was used to build and expand plants in Asia. So far it has been a good use of debt, but it does create some risk if there is an extreme economic slowdown. Paying down debt has been a priority use for cash.
TTM tracks end markets into 5 segments. For the quarter aerospace and defense was below trend. Cell phones were strong, particularly smartphones. Computers and related were weak and are expected to continue to be weak in Q4. The medical and industrial segment was flat. Networking and communciations, which accounted for 38% of revenue, is expected to be soft in Q4. There is also an "other" category, which saw growth because they are producing the PCBs for a new e-reader for an unspecified customer.
The top five customers were: Apple, Cisco, Ericsson, Huawei and ZTE. Only one of them accounted for more than 10% of revenue.
I believe that as the global electronics industry recovers TTM will continue to pay off debt and eventually be better positioned to use cash for buy-backs and dividends.
Disclaimer: I am long TTMI. I have no plan to change my position this quarter.
Keep diversified!
Q3 2011 was a no-growth quarter. Revenues were $358.3 million, down 2% sequentially from $366.1 million, and about flat against $356.8 million in the year-earlier quarter. GAAP net income was $24.5 million, up sequentially from negative $20.3 million, but down 16% from $29.1 million year-earlier. Q2 profits were hit by a one-time non-cash accounting charge for writing off some obsolete factory equipment. So, switching to a non-GAAP view of net income, we have: Q3 2011 $31.0 million, Q2 2011 $32.9 million, Q3 2010 $35.0 million.
While growth has been stagnant this year, profits have remained healthy. Annualizing Q3 non-GAAP EPS gives a P/E ratio is about 7.2 at today's closing price of $11.01 per share.
Because TTM has a broad array of end customers and a global presense, to a large extent its fortunes reflect those of the electronics industry as a whole. For that industry Q3 was a slow quarter in a slow year. Everyone is worried about end demand because of the economy. I believe TTM's ability to make a profit in this environment means it is a reliable cash generator. If the electronics industry picks up again in 2012, there is upside potential.
In the Q3 conference call on November 2nd management noted that some orders were pushed out past the end of the quarter. Cash flow from operations was $42.6 million. The cash and equivalents balance ended at $207.7 million. Long term debt ended at $366.7 million. TTM made capital expenditures of $28.3 million, mostly for new high-end manufacturing equipment in China.
It is notable that debt still exceeds cash. The debt was used to build and expand plants in Asia. So far it has been a good use of debt, but it does create some risk if there is an extreme economic slowdown. Paying down debt has been a priority use for cash.
TTM tracks end markets into 5 segments. For the quarter aerospace and defense was below trend. Cell phones were strong, particularly smartphones. Computers and related were weak and are expected to continue to be weak in Q4. The medical and industrial segment was flat. Networking and communciations, which accounted for 38% of revenue, is expected to be soft in Q4. There is also an "other" category, which saw growth because they are producing the PCBs for a new e-reader for an unspecified customer.
The top five customers were: Apple, Cisco, Ericsson, Huawei and ZTE. Only one of them accounted for more than 10% of revenue.
I believe that as the global electronics industry recovers TTM will continue to pay off debt and eventually be better positioned to use cash for buy-backs and dividends.
Disclaimer: I am long TTMI. I have no plan to change my position this quarter.
Keep diversified!
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!
Thursday, August 11, 2011
TTM Technologies (TTMI) Expands to Meet Demand
TTM Technologies (TTMI) makes PCBs (printed circuit boards) for the communications, industrial, medical, and consumer electronics industries. It is a U.S. corporation, but in 2010 bought a Chinese PCB manufacturer. The U.S. facilieis generally do small runs of PCBs for prototypes and specialized, low volume products. Chinese facilities largely do larger PCB runs for computer and communications equipment, cell phones including smartphones, and more recently tablet computers.
TTM is a value plus growth proposition, but let's start with the caveats. The Chinese segment, formerly Meadville, had borrowed substantial amounts of money to buy capital equipment to serve the rapidly expanding market. TTM took over those debts. As of the latest quarter reported, long term debt was $432.3 million. On the other hand the cash and equivalents balance was $235.9 million, giving net debt of about $196 million. Cash flow from operations was $67 million, but capital equipment is still being purchased to meet demand (and replace obsolete equipment). Capital expense was $44 million. So it will take some time to pay off the debt, which fortunately carries a low interest rate.
Given the debt, a serious slowdown in demand for PCBs would set back TTM, but with so much cash on hand they should be able to get through a slow period better than most businesses, including much of their PCB competitors.
On the positive side TTM has a great model within its industry. It is one of the largest players in the world. It also specializes in the very highest end PCB technologies, the ones needed to create ever-smaller, more powerful devices. This involves, for instance, drilling holes for component connections with lasers, from computer-generated designs. Increasingly prototypes will be engineered and tested in the U.S. When production runs are large, they can be done in China. Clients like this model, and TTM is likely to pick up more clients over time.
While there are a few big players at the global scale, much of the PCB competition in the U.S. consists of much smaller businesses that can't afford to buy the capital equipment necessary to make high tech PCBs. One notable competitor at the high end in the U.S. is DDi Corporation.
In the last year, one of little growth in the U.S. economy, TTM revenues for Q2 2011were $366.1 million, up 18% from $310.2 million in the year-earlier quarter. Non-GAAP EPS was $0.40 per share. When you analyse TTM be sure to note that revenues are somewhat seasonal.
Aside from the recent general stock market turmoil, TTM had a stock price drop based on a one-time non-cash charge of $48.1 million for obsolete equipment. Also, management honestly does not know what the effect of the current macroeconomic uncertainty will be on end demand. However, if demand slacks they can stop adding capital equipment, so they have plenty of a cash flow cushion in that scenario.
I have been observing TTM's management for years now. They appear to be honest, smart, and hard-working. I take notes on their analyst conference calls, which you can find at TTM Technologies analyst call summaries. If you go back to 2008 you can see how they managed their way through the last recession.
Keep diversified!
TTM is a value plus growth proposition, but let's start with the caveats. The Chinese segment, formerly Meadville, had borrowed substantial amounts of money to buy capital equipment to serve the rapidly expanding market. TTM took over those debts. As of the latest quarter reported, long term debt was $432.3 million. On the other hand the cash and equivalents balance was $235.9 million, giving net debt of about $196 million. Cash flow from operations was $67 million, but capital equipment is still being purchased to meet demand (and replace obsolete equipment). Capital expense was $44 million. So it will take some time to pay off the debt, which fortunately carries a low interest rate.
Given the debt, a serious slowdown in demand for PCBs would set back TTM, but with so much cash on hand they should be able to get through a slow period better than most businesses, including much of their PCB competitors.
On the positive side TTM has a great model within its industry. It is one of the largest players in the world. It also specializes in the very highest end PCB technologies, the ones needed to create ever-smaller, more powerful devices. This involves, for instance, drilling holes for component connections with lasers, from computer-generated designs. Increasingly prototypes will be engineered and tested in the U.S. When production runs are large, they can be done in China. Clients like this model, and TTM is likely to pick up more clients over time.
While there are a few big players at the global scale, much of the PCB competition in the U.S. consists of much smaller businesses that can't afford to buy the capital equipment necessary to make high tech PCBs. One notable competitor at the high end in the U.S. is DDi Corporation.
In the last year, one of little growth in the U.S. economy, TTM revenues for Q2 2011were $366.1 million, up 18% from $310.2 million in the year-earlier quarter. Non-GAAP EPS was $0.40 per share. When you analyse TTM be sure to note that revenues are somewhat seasonal.
Aside from the recent general stock market turmoil, TTM had a stock price drop based on a one-time non-cash charge of $48.1 million for obsolete equipment. Also, management honestly does not know what the effect of the current macroeconomic uncertainty will be on end demand. However, if demand slacks they can stop adding capital equipment, so they have plenty of a cash flow cushion in that scenario.
I have been observing TTM's management for years now. They appear to be honest, smart, and hard-working. I take notes on their analyst conference calls, which you can find at TTM Technologies analyst call summaries. If you go back to 2008 you can see how they managed their way through the last recession.
Keep diversified!
Friday, June 3, 2011
AMD Fusion Upside
AMD (Advanced Micro Devices) recently revealed that it has been unable to meet the demand for its first Fusion processors. They call these APUs, for Advanced Processing Units, to indicate that each chip includes both a CPU and a GPU (graphics processing unit). Introduced in late 2010, the first APU variety was designed to bring low cost, high quality graphic capabilities to inexpensive notebook computers. Computer makers (HP, Lenovo, Sony, etc.) embraced these first Fusion chips as a big improvement on the Atom chip from Intel, famous for underwhelming netbooks (sub-standard but very portable notebooks).
Does that mean the sun is finally rising on AMD investors (that includes me)? Intel remains not only holding most market share, but dominating the most profitable segments of the market, including chips for server computers. On the other hand Intel has its own problems, pressed from below by ARM architecture based chips in smartphones and tablets, while failing to be able to deliver the graphic quality consumers now expect. To make a workable business or consumer computer manufacturers need to add an AMD Radeon or NVIDIA GPU to the system.
Intel itself is not exactly the darling of Wall Street anymore. Today Intel is trading at 10 times last year's non-GAAP earnings per share. No tech bubble there. AMD is trading at 8.5 times last year's EPS. Intel is wading in cash; AMD has a substantial amount of debt. If you wanted to buy a computer processor manufacturing company, Intel would be the more obvious choice.
To break out of its trading range AMD, at the very least, would have to start generating substantially more earnings than it has lately. What are the chances of that, when the sector itself appears to be in trouble, and Intel has a tradition of crushing AMD whenever Intel's market share starts to slip?
It really does come down to Fusion. Intel is scared of Fusion, so it is using considerable resources to catch up in graphics technology. Intel is now paying NVIDIA to use its intellectual property, which probably includes graphics designs. That should start to show up in Intel chips in 2012. My guesstimate is that by 2013 Intel will have closed the graphics gap. So AMD's future profits, and the value of its stock, highly depends on how much market share it can pick up in 2011 and 2012, and at what kind of profit margins.
It came as a surprise to me, and probably to everyone, that AMD became supply-constrained in Q1. I think the problem is that the first Fusion chips were on the 40 nm process, which is where most graphics chips are at this year. Both NVIDIA and AMD reported supply constraints at 40 nm in early 2010. AMD failed to anticipate demand for its new chips, and so did not book enough capacity in advance. AMD now contracts for fabrication of its chips, whereas Intel has its own fabs. On the April 21 AMD analyst call for Q1 2011, AMD executives talked about insuring future fabrication capacity, so that must be about the Fusion shortfall.
Right now AMD is about to launch its second round of Fusion processors, which will be more powerful, but also will require more power. So they will be for higher-end notebooks and for desktop CPUs. The will be on the more-advanced 33 nm process. That may have its own issues, but it won't run into the 40 nm roadblock. Later this year AMD will also introduce its Bulldozer CPUs, which are not part of Fusion (they don't have graphics processing on the die).
The upside for AMD investors depends on continued support from manufacturers (HP, Dell, Lenovo, etc.) and from retailers like Best Buy. The near-universal sentiment now is that consumers get more for their money with AMD based computer systems, particularly when it comes to graphics capabilities. Thus AMD should pick up market share this year in the sub-$1000 categories of notebook and desktop computers.
One commonly told story is that consumers are moving to tablets, so sales of PCs and notebook computers are about to come to a grinding halt. The actual evidence for that is scant. In the U.S., prior to the introduction of tablet computers (they've been around for nearly a decade, but did not become popular until Apple marketed a more attractive, if less powerful, version), everyone pretty much had at least one computer, either a desktop or a notebook, maybe a netbook. Most moderate to heavy users had a PC at work and a desktop and either a notebook or netbook for personal use. As the new thing, tablets are going to sell, and with budgets tight, they are going to cause purchases of notebooks and desktops to be delayed. But most tablet computer users have found they are not really a replacement for their more powerful cousins. So, the question becomes: what do they upgrade next? Are they going to get an even newer tablet, or are they going to refresh the old desktop or notebook computer?
You know what the gadget guys will have. A good, reliable, high-performance desktop, a good notebook computer for working away from home, a tablet to be cool and consume video, and a smartphone.
AMD is not going to compete in the smartphone space, but their Fusion chips are beginning to appear in Windows-based tablets. Their stand-alone graphics chips are now used by Apple for its desktop computers.
Also, this is a global market. The same low-cost high-graphics capability that appeals to U.S. consumers will appeal even more to first-time PC buyers in India, China, Brazil, and developing countries.
A recovery of market share in the server GPU market would also benefit AMD, but I'll leave that topic to a later story.
Any reasonable investor not already holding AMD should probably take a show-me the market share and EPS gains attitude. On the other hand, there is a good chance that 2011 will be a year when those of us who already hold AMD will see the upside of Fusion. Maybe as early as the report on Q2, if production was ramped for the new Fusion products.
See also:AMD home page
Monday, May 30, 2011
Marvell Technology Sees Higher Q2
Marvell Technology (MRVL) makes semiconductor chips for hard disk drives, cell phones, networking and telecommunications. Recently the going has been rough for Marvell stockholders, as reflected in its stock price. After a high of $22.87 in April 2010, the stock hit a 52-week low at $13.87. After the Marvell analyst conference call, on Friday the stock jumped 11%, from the Thursday May 26 close of $14.56 to the Friday close of $16.17. So is that it for Marvell, or are we starting a new ramp?
Marvell's management described the results for Q1 fiscal 2012 ending April 30, 2011 as a low point in their cycle. Partly this was the usual seasonality as consumer end products build in Q2s and Q3s. But it also reflected poor sales to RIM for Blackberry models, a slow growth rate in the hard disk drive market, and slow new product ramps. In each case Marvell makes one or more mixed digital and analog chips for the end products.
Revenue for Q1 was $802.4 million, down 11% sequentially from $900.5 million and also down 6% from $855.6 million in the year-earlier quarter. Revenue was at the very low end of guidance. I think the stock had been shorted on the theory they would actually miss guidance, and they did miss Street estimates.
However, Marvell reported that things are already picking up in Q2 and the long-promised Marvell Inflection Point may finally make an appearance in Q3. Q2 revenues are now expected between $870 to $910 million, with non-GAAP EPS of about $0.37, which would support a stock price far higher than Friday's close.
The change in fortunes has several factors. Marvell is leading (or certainly one of the top 2 leaders) in the Solid State Drive market, which is ramping pretty nicely as prices drop and people see the advantages of SSDs. It is also a leader in chips for high-end networks. In the smartphone market we know the competition is intense, but Marvell providing the core chips for the Chinese TD-SCDMA standard based OPhone market. While OPhones started to be available in 2010, they are expected to ramp quickly as 2011 progresses. We are talking potentially 600 million OPhone customers, which makes the fight over American market share seem like a global side show.
Marvell is also sampling solutions for the LTE smartphone market. Again, expect fierce competition, but Marvell should win a share of slots in 2012.
I own Marvell stock and understand the risk of competing against the talented people at other semiconductor companies.
See also:
http://www.marvell.com/
My May 26, 2011 Marvell (MRVL) analyst call summary
My March 2011 Marvell (MRVL) analyst call summary
Saturday, May 28, 2011
Applied Materials Rocks Q2
Applied Materials, the semiconductor capital equipment maker, reported stronger than expected revenues and earnings for its second quarter of fiscal 2011 ending May1. The stock traded down on Friday based on management's cautious guidance for the remainder of 2011.
Prior guidance had been for Q2 sequentially flat to up 5% from Q1 revenues of $2.69 billion, with non-GAAP EPS of $0.34 to $0.38. Instead revenues came in at $2.86 billion, up 7% sequentially from $2.69 billion, and up 25% from $2.30 billion in the year-earlier quarter. Non-GAAP EPS was at the high end of guidance, $0.38.
Prior guidance on full fiscal 2011 revenues was over $11 billion and non-GAAP EPS was over $1.50. Management now said that is the high end of a range that depends on demand in Q3 and Q4.
The dividend is now 8 cents per quarter, 32 cents per year. There is a lot of room for growth given EPS, but acquiring Varian Semiconductor will eat up much of Applied's $4.6 billion cash and investment balance. Once Varian is digested the dividend could start growing again. At Friday's closing stock price the current dividend is a healthy 2.35%.
Within the semiconductor equipment and servicing industry Applied Materials serves a variety of segments. Variations in the demand cycles in segments and sub-segments account both for the stellar quarter and for the cautious guidance. The solar power division set a record, but revenues exceeded new orders as there are questions about end demand in Europe. Orders exceeded sales in the largest segment, silicon semiconductor manufacturing equipment, but the orders are mostly in new process modes (40 nm and under), driven by mobile end market demand. Large panel display capacity is plentiful, so most orders are to make small panels for smartphones and tablets.
My own view is that there is mainly upside. The Varian Semiconductor acquisition will make Applied very close to a full service provider for foundries. Despite uneveness, we are still in a global economic ramp with billions of consumers set to acquire smartphones in the next 3 years (600 million in China alone). Everyone wants devices that do more with less power, and the only way to get that is with new semiconductor manufacturing capabilities. It does not matter who wins the smartphone race; everyone needs the kind of semiconductor solutions Applied Materials provides.
For more details about Q2 results, including questions by analysts, see my Applied Materials Q2 2011 Analyst Call summary.
I own Applied Materials (AMAT) stock. See also the Applied Materials web site.
See also: http://www.appliedmaterials.com/
Saturday, May 14, 2011
NVIDIA Explains Smartphone and GPU Strategies
The NVIDIA (NVDA) analyst call on Thursday was characterized by a relatively short presentation and long question and answer session. Analysts pressed a variety of concerns while management explained their view of the technology space and their strategy for increasing revenue and profits. [See also call details at Nvidia Q1 fiscal 2012 analyst call news summary.]
The explaining was necessary because revenues were $962.0 million, up 8.5% sequentially from $886.4 million, but down 4% from $1.002 billion in the year-earlier quarter. GAAP net income was $135.2 million, down 21% sequentially from $171.7 million, and down 2% from $137.6 million year-earlier. GAAP EPS (earnings per share) were $0.22, down 24% sequentially from $0.29, and down 4% from $0.23 year-earlier. Those numbers include a $40 million payment from Intel for intellectual property (really, to keep NVIDIA a strong ally against AMD); take that out, and the y/y comparisons look worse, while Q1 last year was nothing to shout about either.
So what are the issues? NVIDIA is exiting the motherboard chip set business, which originally became necessary because of a dispute with Intel. AMD has cut heavily into NVIDIA's former dominance in the discrete GPU (graphics) chip and card business. NVIDIA's supercomputer graphics business actually shrank a bit, though management argued it would expand down the road.
That leaves the savior of the moment, Tegra, a chip that runs cell phones and tablets. The newest one is Tegra 2, which everyone admits is a big improvement over the original Tegra. Tegra chips generated $122 million in the quarter, which is a lot of money, until you compare it with losses from the humble chip set business, or the bulk of NVIDIA's revenue, or smartphone chip revenue of some competitors.
NVIDIA claims they are going to take market share in the discrete graphics chips for notebook computers segment. Their only real competitor, AMD, says the same thing. But the good thing about discrete GPU chip competition is there are just those two players. The competition between them is intense, but at least it is somewhat predictable.
In smartphones and tablet computers, however, almost everyone is licensing the core processor design from ARM and adding graphics, Wi-Fi, and cellular modems as best they can. The competition is multifold. Qualcomm was the pack leader two years ago, and still outsells NVIDIA heavily. TI is very competive and believes it now is closer to the heart of Google (maker of the Android smartphone operating system) than NVIDIA, 2010's sweetheart. Apple makes its own ARM based processor for the iPhone and iPad. If they all disappeared there would be Marvell, which dominates the hard drive chip sector and has slots in a number of phones, including the new OPhones in China. There are other players in Korea, Japan, and China. Then there are the non-ARM entries, mainly for tablets but eventually for smartphones, from AMD and Intel.
And anyone can license the intellectual property to make a smartphone chip. In other words, there could be more players in 2012, not less.
Which is too many players. Consolidation will take place, probaby around 2013 when smartphones have completed replacing the bulk of not-so-smart cell phones. While the competition so far has been on technology, with points for speed, usability, and low-power consumption, at some point price will become an important issue. Profit margins will be squeezed.
I certainly believe NVIDIA is as competitive as any of the other companies I named. But there are going to be losers. There will have to be losers. It is next to impossible to predict who they will be.
Given that, investors might want to think about going lower down the food chain, to the companies that make semiconductor manufacturing equipment like Applied Materials or printed circuit boards for smartphones like TTM Technologies.
Of the companies named above, I currently own stock in Applied Materials, TTM Technologies, Marvell, and AMD. In the past I owned stock in NVIDIA.
See also NVIDIA
Keep diversified!
The explaining was necessary because revenues were $962.0 million, up 8.5% sequentially from $886.4 million, but down 4% from $1.002 billion in the year-earlier quarter. GAAP net income was $135.2 million, down 21% sequentially from $171.7 million, and down 2% from $137.6 million year-earlier. GAAP EPS (earnings per share) were $0.22, down 24% sequentially from $0.29, and down 4% from $0.23 year-earlier. Those numbers include a $40 million payment from Intel for intellectual property (really, to keep NVIDIA a strong ally against AMD); take that out, and the y/y comparisons look worse, while Q1 last year was nothing to shout about either.
So what are the issues? NVIDIA is exiting the motherboard chip set business, which originally became necessary because of a dispute with Intel. AMD has cut heavily into NVIDIA's former dominance in the discrete GPU (graphics) chip and card business. NVIDIA's supercomputer graphics business actually shrank a bit, though management argued it would expand down the road.
That leaves the savior of the moment, Tegra, a chip that runs cell phones and tablets. The newest one is Tegra 2, which everyone admits is a big improvement over the original Tegra. Tegra chips generated $122 million in the quarter, which is a lot of money, until you compare it with losses from the humble chip set business, or the bulk of NVIDIA's revenue, or smartphone chip revenue of some competitors.
NVIDIA claims they are going to take market share in the discrete graphics chips for notebook computers segment. Their only real competitor, AMD, says the same thing. But the good thing about discrete GPU chip competition is there are just those two players. The competition between them is intense, but at least it is somewhat predictable.
In smartphones and tablet computers, however, almost everyone is licensing the core processor design from ARM and adding graphics, Wi-Fi, and cellular modems as best they can. The competition is multifold. Qualcomm was the pack leader two years ago, and still outsells NVIDIA heavily. TI is very competive and believes it now is closer to the heart of Google (maker of the Android smartphone operating system) than NVIDIA, 2010's sweetheart. Apple makes its own ARM based processor for the iPhone and iPad. If they all disappeared there would be Marvell, which dominates the hard drive chip sector and has slots in a number of phones, including the new OPhones in China. There are other players in Korea, Japan, and China. Then there are the non-ARM entries, mainly for tablets but eventually for smartphones, from AMD and Intel.
And anyone can license the intellectual property to make a smartphone chip. In other words, there could be more players in 2012, not less.
Which is too many players. Consolidation will take place, probaby around 2013 when smartphones have completed replacing the bulk of not-so-smart cell phones. While the competition so far has been on technology, with points for speed, usability, and low-power consumption, at some point price will become an important issue. Profit margins will be squeezed.
I certainly believe NVIDIA is as competitive as any of the other companies I named. But there are going to be losers. There will have to be losers. It is next to impossible to predict who they will be.
Given that, investors might want to think about going lower down the food chain, to the companies that make semiconductor manufacturing equipment like Applied Materials or printed circuit boards for smartphones like TTM Technologies.
Of the companies named above, I currently own stock in Applied Materials, TTM Technologies, Marvell, and AMD. In the past I owned stock in NVIDIA.
See also NVIDIA
Keep diversified!
Wednesday, May 11, 2011
TTM Technologies (TTMI) Grows with Smartphones, Tablets
TTM Technologies (TTMI) makes the printed circuit boards (PCBs) that are the backbones of electronic devices; it is the largest PCB manufacturer based in the United States. Last year it acquired a Hong Kong based company with multiple manufacturing facilities in China. Most U.S. PCB manufacturing is now for prototypes and relatively small runs for low-volume end products. By designing and prototyping in the U.S. and doing full-scale runs in China, TTM has created a lot of utility for U.S. based technology companies. It has been running at near capacity, while continuing to expand capacity.
One of the main drivers of increased capacity is tablet computing devices, following the leading edge created by smartphones. This is not just a matter of increased volume. All the electronics have been shrunk, meaning the PCBs themselves involve a higher level of technology than they did a decade ago. This has been good for TTM since many smaller players have been unable to invest in the newest technologies, and TTM gets better profit margins on the higher-technology boards.
With the Chinese acquisition TTM's business has become somewhat more seasonal. The U.S. business was (and still will be) affected by summer vacations and December holidays. Since it is mainly about prototyping and low volume runs for medical, industrial, and aerospace devices, it was not much affected by the Q3 bulge seen in many consumer oriented electronics companies. In China, however, there is a slowdown during the Lunar New Year, and since much of the work is for consumer smartphones, computers, and tablets, there will by Q3 bulges.
Last Thursday, reporting for Q1 2011 ending March 31, 2011, results were solid once seasonality is accounted for. Revenues were $342.8 million, down 8% sequentially from $373.4 million, but up 148% from $138.2 million year-earlier. GAAP Net income was $29.1 million, down 20% sequentially from $36.5 million, but up by a factor of 6 from $4.5 million year-earlier. GAAP EPS (earnings per share) were $0.33, down 20% sequentially from $0.41, but up 230% from $0.10 year-earlier.
Guidance was for Q2 revenue between $350 and $370 million. GAAP EPS $0.28 to $0.37; non-GAAP EPS $0.36 to $0.45.
TTM has a strong cash position at $202 million, and is rapidly paying off its $321 million debt. It is also investing in more equipment in China to keep up with the pace of producing PCBs for iPhones, iPads, and other smartphones and
I own TTM stock, and believe it was a good strategic acquisition for my portfolio (I bought it cheap during the recession). I did not want to try to pick a winner among Apple, Google & partners, etc., for the smartphone/tablet computer revolution. But companies like Applied Materials (AMAD) and TTM provide the infrastructure for the revolution, no matter who wins what market share. There are some exceptions, of course, and plenty of competition in the PCB and semiconductor capital equipment spaces, but so far the strategy has worked pretty well.
For more details on TTM's recent performance, see my TTM Technologies Q1 2011 analyst call summary. One notable fact from management answering analyst questions was that labor costs, per hour, have increased 18% recently. This does not put much pressure on TTM margins, since the factories are highly automated. It does indicate that China is moving to a internal-consumption economy. The rich there are buying all the iPhones Apple can supply, and for middle management and the the working class there are now OPhone type smartphones available at a far lower cost.
See also TTM Technologies
One of the main drivers of increased capacity is tablet computing devices, following the leading edge created by smartphones. This is not just a matter of increased volume. All the electronics have been shrunk, meaning the PCBs themselves involve a higher level of technology than they did a decade ago. This has been good for TTM since many smaller players have been unable to invest in the newest technologies, and TTM gets better profit margins on the higher-technology boards.
With the Chinese acquisition TTM's business has become somewhat more seasonal. The U.S. business was (and still will be) affected by summer vacations and December holidays. Since it is mainly about prototyping and low volume runs for medical, industrial, and aerospace devices, it was not much affected by the Q3 bulge seen in many consumer oriented electronics companies. In China, however, there is a slowdown during the Lunar New Year, and since much of the work is for consumer smartphones, computers, and tablets, there will by Q3 bulges.
Last Thursday, reporting for Q1 2011 ending March 31, 2011, results were solid once seasonality is accounted for. Revenues were $342.8 million, down 8% sequentially from $373.4 million, but up 148% from $138.2 million year-earlier. GAAP Net income was $29.1 million, down 20% sequentially from $36.5 million, but up by a factor of 6 from $4.5 million year-earlier. GAAP EPS (earnings per share) were $0.33, down 20% sequentially from $0.41, but up 230% from $0.10 year-earlier.
Guidance was for Q2 revenue between $350 and $370 million. GAAP EPS $0.28 to $0.37; non-GAAP EPS $0.36 to $0.45.
TTM has a strong cash position at $202 million, and is rapidly paying off its $321 million debt. It is also investing in more equipment in China to keep up with the pace of producing PCBs for iPhones, iPads, and other smartphones and
I own TTM stock, and believe it was a good strategic acquisition for my portfolio (I bought it cheap during the recession). I did not want to try to pick a winner among Apple, Google & partners, etc., for the smartphone/tablet computer revolution. But companies like Applied Materials (AMAD) and TTM provide the infrastructure for the revolution, no matter who wins what market share. There are some exceptions, of course, and plenty of competition in the PCB and semiconductor capital equipment spaces, but so far the strategy has worked pretty well.
For more details on TTM's recent performance, see my TTM Technologies Q1 2011 analyst call summary. One notable fact from management answering analyst questions was that labor costs, per hour, have increased 18% recently. This does not put much pressure on TTM margins, since the factories are highly automated. It does indicate that China is moving to a internal-consumption economy. The rich there are buying all the iPhones Apple can supply, and for middle management and the the working class there are now OPhone type smartphones available at a far lower cost.
See also TTM Technologies
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