Dot Hill Ups Guidance, Announces Quantum Parntership

Dot Hill's stock price shot up today on a series of announcements about partners and future guidance, as well as holding its annual analyst day. The last 5 years have been rocky for HILL despite gradual acquisitions of new customers since in lost Sun. In 2012 Dot Hill was developing products that it said would attract new customers [See Dot Hill's 2013 Hopes]. Today was delivery day.

New guidance was given for Q1 2013, Q2 2013, full year-2013, and (tentatively) 2014.

A recap of Q4 2012 provides perspective: revenues were $44.1 million, down 6% from year earlier. Non-GAAP earnings per share (EPS) were negative $0.03, down from $0.00 year-earlier. Not a great quarter.

Prior guidance for Q1 2013 was revenue between $43 and $46 million, with a non-GAAP EPS loss between $0.02 and $0.04.

Today's guidance for Q1 (which should be pretty close, given that the quarter is over) is revenue of $44 to $45 million, narrowing but not increasing the range, with EPS as low as negative $0.02 and as high as $0.00.

$0.00 non-GAAP EPS may not seem like much to get excited about, but that includes research and development costs for new products as well as startup manufacturing costs in costs-of-goods sold. With higher revenue and flat or lower R & D costs going forward, we get to the prettier picture for the future:

Q2 2013 guidance is for revenues between $47 and $53 million, up about 12% sequentially. Non-GAAP EPS estimated range is negative $0.01 to $0.02 per share.

For the full year 2013 revenues are estimated between $205 and $227 million. Non-GAAP EPS should be positive $0.02 to $0.10. That would be great if it happens.

For the full year 2014 revenue estimates are between $231 and $301 million and non-GAAP EPS could be $0.11 to $0.40.

While such long-term predictions should be taken with a healthy spoonful of the salt of cynicism, consider the value of HILL stock if it hit the $0.40 per share top of guidance in 2014. That would likely more than restore investor confidence, so let's give a PE ratio of 15. That would bring the stock to $6 per share. As I write it is trading at $1.53. There are a lot of hoops to jump between $1.53 and $6.00, but there are some reasons to not entirely discount the top range of estimates.

The world of data storage has been evolving rapidly. HILL does not sell disk drives. It sells storage systems for small, medium, and increasingly enterprise businesses. It used to make storage systems for Sun Microsystems until Sun brought a competitor in house. It then picked up HP and NetApp as OEM clients, plus some smaller players and system integrators. Dot Hill dumped NetApp because the margins in the deal was bad, and that made its revenues slump. But all the while it used its substantial cash to develop better systems. Now we are seeing the payoff.

The big announcement today is that Quantum is selling systems, its new QX family, supplied by Dot Hill. A rep from Quantum, at today's Hill analyst conference, reviewed how Quantum has been addressing the rapidly evolving data storage market and how Hill's new products fit into the picture. The amount of data stored in the world is climbing rapidly, largely to accommodate video, full time data feeds, and the mining of big data. Verticals with particular needs to expand their disk drive farms rapidly include entertainment, government, life sciences, and resource extraction (geology). In entertainment many company are rapidly expanding their incoming video feeds, and need all that video instantly for editing and pushing out to consumers. Clients need cheap, reliable storage, and that is what Dot Hill has been developing and is now shipping.

HP, which has provided the bulk of HILL revenues these last few years, has committed to continue using Hill as a supplier of their lower-end, mass market products, the MSA line, the market share leader in its class. While no specifics were mentioned, HP indicated a product refresh is on the horizon. HP has noted Dot Hill systems value, reliability, and interoperability (ability to work with most hardware and software).

The new data storage workloads that are driving the adoption of Hills (patented) technologies are described as a randomized sequential workload. In other words, a lot of data has to be quickly available, and it is hard to predict which data will be needed. However, in a VMWare environment, the new Dot Hill systems were shown to be rock solid reliable and capable of learning about the data demands so as to increase spread over time. With SSD still expensive and tape still much cheaper (using less electricity) than disk drives, the ability to load balance between various media has become a necessity, and Dot Hill does that well.

Also notable is that Dot Hill has greatly increased its addressable market by moving to the higher-end of the data storage market. It is also bringing high-end capabilities to the midrange and even lower range business markets, which makes all of its offering attractive at their price points.

It is an exciting time to be an owner of Dot Hill, but the usual cautions apply: data storage is highly competitive, margins could be better, and the global economy is always an issue.

So keep diversified! And congratulations if you already own HILL stock.

Disclaimer: I own HILL stock. I won't trade HILL stock for at least 3 days from the first publication of this article.

See also:

My Dot Hill main page.

My Q4 2012 Dot Hill conference notes

and of course www.dothill.com

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.

Opportunities in Data Storage: Seagate, Western Digital, and Marvell

Because I own stock in Marvell Technologies (MRVL), which gets about half of its revenue from sales of HDD controller chips, I read a detailed interview with Steve Luczo, the CEO of Seagate Technology (STX) [See Seagate CEO Interview at Forbes]. Seagate is one of only 2 remaining major hard disk drive (HDD) manufacturers. The other is Western Digital (WDC). While I already agreed with the overall HDD story, Steve made some very good points that I had not thought of or heard before.

In addition to MRVL and STX, I'll be discussing semiconductor manufacturing capital equipment makers Applied Materials (AMAT) and KLA (KLAC) as well as Dot Hill (HILL), EMC, AMD, and Intel (INTC).

Let's tackle the Thailand flooding aftermath before taking on long-term trends. Industry-wide, quarterly unit sales were projected to be 180 million before the floods hit. Instead Q4 2011 production was 120 million units. Q1 production rose to 140 million units, Q2 expectations are 160 million units, and Q3 should be back to 180 million. If there are still shortages, Q4 could see between 180 and 200 million units produced.

In addition, as the year progresses industry average drive capacity will increase as new, high-capacity equipment replaces older machines damaged by the flooding.

For makers of parts that go into the drives, that is good news. It is also good news for PC and server manufacturers (and suppliers like AMD and Intel (INTC)) that have been constrained by HDD shortages. In Marvell's case, they report quarters with a one-month lag and also ship pre-production. That means that Marvell is currently in a quarter that runs February to April. April chips will go in May HDDs, so run rates should be pretty good by then. It is possible that Marvell's July quarter will be back to record HDD controller chip shipments.

Overall expectations are that once we get past Q1, this should be a banner year for almost everyone in the storage industry, with good margins (because shortages will persist) and unit shipments improving markedly in the second half.

But aren't Solid State Drives (SSD's) going to replace HDDs, which are not used in tablet computers, smartphones, or possibly in thin and light notebook models? Should investors continue to flee the entire HDD industry? Why else, except investor flight, would Seagate have a forward P/E of just 4.1?

Luczo does not think so. The anti-HDD argument that has been around investor circles for some time is that as SSDs become mass-market, and technologies shrink, SSD capacities will go up, prices will come down, and HDD demand will decline in short order.

The typical counter argument is that data storage requirements are based on the expanding storage needs of the world. Storage is a volume business, so while SSDs may provide speed, HDDs need to continue to improve both capacity and units shipped just to keep up with expanding volumes of data, particularly video data. For every iPad there has to be disk capacity in the cloud somewhere, because iPads mostly need to connect to data stored on disks in the cloud to be useful.

The stronger argument is this: semiconductor fabs cannot be built fast enough to make the SSD replacing HDD dream come true, not anytime soon, if ever.

A new semiconductor fab (factory) is a very expensive investment at $10 billion. If the chips produced by the fabs (in this case mainly memory chips) are not expensive enough, building a new fab is a money loser. In effect the prices for chips are set by the capital required to build the fabs.

It is much, much cheaper to add data storage production capacity, on a byte basis, by building new HDD factories than by building new semi fabs. The same data capacity expansion could be achieved with less than $1 billion in capital, Thus HDDs will have a considerable price advantage for the reasonably visible future.

Technology investors have learned that when a technology is dying, you might as well exit. Some companies role well from one technology generation to another, as Intel has. But the point here is that the HDD industry is not dying. The SSD industry can grow rapidly for an entire decade and the HDD industry will still be far larger at the end of the decade than it is today, and than the SSD industry will be. Of course many companies will play both sides of the SSD/HDD game, and hybrid drives are already available.

But suppose Luczo is wrong in the sense that chip manufacturers do decide to invest rapidly in fabs to drive as much SSD expansion as quickly as possible. I still think Seagate is undervalued in that scenario, but there would be other winners. The obvious ones are the semiconductor equipment manufacturers whose machines make the silicon wafers and create the tiny transistors that make up Flash memory. There are still a number of companies in this category, but as capital requirements increase this segment is consolidating as well. Two big players that should gain from SSD fab accelerations are Applied Materials (which recently acquired Varian), and KLA-Tencor. Both currently have attractive P/Es that do not reflect any future boom in the SSD industry.

Meanwhile data storage equipment makers from giants like EMC and HP to specialists like Dot Hill should continue to do well, since the systems they manufacture can accommodate both SSDs and HDDs, depending on the needs of the end customers.

Disclaimer: I own MRVL, AMAT, and HILL. I do not own STX, WDS, KLA, INTC, or EMC. I won't trade in any of these stocks for 3 days after this article is published.

Keep diversified!

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!

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