Dot Hill (Nasdaq: HILL), a data storage equipment manufacturer, had a very interesting analyst call reporting Q1 2011 results last Thursday. Until December NetApp had been Dot Hill's second largest customer. But profit margins for that particular relationship for Dot Hill were negative, and negotitions with NetApp were not fruitfull. So Dot Hill dropped NetApp.
The result was a pretty steep drop in revenue to $49.2 million, down 25% sequentially from $65.4 million in Q4, and down 18% from $60.0 million year-earlier. Q1 is typically the slowest quarter for Dot Hill. However, the profit hit was much less. GAAP Net income was negative $1.2 million, down sequentially from $0.3 million, but up from negative $6.4 million year-earlier. Non-GAAP net income was $0.1 million for EPS of $0.00, better than I expected.
HP, which buys storage arrays from Dot Hill and resells them under its own brand, was responsible for 76% of Hill's revenues in the quarter. Sales to HP grew 20% y/y. But Dot Hill knows the danger of manufacturing mainly for one customer. They used to make equipment almost exclusively for Sun Microsystems. That business disappeared several years ago.
In fact Hill already supplies to several other major players including Lenovo and Samsung. But in none of these cases is it the exclusive storage supplier. It also sells through a large number of smaller systems integrators, but in the quarter that only amounted to $1.2 million in revenue.
There are three relatively large opportunies for Dot Hill going forward, aside from just selling more through HP. LSI's storage division Engenio is being acquired by NetApp. Some of LSI's Engenio clients are NetApp competitors. Some have begun discussions with Hill about switching to Hill as a first or second source. The second opportunity is selling more software with its hardware solutions, which brings higher profit margins. The third is the industry is consolidating, and Hill is an attractive acquisition candidate, although no discussions have been announced.
Q2 is looking better than Q1, partly due to orders late in Q1 that did not ship until Q2. Revenues for Q2 are projected at between $49 and $53 million, with non-GAAP net income and EPS expected in the vicinity of break-even. When Hill takes on new major OEM clients it does customization for them, which incurs increased engineering costs.
It is notable that GAAP gross margins increased from 13.5% year-earlier to 24.6% in Q1. This was partly from dropping NetApp, partly from a higher-margin mix in the rest of the business, and partly from increasing sales of storage management software.
For a greater level of detail see my Dot Hill Q1 2011 analyst call summary.
I own Dot Hill stock.
See also www.dothill.com
Showing posts with label storage. Show all posts
Showing posts with label storage. Show all posts
Tuesday, May 10, 2011
Sunday, May 9, 2010
Dot Hill Scrambles for Profits
Dot Hill (symbol: HILL) disappointed me with their Q1, 2010 results, but the analyst conference on May 6, 2010 reminded me that the data storage manufacturing company is about investing for future profits. So it still fits with my core strategy.
It was not that horrible of a quarter, it is just that, unlike my chip companies MCHP and AMD, revenues did not show a big sequential ramp. They were down 4% from Q4, which is still better than the usual seasonal downturn.
Revenues were $60.0 million, down 4% sequentially from $62.6, but up 11% from $53.9 million in Q1 2009.
GAAP net income was negative $6.4 million, a sequential drop from negative $5.0 million, and also worse than negative $3.3 million year-earlier. GAAP EPS was negative $0.12, down sequentially from negative $0.11, and down from negative $0.07 year-earlier.
The question investors, current and potential, have is: how is Dot Hill going to make a profit?
To understand how that might happen, you need to understand why HILL is not making a profit now. It makes data storage systems for businesses. These are typically standalone arrays of hard disks that attach to a network. This is a low margin business; it is fairly well-understood, there is plenty of competition, and it is hard to differentiate your products without raising your costs and cutting into your already slim margins. HILL acts as a supplier to OEMs, the main ones being HP and NetApp. It used to supply Sun, but even before Sun was absorbed by Oracle (the Blob of technology companies), Sun bought its own storage supply company and discontinued HILL.
If gross margins [revenues less the actual costs of making the goods] are low, a company can become profitable by keeping its operating (administrative and R&D) costs low while ramping up the volume of sales.
The other strategy is to increase gross margins by changing the nature of your product. Dot Hill management is determined to do both. Cost cutting is well-understood, so I will focus on how they plan to increase margins.
Data storage systems need to be managed, and while some management capabilities need to be built into the hardware, the management software can be sold separately. Software has much higher gross margins than hardware (but beware that software development costs go into the operating costs).
Since Dot Hill is already selling hardware, if it can get the end customers to buy its software packages as well, its hardware prices remain competitive, but it generates some high-margin revenues. In addition to its internal development efforts, HILL bought Cloverleaf Communications in January. The software is now for sale. It even works with non-Dot Hill products.
So when the report on the June quarter, the most important indicator will be attach rates. How much software revenue have they been able to attach to the hardware revenue? Of course it takes time to get this sort of program going, but management should be able to give an indicator of the trend for the June quarter.
Dot Hill is also introducing its 3000 series, which they say brings many features that in the past were only available on much more expensive storage systems. Customers have the choise of implementing the features or not; they pay to implement them. Hopefully the HP and NetApp salespeople will be pushing the customers to choose to pay to implement a full feature set.
HILL is working hard to be less dependent on HP and NetApp. By the end of Q1 they had doubled the number of small resellers they work with to 118. In Q4 the total HP + NetApp share of revenues was 84%, but in Q1 it declined to 80%. Because of the nature of the business, profit margins are better when HILL sells through smaller resellers. That is an encouraging trend.
Other major OEMs are negotiating with Dot Hill to become resellers of the 3000 system. This is a mixed blessing. It should be good in the long run if a third major OEM joins the team. But in the short run it means another ramp in R&D spending to ensure compatibility and the specific feature set the OEM will mandate. Which would mean more delays in getting to profitability.
Dot Hill is a risky stock because demand could soften, or OEMs could drop out or demand even lower margins. That would be ugly for a company that is already bleeding money.
On the other hand the up side potential is pretty good, and the stock is dirt cheap (it closed Friday at $1.38, giving it a market capitalization of $75 million). Dot Hill has a relatively clean balance sheet with about $50 million in cash on hand.
I own Dot Hill stock. For more detailed Q1 data see my Dot Hill Q1 2010 analyst conference summary.
See also Dot Hill www.dothill.com
And Keep Diversified!
It was not that horrible of a quarter, it is just that, unlike my chip companies MCHP and AMD, revenues did not show a big sequential ramp. They were down 4% from Q4, which is still better than the usual seasonal downturn.
Revenues were $60.0 million, down 4% sequentially from $62.6, but up 11% from $53.9 million in Q1 2009.
GAAP net income was negative $6.4 million, a sequential drop from negative $5.0 million, and also worse than negative $3.3 million year-earlier. GAAP EPS was negative $0.12, down sequentially from negative $0.11, and down from negative $0.07 year-earlier.
The question investors, current and potential, have is: how is Dot Hill going to make a profit?
To understand how that might happen, you need to understand why HILL is not making a profit now. It makes data storage systems for businesses. These are typically standalone arrays of hard disks that attach to a network. This is a low margin business; it is fairly well-understood, there is plenty of competition, and it is hard to differentiate your products without raising your costs and cutting into your already slim margins. HILL acts as a supplier to OEMs, the main ones being HP and NetApp. It used to supply Sun, but even before Sun was absorbed by Oracle (the Blob of technology companies), Sun bought its own storage supply company and discontinued HILL.
If gross margins [revenues less the actual costs of making the goods] are low, a company can become profitable by keeping its operating (administrative and R&D) costs low while ramping up the volume of sales.
The other strategy is to increase gross margins by changing the nature of your product. Dot Hill management is determined to do both. Cost cutting is well-understood, so I will focus on how they plan to increase margins.
Data storage systems need to be managed, and while some management capabilities need to be built into the hardware, the management software can be sold separately. Software has much higher gross margins than hardware (but beware that software development costs go into the operating costs).
Since Dot Hill is already selling hardware, if it can get the end customers to buy its software packages as well, its hardware prices remain competitive, but it generates some high-margin revenues. In addition to its internal development efforts, HILL bought Cloverleaf Communications in January. The software is now for sale. It even works with non-Dot Hill products.
So when the report on the June quarter, the most important indicator will be attach rates. How much software revenue have they been able to attach to the hardware revenue? Of course it takes time to get this sort of program going, but management should be able to give an indicator of the trend for the June quarter.
Dot Hill is also introducing its 3000 series, which they say brings many features that in the past were only available on much more expensive storage systems. Customers have the choise of implementing the features or not; they pay to implement them. Hopefully the HP and NetApp salespeople will be pushing the customers to choose to pay to implement a full feature set.
HILL is working hard to be less dependent on HP and NetApp. By the end of Q1 they had doubled the number of small resellers they work with to 118. In Q4 the total HP + NetApp share of revenues was 84%, but in Q1 it declined to 80%. Because of the nature of the business, profit margins are better when HILL sells through smaller resellers. That is an encouraging trend.
Other major OEMs are negotiating with Dot Hill to become resellers of the 3000 system. This is a mixed blessing. It should be good in the long run if a third major OEM joins the team. But in the short run it means another ramp in R&D spending to ensure compatibility and the specific feature set the OEM will mandate. Which would mean more delays in getting to profitability.
Dot Hill is a risky stock because demand could soften, or OEMs could drop out or demand even lower margins. That would be ugly for a company that is already bleeding money.
On the other hand the up side potential is pretty good, and the stock is dirt cheap (it closed Friday at $1.38, giving it a market capitalization of $75 million). Dot Hill has a relatively clean balance sheet with about $50 million in cash on hand.
I own Dot Hill stock. For more detailed Q1 data see my Dot Hill Q1 2010 analyst conference summary.
See also Dot Hill www.dothill.com
And Keep Diversified!
Sunday, November 9, 2008
Rackable Systems Has Ice Cube Orders
Rackable Systems (RACK) has been talking about its ICE Cube containerized datacenter systems for over a year now. At their analyst conference on November 3, 2008, they announced that an indefinite amount of ICE Cubes will ship in Q4. My take is that if the orders are not cancelled, and if they ship early enough in Q4, Rackable may report revenues from the orders in Q4. This is great news for Rackable investors (which includes me).
We knew from the pre-announcement that Q3 results would be bad, and they were. Revenues were $65.3 million, down 14% sequentially from $76.0 million and down 25% from $87.2 million year-earlier.
On the other hand, even though net income was negative, it improved significantly due to tighter cost controls. Net income was a loss of $6.0 million, a sequential improvement on Q2 loss of $27.9 million, but worse than essentially $0 results year-earlier. EPS was negative $0.20, compared to negative $0.95 in Q2, and $0.00 year-earlier.
Rackable still has a lot of cash and equivalents, ended at $184.6 million, down sequentially from $198.1 million. Most of the reduction, according to management, was to produce the ICE Cube units that will ship this quarter.
Rackable was not able to sell its RapidScale storage division, so that will be written off as a loss. Instead it is partnering with NetApp for storage. You may recall how RapidScale was once lauded as a division that was going to give Rackable a competitive edge and good profit margins once it ramped up. Well, that does not mean closing it down now is not the right thing to do.
The NetApp partnership might work out to be more than it appears. Management says the NetApp people are introducing them to potential new clients. Since NetApp is probably confronted with occasional losses against vendors like HP and Dell that can provide both servers and storage, working with Rackable could prevent them from losing from sales. It is conceivable that the partnership could be quite beneficial for both parties, but I would not bet on it until I saw some actual revenues coming in. Rackable expects the NetApp partnership to start generating revenue in 2009.
They continue to lead with their high-quality, computationally intense, energy efficient technology. Their newest technology is called CloudRack. Obviously they are targeting the cloud computing market.
Rackable's stock is in the dumps, but then again they have not turned in a profitable quarter in some time. They have enough cash to survive a downturn, but so do their principal competitors. So Rackable, while promising, has to be rated as a risky tech stock.
For details on what management said on November 3, see my Summary of the Rackable Systems analyst conference for Q3 2008.
Keep Diversified!
More:
Rackable Systems
We knew from the pre-announcement that Q3 results would be bad, and they were. Revenues were $65.3 million, down 14% sequentially from $76.0 million and down 25% from $87.2 million year-earlier.
On the other hand, even though net income was negative, it improved significantly due to tighter cost controls. Net income was a loss of $6.0 million, a sequential improvement on Q2 loss of $27.9 million, but worse than essentially $0 results year-earlier. EPS was negative $0.20, compared to negative $0.95 in Q2, and $0.00 year-earlier.
Rackable still has a lot of cash and equivalents, ended at $184.6 million, down sequentially from $198.1 million. Most of the reduction, according to management, was to produce the ICE Cube units that will ship this quarter.
Rackable was not able to sell its RapidScale storage division, so that will be written off as a loss. Instead it is partnering with NetApp for storage. You may recall how RapidScale was once lauded as a division that was going to give Rackable a competitive edge and good profit margins once it ramped up. Well, that does not mean closing it down now is not the right thing to do.
The NetApp partnership might work out to be more than it appears. Management says the NetApp people are introducing them to potential new clients. Since NetApp is probably confronted with occasional losses against vendors like HP and Dell that can provide both servers and storage, working with Rackable could prevent them from losing from sales. It is conceivable that the partnership could be quite beneficial for both parties, but I would not bet on it until I saw some actual revenues coming in. Rackable expects the NetApp partnership to start generating revenue in 2009.
They continue to lead with their high-quality, computationally intense, energy efficient technology. Their newest technology is called CloudRack. Obviously they are targeting the cloud computing market.
Rackable's stock is in the dumps, but then again they have not turned in a profitable quarter in some time. They have enough cash to survive a downturn, but so do their principal competitors. So Rackable, while promising, has to be rated as a risky tech stock.
For details on what management said on November 3, see my Summary of the Rackable Systems analyst conference for Q3 2008.
Keep Diversified!
More:
Rackable Systems
Wednesday, August 6, 2008
Dot Hill Accelerates
Dot Hill (HILL) reported on its second quarter today, and it was quite a quarter. The long-promised turn-around has begun with a thundering 34% increase in revenue over the first quarter. See my Dot Hill analyst conference summary for September 6, 2008 to get the gist of what management said about Q2, including its answers to analyst questions.
Be warned, I own some HILL stock because I suspected this was going to happen. The company was in pretty dire straights a couple of years ago. Its stock has been dirt cheap since then, and still is. Management tried a number of initiatives while burning carefully through a pile of cash. The problem was that most of their business was supplying SAN storage products to Sun. First Sun had its well-publicized difficulties, then Sun bought a storage company and so started phasing out Dot Hill products. Adding to diffuculties, Dot Hill settled a patent dispute with rival Crossroads, giving up a substantial amount of cash in the process.
Dot Hill used its cash to support a research and development drive that took a while to pay off. Its improved storage devices first sold to a number of small equipment manufacturers and specialty shops. Then NetApp picked them up in late 2007. But the big driver of Q2 revenues was a partnership with HP, which generated about $23 million in revenues for Hill in Q2. Also a plus, Dot Hills old products are so good that Sun customers continue to buy them, to the tune of about $20 million in revenues for Dot Hill during the quarter. The Sun revenue is ramping down, but revenue from HP, NetApp and smaller vendors is ramping up much more quickly.
Dot Hill still has a ways to go to guarantee it won't become another tech has-been. It lost money on its $71 million in Q2 sales. From my point of view this is okay. The money was used to develop new products and market them. HP had special modifications made to the equipment it bought, which was expensive. Now those expenses should ramp down, although in technology there is always the next product cycle to think of. The key to profitability is decreasing production costs. Part of this happens naturally as the product cycle lengthens and the number of units sold increases. Part of it must be driven by engineering for value.
As I see it, while things can always go wrong, we are looking at a company that will soon have $300 million in annual revenues. With cost reductions there is no reason $30 million in annual net income can't be generated, maybe not in 2009, but certainly in 2010. Give that a modest PE ratio of 15, and you have a company that could have a market capitalization of $450 million within a reasonable time horizon.
What was the market capitalization at the close of trading today? Less than $114 million.
Hill has disappointed investors on a regular basis for a few years. It might disappoint again. But with $62 million in cash, guidance to $73 to $78 million in revenues for Q3, and such a low stock price, I think the upside potential far outweighs the down side.
Note again that I own some Dot Hill stock.
Keep diversified!
More data:
www.dothill.com
Be warned, I own some HILL stock because I suspected this was going to happen. The company was in pretty dire straights a couple of years ago. Its stock has been dirt cheap since then, and still is. Management tried a number of initiatives while burning carefully through a pile of cash. The problem was that most of their business was supplying SAN storage products to Sun. First Sun had its well-publicized difficulties, then Sun bought a storage company and so started phasing out Dot Hill products. Adding to diffuculties, Dot Hill settled a patent dispute with rival Crossroads, giving up a substantial amount of cash in the process.
Dot Hill used its cash to support a research and development drive that took a while to pay off. Its improved storage devices first sold to a number of small equipment manufacturers and specialty shops. Then NetApp picked them up in late 2007. But the big driver of Q2 revenues was a partnership with HP, which generated about $23 million in revenues for Hill in Q2. Also a plus, Dot Hills old products are so good that Sun customers continue to buy them, to the tune of about $20 million in revenues for Dot Hill during the quarter. The Sun revenue is ramping down, but revenue from HP, NetApp and smaller vendors is ramping up much more quickly.
Dot Hill still has a ways to go to guarantee it won't become another tech has-been. It lost money on its $71 million in Q2 sales. From my point of view this is okay. The money was used to develop new products and market them. HP had special modifications made to the equipment it bought, which was expensive. Now those expenses should ramp down, although in technology there is always the next product cycle to think of. The key to profitability is decreasing production costs. Part of this happens naturally as the product cycle lengthens and the number of units sold increases. Part of it must be driven by engineering for value.
As I see it, while things can always go wrong, we are looking at a company that will soon have $300 million in annual revenues. With cost reductions there is no reason $30 million in annual net income can't be generated, maybe not in 2009, but certainly in 2010. Give that a modest PE ratio of 15, and you have a company that could have a market capitalization of $450 million within a reasonable time horizon.
What was the market capitalization at the close of trading today? Less than $114 million.
Hill has disappointed investors on a regular basis for a few years. It might disappoint again. But with $62 million in cash, guidance to $73 to $78 million in revenues for Q3, and such a low stock price, I think the upside potential far outweighs the down side.
Note again that I own some Dot Hill stock.
Keep diversified!
More data:
www.dothill.com
Wednesday, February 13, 2008
Dot Hill Q4 2007
Dot Hill (symbol: HILL) will be releasing its Q4 2007 results and holding its analyst conference on March 16, 2008. You can look at past analyst conference summaries now and then at the March conference summary when it is posted at my Dot Hill main page.
In the meantime management has twice updated their guidance on Q4 results, so we have a pretty good idea what the main numbers will be (they are way better than guidance given in November). Revenue was near $51.5 million, and loss per share will be between $0.11 and $0.14. In Q4 2006 revenues were $59.4 million?
Is that anything to get excited about? This price per share hit a low of $2.12 in December; today it ended at $3.98 per share.
To the extent their is excitement, it is due to the long-term story line for Dot Hill. A few years back it was almost totally dependent on selling its data storage products for SANs to Sun. With Sun in a slump, it was not pretty. But the company had a lot of cash on its balance sheets. It went into cost-reduction mode and started looking for a more diversified customer base. But Sun bought a storage company and started using the acquired technology more and Hill's less. Dot Hill's growth in new customer orders was slower than its decline in Sun orders.
In Q3 2007 Dot Hill reported that 42% of revenue was now from non-Sun customers. Since then it has been announced that HP plans to use Dot Hill products more intensely. More new customers have signed up. And most of the new customers are just beginning to sell Hill products.
Hill had $90.2 million in cash at the end of Q3. We know Q4 sales bounced upwards. If sales go well in 2008 and costs are kept low, $4 a share will be conservative. On the other hand the data storage device arena is very competitive, so at any price Hill is a risk stock.
Disclaimer: keep in mind that I own Dot Hill stock.
Keep diversified.
www.dothill.com
Dot Hill press releases
In the meantime management has twice updated their guidance on Q4 results, so we have a pretty good idea what the main numbers will be (they are way better than guidance given in November). Revenue was near $51.5 million, and loss per share will be between $0.11 and $0.14. In Q4 2006 revenues were $59.4 million?
Is that anything to get excited about? This price per share hit a low of $2.12 in December; today it ended at $3.98 per share.
To the extent their is excitement, it is due to the long-term story line for Dot Hill. A few years back it was almost totally dependent on selling its data storage products for SANs to Sun. With Sun in a slump, it was not pretty. But the company had a lot of cash on its balance sheets. It went into cost-reduction mode and started looking for a more diversified customer base. But Sun bought a storage company and started using the acquired technology more and Hill's less. Dot Hill's growth in new customer orders was slower than its decline in Sun orders.
In Q3 2007 Dot Hill reported that 42% of revenue was now from non-Sun customers. Since then it has been announced that HP plans to use Dot Hill products more intensely. More new customers have signed up. And most of the new customers are just beginning to sell Hill products.
Hill had $90.2 million in cash at the end of Q3. We know Q4 sales bounced upwards. If sales go well in 2008 and costs are kept low, $4 a share will be conservative. On the other hand the data storage device arena is very competitive, so at any price Hill is a risk stock.
Disclaimer: keep in mind that I own Dot Hill stock.
Keep diversified.
www.dothill.com
Dot Hill press releases
Wednesday, October 3, 2007
Dot Hill Withers in Q3
I have been watching SAN (Storage Area Network) equipment maker Dot Hill (HILL) closely lately, hoping Q3 would be the day this company showed traction. The stock is cheap, the company has quite a bit of cash compared to its market capitalization value, but this only will work out for investors if revenues and earnings start a steady increase. (I don't hold Dot Hill, but have in the past).
Hopes were dashed today by a preliminary Q3 earnings report. Instead of getting traction, revenues were down quite a bit. The estimate is $43 to $46 million, a plunge of at least $10 million from Q2, and at least $4 million below the low end of the guidance given by management in August.
The only bright bit of data is that cash may have increased slightly. The company has been taking steps to cut costs.
Dot Hill has been trying to get away from being a parts source for a single customer, Sun. It has made good progress on that score in the past year. It is not clear whether the Q3 shortfall is due to lack of orders from Sun, or a gap in orders from one of the new customers. In any case sales to new customers cannot be ramping very quickly when we see this kind of result. Dot Hill has some impressive new technology, but competition in the data storage industry is fierce.
For more information see my Dot Hill page, which has links to my notes on prior Dot Hill analyst conferences.
Hopes were dashed today by a preliminary Q3 earnings report. Instead of getting traction, revenues were down quite a bit. The estimate is $43 to $46 million, a plunge of at least $10 million from Q2, and at least $4 million below the low end of the guidance given by management in August.
The only bright bit of data is that cash may have increased slightly. The company has been taking steps to cut costs.
Dot Hill has been trying to get away from being a parts source for a single customer, Sun. It has made good progress on that score in the past year. It is not clear whether the Q3 shortfall is due to lack of orders from Sun, or a gap in orders from one of the new customers. In any case sales to new customers cannot be ramping very quickly when we see this kind of result. Dot Hill has some impressive new technology, but competition in the data storage industry is fierce.
For more information see my Dot Hill page, which has links to my notes on prior Dot Hill analyst conferences.
Friday, August 24, 2007
Marvell's Huge Research and Development Budget
Marvell (MRVL) reported fiscal Q2 2008 earnings yesterday (August 23, 2007) with a GAAP loss of X or x per share. The stock lost 10% of its value in trading today. I believe some traders were hoping for a short-term pop because of rumors that a hedge fund had taken a position and that Marvell produced one part for Apple's iPhone cell phone. They overlooked the elephant in the room: Marvell's R&D (research and development) spending for the quarter. In fact the short-term sell-side analysts probably see the R&D budget as a negative. Here I'll focus on the future and the R&D expenses. For more on the past, see my notes on the Marvell analyst conference.
Marvell spent an astonishing $236 million on R&D in the quarter. Its revenues for the quarter were $657 million. So R&D was 36% of its budget. Compare that with, say Intel, which spent 30% of its revenues on R&D last quarter; or a more direct competitor, Linear Technology, which spent $47 million on R&D, or 17.5% of revenue.
It looks to me like Marvell is girding for war. They are not going to try to become the world's sole supplier of semiconductor chips, but they are going after a lot of cutting-edge, high volume, high margin business.
Some results are already rolling in. In May management guided Q2 revenues to $645 million; instead they came in at $657. Part of the differential probably came from chips that went in iPhones, but you have to remember that Marvell is already a big company. In fact it has pretty well made its intention clear: it is going after the 3G high-end phone market, not just Apple's tiny fraction of it. Last year it bought Intel's communication processor business (which this year is resulting in $36 million per quarter non-cash write offs of amortization costs, which really skews GAAP EPS downward). It was already developing its own communications processors. It also has some of the best analog radio technology in the industry. What it is doing is combining all of these functions - digital signal processing, general digital processing, and cell radio signal transmission with Wi-Fi and bluetooth. That is a killer combo. It does not mean there is no competition, or that any cell phone maker is required to adopt it. But those who do not may find themselves, in a year or two, at a severe competitive disadvantage.
Most companies that have done so well in making chips for hard-drive storage would see taking on the entire cell phone semiconductor industry as challenge enough. But not Marvell. It is also going after some other big hunks of business.
One is video processors for large screen TVs. Again, Marvell came to this game late. Again, the already have a foot in the door with some advanced silicon that makes for better pictures. Again, they are planning to solve a bunch of unsolved problems and deliver a solution that will be irresistible to the TV makers.
In parallel with that they are working on the DVD/ HD-DVD end of things as well.
Oh, and not satisfied with mere dominance in the hard drive industry, they have sunk a bunch of effort into R&D to make even better drive chips; they are confident they can gain revenues in this area.
Then there are their advance in LAN technology. And power management. And printer technology. I'm probably missing something, but that seems to cover the basics.
After a year in which Marvell and many other semiconductor makers got hit by inventory adjustments, slowed demand growth, and pricing pressure, Marvell's intense pursuit of new markets may be bearing fruit. Management believes Q3 revenues may come in around $710 million, up $53 million sequentially from Q2. I'll be very impressed if that happens.
More important, if they are right about design wins they are getting this year leading to significant new revenues in calendar 2008, I can't wait to see what Marvell looks like a year from now.
As to pricing the stock, you'll just have to choose your theory. I don't believe in buying stocks with high PE ratios, and right now if you use the GAAP numbers the PE ratio of Marvell is infinite. If you use non-GAAP numbers, it is pretty high. On the other hand I understand the value of R&D. Another company, trying to please short term investors, could have simply cut back its R&D budget in Q2 and shown some very impressive results. But as a long-term investor I'd rather have the company with the bad short term results, especially when its R&D arm has a record of paying off, as Marvell's has.
Right now I already own as much Marvell stock as my portfolio model allows, so I won't be buying more anytime soon. Even holding it at this level involves risk: just because Marvell is spending money on R&D does not mean it can sell any resulting technology. But that is a risk I can live with.
Marvell spent an astonishing $236 million on R&D in the quarter. Its revenues for the quarter were $657 million. So R&D was 36% of its budget. Compare that with, say Intel, which spent 30% of its revenues on R&D last quarter; or a more direct competitor, Linear Technology, which spent $47 million on R&D, or 17.5% of revenue.
It looks to me like Marvell is girding for war. They are not going to try to become the world's sole supplier of semiconductor chips, but they are going after a lot of cutting-edge, high volume, high margin business.
Some results are already rolling in. In May management guided Q2 revenues to $645 million; instead they came in at $657. Part of the differential probably came from chips that went in iPhones, but you have to remember that Marvell is already a big company. In fact it has pretty well made its intention clear: it is going after the 3G high-end phone market, not just Apple's tiny fraction of it. Last year it bought Intel's communication processor business (which this year is resulting in $36 million per quarter non-cash write offs of amortization costs, which really skews GAAP EPS downward). It was already developing its own communications processors. It also has some of the best analog radio technology in the industry. What it is doing is combining all of these functions - digital signal processing, general digital processing, and cell radio signal transmission with Wi-Fi and bluetooth. That is a killer combo. It does not mean there is no competition, or that any cell phone maker is required to adopt it. But those who do not may find themselves, in a year or two, at a severe competitive disadvantage.
Most companies that have done so well in making chips for hard-drive storage would see taking on the entire cell phone semiconductor industry as challenge enough. But not Marvell. It is also going after some other big hunks of business.
One is video processors for large screen TVs. Again, Marvell came to this game late. Again, the already have a foot in the door with some advanced silicon that makes for better pictures. Again, they are planning to solve a bunch of unsolved problems and deliver a solution that will be irresistible to the TV makers.
In parallel with that they are working on the DVD/ HD-DVD end of things as well.
Oh, and not satisfied with mere dominance in the hard drive industry, they have sunk a bunch of effort into R&D to make even better drive chips; they are confident they can gain revenues in this area.
Then there are their advance in LAN technology. And power management. And printer technology. I'm probably missing something, but that seems to cover the basics.
After a year in which Marvell and many other semiconductor makers got hit by inventory adjustments, slowed demand growth, and pricing pressure, Marvell's intense pursuit of new markets may be bearing fruit. Management believes Q3 revenues may come in around $710 million, up $53 million sequentially from Q2. I'll be very impressed if that happens.
More important, if they are right about design wins they are getting this year leading to significant new revenues in calendar 2008, I can't wait to see what Marvell looks like a year from now.
As to pricing the stock, you'll just have to choose your theory. I don't believe in buying stocks with high PE ratios, and right now if you use the GAAP numbers the PE ratio of Marvell is infinite. If you use non-GAAP numbers, it is pretty high. On the other hand I understand the value of R&D. Another company, trying to please short term investors, could have simply cut back its R&D budget in Q2 and shown some very impressive results. But as a long-term investor I'd rather have the company with the bad short term results, especially when its R&D arm has a record of paying off, as Marvell's has.
Right now I already own as much Marvell stock as my portfolio model allows, so I won't be buying more anytime soon. Even holding it at this level involves risk: just because Marvell is spending money on R&D does not mean it can sell any resulting technology. But that is a risk I can live with.
Friday, May 25, 2007
Marvell: Hero or Zero?
Marvell Technology Group (MRVL) was a hero to its investors back between mid-2002 and late 2005, when it rose from under $5 per share to over $30. Those who bought in too late (including me) have been disappointed by its slump to near $15 per share. Is Marvell now a bargain, a hero merely stunned in battle, or is it wounded and heading for the trash bin of semiconductor history?
Marvell makes semiconductor chips and is noted for advanced chips integrating digital and analog functions. The chips go in switches, transceivers, power management, printer, and communications products. But above all they go into hard drive based data storage devices.
If you look at revenue on an annual basis you will see rapid growth from 2001 ($288 million) forward to 2005's $1670 million. In the latest quarter report, in the typically seasonally weak Q1 2008, revenues were $635 million, which puts Marvell at an annual run rate of $2.5 billion. What is not to like about that?
First of all, we can only guess what net profits, if any, Marvell has been pulling in. It is one of those stock-option accounting, can't tell you anything until it is done firms. Management did say that, yes, there was incorrect dating of options; the investigation is essentially complete; they hope to file restatements and late statements with the SEC as soon as possible.
The other big shoe that fell was in the data storage market. Western Digital and Toshiba each amount for over 10% of Marvell's revenue. Marvell's superior products now command about 65% of market share. Marvell's rapid growth, and rapid stock price appreciation, came from going from 0% to 65%. Going over 65% is not easy for two reasons: competing chip makers are doing everything they can to hold on, and the hard drive manufacturers want to have alternative sources available because competition keeps prices reasonable.
After that the biggest concern other than a recession or potential weakness in the overall semiconductor market is in the XScale/cellphone sector. In 2006 Marvell bought Intel's division that produced XScale microprocessors that are meant to be used in advanced (3G) cell phones and PDAs. As everyone knows the PDA market is basically over. Intel was losing money in the division and needed to focus on its battle with AMD. Marvell payed too much for this asset, I think, but its executives believe that by combining XScale with Marvell's analog expertise (never an Intel strong point), lowering manufacturing costs, and gaining market share, this division could be very profitable. It is possible, of course, but the competition for chips going into 3G cell phones is intense, with some formidable players like Motorola in the mix. Just getting this segment to break even will impress most analysts.
Much of Marvell's revenue growth these last 2 years has been by acquisitions, including the printer chip division, which Marvell reports is doing well. Storage growth is limited by growth of the storage market itself.
There are a couple of bright spots on the horizon, notably advanced video processing chips. But so far these are contributing insignificant revenues.
The real fear: when the veil comes off, when the restatement is made, earnings will suck due to costs associated with the XScale acquisition. These should be one time costs, but they will give a bad impression.
My take? Worth the risk at this price. Once the accounting disruption is in the rear-view mirror and the Intel acquisition is digested we'll see what Marvell is doing and where it is heading. Marvell has always been well-managed, so I think the earnings picture will be pretty healthy.
Would a U.S. recession matter to Marvell? Some, but it sells its chips into a global economy. With Germany and China booming, with India and Japan coming along, I don't see a global recession near-term.
Reminder: I own Marvell stock.
More information:
My Marvell page, with links to my summaries of analyst conferences
Marvell web site
openicon.com
Marvell makes semiconductor chips and is noted for advanced chips integrating digital and analog functions. The chips go in switches, transceivers, power management, printer, and communications products. But above all they go into hard drive based data storage devices.
If you look at revenue on an annual basis you will see rapid growth from 2001 ($288 million) forward to 2005's $1670 million. In the latest quarter report, in the typically seasonally weak Q1 2008, revenues were $635 million, which puts Marvell at an annual run rate of $2.5 billion. What is not to like about that?
First of all, we can only guess what net profits, if any, Marvell has been pulling in. It is one of those stock-option accounting, can't tell you anything until it is done firms. Management did say that, yes, there was incorrect dating of options; the investigation is essentially complete; they hope to file restatements and late statements with the SEC as soon as possible.
The other big shoe that fell was in the data storage market. Western Digital and Toshiba each amount for over 10% of Marvell's revenue. Marvell's superior products now command about 65% of market share. Marvell's rapid growth, and rapid stock price appreciation, came from going from 0% to 65%. Going over 65% is not easy for two reasons: competing chip makers are doing everything they can to hold on, and the hard drive manufacturers want to have alternative sources available because competition keeps prices reasonable.
After that the biggest concern other than a recession or potential weakness in the overall semiconductor market is in the XScale/cellphone sector. In 2006 Marvell bought Intel's division that produced XScale microprocessors that are meant to be used in advanced (3G) cell phones and PDAs. As everyone knows the PDA market is basically over. Intel was losing money in the division and needed to focus on its battle with AMD. Marvell payed too much for this asset, I think, but its executives believe that by combining XScale with Marvell's analog expertise (never an Intel strong point), lowering manufacturing costs, and gaining market share, this division could be very profitable. It is possible, of course, but the competition for chips going into 3G cell phones is intense, with some formidable players like Motorola in the mix. Just getting this segment to break even will impress most analysts.
Much of Marvell's revenue growth these last 2 years has been by acquisitions, including the printer chip division, which Marvell reports is doing well. Storage growth is limited by growth of the storage market itself.
There are a couple of bright spots on the horizon, notably advanced video processing chips. But so far these are contributing insignificant revenues.
The real fear: when the veil comes off, when the restatement is made, earnings will suck due to costs associated with the XScale acquisition. These should be one time costs, but they will give a bad impression.
My take? Worth the risk at this price. Once the accounting disruption is in the rear-view mirror and the Intel acquisition is digested we'll see what Marvell is doing and where it is heading. Marvell has always been well-managed, so I think the earnings picture will be pretty healthy.
Would a U.S. recession matter to Marvell? Some, but it sells its chips into a global economy. With Germany and China booming, with India and Japan coming along, I don't see a global recession near-term.
Reminder: I own Marvell stock.
More information:
My Marvell page, with links to my summaries of analyst conferences
Marvell web site
openicon.com
Friday, May 4, 2007
Dot Hill: About to Turn the Corner?
I did pretty well in Dot Hill (HILL) stock once under circumstances quite similar to those existing now. So why am I hesitant to plunge back in?
At this moment's price of $3.81 per share Dot Hill has a market capitalization of $171.6 million. If you had $171.6 million, would you buy the whole company? You might want to look at my summary of yesterday's (May 3) analyst conference before making your decision.
On the one hand HILL had $96 million in cash at the end of Q1, a whopping 56% of market cap. And the guys and gals there aren't sitting on their butts: they had revenues of $53.4 million in the quarter, which is typically seasonally weak in the technology industry, and would make for an annual run rate of $213.6 million.
On the other hand net income for the quarter was negative $6.0 million. That is an annual run rate loss of $24 million a year. That could burn up the cash over time. Also revenues were down 10% sequentially and 9% from Q1 2006. If revenues continue to slide along with cash eventually what we will have is a penny stock.
So it is all about the future, and predicting the future is notoriously risky. Management believes Q2 revenues will range between $56 and $60 million, which is going in the right direction. Their Q1 guidance was lower than their results, so they don't appear to be purposefully deceiving investors.
But Q2 will still show a loss. Can they get to profitability? You need profitability to justify a market capitalization over your cash balance. Can they get to serious profitability, the kind where traders who buy the stock today are going to tell you what analytic geniuses they are a year from now?
If you have a lot of stocks in your portfolio you can just buy it because the risk is relatively low short term (due to the cash and current investor disdain for the company) and the rewards could be pretty good short term (if momentum investors get in), medium term (if Q2 or Q3 results are better than expected) or long term (if they start selling a lot of their product at profitable prices).
Let's look deeper: deeper into what Dot Hill does, and further into the past.
How can you sell over $200 million in widgets in a year and lose money? In Dot Hill's case they are a "leader" in SAN (Storage Area Network) equipment. They have a good reputation for quality: their major customer is Sun (SUNW), which accounted for 76% of Dot Hill revenue in Q1. There, indeed, is the rub. As you know, Sun has not done all that well since 2000. With only one client, itself under pricing pressure, and decreased volumes, HILL had little ability to price its products above cost.
According to management that is changing. A year ago Sun accounted for 88% of revenue. Dot Hill has signed up a number of new clients who are enthusiastic about its 2730 product. But beware. Non-Sun clients bought 12% of $58.7 million in revenues in Q1 2006, or $7 million of stuff. In Q1 2007 they bought 24% of $53.4 million, or $12.8 million. So non-Sun revenues, over an entire year, only increased by $5.8 million.
Management has two answers, and they are worth listening to. They have been building their products in the U.S.A. They are moving production to Asia; they process should be completed in Q3 2007. At that point, barring unexpected problems, decreased costs and firm sales prices should make the company profitable.
And to a certain extent they have been building the 2730 line to spec. In talking to some of their non-Sun OEM customers they are expecting much larger orders going forward, though the timing of that is up to the customers.
Again, why not take the plunge? Let's go deeper into history, to the time I made some money trading Dot Hill stock. It was mid-April in 2005; I bought the stock at an average price of $4.90 per share. Other traders had the same thinking. In February of 2006 I was able to sell for almost $8 per share (just got lucky in my timing), because the stock had gotten way ahead of any actual signs of a turn around.
If I had held my stock I would be well below water today.
So as I write this I don't know. I have very little cash in my portfolio at the moment. The odds are really quite good: it really does look like profitability is a couple of quarters away, just like in 2005, just like in 2006. And even if it is not, other traders might push up the stock price again; I just would have to bail out again at the right time.
If Dendreon (DNDN) hits the jackpot on May 15 I may sell some of it, and with more cash to work with, HILL will certainly be on my short list of stocks to look at.
At this moment's price of $3.81 per share Dot Hill has a market capitalization of $171.6 million. If you had $171.6 million, would you buy the whole company? You might want to look at my summary of yesterday's (May 3) analyst conference before making your decision.
On the one hand HILL had $96 million in cash at the end of Q1, a whopping 56% of market cap. And the guys and gals there aren't sitting on their butts: they had revenues of $53.4 million in the quarter, which is typically seasonally weak in the technology industry, and would make for an annual run rate of $213.6 million.
On the other hand net income for the quarter was negative $6.0 million. That is an annual run rate loss of $24 million a year. That could burn up the cash over time. Also revenues were down 10% sequentially and 9% from Q1 2006. If revenues continue to slide along with cash eventually what we will have is a penny stock.
So it is all about the future, and predicting the future is notoriously risky. Management believes Q2 revenues will range between $56 and $60 million, which is going in the right direction. Their Q1 guidance was lower than their results, so they don't appear to be purposefully deceiving investors.
But Q2 will still show a loss. Can they get to profitability? You need profitability to justify a market capitalization over your cash balance. Can they get to serious profitability, the kind where traders who buy the stock today are going to tell you what analytic geniuses they are a year from now?
If you have a lot of stocks in your portfolio you can just buy it because the risk is relatively low short term (due to the cash and current investor disdain for the company) and the rewards could be pretty good short term (if momentum investors get in), medium term (if Q2 or Q3 results are better than expected) or long term (if they start selling a lot of their product at profitable prices).
Let's look deeper: deeper into what Dot Hill does, and further into the past.
How can you sell over $200 million in widgets in a year and lose money? In Dot Hill's case they are a "leader" in SAN (Storage Area Network) equipment. They have a good reputation for quality: their major customer is Sun (SUNW), which accounted for 76% of Dot Hill revenue in Q1. There, indeed, is the rub. As you know, Sun has not done all that well since 2000. With only one client, itself under pricing pressure, and decreased volumes, HILL had little ability to price its products above cost.
According to management that is changing. A year ago Sun accounted for 88% of revenue. Dot Hill has signed up a number of new clients who are enthusiastic about its 2730 product. But beware. Non-Sun clients bought 12% of $58.7 million in revenues in Q1 2006, or $7 million of stuff. In Q1 2007 they bought 24% of $53.4 million, or $12.8 million. So non-Sun revenues, over an entire year, only increased by $5.8 million.
Management has two answers, and they are worth listening to. They have been building their products in the U.S.A. They are moving production to Asia; they process should be completed in Q3 2007. At that point, barring unexpected problems, decreased costs and firm sales prices should make the company profitable.
And to a certain extent they have been building the 2730 line to spec. In talking to some of their non-Sun OEM customers they are expecting much larger orders going forward, though the timing of that is up to the customers.
Again, why not take the plunge? Let's go deeper into history, to the time I made some money trading Dot Hill stock. It was mid-April in 2005; I bought the stock at an average price of $4.90 per share. Other traders had the same thinking. In February of 2006 I was able to sell for almost $8 per share (just got lucky in my timing), because the stock had gotten way ahead of any actual signs of a turn around.
If I had held my stock I would be well below water today.
So as I write this I don't know. I have very little cash in my portfolio at the moment. The odds are really quite good: it really does look like profitability is a couple of quarters away, just like in 2005, just like in 2006. And even if it is not, other traders might push up the stock price again; I just would have to bail out again at the right time.
If Dendreon (DNDN) hits the jackpot on May 15 I may sell some of it, and with more cash to work with, HILL will certainly be on my short list of stocks to look at.
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