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.

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 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