Marvell (MRVL) is a Santa Clara based semiconductor company with a wide footprint ranging from storage, communications and consumer products. It was started in 1995 by Sehat Sutardja, his wife Weili Dai and his brother Pantas Sutardja. iPhone fans will know this company as the provider of its Wi-Fi capabilities.
While the company promised a lot in the past, it has been reeling under a series of setbacks. Today its shares are at $15.11 capping at $8.92 billion. Despite a quarterly revenue of close to $800 million, the company incurred losses with an operating income of -6.44%. What is more, the outlook was also a letdown with uncertain sales for the next few months. So what happened? The answer is in two major events that have encompassed the Sutardjas’ empire over the past two years, namely the purchase of Intel’s Xscale assets and the stock-backdating scandal. I will focus on the first event in this piece.
In June 2006, Marvell acquired Intel’s XScale PXAxxx applications processor and 3G baseband processor businesses for $600 million plus existing liabilities. With it came Intel’s UMTS and HSDPA capabilities. A lot of Intel’s own 3G wireless brain-power came from its 1999 acquisition of Cupertino-based DSP Communications Inc. Thus Marvell, with a new team of smart engineers, believed that it could synergize its high-volume consumer chipset production capabilities with the new avenues that the Intel 3G division brought in. Besides, there was always the possibility for integrating Wi-Fi and other features in its mobile chipsets. Sehat Sutardja said, “We have all the IPs. We just have to pull it out of different product lines and do the integration.”
Marvell has never minced words about its ambitions or its modus operandi. Sehat is quoted to have said, “We want to be the next Texas Instruments”. The company’s unofficial motto is purportedly to wait for a market to get big enough and kill whoever is there. These are, however, not empty statements. It supplanted TI from the disk-drive chip business and Broadcom from some communications markets. The Intel deal, gave it a chance to take a piece of the mobile pie dominated by Qualcomm, TI along with other contenders such as Freescale, Broadcom, Infineon etc.
The executives, at various times in the past, have been predicting that the XScale business should turn profitable by the end of this year. They seem to hedge their bets on the company capturing a substantial portion of the smart-phone market. What this means is that as it transitions to 65 nm, Marvell cannot just survive through efficient manufacturing and slashed costs, but needs improved modem performance. As I have often mentioned, new entrants in the mobile market can easily get exhausted playing catch-up while the leaders, with their deep coffers, relentlessly work to stay ahead of the race. Therefore, I am inclined to believe that Marvell perhaps grossly underestimated what it was getting into. Wireless is not anything like the disk drive market that gave its first break. It is dominated by big players, IP-based business models and rigid standards bodies.
The repercussions are definitely showing. The company recently announced a global 400 employee lay-off (7% work-force reduction) as part of a restructuring plan. Most of the jobs shelved are likely to be those of the 1400 former-Intel employees that Marvell so proudly assimilated into its work-force. The pruning will likely come from its Austin and Israel offices where a lot of the XScale and 3G development is done. I can’t help but quote Will Strauss, principal at Forward Concepts, who at the time of the purchase quoted, “Two years from now they will be lucky if they have half that many [Intel] people.”
On the technical side, I still don’t think that Marvell has all the ingredients to outsell others in the smart-phone segment. One reason is the lack of key components such as GPS. Its leadership in the mobile WLAN segment will definitely help but the absence of a holistic solution will be a definite negative. Unfortunately, given its financial crunch, Marvell seems to be unable to acquire GPS capabilities. This in turn, has pushed the company further down the barrel as compared to its rivals, most notably Broadcom.
The Sutardjas’ ambitious moves have almost always paid off. This one may backfire. Though the company’s wide footprint will make it resilient to any downside from its mobile business, the market is definitely not happy with its current fortunes. As it attempts to come out of its slump, Marvell’s fortunes may well be determined by its mobile business successes next year considering that the smart-phone market is likely to explode starting 2009.
This segment is a part in the series : Marvell