Marvell Still Has Operational Challenges

On August 28, chipmaker Marvell Technology Group Ltd. (NASDAQ: MRVL), reported strong Q2 results that beat estimates. However, its weak revenue forecast disappointed the market and led to a fall in the share price. Marvell’s chips are used in the 3G iPhone as well as the BlackBerry. Marvell is also on my list of Top 10 Semiconductor Stocks. In our Q108 coverage, I speculated that Marvell could have a design win in the 3G iPhone, and it turns out that the company is providing 88W8686, the Wi-Fi single chip in the new iPhone. In the first generation iPhone, Marvell provided a 90nm WLAN part.

On the financial front, Q209 revenue was $842.6 million, up 28% y-o-y and 5% q-o-q, driven by better-than-expected sales of datacomm products. Net income was $71.4 million or $0.11 per share versus net loss of $56.5 million in Q208 and net income of $69.9 million last quarter. Q2 non-GAAP net income was $154 million or $0.24 per share. Analysts had estimated non-GAAP earnings of $0.21 per share on revenue of $836 million.

Non-GAAP gross margin was 52.3%, up from 49.4% last year and 52% last quarter. Cash flow from operations was $183 million, up 40% q-o-q from $130 million in Q109. Free cash was $167 million, up 67% q-o-q.

On the product front, Fujitsu has awarded Marvell the SoC design for its next generation SAS enterprise drive. Marvell has also extended its longstanding supplier relationship with Seagate to supply advanced enterprise class read channel and SoC products, further strengthening its position in storage ICs. Notably, though, Marvell is not supplying Hitachi, a storage systems leader known for its stringent quality requirements. Competitor LSI has this business, presumably due to superior DPM standards.

For Q3, Marvell forecast revenue of $860-$880 million and non-GAAP EPS of $0.24-$0.26. Analysts were expecting revenue of $889 million and EPS of $0.24. Because of the company’s weak forecast, the stock is currently trading at around $14 with a market cap of about $8.5 billion. In June it crossed $18, closer to our price target of $21.

Marvell has addressed a lot of the stock option and accounting issues but still has operational challenges to tackle, some of which directly impact their design wins.