Marvell Cleaning Up Amidst Uncertainties

Yesterday, Marvell (Nasdaq: MRVL), a leading chip maker with annual revenue of $2.9 billion, reported its third quarter results that beat estimates but missed its last quarter projections mainly due to weak demand in the PC market. 

Q309 revenue was up 4% y-o-y and down 6% q-o-q to $791 million. Net income was $70.9 million, or $0.11 per share versus net loss of $6.4 million $0.01 per share last year and net income of $71.4 million, or $0.11 per share last quarter. Non-GAAP net income increased to $145.3 million, or $0.23 per share. Analysts expected earnings of $0.21 per share on revenue of $793 million.

Marvell is curtailing its expenses and non-GAAP operating expenses were $266.0 million, about 33.6% of its revenue. In his in-depth valuation series on Marvell, Guest Author Vijay Nagarajan had concluded that if Marvell limits its expenses to 35% of revenues, its value would double. Its non-GAAP gross margin was 52.3% percent, versus 48.3% last year and flat with last quarter. Despite the tough economic conditions, Marvell achieved the highest free cash flow in its history: $246.0 million, up 47% q-o-q.

Marvell experienced weak demand across its entire product portfolio, with about half the shortfall in its projections coming from the PC end market, 20% from embedded wireless, 20% due to handsets and mobility, and about 5% due to enterprise network and products.

Sales of communication processors missed projections mainly due to product transitions coupled with ongoing inventory balances at one of its major handset customers. However, this was partially offset by demand for newer 3G communications processor products, which is expected to grow in subsequent quarters.

Sales of embedded wireless products were down sequentially but grew 17% y-o-y, reflecting the increased usage of wireless connectivity and Marvell’s strength in embedded wireless products. Sales of Ethernet products grew 5% y-o-y, enterprise products grew 13% y-o-y, and storage products grew 16% y-o-y. Sales of client-based Ethernet controllers were flat y-o-y while sales of cellular products declined both on a y-o-y basis and sequentially.

The company expects to generate $110.0 to $120.0 million free cash flow during the quarter and it has already paid off the remaining $192.0 million in bank debt, which should result in a cash balance of about $1.0 billion.

For the fourth quarter, Marvell is uncertain about the demand for chips and expects revenues in the range of $690.0 to $730.0 million, a decrease of 14% to 19% y-o-y and 8% to 13% q-o-q mainly due to weak demand in the PC end market. Analysts forecast revenue of $736.7 million. Non-GAAP EPS is expected in the range of $0.14 to $0.20 versus Street estimate of $0.17. It is currently trading around $5 with market cap of about $3.1 billion. Before the market collapsed, Vijay had valued it at $21 and at one point of time when it was trading around $17 it looked quite achievable especially with the iPhone design win. At this point, that valuation analysis no longer holds given the altered macro conditions.

Nonetheless, I like the way Marvell has been cleaning up its act.