Marvell Technology Group (MRVL), a fabless designer of a wide range of semiconductor devices, is set to report earnings on August 16, 2012. I am bullish ahead of this upcoming earnings report and expect the company to at the very least hit the midpoint of its guided range for the following reasons:
1. Storage Sector Is Thriving: At the last earnings report, Marvell stated that the storage sector accounted for 45% of the firm's revenues. The company noted that the industry as a whole is recovering from the Thailand floods, and that in the most recent quarter, the storage division's results came in at the high end of estimates.
The company guided to a 10-15% sequential growth in revenues for the segment, with a 50% sequential increase in 500GB/platter controller revenue. While I am very bullish on solid state drive adoption, I realize that for cost-effective, high density storage, traditional hard disk drives cannot be beaten. The recent earnings reports from Western Digital (WDC) and Seagate (STX) confirmed that hard disk drive demand is booming.
Further, the company noted that it would see "sequential growth" in SSD revenue, and I believe that this segment should be particularly strong for Marvell as their solid state drive controllers are seeing widespread adoption by drive vendors such as: Micron (MU), Plextor, OCZ Technology Group (OCZ), and Corsair Components.
2. Mobile And Wireless Should Perform Well: The second largest market segment for the company, mobile and wireless, accounts for approximately 29% of the firm's overall revenue. In the most recent quarter, the segment's revenues saw a 1% sequential decrease but a 14% year-over-year increase. Further, it seems that TD-SCDMA phones in China are gaining traction, as the company saw a 25% sequential growth in the segment coupled with a 50% year-over-year cellular revenue growth.
The company expects to see mid to high single digit sequential revenue growth in this division, with a greater-than 20% sequential increase in TD smartphone revenue. I believe that the growth prospects in this segment are also incredibly healthy and that the company won't disappoint here when it reports.
3. Networking Should Be Nice And Steady: This is the third largest market segment for the company weighing in at 22% of revenue. The company performs well here, and in the most recent earnings call presentation, it was noted that the results in this segment were "better than the aggregate networking end market", highlighting the company's strong execution in a modestly growing area.
The company expects mid-single digit sequential growth in the current due to a broad increase in demand, and expects adoption of its advanced network processing products to be a driver here.
While the growth in this segment is expected to be relatively modest, it's still more than welcome.
Marvell classifies a fourth revenue source in its earnings report titled "other/emerging" that accounts for a mere 4% of revenues. In this segment, I am particularly excited by the firm's collaboration with Dell (DELL) on developing microservers based on Marvell's ARM-compatible "Armada XP" SoCs.
Interestingly enough, Marvell is one of the few players that produces their own CPU designs on the ARM instruction set rather than simply building an SoC around the licensed ARM. This is an often overlooked, significant advantage that Marvell has in the space, and I suspect that as more applications come up that require custom, high performance processors based on the ARM instruction set, Marvell will be in a prime position to supply such chips.
5. The Company Is Shareholder Friendly
Marvell is a very shareholder friendly mid-cap semiconductor company. It pays a dividend of $0.24/year (and I expect the company to continue to raise it going forward) and it has been buying back shares aggressively. I expect the company to announce that it bought back a significant number of shares (especially since the stock is trading very close to its 52-week lows).
It's good that Marvell has no debt and a strong cash position with which to invest in its own future, and it's even better that the company is able to return cash to its shareholders at the same time.
6. Earnings History Is Strong
The company has a particularly strong history of meeting or exceeding analyst expectations when it comes to earnings. The company has either met or exceeded analyst earnings expectations during the entirety of fiscal years 2009, 2010, and 2011, with the two most recent quarters presenting upside surprises.
The company has guided to $840-$890M in revenues for the most recent quarter and GAAP EPS of $0.21 +/- $0.02. Further, gross margins are expected to come in at 54.5% +/- 50 bps. The key to this quarter will be in its guidance for FQ3 2013.
7. Valuation Is Still Cheap
The most direct competitor I see to Marvell is LSI Corporation (LSI), which I am also bullish on. Marvell trades at 12.7x past earnings and 8.85x forward earnings, 2.01x sales, and has $2.20B in cash (roughly 33% of market capitalization) . Compare this to LSI which comes in at 28.14x past earnings, 9.76x forward earnings, 1.85x sales, and has $601.1M in cash (roughly 14% of market cap).
Backing out cash in both companies, and Marvell is trading at 8.6x past earnings and 1.32x sales. LSI comes in at 24.63x past earnings and 1.59x sales.
Both companies are buying back shares, but Marvell pays a dividend as well, which is attractive to dividend growth investors.
In short, I expect Marvell to do quite well this quarter, and further anticipate a strong guidance. With a decent dividend (that I expect to grow over time), share buybacks, strong core businesses, and interesting growth prospects, I am bullish on the company on a long term basis.