Seeking Alpha
Long/short equity, contrarian, independent research, tech
Profile| Send Message|
( followers)  

Marvell Technology Group (NASDAQ:MRVL) reported disappointing Q2 results and ended up missing its guidance on the top and bottom lines. Guided revenues were $840M - $890M, and non-GAAP EPS was guided to $0.26 - $0.30. For the quarter, revenues came in at $816M and non-GAAP EPS came in at $0.24, lower than the low end of guidance in both respects. Guidance also came in rather tepid at $800M - $850M in revenue and non-GAAP EPS of $0.22 - $0.26.

While the headlines being pushed through the newswire seem to indicate doom and gloom, the long-term story is still intact: hard disk demand will continue to recover, solid state drive growth will be a positive driver and networking continues to exhibit solid performance. Wireless seems to be the segment experiencing strong headwinds, but I still believe the company can achieve long-term success in this area.

Cash Position Strong, Return To Shareholders Continues

Despite the weakness in the quarterly results and the guidance, the company still has no long-term debt and has a strong cash position of $2.1B, or just over 30% of the firm's market capitalization, so Marvell still has plenty of dry powder to invest in R&D and to weather tough macro-economic times.

In addition to acting as a safety net, the company managed to return $250M to shareholders by buying back 20M shares as well as initiating a $0.06/share quarterly dividend. I hope that Marvell will continue its aggressive share buybacks, and that it will increase the dividend meaningfully at a steady clip, since the stronger the dividend, the more solid a floor the share price has.

Storage: Still Showing Relative Strength In Tough Macro

Marvell CEO Dr. Sehat Sutardja noted on the company's conference call that, despite the miss on the top and bottom lines, it captured hard disk drive market share from its largest competitor (presumably LSI Corporation (NASDAQ:LSI) ) in the hard disk space, holding roughly 60% of share. Further, management was very clear that in the solid state drive space (which saw 25% sequential growth), the company had "at least" the same market share as it does in the hard disk space. So, despite broad weakness due to macro-economic weaknesses, the company itself is executing well.

The company expects low single digit sequential increase in revenues in storage. This is working on the assumption that the company continues to take share in the space, which given past execution history, is not an unreasonable expectation. A diamond in the rough here is that company expects "over 25% sequential growth in SSD" revenue, quelling investor fear that Marvell will suffer from storage revenue declines due to solid state drive prevalence.

Networking: Steady, Solid Performance

This segment did fairly well, seeing a 4% sequential increase. The company's product lineup in this area is very competitive. The company's network processors are seeing traction, especially with its Armada-XP ARM-based SoCs shipping in Dell's (NASDAQ:DELL) new, ARM (NASDAQ:ARMH) micro-servers.

Guidance in this segment calls for a low single digit percentage sequential increase.

Wireless & Mobile: Continued Weakness Is Troubling

The one market segment that particularly showed weakness was wireless and mobile. Demand weakness in the U.S. and China impacted results this quarter, and is expected to further hurt the segment, as the company is guiding for a low to mid single digit decline. This segment is the company's second largest by revenue, representing 27% of sales, so weakness here should not be ignored.

On the conference call, the company seemed optimistic about the long-term opportunities here, and with the strength of its products in the TD phone space, optimism here is justified. The problem, however, is that the company still doesn't have a 4G/LTE solution available for North American phones. Further, with Research In Motion's (RIMM) rapidly declining sales, Marvell's presence in the U.S. and Europe is weakening.

It will be interesting to see how this segment plays out for Marvell, but it seems that the company needs to expand its product portfolio in order to become more competitive in additional markets and score design wins with more phone vendors.

Coming To A Fair Value

Given that the company has seen year-over-year decreases in revenue, I will, for the near term, assume a fair price-to-earnings multiple at a significant discount to the semiconductor industry median of 15.98, at 12x expected non-GAAP CY2012 earnings. To be safe, for the current quarter, I will assume the company comes in at the low end of its guidance at $0.22/share, and I will assume further that the fourth quarter of the year will come in at a 20% year-over-year decrease from the year-ago quarter at $0.17/share. This gives a full year earnings-per-share estimate of $0.86 translating to $10.32/share, giving a nice lower bound.

It's important, however, to keep in mind that the company will be buying back shares, which could have a positive effect on the earnings-per-share in future quarters. Further, it's hard to exclude Marvell's $3.73/share in cash that seems to have held fairly steady. Add this back in, and we arrive at a price target of $14/share -- a 26% premium to the most recent after-hours trade (as of this writing) of $11.12.

Conclusion

Marvell's recent quarter wasn't stellar (or even good), and in particular, its wireless and mobile division's performance was notably weak. The company's growth will have to be supported by storage and networking, areas where Marvell has still been performing as well as macroeconomic headwinds will let it. However, the weaknesses in the wireless and mobile segment need to be addressed before the company will be seen by the investment community as a growth play worthy of a "growth stock" multiple.

I believe that the company is still a compelling value play at these levels, especially as most of the issues seem to have been baked in over the last few months as the stock price dropped from north of $16 to $11. With a strong cash position, exposure to a number of high growth areas, a modest valuation, and problems mostly arising from macro-economic headwinds, the downside seems limited. And with the company buying back shares and paying a dividend, the value proposition is even more compelling.

Source: Marvell's Q2 Miss: Long-Term Strength Despite Short-Term Weakness