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Barclay's Capital Commentary From Monday:
Investment Conclusion
We are lowering our estimates on Marvell due to
ongoing weakness in hard disk drives balanced in
part by steady gross margin and lower op ex. We
think Marvell is cheap at slightly above 1x sales
but upside is limited until fundamentals bottom.
Maintain 2-EW and lower price target to $8 (14x
CY09 $0.57) from $9 (14x old CY09 $0.67).
Summary
~ Our estimates decrease this qrtr to $672M (-15%
QoQ)/$0.14 ($0.08 incl ESO) from $708M/$0.17
and in CY09 to $2.7B (-15% YoY)/$0.57 ($0.34
incl ESO) from $2.9B/$0.67.
~ Though FQ4 is back end loaded we think Marvell
is tracking below sales guidance of down 8-13%
due to weakness in drives particularly in the month
of Dec.
~ Despite our expectation for weaker sales, gross
margin should still improve 50 bps and operating
expenses should drop inline or below guidance of
$260M.
~ We believe key sales growth drivers in CY10
include 60-75M client drives at Seagate (assumes
40-50 market share) and a new integrated
baseband/apps processor customer (Samsung).
Barclays Capital Commentary on Q3 Results
JANUARY REVENUES GUIDE REVISED FURTHER DOWN; SIGNS OF STABILIZATION
Marvell reported October results in line with the November 3 pre-announcement. Revenues came in at $791M versus our $788M estimates and consensus of $793M. EPS at $0.23 was slightly better than our $0.22 estimates, helped by lower operating expenses (-$6M). The company also took advantage of favorable exchange rates and paid taxes in foreign jurisdictions during the quarter.
Management further lowered the January revenue expectations versus prior guidance. Marvell now expects F4Q09 revenues to decline 8 – 13% QoQ versus previously guided 5 – 10% sequential decline. From a business segment perspective, the company expects weak PCs and consumer demand to offset RIM supported 3G demand in cellular (RIM recently launched 3G “Bold”). The CFO commented that business conditions remain difficult as broad based weakness in demand persisted through November. However, some customers recently placed orders at a short notice, in what may be interpreted as a sign of stabilization or a possible snap back from overreaction to downside.
Pointing to lean inventory in the channel and shortened lead times, management expressed confidence in being well positioned for the demand rebound.
CONTINUED EXECUTION ON OPERATING EXPENSES
The CFO highlighted Q3 operating margins (18.6%) and strong free cash flow ($246M) in a weak environment. We think that operating expense control is likely to be a key theme throughout 2009. Despite reduced revenues, gross margins remained flat with prior quarter as a result of operational efficiencies and lower engineering costs (tape outs, prototyping etc.). The improvements are expected to help gross margins improve further (+50bps) in the January quarter.
Marvell is focusing heavily on aligning its cost structure with the reduced revenue outlook. Non GAAP operating expenses for January quarter were guided to decline $6M sequentially from $266M in October. We think that Marvell will further streamline the operations and look at options including headcount rationalization and reducing fixed costs.
SOLID CASH FLOW; STRONG BALANCE SHEET WITH NO DEBT
Marvell generated $246M in FCF during October quarter. The company paid down remainder of the term loan ($188M) on the balance sheet in the beginning of FQ4 and is expected to have $1B in cash and no debt at the end of January quarter. With a reasonable cash cushion on the balance sheet and solid cash flow from operations, we think that Marvell is likely to initiate a share buy back program when the markets conditions improve.
NEW PRODUCT INITIATIVES; EXPANDING NEW REVENUE OPPORTUNITIES
The CEO highlighted that Marvell is well positioned to exploit new revenue opportunities by leveraging its strong X-Scale based product portfolio and mixed signal engineering expertise. In particular, Marvell is actively looking to launch a highly
integrated platform for the emerging MIDs (mobile internet devices) market in the next 12 months. Our colleague Tim Luke
estimates that the MID market could grow from less than 1M units in 2008 to 7M in 2009.
MRVL also introduced new 40GbE and 100GbE Prestera family of high performance switching products in November, targeted at data centers that enable services such as the “cloud” end of the cloud computing platform, server virtualization and SaaS (software as a service). While in fairly early stages of development, this market is expected to grow to several hundred million dollars over the next few years.
Additionally, recent design wins at Fujitsu (already shipping) and Seagate in the enterprise SoC are expected to contribute
revenue in 2009. We think an expanded relationship with Seagate should help offset possible share loss at Western Digital as a result of recent WD acquisition of the ST Micro’s HDD engineering team.
DISCOUNTED VALUATION REFLECTS MARKET CONCERN ON RISK TO ESTIMATES, IN OUR VIEW
MRVL trades at a relative discount to peers (7.3x C09 versus 10.8x average). The discount primarily reflects the market
concern on lack of catalysts (weaker storage and consumer) and further risk to estimates, in our view. We think the stock has bottomed on solid operational execution, $1B in cash, and 11% in EV based FCF yield (incl ESO). We maintain 2-EW and $9 price target (14x our new C09 of $0.67 vs 13x prior C09 of $0.70).
Citigroup Commentary on Pre-Announcement
3 November 2008 - 9 pages
Marvell Technology Group Ltd (MRVL)
Unsurprising Guide-Down, Surprising Margin Protection
* What's New - Monday post-close MRVL lowered its F3Q09 (Oct-Q) revenue outlook to -6-8% (from +2.5%) and provided a F4Q09 outlook of down 5-10%. The action is un-surprising given a sector-wide chip order deceleration since mid-Sept (on-cycle chip co's guided C4Q08 rev to -7.4% q/q avg). Indeed, last wk we proactively cut MRVL and other off-cycle estimates (10/31 "Decisively Cutting Estimates, Decidedly Bullish On Select Names")
* A Silver Lining In The Margin Outlook - We think fresh COGS initiatives under CFO Hosein are helping drive sequential gross margin improvement in the October and January quarters and to ~53.0-53.5% on a FY10 basis (CIR 52.3%). Coupled with equally potent expense management initiatives which should cut ~$5M of opex per qtr into 1H09, operating margins should trough at ~15.5% in April (on ~$690M in revenues). The trough shows an impressive 4x and 40% respective improvement over troughs of Jan-07 and Jan-08. Stock up 3.7% after-market, recapturing the day's 3.7% loss.
* Estimate Changes - Our updated estimates now bake in -6.5%, -9.0% and -3.0% revenue growth in the October through April quarters, for trough quarterly EPS of $0.15 vs $0.17 previously - good EPS protection. Our C08/C09E EPS fall to $0.85/$0.77 from $0.95/$0.89, while our target price remains $13 on an unchanged 15 P/E multiple but an increase in our EV/S multiple (to 2.6x from 2.2x) given higher gross margin.
* Implications - MRVL's negative pre: a) continues a swift and dramatic estimate pull-in sector-wide (positive revisions now 10% vs 7% at 2001 lows), b) bolsters conviction in similar activity from others (NSM), and c) given the positive gross margin and expense mgt performance adds ballast to our assertion that co-specifics can differentiate stock performance ahead.
* Stock Strategy - In the last three weeks we have signaled that Specialty Semi stocks are in the 'Buy Zone', and that investors should position in companies getting stronger in the down cycle. We are impressed with MRVL's margin and expense execution, and think the stock will begin to sustainably discount a positive operating margin inflection and the late-C09 STX desktop and notebook drive ramp early next year. Add to positions with a 61.5% pullback from 1H08 highs leaving EV/S and P/E multiples at 1.1x and 8.7x on our new est, risk/reward of 3.5:1 (-24% to recent lows, +94% to our $13 target). Reiterate Buy.
I've had a small position in ZGEN, which became much smaller this week.
I had intended to wait for next week's conference call to decide whether to add to my position, but today I couldn't resist with ZGEN trading in the $2.70's.
To me, the discontinuance of this single trial doesn't appear to have that dire of implications for the ultimate success of atacicept in other indications, at other dosages, and/or in combination with other drugs.
Is anyone else adding here as well??
I'm glad you're back, Lakers. Good timing, too - - MRVL is EXTREMELY attractive at less than $10 (unless, I suppose, Congress drops the ball over the weekend).
Pack the Cooler, Dump These Stocks
By TIERNAN RAY
This is no time to be paying through the nose for pricey tech shares. Here's our hit list.
TIME TO GRAB THE SUNTAN lotion, stock the cooler, and dump a bunch of overpriced tech stocks.
With the Federal Reserve unlikely to come to anyone's rescue this summer, oil still sky-high, and corporate IT budgets in a state of flux, pricey tech shares probably won't show substantial gains the next few months, and may even cost investors a bundle.
Stocks of some leading tech companies are trading at absurd multiples relative to the rest of the technology universe. Why, for example, is Salesforce.com (ticker: CRM) trading at a price-to-earnings (P/E) multiple of 110 times next year's projected earnings, when Microsoft (MSFT), the largest software vendor in the world, trades at just 13 times?
Other egregious examples abound. Storage-equipment vendor Data Domain (DDUP) has mastered very complex technology with its information-archiving equipment and software. Does that mean it should trade at 264 times the next four quarters' earnings? No.
Barron's Online identified four other stocks that seem unlikely to "grow into" their rich valuations by substantially outperforming in a beleaguered economy. Advent Software (ADVS), Rackable Systems (RACK), Vocus (VOCS) and Equinix (EQIX) are all promising companies, but their shares could take a breather before investors return to their Bloomberg screens after Labor Day.
Even the best forecasts for earnings leave these stocks too dear at a time when software bookings and equipment purchases could still be hurt by a macroeconomic slowdown in coming quarters.
"Most years, I'm inclined to discount the 'sell and go away' notion, but this year we've got real economic issues," says Jim Grossman, a tech analyst with Thrivent Investment Management, referring to the continued unraveling of the financial sector and persistent worries about the rise in oil prices.
"Those issues cause me to be less bullish during the summer months and to not rush to buy stocks."
Last year, the flight to quality from financial stocks gave a lift to tech all summer long and well into the fall, as Barron's Online chronicled in a couple of different articles.
That's less likely to be the case this year, with financials having substantially crumbled.
"The economy is really teetering," observes Grossman. "Last summer the Fed was on hand to try and avert the financial crisis. That's not the case now, as the Fed has indicated it has a renewed preoccupation with inflation," at Wednesday's Federal Open Market Committee meeting.
"I think it's going to be a tough summer," says Richard Parower, who manages $500 million as head of the J. & W. Seligman Global Technology Fund.
"Demand is not going to be that good, oil's not going to get that much better for a while, and housing's certainly not going to get better."
Mark Mowrey, a technology analyst with Al Frank Asset Management in Laguna Beach, Calif., believes that the troubling economic environment will cause investors to turn sour on tech shares.
"The fundamentals [of tech businesses] don't justify a lower Nasdaq in August," observes Mowrey. "But could sentiment put it lower in August?," Mowrey asks rhetorically. "Yes."
To be sure, there are catalysts this summer to help tech stocks. Chief among them, Apple's (AAPL) introduction of its next iPhone on July 11. And the back-to-school season always provides some bounce to PC makers.
But all that may be only a catalyst for one stock -- Apple.
"I think Apple will have a fantastic year in notebook computers," says Grossman. Nor are investors betting against the second coming of the iPhone.
Apple, at a mere 29 times next year's profit per share, and with $19 billion in cash, seems relatively undervalued.
By contrast, "the Street has always assigned Salesforce a way higher premium than we think the company is worth," observes Mowrey. That's in part because "they are the perennial [acquisition] target," and because "some people will invest in anything but Oracle (ORCL)," he adds.
In looking for high-valuation stocks that seem destined for a fall, Barron's Online made allowances for companies whose sufficient cash position seems to provide a floor for the stock price -- outfits such as RealNetworks (RNWK) and Limelight Networks (LLNW).
We also were merciful with companies caught in a cyclical earnings trough, such as semiconductor-equipment makers. Their shares may rebound once their industry rebounds.
Tech High-Flyers That Can Crash
Company P/E Forward 4 Qtrs EPS P/E Next Year's EPS Price Change Last 12 months Price (June 25 close)
Advent Software 58.1 45.8 14% $37.92
Data Domain* 258.0 71.1 -1% $24.76
Equinix 87.0 46.6 9% $92.84
Rackable Systems 106.0 59.0 13% $13.52
Salesforce.com 173.3 106.4 68% $70.70
Vocus 60.6 47.7 22% $32.15
*Since the IPO of June 27, 2007.
Source: Thomson Reuters
The six companies focused on here could all perform well, but much of that is baked into the shares. Data Domain's racks of disk drives have software that cuts down on how many copies of a file need be saved, thus -- hopefully -- reducing IT costs.
But for a "hyper-growth" stock like Data Domain to pay off for investors, you'd have to look out three to four years to find earnings on a per-share basis that make the current stock price look reasonable.
"If you're buying fast growth at a high P/E, you've got to worry that the company may not have smooth sailing for an extended period of time," says Kevin Landis, who manages $600 million for Firsthand Capital Management .
The outsized multiples of aggressive young tech firms make some money managers blanch when they see the multiples at which well-established tech companies are trading.
"I like the leading tech firms that have a market multiple; I'm more confident of their growth," then that of less-established companies, says Michael Shinnick, manager of the 1st Source Monogram Long-Short Fund in South Bend, Ind.
Shinnick notes Nokia (NOK), a stock he likes, is trading at 9.5 times next year's earnings, despite dominating cellphones with 40% market share and continuing to make progress in emerging markets.
Landis likes Netflix (NFLX), which he views as a high-growth company that trades at only 19 times forward earnings. "They remain the little engine that could," he says.
Thrivent's Grossman has compiled a buying list of established tech firms, including chip makers Nvidia (NVDA), Marvell Technology Group (MRVL) and Broadcom (BRCM), which he will pick up if their stocks pull back. Intel, on the other hand, is a great buy already in a PC market that is chugging along but getting scant attention.
There's nothing wrong with buying high-multiple tech stocks if one is confident they can continue to meet high expectations. But waiting for a payoff two to three years out seems more than investors should bear in a summer sweating from much larger economic concerns.
Excerpt from Citi's Latest Report - - released Thursday evening
"12 June 2008 - 20 pages
Marvell Technology Group Ltd (MRVL) Structural Change A Defensive Long Opportunity; Reiterate Buy
* Structural Change Underway - In the 2+ wks since the F1Q09 beat and raise, incoming calls have spiked, focused on product cycles, margins and ultimately earnings power. We conclude a) product cycles are broader then the Street perceives, b) margin improvement is earlier and incremental to prior expectations, and c) the earnings inflection is structural w/upside potential.
* Product Cycles Among Best In Our Coverage - Modeled C08E growth of 20% is underpinned by: a) new technology for desktop and notebook drives, b) an ASP-doubling system on chip transition in enterprise, c) a WLAN move to the 802.11n standard (embedded, stand-alone), and d) RIMM handset leverage.
* Margin Upside Probable - Sustainable, non-handset factors drove 67%+ of F1Q09's 330 bps of GM upside, so another 100+ bps (to 53.0%+) is possible through late-09 as handsets improve further. Coupled with new and broad-based op ex controls, we conclude C09 EPS power could ultimately be $0.10 higher than CIR's above-Street model (Street C08/09 at $0.93/$1.10).
* Still Some Risks, But Big Ones Now Behind - End demand risks are escalating, but options filing and CFO hiring (Clyde Hosein) risks are behind.
* Structural Change Should Outperform - A 14% YTD gain is timid after C06 and C07's 32% and 27% declines when deal (handset), options, and CFO concerns weighed. Valuation is just ~15% above trough P/E's, upside to our $22 target is ~38%, and positive estimate catalysts are compelling into C09. Structural change should out-perform in an uncertain environment; Buy for 37.8% ETR.
S t r u c t u r a l T u r n - A r o u n d S t o r y S h o u l d O u t - P e r f o r m C y c l i c a l P l a y s I n 2 H 0 8
Over the past two weeks MRVL has driven unusually high incoming call volume. Questions center on the nature and sustainability of recent revenue and margin upside and thus longer-term earnings power. It seems many investors dis-engaged from the story in 2006 or 2007, but are now evaluating if something more than an early-cycle up-tick is at play. After a detailed look at the business we conclude: 1) product cycles are some of the best in our coverage, 2) gross margin upside prospects are better than previously thought in C2H08 and C09, 3) that operating expense has potential to perform better than previously expected, and thus 4) that C08 and C09 EPS power has upside to CIR and Street estimates. Against an increasingly uncertain macro backdrop, we expect the structural change story to strongly outperform purely cyclical plays in 2H08. Supporting our view:
* Product cycles broad-based: a) new desktop and notebook technology, b) enterprise system on chip, c) NAND controller, d) WLAN 802.111n transition in stand-alone and embedded solution, and e) Enterprise switches. We expect C08/09 revenue growth of 20% and 14%.
* Gross margin has upside: MRVL thinks handset margins can get to the low- 50's from ~40% now. We think the mid-40's is a reasonable late-09 target, for corp gross margin upside of 100+ bps exiting next year ($0.05/share).
* So does operating leverage: While the Street models ~1% qq growth this year, an array of sustainable internal controls suggest flat expenses are possible. We conclude $40M or $0.05 of EPS upside is possible in C09.
* Options overhangs resolved: Client conversations YTD reveal: 1) the absence of a CFO was the biggest impediment to ownership, but 2) that Clyde Hosein is viewed as a strong appointment (starts 6/23). The SEC inquiry is closed, financials were re-filed last year, and just one appointment remains (COO).
Valuation Multiples Near Troughs, Risk/Reward Compelling
After declining 32% and 27% in C06 and C07, respectively, shares are up 14% YTD, the move occurring after 5/29's 'beat and raise' F1Q09 print. While Bears will argue the good news is now priced in: a) the move discounts only 20-60% of prior up-cycle uplift, despite b) a huge EPS increase and positive revision potential ahead, while c) valuation (P/E and EV/Sales) is within 15% of trough levels (an cheaper than pre-results levels), mitigating risk from here. Exiting 1Q08 we argued for a move away from high quality and toward commodity analog/memory or growth. MRVL's strong growth potential and transition from a broken story to a structural change story is far from discounted in the stock. Key milestones ahead are sub-1% operating expense growth and improving handset chip margins into mid-2009. Risks to monitor are PC demand (desktop/NB chips 30% of total revenue), RIMM volumes (given Apple's lower iPhone price points), and the health of the global economy. On top picks, ONNN (ONNN.O; US$8.70; 1S) remains our Top Picks Live small cap pick, MRVL becomes a top large cap pick. We are more cautious on more cyclically-dependant plays such as FCS (FCS.N; US$12.90; 2S) and NSM (NSM.N; US$22.92; 2H) and sell-rated MXIM.PK (MXIM.PK; US$21.65; 3S)"
Citigroup Commentary From Friday
(& congrats to the longs who hung tough with MRVL despite all its recent "challenges"!)
Marvell Technology Group Ltd (MRVL) Surprising Structural Improvement AND a New CFO; Reiterate Buy
* What's New - While the Street expected a solid top line Y (CIR 5/18/08 note), expectations were low regarding gross and operating margins given spotty trailing-four quarter execution and the absence of a CFO. However, MRVL beat Street EPS by 70% with: 1) a structural up-tick in gross margin, 2) a structural down-tick in op ex, and 3) on-track product cycles. St C08/9 EPS to increase 40%/25% so despite an 18% post-close stock pop, valuation is benign (13.6x C09 EPS). Stock likely headed to the low-to-mid-20's in 12 months; let short-covering play-out Friday, then add to positions on mkt volatility for 35% ETR.
* A Clean Results 'Beat' - Revenues over-achieved yet again (-4.8% qq to $804.1M; Street $783.6M) but the real surprise was: a) huge gross margin upside (52.0%; CIR 49.2%), and b) tight op ex control ($270M vs CIR $293M). Overall EPS was $0.22 vs. Street $0.13. Simply nothing for Bears to pick at.
* Solid (Though Conservative) Outlook - The 3.9% qq rev growth guide is in-line but ests move up $25M on a higher base. While GM was guided flat to down 100 bps and op-ex up ~4%, we see conservatism given the number of initiatives at play. Implied EPS of $0.21 is 31% better than Street ($0.16).
* CFO In The House - Clyde Hosein (from IDTI) should: a) bolster expense mgt, b) deliver clear, steady messaging, and thus c) be welcomed by the Street.
* Estimates (F2009) - CIR F09E revs and EPS increase to $3.47B (up 20% yy)/$ 0.98 from $3.40B/$0.72. On higher estimates our target increases to $22 from $19, our risk rating to High from Speculative.
M a r g i n L e v e r a g e H e r e ; C F O I s s u e P i v o t s F r o m H e a d w i n d T o T a i l w i n d
We remain constructive on MRVL's C08E product and margin leverage story and on stock risk/reward. While acknowledging demand uncertainty given the current macro backdrop, company-specifics are improving on four important vectors: 1) the product cycle story is coming through, 2) un-satisfactory wireless handset gross margins are improving (now 40%+), 3) 2007's sloppy expense management looks under control, and 4) the CFO over-hang is gone with the placement of a well-regarded industry veteran. While the Bear argument will now shift to new CFO guidance conservatism risk in the August outlook, our checks suggest investors will look through this issue.
* Company-specific Storage drivers (~42% of sales) including: a) new 'iterative' technology in desktop (39% of sls) and notebook (42% of sls) products, b) a transition from a read channel component to a SOC in enterprise (11% of sales) which doubles ASP's, and new MLC NAND flash controllers (we think customers are INTC and SEC),
* Secular trends in WLAN (12% of sales) fueled by: a) uptake of .n technology, b) increased application penetration, and c) growth in the home router market.
* Continued handset chip momentum (15% of sales): a) Strong RIMM 2.5G/2.75G sales momentum, b) new shipments of 3G devices, and c) continued shipment to the portable navigation device market.
* We model margins easing back to 51.5% and note that the steady handset component manufacturing transition to TSMC is a gradual gross margin tailwind, though leave conservatism for increased pricing if foundry utilization moves significantly higher
* New internal controls/benchmarking, etc, and a full quarter's benefit from F1Q09's initiatives suggest that the $280-$285M F2Q09 guidance is conservative. We think 1-2% expense growth is possible.
* On CIR's revised estimates shares trade at 16.6x and 13.6x F09E (C08) and F10E (C09) EPS estimates, as operating margins ramp from 10% in F08 to 19.2% and 20.2% in F09 and F10. With downside to ~$14 (trough multiple on C08 EPS) and upside to $22, risk/reward remains favorable.
Tactically, we argue to let short covering play out Friday, then add to positions on market volatility through June, noting that after its post- results pop of 16.0%, BRCM shares soon offered investors more compelling entry opportunities. On implications, BRCM is likely to enjoy a favorable bid Friday, while the strength of MRVL's print, coupled with Dell's after-market move, likely augurs well for broader strength in Specialty Semiconductors. Our top pick for new money remains ONNN (40% ETR to $14 target).
P o s i t i v e s :
* Revenue ($804M) beat CIR/Street (~$780M) by 3% on: 1) Storage - strength in notebook segment, 2) WLAN and 3) Printers.
* Gross margins of 52.0% vs CIR at 49.2%, up 330 bps on improved costs, wafer yield enhancements and better inventory management.
* Operating expenses of $255M (includes one time benefit of $15M), significantly better than $293M modeled on reduced legal expenses and heightened focus on cost controls.
* Non-GAAP EPS of 24 cents beats CIR/Street EPS of $0.12/$0.13.
* Net cash per share increased to $0.67 from $0.45 in the prior quarter
* Storage revenue grew by ~30% y/y (Mobile 2.5' drives, HDD share gains by customers).
* Began volume shipment of HSDPA communications processor to RIMM.
* WLAN revenues grew 90% Y/Y
* Revenues guided $835M (mid pt) up 3.86% in line with CIR/St despite $24M upside in current quarter.
* Gross margins guide down 50 bps (midpt) appears conservative given structural improvements in the underlying business, though rising foundry utilization is a modest headwind.
* Focused on maintaining operating expenses flat post C2Q08
* EPS guide of $0.21 (mid point) above CIR/St at $0.15/$0.16.
* Management plans to pay down $100M in term loan (~25% of current outstanding) in C2Q08 Negatives:
* Enterprise networking revenues less robust than that observed at competitors (demand pull in prior quarter).
* Applications processor revenues were below expectations due to end of life of current product
* DSOs increased by 12% to 42 days from $0.36 in prior quarter
Risk Rating Reduced to High From Speculative We are revising our MRVL risk rating to High from Speculative predicated on the following factors:
* Strong cash flow generation potential and expected pay-down of 25% of the debt balance next quarter even through cash on hand and FCF.
* Improving earnings stability as gross margin and expense management initiatives take hold, as evidenced in gross and operating margins which are moving toward the company's targeted levels.
* The placement of industry veteran Clyde Hosein in the formerly open CFO position which is likely to further bolster expense management initiatives while also improving the company's ability to effectively communicate with the Street.
* Resolution to the SEC options timing inquiry in May and the removal of expense and executive retainment/recruitment risk related to this now- closed case.
Thanks for posting this, k-007.
Whether one trusts UBS overall or not, their analysis of MRVL can be evaluated on its own merits, and the rationale for their upgrade appears valid to me.
>>perhaps some nippling by institutions<<<
You learn something new every day - - I knew guys like to engage in nippling, but I never knew institutions did as well!!
>>>Now where on their accounting sheet do they account for the $26M that they have actually spent but have not reported in their cost of goods? Where is it? This $26M is money they have spent. They must account for it somewhere in their accounting. Where is it?<<<
I believe the direct answer to your question is that the $26 million was included as part of the Xscale acquisition cost.
When MRVL purchased Xscale, they also committed to buy minimum amounts of parts for a number of quarters, at pre-specified prices. Since these pre-specified prices were recognized to be above fair market value, the supply agreement constituted additional consideration to Intel associated with the acquisition, and purchase accounting requirements required that this delta be recognized as part of the cost of acquisition.
So the extra cost was recognized prior to the time it was incurred, which from an accounting standpoint means that a reserve was established. Then, as the parts were actually purchased, adjustments have been made from this reserve to credit the Cost of Goods Sold for the excess prices paid over fair market value. These adjustments are declining because the reserve has now been mostly used up.
Closed at $15.65, +2%. The SOX was flat, so MRVL did basically catch up with what it might have done yesterday. Perhaps today was the start of better things for MRVL.
Everyone have a great weekend! (Well, the longs anyway...)
Even though MRVL didn't participate in the SOX's move today, I expect it will catch up.
I'm not very knowledgeable about option premiums, but it appears to me that the implied volatility in MRVL's option prices has declined since the earnings report event and because of the stock's recent quiescence. In any case, I bought May 17.50 Calls today for $1.05 - - it seems like I'm getting quite a long time for that amount of premium, and I wanted a term which encompassed MRVL's year-end report, which will probably occur in early March.
Unfortunately, these calls are basically replacing my ill-fated December 17.50's, which appear to be terminal...
Citigroup Commentary on Q3
Marvell Technology Group Ltd (MRVL) A Solid Quarter and An Important Turning Point; Buy on Weakness
* What's New - The quarter was solid and a 400-person lay-off plus an array of gross margin initiatives show a new sense of urgency regarding current investor concerns. While we expected revenue growth guidance conservatism, the Street found this and C2008's margin outlook unsatisfactory, pressuring the stock to $15.15 AMC. In our view, the Street cuts we feared are an opportunity to Buy, not sell the stock, and we would use weakness to leg into positions.
* Reports Above CIR/Street F3Q08 Expectations - Revenue growth was 15%, nearly double CIR and Street 8% modeling, which coupled with in-line gross margins (up 30bps) and a 4% opex increase, lifted EPS to $0.14, above CIR/Street's $.09/$.08. Inventory days increased 10% to 89, dollars 29%, a negative following a $14M inventory re-valuation.
* 14-Week F4Q08 Clouds Compare But RIF Shows MRVL 'Gets It' - MRVL guided revenue to $780M (2.9% growth, but down ~3-4% apples-to-apples), gross margin up 40 bps and launched a 400 person, $10M/Q RIF which acknowledges acute investor expense concerns (a positive).
* Provides F2009 Sign Posts - Mgt is confident in double-digit F09 storage rev growth (40% of sls; CIR models +6.6%); at least 50% F2H09 GMs (CIR 51% in F4Q09) and a ramp in optical and power products.
* Estimates - F09E revs increase to $3.23B from $3.07B while EPS decrease to $0.56 from $0.64; macro-related demand issues remain a risk to our outlook.
Buy/Speculative 1S
P o s i t i v e s :
* Revenue ($758M) beat CIR/Street ($710M) by 7.5% on: 1) Storage - strength across all customers and market segments, 2) Printer ASICs - record shipments, and 3) WLAN (over 50% q/q growth).
* Gross margin increased 40 bps to 48.7% v/s 48.3% in 3Q.
* Op ex up just 25% the rate of revenue growth (4% vs 15%)
* Tax rate declined in Q3 to 7.5% from 19.5% in Q2 (on settlement of foreign tax audit and reversal of prior reserved taxes).
* Non-GAAP EPS of 14 cents beats CIR/Street EPS by over 45%.
* Revenue guidance for 14-week F4Q appears conservative (up 2.9% to $780M, but down 3-4% on 'normalized' basis).
* Plans to lay-off 400 Employees (7% of current workforce) to save $10M per quarter (~$4M to reflect in 4Q).
* Expects double digit storage revenue growth in F09 based on PC and non- PC design-wins, suggesting $35M or more of potential upside to CIR's F2009 model
* Current SEC/Options-related legal inquiry should ultimately be completed, saving $9M/$0.013 in quarterly expenses currently in our and Street models in F2008 and F2009.
N e g a t i v e s :
* Base band & Application Processor unit grew 10% v/s our 23%'; wireless only expected to be flat in F4Q08.
* Inventory increased by $86M q/q (60% of which was handset-related).
* One-time charge of $8M in Q4 on employee severance plan.
* GM to reach 50% by F2H09 v/s our projection of F3Q09.
I just added shares at $15.35 - - what a deal!
Thanks for your posts, sungolfer, I like to read about what the analysts are saying. And today, I went along with the Caris recommendation and bought Dec 17.50 calls for 60 and then 55 cents.
I think this could be a breakthrough quarter for MRVL, and in case it is I want to be able to be able to add to my position at what in hindsight will be the very attractive price of $17.50.
On the other hand, cbs may be right that if the market doesn't improve, MRVL's earnings may not matter....
More Citigroup Commentary out this evening:
C o m m u n i c a t i o n I C ( B R C M , M R V L , S L A B )
Sector Thesis and 2008 Stock Opportunity - While CommIC was a source of significant volatility and repeated disappointment 2007, we expect a forming R&D pay-off in wireless investments to deliver some of the best YY revenue comps and operating margin expansion in semis in 2008. In addition, both BRCM and MRVL benefit from solidifying new management (BRCM = CFO, MRVL = CFO, COO, new Board members).
While investor confidence was significantly damaged in the past 18 months, it can recover if margin leverage returns as we expect. A near-term risk is aggressive January quarter Street estimates for MRVL, though as these rationalize the shares should continue to trade higher on 2008 and 2009 prospects.
* Our BRCM investment thesis is that 2008 will be a year of modest though accelerating base band pay-off, accelerating YY comps (to the high-20's) and that visibility into 2009's revenue growth and target margin model attainment (helped by WLAN, DTV, Bluetooth, and navigation demand) can drive strong share appreciation. We believe shares over-reacted to 4Q07's revenue and margin outlook, and based on our valuation analysis are now within 10-15% of trough levels, trading at 22.8x our 2008E EPS estimates and at 3.9 EV/Sales (31% and 27% below long term medians). The 45% ETR to our $49 target(comprehends full Verizon licensing payments (Street estimates do not) creates an attractive risk/reward equation in this long-term call. Upcoming milestones include November 8th Analyst Day, and product news at CES and 3GSM in January and February, 2008 key events ahead.
* Our MRVL investment thesis is that broad-based revenue growth, steady sequential operating margin expansion totaling 500 bps next year (to 16.1%), helped by improving handset gross margins and controlled operating expenses, can drive share appreciation into the low-20's on a 12-month basis. Recall we trimmed revenue estimates last week on Marvel's January quarter, recognizing the predilection for more conservative than modeled guidance and also anticipating that a new CFO would take a conservative tack in setting expectations. The stock could be volatile in the next month as competitors take this same approach, though the shares are up 12% QTD (vs -8% for the SOX and 1% for SP500) suggesting that investors are starting to look through near term estimate revision risks toward a more material and longer-duration fundamental turn for the company. MRVL remains rated Buy, though with potential for a negative Street reset we would look to add to positions following the next call.
Investment Framework - Our investment framework rests on potential for company-specific new product revenue growth drivers and operating margin expansion against a backdrop of favorable secular communications applications drivers (handsets, home and enterprise networking, digital TV), and technologies (WLAN, Bluetooth, DTV, navigation).
Reporting Outlook and Implications - Company-specifics came to the fore in 3Q07 results and 4Q07 outlooks, a theme that should persist in 2008. On the positive side, the demand backdrop looks healthy all- around (ATHR (NR), BRCM, SLAB). Further small companies (ATHR,SLAB) are generating growth and leverage, in SLAB's case, harvesting a pay-off from 2006 and 2007 microcontroller, broadcast, and networking R&D. The flip side of this coin is that BRCM and MRVL are presently struggling with high handset investments which are deflating gross margins (MRVL), inflating operating expense (both), and therefore muting operating margins (both). However, we think both companies will begin to better harvest top line growth and margin leverage in 2008, a basis for our constructive stance on both names.
Citigroup Commentary on High Notebook Demand - - out this evening.
"What's New: Intel Lead Times Stretching - Discussions with the PC supply chain suggest Intel's lead times are stretching, particularly for high-demand notebook parts. Despite sluggish desktop component demand (e.g. motherboards), notebook component demand in 4Q07 has been better than original expectations, driving Intel's tightness. Meanwhile, Intel continues to see solid demand for quad-core server processors, incrementally benefiting from AMD's limited Barcelona supply. Intel has executed rush deliveries in certain circumstances to meet unfulfilled Barcelona demand."
"Developments in Pakistan are extremely serious and will certainly impact equities. Add this to the list of oil, dollar and sub-prime as U.S. elections near and you have a top ready to pop."
Based upon your comment I updated myself on today's developments in Pakistan, and I don't find Musharraf's declaration of emergency rule to be all that significant. Whatever he has to do to maintain control of that country is in our interests. I'll get worried if he were to be ousted somehow, because then the fanatics will be in charge.
Similarly, I consider oil, the dollar, sub-prime, and US elections to also be "old news," and that people will probably turn out to be ill-advised to sell for any of those reasons as well.
I'm with Barton Bigg's, in thinking that a melt-UP in multinationals and tech is a good possibility in the coming months:
http://www.cnbc.com/id/21562349
"I do expect to see the MMs attempt to take the PPS to 17.5...or at least try. Will they succeed is the question."
I think you're right that options premiums will probably decline some on Monday, but with 2 weeks of trading until expiration, I doubt the MM's will be able to pin MRVL common to $17.50.
Of course I'm biased because I'm a pure long, but the stock's been acting like it's ready to run, provided the market starts acting better and/or there's a company-specific catalyst.
Hopefully the financials can start acting better next week - -perhaps something constructive will emanate from Citigroup over the weekend. And speaking of Citigroup, their analyst report which I recently posted almost sounded like they KNEW that a MRVL CFO announcement was imminent. Assuming the new CFO is well-regarded, which I expect, this could be an important driver of the stock price.
Overall, I feel quite comfortable with holding my long position through the November 27 conference call. With or without a new CFO, I think the news will be good, and they'll be better prepared to explain the gross margin upside and downside impacts and future trends.
Here's some MRVL-related excerpts from a Citigroup Report issued this morning:
31 October 2007 - 21 pages
Specialty Semiconductors
Trimming Estimates for Off Cycle Reporting Companies
* Trimming Proactively - We anticipated 4Q07 Street revenues were vulnerable entering earnings ('Previewing 3Q07 Results, 4Q07 Outlooks and 2008 Prospects', 10/2) and thus far company guidance has undershot by ~250 bps.
The trend likely continues with off-cycle ADI, MRVL, NSM, and SMTC in the next 45 days. We proactively adjust estimates down now. While stocks have recently come in (the three analog names are down an average of 10% QTD and MRVL has underperformed YTD (-6%)) downside volatility remains a risk until EPS estimates align to more realistic 4Q07 and 2008 prospects. Once estimates recalibrate, better positioned stocks should base and then move higher given 2008 revenue, margin and FCF catalysts. //snip//
* MRVL - Encouraging organizational changes include two board member appointments in the past week and potentially a new CFO within the next month. On fundamentals, F3Q08's 8% revenue guidance looks attainable, though CIR's F4Q08 estimate falls to 3% from 8%, baking in greater HDD, Ethernet and WLAN seasonality. Handset gross margins remain a risk, though MRVL working on positive offsets. C08/09 revs and EPS decline to $3.07B/$3.36B and $0.64/$0.91 from $3.23B/$3.91B and $0.80/$1.19 (Street $0.73/$1.09). Reit. Buy seeing potential downside to $15.5, upside to $22.0. //snip//
M a r v e l l T e c h n o l o g y ( M R V L . O - U S $ 1 7 . 8 6 ; 1 S )
While one of the sector's fastest growing companies this decade until 2006, the past year+ has proved problematic for MRVL. However, revenue growth appears to be returning to the model just as a new executive (CFO) and board placements come together to strengthen the organization. Multiple fundamental inflections appear hand, though risks still exist such as handset gross margins, and ultimately new CFO guidance conservatism. FY08E and FY09E Street estimates have come down modestly (3 to 4%) since September(likely due to new analyst initiations) though in the past month the shares are up 10% QTD (vs -8% for the SOX and 0% for SP500) suggesting that investors could be willing to look through near term estimate revision risks if a more material and longer-duration fundamental turn is at hand for the company. MRVL remains rated Buy with a favorable 2:1 risk/reward ratio, though with potential for a negative Street reset we would look to add to positions following the next call.
Our $22 target is unchanged, though have adjusted estimates for the following:
* Our target price is now derived from our C2009 projection, rolled over from a C2008 basis.
* We reduced our FY09 pro forma EPS estimates to $0.64 (9% below Consensus estimates) while lowering FY10 EPS to $0.91 by 24% to account for down-cycle modelling.
"Again, watch the $20 strike px for an early indication. The reason why I keep saying this - is this will be your first sign to the stock going higher. It still has not yet materialized and won't until MRVL trades north of $18.50."
Thanks for contributing your options expertise, cbs. In your statement above, my question is: Which is the chicken and which is the egg? Will activity at the 20 strike price be a forerunner to an advance in MRVL's stock price, or will an advance in MRVL's stock price be a forerunner to activity in the 20's options?
"One question I have is how might MRVL stock price react going into the EOY. I hope it does not suffer from tax selling."
MRVL has a market cap of around $10 billion. In my experience, tax loss selling only affects small caps which have a higher retail participation. In MRVL's case, their price performance for the rest of the year will depend upon how well they can regain the confidence of institutional investors, and I think they're making some progress in that regard.
"The Sox Index is not only about Chip makers, the Semi Equipment sector (See AMAT, BRKS, LRCX, NVLS etc.) is tanking..."
That's a good point - - the equipment companies have significantly underperformed the semi designers, and the equipment companies do have substantial representation in both the SOX and in SMH. Which brings me back to a point I have raised in the past: For an investor in the semi designers only (such as myself), the SOX and SMH are not very accurate indicators of performance.
And when you think about it, no other industry indexes incorporate capital equipment suppliers to that industry into the same index. For example, transportation indexes are comprised of airlines, railroads, and truckers, but they don't include airplane manufacturers, railcar manufacturers, or truck manufacturers - - - and the same distinction is maintained all other industry indexes - - except for semis.
A Theory as to Why Semis Have Been Weak
Overall, tech has done well the past couple of months, because in general tech spending is viewed as being responsive to the level of capital spending by corporations, which is anticipated to be strong.
However, over the past few years semi sales have come to be increasingly viewed as being responsive to the level of consumer spending (particularly for cellphones and other mobile devices). So since consumer spending is expected to weaken, semi stocks have been viewed as being sensitive to consumer-discretionary expenditures, and accordingly have not done well. The earnings reports this week by TXN and BRCM reinforced this perception, at least for the time being, even though I think the issues in those cases were mostly company-specific.
The $64 question is: Is it true that semi sales will be hurt be a consumer spending slowdown in the U.S., precipitated by the recession in housing?
In my opinion, this perception is NOT valid. High semi-content items such as PC's and networking gear are still predominantly responsive to corporate capital spending, as are Blackberries and smartphones. And among primarily consumer items, one must consider WORLDWIDE demand for such items as low-end cellphones, not just US demand. In most emerging markets, a cellphone is the highest priority electronics device for most consumers - - the first thing they'll purchase as soon they can afford it. It seems to me that increasing emerging market demand will more than offset any decreased consumer demand in the US.
I'm interested in whether others: a) believe identification with the consumer is at least partially responsible for the semis stocks' weak performance, and b) whether a consumer spending slowdown in the US would actually hurt semi sales significantly, and MRVL's sales in particular.
Bravo cbs, and Godspeed! [EOM]
Here's my viewpoint: There's a message board practice referred to as "clogging," and whether intentionally or not JB, that's the effect of your very large number of posts.
Yes, most of your posts broach an idea of some kind (as opposed to being entirely devoid of content), but even so the majority of your ideas are not MRVL-related. When a visitor comes to this board and typically checks out only the first page, what I consider to be the great posts of Lakers, for example, will tend to be swept from view because there's too much clutter, and the excellent contributor that visitor might have become will instead be driven away.
I'm not saying you should become something you're not, JB, but it seems to me your interests and style would be better suited to I-Hub's active "Short Term Traders" board, and here's the link: http://investorshub.advfn.com/boards/board.asp?board_id=2871
We're at a transition point in this board, and what this board becomes is up to those of us who choose to stay. So, I'm speaking up, not to hurt anyone's feelings, but in the hope that in the future this board will be a valuable contributor to our understanding about MRVL and will thereby help us to make better investment decisions regarding MRVL. Now is the time for others to speak up as well -- including the lurkers!
<<<...a long time investor, not a options guy or a trader but an individual that has faith in the management's ability to monetize it's technical expertise. Whether it be this year or next.>>>>
I like your philosophy, finetooth. How about you, would you be interested in being the successor moderator for this board?
S2, with your move to the TXN board, I'd like to nominate Lakers to be the successor moderator for the MRVL board, assuming he wants to stay and is willing to accept the nomination.
I don't see any information on the website regarding how a successor moderator is selected, but an e-mail from you to the administrator would probably do the trick, I'd think.
I'm not interested in TXN (I'm inclined more towards small and mid-caps), and I suspect others here are "married" to MRVL as well (i.e., for better or worse). In my view, the content of Laker's posts is exceptional (acknowledging that I'm a fundamentalist), and I hope this board (as well as our MRVL holdings) will prosper in the future.
<<< I have the suspicion because there was no news, that this might just be a game of pin the strike.>>>
Here's my alternate, fundamentalist explanation: Institutions are aware that MRVL's growth is picking up again, but they've been loathe to buy because they knew the SEC still wanted its pound of flesh for the stocks options issue.
With last Friday evening's Wells Notice announcement, the end of this matter is now in sight for the institutions, and the consequences aren't going to be that severe (except perhaps for Daili). So, these institutions have begun their accumulation this week, and this effect was enhanced by INTC's good news and the resultant favorable semi group backdrop.
The proper order of things has been restored: Semis lead the market to the upside, and MRVL leads the semis - - closing on its high of the day.
I hope this trend continues!!
For some elaboration on the implications of a "Wells Notice," pasted below is an 8-K filed by Take-Two Interactive on August 15. Notice especially the last sentence. TTWO is up sharply since this development was announced. In Marvel's case, however, I'll bet that the settlement with the SEC will require Weili Dai's complete departure from the company.
Item 8.01. Other Events.
The Company received a "Wells" call on Thursday, August 9, 2007, from the Staff of the Division of Enforcement (the "Staff") of the U.S. Securities and Exchange Commission (the "Commission") in connection with the previously disclosed investigation into the Company's historical stock option granting practices. The Staff informed the Company that it intends to seek authority from the Commission to file charges in connection with its investigation, and that it also intends to seek authority from the Commission to seek a civil monetary penalty. The Staff informed the Company that it could make a submission to the Commission and the Staff that the Company thought appropriate (a "Wells" submission). The Staff informed the Company that it would consider the content of the Wells submission and provide the submission to the Commission before the Commission ultimately makes its charging and penalty decisions. The Company continues to cooperate with the Staff and continues to expect to resolve this investigation by means of a settlement rather than a contested litigation of charges, and believes that the "Wells" call represents a significant step forward towards that resolution.
<<<< I don't get the tanking in SMH? >>>>
SMH didn't tank. They kicked MXIM out of the ETF because it was delisted to the pink sheets. Today the SMH was ex-dividend .05 shares of MXIM which will be distributed to yesterday's SMH owners. They should have adjusted the previous day's close down to reflect the value of the MXIM shares being distributed, but didn't for some reason.
<<<<Why is the SOX so underperforming in this mkt??>>>>
I've been wrestling with this question myself. This week, one could say that earnings warnings and analyst downgrades are the culprit.
But the SOX has been underperforming for about the past 3 months.
One partial explanation is that the SOX index is not that representative of the overall semiconductor sector. It is a price-weighted index (like the Dow), which means that the largest weighted components (at about 11% each) are KLA-Tencor and SanDisk. A more representative index is the one underlying the Ishares Semiconductor ETF, symbol IGW. As you can see from the linked chart, IGW has not been underperforming as badly as the SOX:
http://stockcharts.com/h-sc/ui?s=IGW&p=D&b=5&g=0&id=p09180611755
However, IGW is still about 4% beneath its July highs, even though other classically cyclical plays (materials, industrials) are doing extremely well.
Attempting to be open-minded to what the market is saying, one could infer that semis are weak because worldwide consumer purchases of PC's, cell phones, and CE items will be relatively soft this holiday season - - i.e., that the continuing cyclical expansion will be driven by capital spending rather than by the consumer.
While I'm watching for signs of the validity of this scenerio, I'm not buying it yet. Sometimes the market just misprices a group for a period of time. I'm still looking for the Semis to substantially outperform the market into year-end, and I expect MRVL to substantially outperform the group.
The past couple of days I've been buying May 20 Calls in the $1.05 to $1.10 area. You need to go out to May to encompass the next two earnings reports - - even the February options will only include one quarterly earnings report.
By May, MRVL's turnaround and growth will be apparent to everyone, and I wouldn't be surprised to see the stock at around $30.
Marvell Tech Group Started At Neutral At Bank Of America
Last update: 9/12/2007 5:41:13 PM(END)
Dow Jones NewswiresSeptember 12, 2007 17:41 ET (21:41 GMT)
I don't have access to any of BofA's commentary, but often brokers won't initiate with a "neutral" unless they think they're likely to be upgrading the stock later on.
In the 10Q they included a very comprehensive explanation for Q2's GM decline (see pasted excerpt below). I suspect this was to correct for the conference call shortcomings.
"The decrease in gross margin percentage for the three and six months ended July 28, 2007 compared to the three and six months ended July 29, 2006 was primarily due to higher inventory excess and obsolescence provision and to lower gross margins for cellular and handset products which commenced shipment in November 2006 as a result of the acquisition of the communications and applications processor business from Intel. The excess and obsolescence provision increased by $22.4 million and $23.3 million for the three and six months ended July 28, 2007, respectively, compared to the same periods in the prior year. The increase in excess and obsolescence provision was due to the mix and quantities on hand compared to forecasted demand for such products on hand including storage SOC, communications and applications processors and wireless products. The cellular and handset inventory that we are contractually obligated to purchase under a supply agreement with Intel are recorded at estimated fair value as required under purchase accounting. The amount of the supply agreement credited against cost of goods sold was $43.9 million and $77.6 million for the three and six months ended July 28, 2007, respectively. We anticipate that we will continue to source cellular and handset inventory under the Intel supply agreement, and that such purchases will in significant part be beyond our minimum committed levels under the agreement. We will record such inventory at cost, which will adversely impact our gross margins relative to periods where we only purchased inventory at the minimum committed level. The supply agreement requires us to purchase inventory earlier than anticipated product shipments to our customers resulting in higher levels of inventory and associated carrying costs. As a result, the higher levels of inventory increase our risk of holding excess and obsolete inventory."
Since the Sept 17.5's expire 3 weeks from Friday, they should definitely be categorized as longshots. However, I own a few myself, and FWIW I'm holding them versus selling them for 10 cents.
Seagate raised its guidance.
http://biz.yahoo.com/prnews/070828/aqtu904.html?.v=1
You're cluttering up this board with repetitive, emotional posts containing no useful information.
On Ignore.
$5,000.