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.
