GS:Sales upside, restructuring positive;14-week 4Q causes confusion
11/27/07
What's changed
Marvell reported FY3Q (Oct) sales of $758mn (+15% qoq), well ahead of our ests., Street, and guidance of $710mn, with strong trends across all segments. EPS (op, inc ESOs) of $0.05 beat our est. of ($0.02) on higher sales, higher GM (47.7% vs our 47.4%),
lower ESO expense ($55mn vs our $60mn), and taxes ($6mn benefit vs our $12mn expense), but higher p/f OpEx ($280mn vs our $274mn). EPS (op, ex ESOs) of $0.11 was above our estimates and Street’s $0.08. FY4Q (Jan) sales guidance is $780mn (+3%), vs
our $736mn and Street $755mn; F4Q is a 14-week period detailed in the 10-Q and noted in our preview, but lack of more upfront communication could have caused confusion given the after market stock action. Marvell announced a 400 person (~7%) workforce
reduction, which will drive ~$10mn/qtr OpEx savings and help Marvell drive to its target model.
Implications
We are updating our model to reflect higher near-term sales, but FY09 and FY10 are
relatively unchanged on an absolute basis given our firm’s bias of a conservative macro view. Still, our EPS improves on the restructuring and lower tax rate, which returns to 10% p/f
historic rate. Our F08, F09, and F10 EPS (op, inc ESOs) go to $0.01, $0.29, and $0.59 from ($0.08), $0.23 and $0.55. We retain a Buy rating as we are encouraged by MRVL’s growth prospects and increased margin focus, but recognize investors have been shaken by recent missteps and could wait for a new permanent CFO.
Valuation
Our normalized EPS goes to $0.46 from $0.45, but we are lowering our 12-month price target to $19 from $21 as we adjust our target PEG to 1.4x from 1.5x given view of lower reduced market risk tolerance.
Key risks
Primary risks to our view on Marvell are end-market trends, ability to gain share in core markets
and penetrate new markets, ongoing scrutiny related to past options issues, and replacement of key
executives, including CFO.
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