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).
