Note: This report contains substantially new material. Subsequent reports will have changes highlighted.
Reason for Report: 4Q18 Earnings Update
Prev. Ed.: January 17, 2018; 3Q18 Earnings
Firms’ Recommendations: Positive: 75% (12 firms); Neutral: 25% (4); Negative: 0.0% (0) Prev. Ed: 14;4;0
Firms’ Target Price: $28.67 (↑$2.11 from last edition;15firms) Firms’ Avg. Expected Return: 27.9%
Note: Although dated Apr 12, 2018, tables are as of Mar 14, 2018.
Note: A Flash Update on 4Q18 Earnings was done on Mar 8, 2018.
Note: The tables below (Revenues, Margins and Earnings per Share) contain material from fewer brokers than in the Valuation table. The extra figures in the Valuation table are taken from reports that did not have accompanying spreadsheet model.
Portfolio Manager Executive Summary
Marvell Technology Group Ltd. (MRVL) is a leader in storage, communications and consumer silicon solutions. The company's diverse product portfolio includes switching, transceiver, communications controller, wireless and storage solutions that power the entire communications infrastructure, including enterprise, metro, home and storage networking. The company is a fabless supplier of integrated circuits (ICs), primarily to the enterprise and consumer end markets. Marvell acquired the wireless IC business, XScale from Intel (Nov 2006), which has enabled it to offer solutions for wireless handheld devices.
Competition:In the High Definition (HD) drive market, LSI Corp.is Marvell’s main competitor as these two are the primary SoC (system on a chip) suppliers. Freescale Semiconductor Holdings, Ltd., QUALCOMM and Texas Instruments offer various components to the market. Within the communications market, Broadcom continues to be Marvell’s chief rival. The two companies appear to share the rapidlygrowing GbE market almost evenly but Broadcom has an advantage in the wireless LAN and Fast Ethernet markets.
Of the 16firms covering the stock in the Zacks Digest Group,12firms provided a positiverating andfourfirmsgave a neutral rating.Target prices range from a low of $21 to a high of $38 with the average being $28.67. The firms’ expected return over the current share price is 27.9%.
Bullish – (Equivalent ratings: Buy, Overweight, Outperform and Above Average)– 13 firms or 76.5%: The firms are optimistic about the company’s impressive recovery after being in the transition phase for around two years. A streamlined product portfolio and new product ramps have negated the headwinds of legacy networking business. Additionally, the company’s Cavium buyoutis likely to be atop-line booster for the company. The margin and the bottom-line figures are also anticipated to be driven by the buyout.
Cautious – (Equivalent ratings: Hold, Neutral and Equal Weight) – 4 firms or 23.5%: Despite being bullish on the company’s Cavium acquisition and its positive impacts, some firms are apprehensive about its long-term growth potential, which keep them on the sidelines.
General Long-Term Outlook:Marvell has a wide range of products in its patented portfolio that allows it to integrate various functions into a single chip with its latest advanced process technology (65-nm). The companybelieves that by leveraging its capabilities in areas like mixed signal design, SoC design, and DSP algorithms, it can deliver growth rates greater than the overall industry rates.Moreover, with the acquisition of the XScale product line, Marvell has established itself as a supplier of end-to-end SoC solutions to the portable consumer electronics device market.
Apr 12, 2018
Overview
California-based Marvell Technology (MRVL) engages in the design, development and marketing of semiconductors, such as analog, mixed-signal and digital signal processing integrated circuits. Marvell’sproducts also include switching, transceivers, wireless, PC connectivity, gateways, communications controllers and storage and power management solutions. The company’s products serve applications used in business enterprise, consumer electronics and emerging markets, and enable customers to store and move digital data by using media infrastructures or wireless. These products are also used for transmitting and recovering digitally converted analog signals to and from various types of broadband communications media. The company has a significant number of patents in design, software and reference platforms to its credit. The company operates in Bermuda, China, Germany, Japan, Korea, Taiwan, the United Kingdom, and the United States. Its website is
The firms identified the following factors for evaluating the investment merits of Marvell:
Key Positive Arguments / Key Negative Arguments- Ramp Up in New Products: WLAN technology is gaining foothold in the digital domain of the consumer industry and is used in handsets, digital cameras, printers, PDAs and in gaming solutions. This technology shift is also increasing Marvell’s earnings.
- Patents that give Marvell an edge: Marvell acquired a significant number of patents in design, software and reference platforms, which give it an edge over its competitors.
- Strong market growth: Strong market acceptance of Marvell’s HD handheld devices and the use of its SoCs in desktops and notebooks by heavyweight and traditional original equipment manufacturers (OEMs) will enable it to become a market leader.
- Barriers to entry: Marvell with its technology and patents provides high entry barriers for new companies within the industry.
- Specific end-market leverage risk: Marvell is dependent on storage and communications end-markets and sluggishness in these markets will put the company at risk.
- Macroeconomic environment: Economic slowdown remains a major cause of concern in the near term.
- HDD: The HDD industry is highly cyclical and rapid technological changes take place. Thus, it might affect Marvell in the future.
- Investigation:Levi & Korsinsky, a national law firm, recently launched an investigation of Marvell for possible violations of the Federal Securities Laws. These litigation and internal accounting and controls investigations will remain a headwind for the company.
Note: Marvell’s fiscal year ends on Jan 31; fiscal references differ from the calendar year.
Apr 12, 2018
Long-Term Growth
Marvell has a broad patented portfolio of products that allows it to integrate various functions into a single chip. The company believes that by leveraging its capabilities in areas like mixed signal design, SoC design, and DSP algorithms, it can deliver growth rates greater than the overall industry rates.With Intel Inc.’s communications and application processor business (XScale acquired in 2006), Marvell gained a strong presence in the growing market segment for processors used in smart handheld devices.
The acquisition of the XScale product line has helped Marvell to establish itself as a supplier of end-to-end SoC solutions to the portable consumer electronics device market. The XScale product line has also helped to remove Marvell’s capacity constraints and aided the migration of existing product lines to more advanced process technology nodes, optimization of its cost structure and the development of highly integrated SoC products.
In a consolidating semiconductor market, which increasingly requires scale and profound SOC design expertise, the firms believe that Marvell is well positioned. In particular, Marvell has industry leading mixed signal design capability and rich experience with leading edge ARM implementations. Hence, they believe Marvellwill play a crucial role in meeting the increasing demand for highly integrated SOC solutions.
In the HDD SOC market, Marvellremains the dominant player. In networking, Marvell is well positioned but has a host of competitors. The 10G/40G silicon cycle is a tailwind but short-term macro weakness could adversely affect results
Being a fabless company, it does not have to own or operate foundries for the production of silicon. Instead, it works with independent merchant foundries and chip assemblers for the manufacturing of products. Marvell’s customers are original equipment manufacturers (“OEM’s”) and original design manufacturers, both of which design and manufacture end market devices. This benefits the company with superior manufacturing capability, scalability, as well as flexibility to develop complex SoC and SiP devices that offer superior technology and services at competitive prices. It also frees up resources for research and development (R&D) activity that would otherwise have been locked up in capital assets. This approach enables it to focus more on the designing, developing and marketing side, which reduces operational and financial risk.
The firms believe that the launch of the new low-cost smartphone supported by Marvell’s ARMADA solution will boost its market share, going forward. They further believe that increasing demand for 4GLTE wireless technologies and smartphones in emerging markets, particularly China will boost Marvell’s market share in the region.
The firms also believe that Marvellis a promising player in thesolid-state drive (SSD) controllers market. Over the coming years, they expect an increasing number of PCs/servers to use flash-based solid-state technology for storage. The storage market is seeing a steady increase in demand, given fast-growing data volume, especially the exponential growth in unstructured data. NAND (non-volatile storage technology) demand is anticipated to remain strong this year as well. SSD demand will also increase and can surpass manufacturing capacity, leading to periodic shortage and higher pricing in the near term. Marvell is benefiting from growing demand for SSD products.
Currently, iPads and Mac devices use flash-based storage solutions, though these are not sophisticated enough for high performance applications. There is still a significant cost premium for high performance SSDs versus HDDs, though Intel Inc.’sUltrabook push could help drive SSD adoption faster and lower average selling prices (ASPs) (with higher volumes).
Over the long term, most of the firms note that Marvellhas a strong product cycle, solid and improving relationships with Tier-1 OEM customers (such as ZTE, Yulong Coolpad, Lenovo, HiSense, Samsung and China mobile-branded phones) and across all its end-market segments, and an ability to improve its margin structure.However, stiff competition from Qualcomm and Texas Instruments Inc. will remain a concern.
Apr 12, 2018
Target Price/Valuation
Provided below is a summary of valuations and ratings as compiled by Zacks Research Digest:
Rating DistributionPositive Rating / 75.00%↓
Neutral Rating / 25.00%↑
Negative Rating / 0.00%
Digest High / $38.00↑
Digest Low / $21.00↑
Avg. Target Price / $28.67↑
No. of Firms with Target Price/Total / 15/16
Risks to the price target include integration risks, end-market concentration and increased competition in storage, management changes, technology obsolescence and high dependence on the HDD industry.
Recent Events
On Mar 08, 2018, Marvell announced 4Q18 financial results. Highlights are as follows:
- Total revenueswere $615.4 million, up 8.7% y/y.
- Non-GAAPEPS was 32 cents that surged 45.5% y/y..
Revenues
Per the press release, Marvell’s revenues increased 8.7% y/y to $615.4 million surpassing the Zacks Consensus Estimate of $611.6 million. Moreover, reported revenues came ahead of the mid-point of management’s guided range of $595-$625 million (mid-point $610 million).
In the end markets, storage revenues (53% of total revenues) grew 4% y/y and 3% sequentially on better-than-expected demand at the SSD (Solid-State Drive) segments, along with elevated demand from enterprise and data-center operators.
The networking business (25%) increased 5% y/y and 3% sequentially mainly due to increase in the network of processor product line, i.e. switch, PHY and embedded.
Revenues from connectivity (14%) climbed 31% y/y. The metric was primarily driven by solid demand for “high-end voice-enabled” and home media streaming applications. However, sequentially, the segment’s revenues slipped 16%. Other product (8%) revenues during the quarter grew 20% y/y and 5% sequentially.
Provided below is a summary of revenues as compiled by Zacks Digest:
Revenues ($ in Million) / 4Q17A / 3Q18A / 4Q18A / 1Q19E / FY17A / FY18E / FY19E / FY20ETotal Revenues / $571.0 / $616.3 / $615.4 / $601.0 / $2,367.0 / $2,414.7 / $2,499.3 / $2,589.7
Digest High / $571.4 / $616.3 / $615.4 / $602.7 / $2,393.0 / $2,416.0 / $2,508.0 / $2,627.0
Digest Low / $566.4 / $616.3 / $615.4 / $600.0 / $2,301.0 / $2,409.2 / $2,495.0 / $2,535.0
Y/Y Growth / -6.7% / -4.6% / 7.8% / 4.0% / -12.4% / 2.0% / 3.5% / 3.6%
Q/Q Growth / -11.6% / 1.9% / -0.1% / -2.3%
Guidance
Marvell projects 1Q19 revenues in the range of $585-$615 million (mid-point $600 million).
Firms’ Outlook
The firms believe that Marvell’s constant endeavor to focus on developing next-generation technologies like small form factor HDD, SSD, and unified TDSCDMA/WCDMA as well as TDD/FDD LTE platforms might lead to competitive advantagesand market expansion over the long run.
These firms are also optimistic about the company’s presence in the networking market,post the integration of Cavium, with the combined effect of Marvel’s switching silicon and Cavium’s Octeon networking processors.
They are positive about the new product ramps and streamlined business portfolio, resulting from the turnaround that the business witnessed after being in the transition phase for around two years.
However, some firms are a bit apprehensive about Marvell’s long-term growth potential and hence prefer to be on the sidelines.
Margins
According to the press release,Marvell’s non-GAAP gross profit came in at $383.1 million, up 17% on a y/y basis. Gross margin also increased from 57.8% to 62.3% on a y/y basis, primarily buoyed by a favorable product mix and higher revenue base. Gross margin also came in marginally higher than management’s expectation of 62%.
Non-GAAP operating expenses rose 2.4% y/y to $217.6 million and were within the company’s expectations of $215-$220 million. As a percentage of revenues, operating expenses contracted 210 basis points to 35.4%. Marvell’s non-GAAP operating margins came in at 26.9% compared with 20.3% reported in the year-ago quarter. The results were positively influenced by higher gross margin and lower operating expenses as a percentage of revenues.
Provided below is a summary of margins as compiled by Zacks Digest:
Margins / 4Q17A / 3Q18A / 4Q18A / 1Q19E / FY17A / FY18E / FY19E / FY20EGross / 57.6% / 61.6% / 62.3% / 62.5% / 55.6% / 61.4% / 62.7% / 63.0%
Operating / 19.5% / 28.3% / 25.7% / 26.7% / 13.3% / 25.4% / 28.3% / 29.5%
Pre-tax / 20.2% / 29.1% / 27.9% / 27.5% / 14.1% / 26.5% / 28.9% / 30.0%
Net / 20.1% / 27.9% / 26.8% / 26.3% / 13.8% / 25.5% / 27.7% / 28.8%
Guidance
Management expects 1Q19 GAAP and non-GAAP gross margin to be approximately 62% and 63%, respectively. GAAP operating expenses are expected to lie between $250 million and $260 million, while non-GAAP operating expenses are estimated to be approximately $215 million.
Firms’ Outlook
According to the firms, reduction in exposure to the declining HDD market will ensure the shift of the product mix to higher margin products,which in turn will improve margins further.
Also, the firms believe that completion of Cavium’s acquisitionwill prove to be beneficial for the company’s margins.
Earnings per Share
According to the press release, The company reported non-GAAP net income of approximately $164.8 million during the quarter as compared with $118.4 million reported in the prior-year quarter. On per-share basis, non-GAAP earnings came in at 32 cents, up 45.5% from the year-earlier quarter’s earnings of 22 cents. Quarterly non-GAAP earnings also came ahead of the mid-point of management guided range of 29-33 cents (mid-point 31 cents) as well as beat the Zacks Consensus Estimate by a penny.
Provided below is a summary of EPS as compiled by Zacks Digest:
EPS / 4Q17A / 3Q18A / 4Q18A / 1Q19E / FY17A / FY18E / FY19E / FY20EDigest High / $0.22 / $0.34 / $0.32 / $0.31 / $0.66 / $1.20 / $1.38 / $1.52
Digest Low / $0.22 / $0.34 / $0.32 / $0.31 / $0.61 / $1.19 / $1.33 / $1.35
Digest Average / $0.22 / $0.34 / $0.32 / $0.31 / $0.62 / $1.19 / $1.36 / $1.47
Y/Y Growth / 99.0% / 69.1% / 47.1% / 29.9% / 63.5% / 93.0% / 14.0% / 8.0%
Q/Q Growth / 9.5% / 13.0% / -4.7% / -3.4%
Guidance
The company anticipates 1Q19 non-GAAP earnings per share in the band of 29-33 cents (mid-point 31 cents). On GAAP basis, earnings are projected to come between 22 cents and 26 cents per share.
Firms’ Outlook
The firms believe that an increase in margins due to shift toward a higher margin product suite will be beneficial for the company’s bottom-line growth.Additionally, the integration of Cavium is likelyto boost the metric in the first six months,post the completion of the acquisition, pertaining to improved cost efficiencies.
Research Analyst / Sreeparna RayCopy Editor / Annesha Bhattacharjee
Content Ed.
QCA / Aniruddha Ganguly
Lead Analyst / Anirudha Bhagat
Reason for Update / 4Q18 Earnings Update
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