Analyst Conference News Summary

Marvell Technology Group
MRVL

conference date: August 22, 2013 @ 1:45 PM Pacific Time
for quarter ending: August 3, 2013 (Q2, second quarter fiscal 2014)

I own MRVL
Forward-looking statements

Overview: Revenue near high end of prior guidance on new product ramps, but still down slightly y/y. Non-GAAP EPS beat guidance.

Basic data (GAAP) :

Revenue was $807.1 million, up 10% sequentially from $734.4 million but down 1% from $816.1 million in the year-earlier quarter.

Net income of was $61.8 million, up 16% sequentially from $53.2 million, but down 36% from $96.2 million year-earlier.

EPS (earnings per share) were $0.12, up 9% sequentially from $0.11, but down 25% from $0.16 year-earlier.

Guidance:

For Q3 fiscal 2014 revenue expected between $850 and $890 million. Gross margin 50.7% +/- 1% GAAP, 51.0% +/- 1%. Operating expenses $360 to $380 million GAAP, $305 to $325 million non-GAAP.

Resulting in GAAP EPS of $0.13 to $0.17, non-GAAP EPS $0.23 to $0.27.

Free cash flow about $100 million.

Conference Highlights:

Good results were attributed to better demand and market share gains in storage, with double-digit growth in mobile and wireless. Many new devices using Marvell SoCs were introduced. "We expect growth to be driven by increased traction in areas such as mobile handsets, tablets, connectivity, smart home devices and SSDs."

Non-GAAP numbers: net income $118 million, up 20% sequentially from $98 million but down from $142 million year-earlier. EPS $0.23, down from $0.24 year-earlier.

The HDD market (storage) market did better than expected, with SSD growing rapidly. End market was tepid, but revenue was up 8% sequentially due to share gains and represented 52% of overall revenue.. HDD OEMs are seeing good demand for non-PC applications. Gaining share in enterprise drive controllers in North America. SSD saw double digit sequential growth, and up 100% y/y. Believes hybrid market growth is mostly ahead. Expects sequentially flat in Q3 as SSD grows and HDD weakens.

Mobile and wireless market results were in line with expectations. Gaining traction with multiple OEMs and devices. 30% sequential increase driven by new products. Represented 22% of total sales. 3G unified platform in production with multiple partners, including Samsung and China Mobile. Quad core for high-end market also doing well. LTE is getting design wins. Expects full LTE North American certification by the end of the year. Chips for mobile computing and video also winning slots. Q3 growth expected again in double digits.

Network processing segment did not meet expectations. Down sequentially 4%, represented 21% of total sales. Order patterns were uneven, notably with PON customers. Network processor line grew over 20% sequentially. Q3 expected growth is in low single digits.

53% non-GAAP gross margin, up due to improved product mix. 13% non-GAAP operating margin.

Cash and equivalents balance ended at $1.7 billion. Cash flow from operations was $86 million. Free cash flow was $65 million. $83 million was spent on share repurchases. The dividend required approximately $30 million. Approximately 30% of Marvell's shares have been repurchased over the past 3 years.

Cost of goods sold was $386.1 million, leaving gross profit of $421.0 million. Operating expenses were $369.0 million, consisting of: $ 292.6 million research and development; $38.5 million selling and marketing; $27.2 million general and administrative; $10.6 million amortization. Leaving operating income of $52.0 million. Interest income $8.25 million. $1.6 million income tax benefit.

$5 million in legal settlement costs were excluded from non-GAAP results.

Inventory was ramped $65 million in the quarter in anticipation of Q3 demand.

Q&A:

Wireless and connectivity guidance, more detail? Additional devices are coming onto the market based on dual-core platform, plus ramping of the quad-core platform. Also the launch of the gaming consoles for the two guys we deal with. Those are the biggest pieces.

Seasonality beyond Q3? Traditionally Q4 and Q1 are seasonally down, and we expect the same this year.

Can you grow more market share in merchant silicon SSD? We have been gaining share and expect to gain more share.

Gross margin in Q3, effect of wireless growth? Margin is very mix dependent. When consumer wireless falls due to seasonality margins should improve. In Q2 the strength of HDD helped offset the increase in mobile and wireless. There is more 3G margin pressure, LTE should have better margins.

Timing of LTE ramp? We have started shipping LTE for modems, but it will be Q4 before we start shipping the integrated LTE solution. In 2014 more LTE devices will launch.

HDD guidance against industry TAM estimates? The Q2 uptick in demand was in July, which becomes the demand customers are seeing for their Q3s.

Design wins are not just in smartphones, they are also in tablets. We have a single-platform architecture so customers can build either. LTE is on the same platform as the 3G, which saves R&D for customers. The higher-end design wins are moving to the LTE platform.

We are now getting results from earlier investments, and believe the same will be true of our LTE efforts.

North American certification is FDD. We are certified in TTD for LTE, but is Asia. We have unified solutions, and will be getting certifications in Asia and North America because there will not be a difference in the long wrong.

Inventory problems in China white box market? No, we are closer to Tier 1 OEMs, not the low-end white box market.

Networking market dynamics? Softness was PON. Forward progress would be from NPUs and carriers. It takes time to get those to market.

Hybrid v. SSD? Marvell expects hybrid will become a significant market portion down the road. But that would require significant cost reduction, because today's cost structure is not that attractive. Marvell is integrating the SSD controller into a single chip with the HDD controller, and has samples of the chips. That will enable lower prices and higher volumes.

Inventory guidance? Days would tend to drop towards the end of the quarter, as we expect Q4 to see seasonally down demand.

Buy backs? We bought back more than our free cash flow in this quarter. We will be more opportunistic, depending on the stock price.

Opportunity in TD-LTE? In long run this will be the majority of the world market. The frequency bands are TDD based. Our solution also works with FDD. So we are not locked into the same customer base, we can address every customer in the world. There is really no low-end LTE market, it all has much higher throughput, at least for the next several years. Further down the road we will address lower-cost markets.

Chinese handset OEMs looking to move into US market? The U.S. market is heavily subsidized. Our move to LTE can drive the U.S. market, including by our China OEM customers.

Handset connectivity opportunities? In past the modem and connectivity sides were independent. Going forward Marvell has a platform solution that includes both modem and Wi-Fi. So we can capture connectivity. We rarely run into a handset customer that wants a separate connectivity supplier.

Enterprise HDD? We grew more than 50% at one customer, but to a still-small amount. The transition will take time.

SAS is an extremely small market for SSDs, though we do have a solution for it. We have at least a 9-month lead for PCIe client SSDs.

3G pricing has been fairly consistent, but with margins lower than some of Marvell's other business. LTE cross over won't be until next year some time. We have a lot of LTE R&D expense.

Can NAND manufacturers capture more controller SoC share? They will build themselves if they can build a better controller, but we have proven we build better controllers. They need us because of the error rates and limited life cycles of the NAND chips. It is a technology we originally created for HDD. Smaller process nodes are trending to shorter life cycles. The same thing happened in HDD; hard drive makers used to make their own controllers, but we consistently made better controllers, and gained market share.

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Disclaimer: Our analyst summaries may include both our condensations of statements made by company representatives and our own analysis. They are not covered by any warranty. We cannot guarantee anything said by company representatives is true. We try not to make errors, but it is possible. Before making or terminating an investment you should always verify any factual basis of your decision.

Copyright 2013 William P. Meyers