Marvell Hardly a Marvel

10/30/2012 7:30 am EST

Focus: STOCKS

Transitioning technologies are making it hard for this drive maker, and its management isn't making things much easier, observes Paul McWilliams of Next Inning Technology Research.

Things keep getting worse at Marvell Technology Group (MRVL). After the close on October 18, MRVL issued two press releases. In the first, MRVL revised its guidance for fiscal third-quarter 2013 (the October 2012 ending quarter).

MRVL lowered its revenue outlook from its original forecast of $800 million to $850 million to a new forecast running from $765 million to $785 million. The 33 analysts covering MRVL had estimates ahead of this press release running from $773.3 million to $835 million, which produced a "consensus" of $813.4 million.

In the press release MRVL CEO Sehat Sutardja provided the following statement: "The continued slowdown in the global economy during the third quarter is resulting in a weaker PC market than previously anticipated and thus lower demand from our storage HDD customers. Our SSD, networking, and mobile product revenues are tracking to be in line with prior expectations. In addition to the continued weak PC demand patterns, visibility in our other end markets remains low as we head into a seasonally softer fourth quarter."

Before we initiate the flogging that MRVL again deserves, it's appropriate to acknowledge the fact that MRVL included a warning that fiscal Q4 will likely track below consensus expectations. In last quarter's review, I was very critical of MRVL for not lowering its guidance for fiscal Q2 even though it came in only modestly below its original forecast.

My admonishment here was focused on the fact MRVL could have used it as an excuse to alert analysts its Q3 guidance would be substantially lower than current consensus estimates, and thereby maintained or even boosted credibility with the analysts covering the stock. As I noted I would, this message was sent to MRVL at the appropriate levels.

While I have no idea if my criticism resonated with Sutardja, it is only appropriate to acknowledge he chose to note in today's press release the implication that analysts should anticipate weaker than expected fiscal Q4 2013 guidance.

During fiscal Q2 2013, revenue from storage products was approximately $384 million, or 47% of total sales. This represented a 7% sequential increase in storage revenue from fiscal Q1 2013.

During its fiscal Q2 2013 conference call, Sutardja stated he expected storage product revenue to grow in low single digits sequentially, and that Solid State Drive (SSD) revenue to grow about 25% sequentially.

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MRVL has never clearly delineated how much revenue is generated by sales into the SSD sector, but noted in the statement that growth there is running in line with its forecast. This means revenue from hard disk drives is tracking substantially lower than expected, and implies we should expect fiscal Q3 storage revenue to come in at about $350 million, or 45% of the revised guidance midpoint (midpoint $775 million). This assumes that revenue from wireless/mobile and networking are all up low single digits—in line with MRVL's original forecast, which was reiterated in the above statement.

With total storage revenue now implied to be down about 10%, and SSD revenue implied to be tracking in line with the 25% sequential growth forecast offered in the last conference call, it suggests we should expect dismal calendar Q4 forecasts from HDD manufacturers Seagate Technology (STX) and Western Digital (WDC) when they report calendar Q3 results during the next two weeks.

The reason I'm focused here on forecasts versus calendar Q3 results is Intel (INTC) stated there was strong order flow during the second half of September to prepare for the Windows 8 launch next week, but that orders following that surge subsided. This is likely what MRVL saw in October—the last month of its fiscal Q3 2013.

In a second press release, MRVL announced the "resignation" of its CFO, Clyde Hosein. Personally, I don't believe for a minute that Hosein resigned "to pursue other opportunities" unless the resignation was tendered as a result of a confrontational disagreement.

During conference calls, Hosein was the only voice of clarity. Unfortunately he was all too often interrupted by Sutardja with one of his long and rambling attempts to answer questions that, more often than not, missed the mark entirely.

Following MRVL's last quarterly release and conference call, which sent the price down to single digits, I expressed unvarnished disgust in MRVL's communications with investors. However, I also noted that based on my $4.67 estimated balance sheet value and the fact MRVL was still solidly profitable, the stock was oversold.

Given the fact that MRVL maintained non-GAAP profitability throughout the trough of 2009 when revenue fell sequentially from $791 million in the quarter that ended October 2008 to only $513 million in the quarter that ended January 2009, I suspect MRVL's profitability will hold well at the anticipated $775 million in the October 2012 quarter, and at what I project might be revenue in the $725 million to $750 million range in the January 2013 ending quarter.

Based on this, and my view that MRVL's balance sheet remains very strong, I will consider adding to my personal position in MRVL tomorrow as it tracks in the $7s. However, if I do it will be for only a short-term trade, and given my poor opinion of MRVL's management, I may lower my target to totally exit MRVL to low double digits versus my previously stated strategy to exit in the mid-teens.

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