TOP CONTRIBUTORS

Michael McGillen

MRVL AT A GLANCE

P/E ► -214   EV/EBITDA ► 31.3 HIGH ROA ► -0.8% AVG ROE ► -1.2% AVG Debt to Equity ► 0.203 LOW Current Ratio ► 3.10 AVG Interest Coverage Ratio ► -2.70 AVG

 

 

 

 

 

 

Marvell Technology Group makes semiconductor chips predominantly used in hard drives. Their chips also can be found in a wide range of communication applications such as network routers, Microsoft Xbox, and smartphones. As of February 2008, Marvell's semiconductor chips powered electronics such as Research in Motion’s Blackberry, the Amazon Kindle, and Apple’s iPhone and iPod with wireless-internet capabilities. ^[1]

Marvell is a fabless semiconductor company, meaning that they outsource the actual production of their semiconductors to other factories. Since Marvell went public in 2000, sales have expanded at an average rate of 60% annually, reaching nearly $2.9 billion in 2008. Marvell’s revenue growth has primary come from sales of its semiconductors designed for data storage. Although headquartered in the United States, Marvell generates 85% of its revenue from Asia.^[2] The slowdown in the global economy has led to lower sales growth for Marvell's storage products. As a result, revenue growth for the company's semiconductor products fell from 34.1% to 29.0% from 2006 to 2007.^[3] According to several analysts, growth in the storage market is likely to stay in the single digits. ^[4]

Marvell has increased production of semiconductors for consumer electronics, such as gaming consoles and smart phones in order to take advantage of the growing demand for wireless, hand held devices.^[5] Sales of semiconductors designed for communication, particularly those designed for mobile smart phones, have increased 36% from 2007 to 2008.^[6]

Company Overview

However, Gross margin declined from 53.1% in 2006 to 50.8% in 2007. The reduction in gross margin resulted from a slower growth in demand for its storage products. As the economic slowdown in the United States continues, companies in Asia and Europe have tightened their budget for new technologies. As a result, Marvell has a higher inventory excess as of February 2008 than it did a year earlier in 2007.^[8]Also, the acquisition of Intel’s Xscale^[9] assets for $600 million in late 2006 has hurt its gross margin for 2007 and 2008.^[10]However, this acquisition has jump started its relatively small mobile phone and handheld devices sector. ^[11] Through increased spending in research as well as additional acquisitions, Marvell has expanded its intellectual property portfolio. As of June 28,2008 Marvell holds 612 U.S. patents, 93 non-U.S. patents, and numerous pending patent applications.^[12] Marvell's wide range of semiconductor products helps prevent the overall sales of its semiconductors from declining from slower growth in one product market.

Business Segments^[13]

• Storage(54% of 2008 Revenue): Marvell has a history of new innovations before its competitors. For example, Marvell developed the first microchip containing all necessary circuits for a system such as an audio receiver, digital converter, microprocessor for memory, and input/output control. Such a microchip, also known as system-on-a-chip (SoC), is a good example of Marvell’s groundbreaking chip designs. ^[14]In addition, it was the first company to design the Gigabit all-CMOS read channel as well as the Serial ATA interface solution. These two developments drastically improved the way notebook and desktop PC’s read and process stored information.
• Communication, Power Management, WLAN, VOIP, DVD-R, Xscale, and Printers(46% of 2008 Revenue): Communication products consist of Marvell’s gigabit and fast Ethernet products designed for LAN on Motherboards(LOM), Network Interface Cards(NICs), and other applications. Marvel has benefited from the construction of metro-level communications networks, which have increased demand for its Ethernet chips and switches. However, these PC connectivity products are also designed for notebook, desktop, mobile devices, and server network connections. Semiconductors designed for consumer electronics are the smallest portion of Marvell’s 2006 and 2007 revenues, but these products provide potential for future sales growth. According to the Consumer Electronics Association, the consumer electronics industry generated $170 billion in revenue in 2008, an increase of 80.6% from 2000. ^[15] With products such as DSP Switcher integrated regulator modules, Marvell been able to make significant gains in the PC power management industry. Marvell has established itself as a top vendor of Wi-Fi chips, which provide handheld devices with fast Internet access through wireless networks. Since purchasing Intel Xscale technology in 2006, Marvell’s semiconductor chips can be found in a range of handheld accessories such as portable video players, the Creative Zen, Sony’s PSP, and the Amazon Kindle. Their chips can provide fast media and data transfer without reducing the electronic's battery life. With this technology, Marvell has won coveted spots on Apple’s iPhone as well as Research in Motion’s new smartphone Bold.

Research and Development

As with any technology-driven company, innovation is crucial to Marvell's future success. In 2008, Marvell devoted 34.2% of net revenue to research and development. A substantial portion of Marvell’s expenses come from research and development. The focus of their research and development sector is not only to develop new lines of products but also to reduce production costs of its current chips.

Cash Flow and Debt

A company’s cash flow statements measure the money coming into company primarily from revenues and the money going out of the business through expenses. It is a useful tool for gauging a company’s current and future performance, because a company, with sufficient cash on hand, will be able to invest cash into future products or acquisitions. ^[16]

In 2006 and 2007, Marvell increased its cash on hand by $181 million and $219 million respectively. The acquisition of Xscale technology decreased their net cash by $37 million in 2007 and by $109 million as of February 2008.^[17]Marvell’s debt may also play a role in their future acquisitions. As of February 2008, Marvell's total consolidated debt was $394.8 million. Having such a large amount of debt limits Marvell's ability to undertake future acquisitions or large investments.^[18]

Trends and Forces

Semiconductor Cyclicality

Demand in the semiconductor industry is very cyclical. Consumer and corporate demand for semiconductor containing electronics can reach levels beyond a manufacturer’s production capability. In the same way, the demand for these consumer electronics, especially PCs, can plummet over the course of a month or two. Typically, the consumer market for electronics is more volatile than the corporate market for electronics. Because a majority of Marvell’s sales still come from large corporations, it is partially protected from substantial declines in demand. As its presence in the consumer electronics business increases, Marvell will increase its overall exposure to this volatile industry. Despite its volatility, the semiconductor industry has experienced an average 13% annual growth over the past 20 years.^[19]

Asian Companies Tighten their Technology Budget

The ripple effects of the United States economic slowdown have reached many of Marvell’s primary markets, including China and Japan.^[20] As businesses tighten their budgets for new technology, there has been a sharp decline in the demand of the new hard disk drives that traditionally account for nearly half of Marvell’s sales. As a result, sales of Marvell's chips used for storage have experienced a slower growth from 2007 to 2008. Also, the Chinese and Japanese currencies have depreciated relative to the United States dollar. Consequently, the chipmaker’s products have become more expensive relative to comparable products of its Chinese counterparts. Some analysts believe that Marvell may lose market share to companies that can produce chips at lower costs. ^[21]With excess inventory in their storage segment, new orders for Marvell’s chips will continue to slow down.^[22]

Larger Companies specializing in either Storage Chips or Consumer Electronics Chips

Although Marvell’s diverse portfolio puts the company in competition with several large companies. In the storage industry, LSI Corporation merged with Agere in 2006 and elected to make storage units its primary focus. [1] In the communication market, Marvell will compete with Broadcom and Atheros. Both Broadcom and Atheros have favorable reputations and have been aggressively pushing their networking chips to enterprises and retail customers.^[23]

Furthermore, a significant amount of Marvell’s revenue come from a limited number of customers. For example, one customer accounted to more than 10% of their net revenues.Most of Marvell’s sales come from orders, which are easy to cancel, change, or delay. ^[24]

The Smartphone Effect

Because growth in the storage industry is slowing down, semiconductor companies like Broadcom and Atheros have started to branch out. One of Marvell’s strategies has been to shift focus from servicing mainly large businesses to providing communication chips to a wide-range of individual consumer electronics. Marvell’s Wi-Fi chips, which are present in several popular media players, are among its most promising new products. As 3G technologies become standard, Marvell will be in position to supply many new costumers with Wi-Fi capable phones.^[25]

Acquisition of Xscale Technology

The communication chips found in Blackberrys, Kindles, and IPhones are Marvell’s mobile PXA processors. These processors are designed for smaller, higher performance handheld devices like the IPhone. In 2006, Marvell purchased Xscale microarchitecture from Intel for $600 million.^[26]PXA processors with Xscale technology are made for electronics that use wireless Internet connections. Xscale technology is unique to other chip technology because it operates over a wide range of speeds and power. Because of this technology, Marvell’s PXA processors can be found in mobile smart phone as well as Xbox wireless controllers. ^[27]

Competition

• LSI Corporation (LSI): Formerly known as LSI Logic Corporation, LSI sells semiconductors and storage systems. LSI makes most of its revenue the sale of its computer storage products to business and individual consumers.

• STMicroelectronics N.V. (STM): Based in Amsterdam, STMicro is a semiconductor producer with sales reaching over $10 billion in 2007. STMicro produces semiconductors found in numerous consumer electronics including digital cable, Bluetooth devices, smart phones, and wireless equipment.

• Broadcom (BRCM): Broadcom produces semiconductors found in DSL modems, wireless local area networks, handheld devices, HDTV, and mobile phones. Boasting the fifth most valuable patent portfolio among chip producers, Broadcom is capable of producing a range of semiconductors for the wireless devices industry.

• Atheros Communications (ATHR): As a developer of integrated semiconductor systems for communication products, is one of Marvell’s fastest growing competitors. From 2006 to 2007, Atheros experienced a 38% revenue growth, one of the largest in the industry. ^[28]

• Texas Instruments (TXN): Large portions of Texas Instrument’s sales come from its semiconductor industry. Its emphasis on chipsets designed for consumer electronics poses a threat to Marvell’s growth in the communications industry. ^[29]

Above chart in US dollars

References

1. ↑ Marvell Product site
2. ↑ MRVL 2008 10-k, note 13: Segment and Geographic Information, page 128
3. ↑ MRVL: Income Statement AOL finance
4. ↑ SearchStorageChannel.com, "Data Storage Hardware Declines, CIOs Show Caution," June 2007
5. ↑ Consumer Electronics Association: Product Sales Data
6. ↑ MRVL 2008 10-K, item 6:Selected Consolidated Financial Data
7. ↑ MRVL 2008 10-k Note 13: Segment and Geographic Information
8. ↑ MRVL 2008 10-K Item 7: Analysis of Financial Condition, page 55
9. ↑ Marvell, Xscale
10. ↑ MRVL 2008 10-K, Item 1A: Risks, page 26
11. ↑ EEtimes, "Marvell buys Intel's Handheld Processor Unit for $600 million," June 2006
12. ↑ MRVL 2008 10-K, Item 1: Business: Intellectual property, page 17
13. ↑ Marvell Products Overview
14. ↑ Marvell Storage Information
15. ↑ Consumer Electronics Assosciation: Industry Sales Statistics
16. ↑ Investopedia.com "Cash Flow"
17. ↑ MRVL 2008 10-K, Consolidated Statement of Shareholder's Equity, page 83
18. ↑ MRVL 2008 10-K, Item 1A: Risks, page 32
19. ↑ Wikiinvest.com, "Semiconductor Cyclicality"
20. ↑ Seekingalpha.com "Marvell's Slide Extends to 25%" Sept. 2008
21. ↑ MRVL 2008 10-K, item 1: Business: Competition, pages 18-19
22. ↑ MRVL 2008 10-K, Item 1A: Risks, page 26
23. ↑ Yahoo! Finance MRVL's Competitors
24. ↑ MRVL 2008 10-K, Item 7: Management's Discussion and Analysis of Financial Condition and Results of Operation: Overview, page 50
25. ↑ Marvell: Cellular and Handheld Solutions
26. ↑ Marvell.com "Marvell to Purchase Intel's Communications and Application Processor Business for $600 Million"
27. ↑ [ http://www.marvell.com/products/cellular/xscale_micro.jsp Marvell.com “About the Intel Xscale Microarchitecture”]
28. ↑ Google Finance, Atheros Communications
29. ↑ Google Finance, Texas Instruments

'