Networking chips designer Marvell Technology (NASDAQ: MRVL) reported results in line with analysts' expectations in Q2 FY2024, with revenue down 11.6% year on year to $1.34 billion. The company also expects next quarter's revenue to be around $1.4 billion, in line with analysts' estimates. Marvell Technology made a GAAP loss of $207.5 million, down from its profit of $4.3 million in the same quarter last year.
Marvell Technology (MRVL) Q2 FY2024 Highlights:
- Revenue: $1.34 billion vs analyst estimates of $1.33 billion (small beat)
- EPS (non-GAAP): $0.33 vs analyst estimates of $0.32 (1.93% beat)
- Revenue Guidance for Q3 2024 is $1.4 billion at the midpoint, roughly in line with what analysts were expecting
- Free Cash Flow of $1.4 million, down 98.7% from the previous quarter
- Inventory Days Outstanding: 113, down from 122 in the previous quarter
- Gross Margin (GAAP): 38.9%, down from 51.8% in the same quarter last year
Moving away from a low margin storage device management chips in one of the biggest semiconductor business model pivots of the past decade, Marvell Technology (NASDAQ: MRVL) is a fabless designer of special purpose data processing and networking chips used by data centers, communications carriers, enterprises, and autos.
Marvell was founded in 1995 by Dr. Sehat Sutardja, his wife, and his brother, and for the first two decades was focused on chips used to run storage devices like disk drives and networking equipment like ethernet switches. It also supplied Wi-Fi chipsets used in mobile devices like the iPhone and Google’s Chromecast. In 2016, in the wake of an internal accounting investigation activist investor Starboard Value acquired a minority stake and ousted Dr. Sutardja and his wife, installing Matt Murphy as CEO.
Murphy quickly exited low margin businesses like the consumer hard drives and Wi-Fi chips and refocused R&D efforts to focus on the higher margin networking business. He made multiple transformative acquisitions: Cavium in 2018, Avera and Aquantia in 2019, and Inphi and Innovium in 2021. The result is a company with leading chipsets that enable data transfer – within and between datacenters, across 5G cellular networks, and throughout autos.
The chips used to power today’s cloud data centers are no longer just general purpose CPUs like we think of that run a PC, but there is also a range of chips that are customized for specific tasks like AI used to scan online videos or machine learning used to make ecommerce recommendations. Marvell specializes in these types of chipsets, known as customized ASICs. Marvell also increasingly competes with chip heavyweights Intel and Nvidia with its Octeon data processing units or “DPUs” which is an ARM-based CPU that offloads networking, storage, security, and other infrastructure workloads from the CPU in the server and accelerates them, saving CPU capacity for other tasks, like running applications.Marvell’s peers and competitors include AMD (NASDAQ:AMD), Broadcom (NASDAQ:AVGO), Intel (NASDAQ:INTC), and Nvidia (NASDAQ: NDVA).
Longer manufacturing duration allows analog chip makers to generate greater efficiencies, leading to structurally higher gross margins than their fabless digital peers. The downside of vertical integration is that cyclicality can be more pronounced for analog chipmakers, as capacity utilization upsides work in reverse during down periods.
Marvell Technology's revenue growth over the last three years has been strong, averaging 29.1% annually. But as you can see below, its revenue declined from $1.52 billion in the same quarter last year to $1.34 billion. Semiconductors are a cyclical industry, and long-term investors should be prepared for periods of high growth followed by periods of revenue contractions (which can sometimes offer opportune times to buy).
This was a slow quarter for the company as its revenue dropped 11.6% year on year, in line with analysts' estimates. This could mean that the current downcycle is deepening.
Marvell Technology's revenue growth has slowed over the last three quarters and its management team projects growth to turn negative next quarter. As such, the company is guiding for a 8.93% year-on-year revenue decline, but Wall Street thinks there will be a recovery next year. Analysts' estimates call for 6.05% growth over the next 12 months.
Product Demand & Outstanding Inventory
Days Inventory Outstanding (DIO) is an important metric for chipmakers, as it reflects a business' capital intensity and the cyclical nature of semiconductor supply and demand. In a tight supply environment, inventories tend to be stable, allowing chipmakers to exert pricing power. Steadily increasing DIO can be a warning sign that demand is weak, and if inventories continue to rise, the company may have to downsize production.
This quarter, Marvell Technology's DIO came in at 113, which is 22 days above its five-year average. These numbers suggest that despite the recent decrease, the company's inventory levels are higher than what we've seen in the past.
In the semiconductor industry, a company's gross profit margin is a critical metric to track because it sheds light on its pricing power, complexity of products, and ability to procure raw materials, equipment, and labor. Marvell Technology's gross profit margin, which shows how much money the company gets to keep after paying key materials, input, and manufacturing costs, came in at 38.9% in Q2, down 13 percentage points year on year.
Marvell Technology's gross margins have been trending down over the last 12 months, averaging 45%. This weakness isn't great as Marvell Technology's margins are already slightly below the industry average and falling margins point to potentially deteriorating pricing power.
Marvell Technology reported an operating margin of 1.69% in Q2, down 21.2 percentage points year on year. Operating margins are one of the best measures of profitability because they tell us how much money a company takes home after manufacturing its products, marketing and selling them, and, importantly, keeping them relevant through research and development.
Marvell Technology's operating margins have been trending down over the last year, averaging 6.65%. This is a bad sign for Marvell Technology, whose margins are already among the lowest for semiconductors. The company will have to improve its relatively inefficient operating model.
Earnings, Cash & Competitive Moat
Analysts covering Marvell Technology expect earnings per share to grow 25.8% over the next 12 months, although estimates will likely change after earnings.
Although earnings are important, we believe cash is king because you can't use accounting profits to pay the bills. Marvell Technology's free cash flow came in at $1.4 million in Q2, down 99.5% year on year.
As you can see above, Marvell Technology produced free cash flow of $775.8 million in the last year, which is 13.3% of revenue. It's good to see Marvell Technology generate positive free cash flow since it allows the company to strengthen its balance street, but we'd be uncomfortable if its FCF margin dropped any lower.
Over the last five years, Marvell Technology has reported an average return on invested capital (ROIC) of just 0.79%. This suggests it struggled to find compelling reinvestment opportunities within the business.
Key Takeaways from Marvell Technology's Q2 Results
With a market capitalization of $52.9 billion, a $423.4 million cash balance, and positive free cash flow over the last 12 months, we're confident that Marvell Technology has the resources needed to pursue a high-growth business strategy.
We were impressed by Marvell Technology's strong improvement in inventory levels. We were also glad that its EPS outperformed Wall Street's estimates. On the other hand, its free cash flow fell short of analysts' expectations and its gross and operating margins regrettably declined. Overall, this was a mixed quarter for Marvell Technology and the market was likely hoping for more. The company is down 2.72% on the results and currently trades at $55.72 per share.
Is Now The Time?
When considering an investment in Marvell Technology, investors should take into account its valuation and business qualities as well as what's happened in the latest quarter. We cheer for everyone who's making the lives of others easier through technology but in the case of Marvell Technology, we'll be cheering from the sidelines. Its impressive revenue growth suggests that it's expanding its market share, and that growth rate is even expected to increase in the short term. Unfortunately, its relatively low ROIC suggests suboptimal profitability prospects and its operating margins reveal subpar cost controls compared to other semiconductor businesses.
Marvell Technology's price-to-earnings ratio based on the next 12 months is 29.6x. While we have no doubt one can find things to like about the company, and the price is not completely unreasonable, we think that at the moment there might be better opportunities in the market.
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