Networking chips designer Marvell Technology (NASDAQ: MRVL) reported results ahead of analyst expectations in the Q1 FY2024 quarter, with revenue down 8.65% year on year to $1.32 billion. Guidance for next quarter's revenue was $1.33 billion at the midpoint, which is 1.53% above the analyst consensus. Marvell Technology made a GAAP loss of $168.9 million, down on its loss of $165.7 million, in the same quarter last year.
Marvell Technology (MRVL) Q1 FY2024 Highlights:
- Revenue: $1.32 billion vs analyst estimates of $1.3 billion (1.67% beat)
- EPS (non-GAAP): $0.31 vs analyst estimates of $0.29 (5.76% beat)
- Revenue guidance for Q2 2024 is $1.33 billion at the midpoint, above analyst estimates of $1.31 billion
- Free cash flow of $108.6 million, down 63.5% from previous quarter
- Inventory Days Outstanding: 122, down from 133 previous quarter
- Gross Margin (GAAP): 42.2%, down from 52.5% 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).Analog Semiconductors
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.
Sales Growth
Marvell Technology's revenue growth over the last three years has been very strong, averaging 31% annually. But as you can see below, last year quarterly revenue declined from $1.45 billion to $1.32 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).
Despite Marvell Technology revenues beating analyst estimates, this was still a slow quarter with a 8.65% revenue decline. Marvell Technology's revenue is continuing to decline, signal that the current downcycle is deepening.
Year on year revenue growth went from positive to negative this quarter, and Marvell Technology expects it to stay negative next quarter with an estimated decline of 12.3% YoY and analysts think the declines will continue, with next twelve months estimated at 2% declines.
Product Demand & Outstanding Inventory
Days Inventory Outstanding (DIO) are an important metric for chipmakers, as it reflects the capital intensity of the business 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 inventory days came in at 122, 29 days above the five year average, suggesting that despite the recent decrease the inventory levels are still higher than what we used to see in the past.
Pricing Power
Marvell Technology's gross profit margin, how much the company gets to keep after paying the costs of manufacturing its products, came in at 42.2% in Q1, down 10.4 percentage points year on year.
Marvell Technology' gross margins have been trending up over the past year, averaging 48.2%. This is a welcome development, as Marvell Technology's margins are slightly below the group average, potentially pointing to improved demand and pricing.
Profitability
Marvell Technology reported an operating margin of 2.97% in Q1, down 16.9 percentage points year on year. Operating margins are one of the best measures of profitability, telling us how much the company gets to keep after paying the costs of manufacturing the product, selling and marketing it and most importantly, keeping products relevant through research and development spending.
Operating margins have been trending down over the last year, averaging 10.8%. Not a great indicator for Marvell Technology, whose operating margins are amongst the lowest for semiconductors, caused by only a modest competitive advantage and a relatively inefficient operating model.
Earnings, Cash & Competitive Moat
Analysts covering the company are expecting earnings per share to be fairly flat over the next twelve months, although estimates are likely to change post earnings.
Earnings are important, but we believe cash is king as you cannot pay bills with accounting profits. Marvell Technology's free cash flow came in at $108.6 million in Q1, down 31.2% year on year.
Marvell Technology has generated $1.03 billion in free cash flow over the last twelve months. This is a solid result, which translates to 17.8% of revenue. That's above average for semiconductor companies, and should put Marvell Technology in a relatively strong position to invest in future growth.
Over the last 5 years Marvell Technology has reported an average return on invested capital (ROIC) of just 1.2%. This suggests it may struggle to find compelling reinvestment opportunities within the business.
Key Takeaways from Marvell Technology's Q1 Results
Sporting a market capitalization of $39.5 billion, more than $1.03 billion in cash and with positive free cash flow over the last twelve months, we're confident that Marvell Technology has the resources it needs to pursue a high growth business strategy.
We were very impressed by the strong improvements in Marvell Technology’s inventory levels. And we were also excited to see that revenue and earnings outperformed Wall St’s expectations. Guidance for next quarter was also slightly ahead for both revenue and EPS. Additionally, management is bullish on the rest of the year, stating that "We are expecting revenue growth to accelerate in the second half of this fiscal year, accompanied by gross and operating margin expansion" and arguing that AI is a tailwind for the company. On the other hand, it was less good to see deterioration in gross and operating margin. Overall, it was a mixed quarter, but the outlook and accompanying commentary are bright spots. The company is up 15.8% on the results and currently trades at $57.25 per share.
Is Now The Time?
When considering Marvell Technology, investors should take into account its valuation and business qualities, as well as what happened in the latest quarter. We cheer for everyone who is making the lives of others easier through technology, but in the case of Marvell Technology we will be cheering from the sidelines. Its revenue growth has been strong, though we don't expect it to maintain historical growth rates. But while its solid free cash flow generation gives it re-investment options, the downside is that its its relatively low return on invested capital suggests suboptimal growth 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 twelve months is 29.9x. While we have no doubt one can find things to like about the company, we think there might be better opportunities in the market and at the moment don't see many reasons to get involved.
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