Marvell’s Marvelous Quarter

Marvell Technology Group (NASDAQ: MRVL  ) is a company that fell on hard times during 2012, especially as its heavy exposure to the PC business (since a good portion of its business is building hard disk drive controller chips) led to several quarters of misses. Couple this with a recent patent lawsuit loss against Carnegie Mellon University that, if not successfully appealed, is worth $1.17 billion in damages, and you've got a recipe for disaster. Indeed, shares hit multi-year lows in January 2013 on the back of this series of negative developments. That being said, Marvell has come back roaring, with the most recent quarter exemplifying exactly what a successful turnaround looks like.

Share gains and stabilization in storage
Marvell's management was confident that with an improving PC environment, robust demand for hard disk drives outside of the PC (think cloud), and share gains against its competitor, LSI (NASDAQ: LSI  ) , its storage business had recovered nicely. It's clear that the "death of the hard disk drive" has been greatly exaggerated (particularly as the cost per gigabyte of a hard disk drive is dramatically lower than that of a speeder flash drive) and it looks as though the storage business has finally bottomed out.

From here, expect this business to be a low- to mid-single digit growth market, and as long as nothing particularly catastrophic goes on (and after what happened with the PC, it seems unlikely that anything further beyond a general economic collapse would do the trick), this should be a stable, cash-cow business for the company.

Mobile and wireless continues to grow like a weed
During 2012, Marvell was having its lunch eaten in the mobile and wireless space by the likes of Spreadtrum, MediaTek, and Qualcomm. The company had a rough time producing a competitive solution for the 3G market, and its LTE solutions were still work-in-progress. However, fast forward a year and investors can clearly see that the company's mobile efforts are finally beginning to pay off with about 50% sequential growth in the most recent quarter.

The good news is that traction in the low-end mobile space is truly a virtuous cycle for a company like Marvell which sells integrated apps processor and cellular solutions as well as connectivity. Indeed, Marvell reports that it has a 100% attach rate of its connectivity combo solutions with its cellular platforms. In the low-cost handset market, OEMs was simple, turnkey solutions so they usually prefer to buy as much as they can from the apps processor vendor. So, each smartphone win that Marvell garners means the sale of at least two pieces of silicon.

The bad news is that this business is extremely cutthroat, which means that the business is a drag on the corporate gross margin profile. Management assured investors that it would be taking steps at the engineering level to better optimize the cost structures of its products, which would improve what is already a compelling story of both secular growth and share gains. Improved margins, frankly, would be icing on the cake.

Networking still not performing as well as expected
The only sore spot seems to have been networking. While the secular trends in networking have been strong, it seems that the competition is proving to be stronger. In fact, last quarter Marvell claimed share gains yet its sales were down 5.5% year over year while peers LSI and Broadcom (NASDAQ: BRCM  ) saw mid-single digit increases (indeed, Broadcom has been performing extremely well in networking infrastructure, no doubt thanks to its Trident II switch silicon as well as its compelling network processor offerings).

This quarter, Marvell came in below its expectations here and didn't mention market share on the call. Marvell at best failed to gain share, but it is just as likely that the company lost share. This will be the segment to really watch for improvement as both storage and mobile & wireless are performing well.

Foolish bottom line
Marvell had a great quarter (beat revenue estimates by 6.6%) and guided for an even better-than-expected next quarter. This isn't a one-time deal, but rather a reflection of a dramatic improvement in the firm's competitiveness in mobile and wireless, its ability to power through in storage, and a modest performance in networking. While the shares have run up quite a bit, on a pullback Marvell looks particularly attractive as it should continue to benefit from the aforementioned secular trends for years to come.

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