Can Marvell Continue Its Strong Performance?

Semiconductor maker Marvell  (NASDAQ: MRVL  ) reported near-record revenue of $958 million in the first quarter, a 3% sequential increase. EPS was $0.27, well above the $0.20-$0.24 guidance range. These impressive results were driven by stronger-than-expected demand for mobile and wireless products, thanks to the LTE rollout in China.

Marvell continues its push into LTE, but increased competition, particularly from MediaTek, is looming. The company also has to manage the shrinking market in its core HDD business, as well as a potentially massive settlement in a patent infringement suit. Can Marvell handle these issues to continue its strong performance?

4G LTE challenges
Marvell is currently the No. 2 supplier by volume in LTE baseband, following dominant market leader Qualcomm (NASDAQ: QCOM  ) , which was estimated to control 95% of the LTE market in 2013. The LTE market is certainly a big opportunity, as China Mobile alone expects to ship between 50 million-100 million handsets this year. Also, Marvell's management claims that, once the China LTE rollout moves further along, many other developing markets will quickly follow since LTE is cheaper for carriers than 3G.

However, the field is also becoming intensely competitive. Intel, whose chips are starting to ship in some LTE devices, was willing to lose $3 billion on its mobile and wireless division in 2013. Broadcom, which has also been investing heavily in LTE over the last year and hoped to compete with Qualcomm at the high end, recently announced that it's pulling out of baseband altogether.

Although it's not disclosing numbers, Marvell is probably also losing money on LTE, and it estimates that, to be "very profitable" here, it needs 15%-20% of market share. While it has a number of design wins in handsets that will be ramping up in volume through 2014, there is concern about upcoming competition from MediaTek, which took share away from Marvell in 3G and is expected to enter the LTE market later this year. However, according to analysts at Nomura, Marvell holds a crucial technological edge in LTE over MediaTek, and MediaTek will find it hard to catch up.

Storage is healthy
Storage controllers have traditionally been Marvell's core business, and storage still accounts for 44% of Marvell's revenue. The good news is that the storage segment is doing well, with 13% year-over-year growth in 2013.

The hard disk drive, or HDD, market has been contracting, but Marvell's market share has been increasing, with the end result of slight revenue gains from HDDs in 2013. Thanks to Marvell's continued investment in HDDs, this business might become a cash cow down the line, as demand for HDDs will eventually stabilize, newer versions of hard disc products will be closer together, and Marvell will dominate the controller technology.

In contrast, the SSD market is booming, with Marvell's customer SanDisk reporting a 65% increase in sales of enterprise SSDs. Marvell is also in a very good position here, with over 50% market share, a number that management expects will grow over time. As the demand for SSDs and other sophisticated flash-based storage solutions continues to increase, Marvell will benefit nicely.

The CMU litigation
Marvell has been engaged in a patent lawsuit with Carnegie Mellon University since 2009 over two CMU patents for HDD technology that Marvell allegedly violated. In 2012, after a four-week trial, the jury found that Marvell "willfully infringed" on the two CMU patents, and awarded the university $1.17 billion in damages. In April, a federal judge increased this sum to $1.54 billion.

While this is a huge sum, Marvell's stock price rose at the news, since there was a possibility of a much higher fine of up to $3.75 billion and a prohibition on selling the chips that violate the patent. Marvell also plans to appeal the current decision, and according to analyst Mike Burton at Brean Capital, it might succeed in reducing the damages awarded by 80%, if it does not succeed in getting the case dismissed altogether.

In conclusion
Marvell is making progress in the LTE market, and it has a head start on rival MediaTek. Its storage segment continues to do well, and it has managed to avoid the worst-case outcome with its patent-infringement lawsuit. Overall, Marvell seems well-positioned to continue its good performance.

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