Chipmaker Marvell Technology (NASDAQ:MRVL) has been tweaking its business to focus more on fast-growing opportunities such as the Internet of Things and storage. It recently offloaded its multimedia solutions business to Synaptics for $95 million. That was the second deal for Marvell after the company sold its home networking business to MaxLinear earlier this year.
As it stands, the chipmaker will no longer sell processors for set-top boxes and other over-the-top multimedia platforms, giving management room to explore opportunities in the networking and storage markets.
But are these moves to reduce its revenue streams wise? The company's fiscal second-quarter results are due after the close on Aug. 24 -- here are the trends investors should be watching to determine if the company is laying the groundwork for future success.
Consistent storage growth
Storage is Marvell's biggest business with more than 50% of the top line. This segment has been expanding at a tremendous pace, logging 25% year-over-year growth in the last reported quarter, thanks to demand for the company's storage drive controllers and other enterprise storage solutions.
This progress seems to indicate that Marvell's focus on expanding its solutions to cover a variety of storage applications is bearing fruit. The company shipped more than 50 million SSD controllers over the past 18 months.
Looking ahead, growth in the storage segment should continue as the adoption of solid-state drives in the PC market is anticipated to increase at an annual pace of 20% until 2021.
On the other hand, the chipmaker is counting on the growing need for datacenter capacity to boost its hard-disk drive business as well. In the first quarter, Marvell's enterprise and datacenter revenue doubled from the prior-year period. With momentum in the broad storage space building, investors should see Marvell's results track this growth.
Networking ... getting better
The networking business now accounts for a quarter total revenue, up from 20% just two years ago. The segment has seen significant progress in recent quarters thanks to the Marvell's focus on developing automotive chips.
First, it launched a new system-on-a-chip back in June that integrates Bluetooth, Wi-Fi, and vehicle connectivity, giving automakers wired and wireless connectivity in a single platform. The second product launch was a secure automotive gigabit Ethernet switch that the company claims to be an industry first.
Marvell says that the latter will allow connected cars to safely transmit data that will be essential to the safety of autonomous vehicles. This presents another major opportunity for the company as revenue from the connected car market is estimated to grow at an annual pace of almost 29% until 2020, according to research from Strategy&, a division of PwC.
Expect margin growth
The recently divested businesses also boasted lower profitability than the company's targets. For example, multimedia solutions carried a gross margin of about 40% compared to 60% last quarter for the full company. In fact, Marvell has been paying special attention to its gross margin over the past few quarters as you can see in the chart below:
So while losing non-strategic units diminished overall revenue, the resulting cost savings and cash flow, combined with the prospects in storage and networking, should quickly get Marvell back on track.
There might be short-term volatility for Marvell stock following its earnings release, but positive long-term catalysts (and how the company executes on them) should be investors' main focus.