Marvell Technology (NASDAQ:MRVL) investors are in a celebratory mood right now thanks to its recently announced plan to acquire Cavium (NASDAQ:CAVM). In fact, Marvell stock has gained remarkably in recent days despite the potential dilution that will take place in the cash-and-stock deal expected to close in the middle of next year. Cavium shareholders will get $40 in cash and 2.1757 Marvell shares for each Cavium share.
Investors are clearly focusing on the long-term benefits that Cavium could bring, as it could turn out to be a great fit for Marvell's existing business, allowing it to move into the lucrative networking and data center space. But before the future beings with Cavium, Marvell is set to report third-quarter earnings on Tuesday.
These results will tell us about the health of the company's core storage business. Here's what to expect.
SSD adoption should drive storage revenue higher
Storage is Marvell's biggest business, supplying 52% of the total revenue last quarter, but the company is facing headwinds because of the weakness in the traditional hard-drive market. The declining trend in hard-drive shipments has had a negative impact on Marvell lately. For instance, global hard-drive shipments were down almost 10% last year as manufacturers are packing more memory into each drive, thereby driving down demand for Marvell's storage controllers.
Not surprisingly, Marvell's revenue in the fiscal year that ended in January 2017 was down almost 13% year over year. But the good news is that the increasing adoption of solid-state drives (SSDs) is helping Marvell make a comeback, pushing its storage revenue up by 13% during the second quarter.
SSDs now supply a quarter of the chipmaker's storage revenue, thanks to the rapid adoption of its controller products for this market. More specifically, Marvell has shipped over 50 million SSD controllers in just 18 months, and the trend is set to continue because of potential expansion of this market.
SSD shipments are expected to increase at an annual pace of 14.7% over the next six years, according to one estimate, driven by their adoption in cloud computing applications and data centers. That's good news for Marvell.
Investors, however, can expect a mixed third-quarter performance from the company. Revenue is expected to decline 6.4% year over year, according to analysts, driven by the weakness in hard-disk drives. But the company's earnings are expected to jump from $0.20 per share last year to $0.32 based on the midpoint of the company's guidance range, indicating that its $250 million annualized cost reduction plan is reaping results.
But all eyes will be on management's comments about the recently announced Cavium acquisition, as this is going to play a key role in accelerating its long-term growth.
The Cavium catalyst
The deal to acquire Cavium is valued at $6 billion, which represents a 20% premium over Cavium's stock price in early November, when rumors of the deal started gaining traction. If Mavell's rising stock price is an indication, investors are fine with the fact that Marvell will take on $1.75 billion in debt and issue 2.1757 shares for each Cavium share to close the deal.
Marvell forecasts that the Cavium acquisition will boost its serviceable addressable market to at least $16 billion. This is significantly higher than the $3.4 billion annual revenue that the combined company will have.
Cavium counts key server players such as Dell, IBM, and Hewlett-Packard Enterprise as customers after it acquired QLogic last year in a $1.3 billion deal. QLogic got 60% of its revenue from the above-mentioned companies, which control 52% of the total server market.
Additionally, Cavium will help Marvell make inroads into the server microprocessor market through the former's Thunder X2 server chip. Cavium and Microsoft announced earlier this year that they are collaborating to evaluate an ARM-based Thunder X2 chip in the Azure cloud platform. Now that Marvell will be able to lay its hands on this chip, it will be able to take advantage of the growing adoption of ARM microprocessors in the cloud.
IDC forecasts that demand for ARM-based server processors will grow at 3.9% a year through 2020, outpacing the 1.3% growth of the overall market. Therefore, Marvell has done the right thing by snapping up Cavium. Additionally, the complementary businesses of the two companies should lead to cost synergies.
In all, investors have several reasons to remain upbeat about Marvell Technology going into its upcoming earnings report. And, a strong outlook from the chipmaker should confirm that it is making the right moves to position itself for long-term growth.
Teresa Kersten is an employee of LinkedIn and is a member of The Motley Fool's board of directors. LinkedIn is owned by Microsoft. Harsh Chauhan has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.