Communications chips are in high demand, and will remain so for the foreseeable future. However, the high-demand products happen to be of the low-end variety, so that hefty revenue stream won't necessarily translate into profits.
That's the takeaway from chip maker Marvell Technology Group's (NASDAQ:MRVL) second-quarter report, in which it pulled in stronger sales than expected, a full 18% more than the year-ago period.
"Our Q2 revenue was greater than expected as a result of strong sales for our communications and applications processors, and our wireless LAN products," said CEO Sehat Sutardja. That implies industry confidence in Marvell's solutions, and the client list here is a veritable who's who of all aspects of networked gadgetry.
Marvell's communications customers include heavyweights like Cisco Systems (NASDAQ:CSCO), Motorola (NYSE:MOT), and BlackBerry maker Research In Motion (NASDAQ:RIMM). The company's various flavors of WiFi chips power the networking engines of Apple's (NASDAQ:AAPL) iPhone, Dell (NASDAQ:DELL) laptops, and Netgear (NASDAQ:NTGR) home networking routers -- among many others.
Sutardja also said that this sales growth should continue into the next quarter, at the very least. But gross margin is down to 48.9%, from 51.4% a year ago. Operating expenses have scaled up along with revenue, but the gross take didn't quite follow suit this time. It's hard to turn a net profit when the operating income is negative.
The share price fell through the floor on this report, and it's easy to see why -- sales growth is great, but matched with disappearing margins and the incredible shrinking profits, it starts to smell like desperation. Is Marvell chasing sales for the sake of sales, with untenable discounts to important customers?
Yes, Marvell works in a highly commoditized sector with WiFi, GSM, and CSMA processors, but you'd think that a market leader like this one could demand some higher prices for its premium products. Let's hope the company can get back to Networking Contracts 101 before the high-demand opportunity wanes again. There's a lot of upside to this stock, but the company has to earn every bit of it back.
Further Foolishness:
- Before the Call: Marvel Over Marvell
- Profits Inside the iPhone
- Another Path to Profit: Riding Cisco's Coattails
- Color to the Numbers: Top Turnaround Stocks
Netgear and Dell are two of our active Motley Fool Stock Advisor recommendations, and Dell is also a Motley Fool Inside Value pick. Marvell may not be a Foolish newsletter selection, but it certainly surrounds itself with quality customers. Read all about them with a bushel of free 30-day trial passes, no strings attached.
Fool contributor Anders Bylund holds no position in any of the companies discussed here. You can check out Anders' holdings if you like, and Foolish disclosure demands that you respect its authoritah!
