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
"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
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.
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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!