Marvell’s Results Solid, but Stock Pricey
Marvell (MRVL) reported solid fiscal third-quarter results that were slightly ahead of our expectations, thanks to broad-based revenue strength and ongoing cost-cutting endeavors that have improved margins. Amidst the shift from hard disk drives to solid-state drives (both of which Marvell supplies controllers), Marvell recorded modest growth in its storage segment, thanks to its SSD controllers that benefited from a positive mix-shift to enterprise and data center SSDs. For the quarter, SSD controllers accounted for about a third of storage sales, which we view as a near-term positive. Management provided scant detail on its recently announced acquisition of Cavium, which we note is expected to close in mid-2018. We reiterate our positive view on the tie-up, as the duo has a highly complementary set of products and end-market exposures along with greater scale to continue providing competitive solutions. However, shares trade at a premium to our unchanged $18.50 fair value estimate, as we believe the market may be assigning overoptimistic expectations to the Marvell-Cavium entity.
Third-quarter revenue was $616.3 million, down 1% versus the recast prior year period (to reflect mobile and wireless businesses classified as discontinued operations). Although storage sales fell 4% year over year to $315.3 million due to seasonality, we do view the aforementioned SSD strength in enterprise and data center as a net positive for the firm. Meanwhile, networking revenue rose 3% from the prior year to $150.5 million, due to the ramp of new switch solutions for the enterprise end-market. Connectivity revenue increased 19% year over year, thanks to strength across gaming, automotive, and voice assist, and streaming markets. Gross margins were 61.3%, up considerably from 56.3% last year thanks to the divestiture of Marvell’s lower-margin multimedia and smartphones businesses.
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