Tech guru stays patient with Marvell

by Paul McWilliams, editor Next Inning

Marvell Technology Group (MRVL) reported fiscal Q3 2013 (the October 2012 ending quarter) revenue of $780.9M, slightly above the midpoint of its lowered guidance range.

With solid and, I think, sustainable positive trends in storage and networking, the company only needs to get its mobile strategy right to reclaim a position as an attractive growth story.

Non-GAAP earnings were reported at $0.20, and free cash flow matched up well with non-GAAP net income. MRVL spent roughly $203M during the quarter to buy approximately 23 million shares of its stock during fiscal Q3.

Given the fact these purchases were weighted towards the second half of the quarter, the majority of the impact won't be seen until the end of the January 2013 ending quarter.

That said, I suspect MRVL will continue to aggressively purchase its shares during fiscal Q4 resulting in a ending share count closer to 550  million or a 19% reduction over the two year period.

MRVL's guidance for fiscal Q4 2013 was weak. It expects revenue to be in the range of $700M to $740M and non-GAAP earnings to be approximately $0.13 at the midpoints of its guidance metrics.

In both storage and networking, MRVL is performing above its peers (taking market share). This trend should continue in 2013.

However, MRVL is performing substantially below its peers in mobile (the smartphone market), which was 25% of revenue in fiscal Q3. And it's going to get worse before there is a chance for it to get better.

The short story here is MRVL was maintaining two product groups that produced two different solutions, one for the TD-SCDMA market and a second for the WCDMA market. It has since combined this into one group and one platform that serves both markets.

MRVL states that it expects 20 new smartphone designs using this solution will be delivered by its customers to wireless service providers during Q4 for qualification testing, and that it will initiate a growth cycle in smartphone chip revenue by no later than calendar Q2 2013.

MRVL may be out in front of its skis a bit in stating its internal goal is to be shipping WCDMA smartphone solutions at a run-rate of 80M per year by the end of 2013 - at this juncture, I'm not going model or discount the potential.

Even struggling today MRVL remains solidly profitable and carries a balance sheet that I think is worth roughly $3.50 per fully diluted share. This suggests that at its current price of about $7.50, MRVL is trading at a forward enterprise price to earnings ratio below five.

I view MRVL as being substantially oversold from a fundamental perspective and as a potential turnaround story, and currently hold long positions in the shares.

Learn more about this financial newsletter at Paul McWilliam's Next Inning.

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