Marvell Technology Group
Under the Hood
MRVL

August 28, 2009

About half of Marvell Technology Group (MRVL) revenue comes from its disk drive segment. It does not make disk drives; it makes the chips that enable the drives read and write data and communicate with the rest of the computer. This was Marvell's first business and it now dominates that market.

Like most technology companies, Marvell had a rocky last half of 2008 and first half of 2009. Even after a 23% sequential revenue increase in its latest quarter (which ended August 2, 2009; second quarter fiscal 2009) to $640.6 million, its revenue was down 24% from the year-earlier quarter. On the other hand, Q2 2008 had been a blockbuster quarter, with Marvell proving that its investments in new technologies could pay off.

While Marvell may yet expand its market share in the hard disk market, and that market may expand as nations like India and China continue to expand their technology sectors, to understand (or at least guess at) Marvell's future revenue, profits, and stock value you must look at the other 50% of the company. This revenue already was approximately $320 million in the latest quarter, yet many of its products are just beginning to produce revenue or are still in development.

The networking end market accounted for about 20% of revenue in the most recent quarter. This segment includes the chips that go into network switches and routers. This is a very big market, and highly competitive, but Marvell has plenty of room to grow its market share.

Mobile and wireless networking is also an important end market. Here the combined analog and digitial expertise of Marvell, which are now integrated onto single chips, comes into play. One new type of product using Marvell chips takes a 3G signal usually used for cell phones and broadcasts Wi-Fi for local wireless internet connectivity.

Marvell also makes chips to control printers. According to HP printer sales have not been so great this last year, so expect this segment to rebound when people's legacy printers start dying.

Most fascinating are Marvell's application and communication processors (based on Kirkwood and Discovery Innovation). These are designed for the type of high performance users now expect from mobile computing devices and use very low amounts of power. More important, Marvell is able to put these processors on a single chip with one or more of its other technologies. It already has chips that combine Bluetooth and Wi-Fi capabilities. Rather than just sell discrete chips, it works with customers to design whole systems-on-a-chip. Other companies do this, but Marvell is the leader in the field.

Some of this last year's profits have been made by cost-cutting, particularly in Research and Development. But the key to profitability has been the model of integrating functions on a chip for customers particular products. To paraphrase management: We will continue to have above-industry margins as long as we are able to build products that our competitors cannot match.

Marvell has video processing capabilities. It says it has many design wins, but does not announce anything until its customers make their own announcements. You can imagine what might be coming out in 2010: devices with a digital processor, video processor, and either wireless or wired communications capabilities all on a single chip. Which will lower costs for consumers, driving unit sales, while allowing both the OEM and Marvell to maintain high margins.

The usual risks and uncertainties apply in the highly competitive technology field.

See also my August 27, 2009 Marvell analyst conference summary.

And keep diversified!

—William P. Meyers

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