Marvell Beats Forecasts but Questions Linger

The company also ups guidance for the current quarter.
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Updated from 4:38 p.m. EST

As many suspected it might, communications chipmaker

Marvell

(MRVL) - Get Report

delivered earnings and revenues that were above Wall Street expectations. As a bonus, the company's chief executive offered a bullish take on chip recovery, suggesting business may return to normal by the middle of 2003.

For the October quarter, sales totaled $135.9 million, up 14% sequentially and 86% over last year's levels. Analysts had anticipated revenue of $132.5 million.

The loss was $7.7 million, or 6 cents a share, compared with a loss of $105.1 million a year ago. The latest period's loss reflects acquisition-related expenses, amortization of stock-based compensation, and a special charge for consolidating facilities.

Pro forma earnings were $17.6 million or 14 cents per share, beating expectations by a penny.

Meanwhile, company executives say signs of improvement on the economic front should lift chipmakers into next year. "We're now seeing some hope that the long-awaited economic recovery is in progress. We're hopeful that by the middle of next year the general industry will be back to a normal, sustainable growth rate," said CEO Sehat Sutardja. As evidence, he cited a series of design wins by Marvell and momentum among its customers, tier-one hardware outfits, to upgrade business network infrastructure with Gigabit Ethernet. He added, "Whether we're right or wrong on our projections for the economy, we believe we can continue to grow rapidly."

The company's guidance for revenue growth of 10%, give or take a little, implies sales of $149.5 million -- above consensus expectations for $145.4 million in the quarter underway. Marvell said its storage and communications lines are both expected to grow 10%.

Earnings are expected to be 16 cents, a penny above the current outlook, according to Thomson Financial/First Call.

On the conference call Marvell also announced a big design win, saying

3Com

has signed on as a customer for its Yukon family of Gigabit Ethernet controllers for desktops. Yukon revenues will start to show up on the income statement sometime in the first half of next year.

Management also said it expects to double its market share in the storage arena to around 40% by the end of next year. Another goal in 2003 is for the company to increase the size of its wireless LAN business to match that of wireline LAN.

The upside surprise for the most recent quarter was widely expected by analysts, but there remains controversy over whether Marvell can keep up the momentum. Earlier today, Gerard Klauer Mattison put out a note cautioning that as good as things look for Marvell, "weakness is around the corner" and arguing that valuations had gotten stretched. The note put pressure on the stock, which closed down Thursday, a rare exception amid strong gains across chipland.

The bank's price target is $11; Marvell closed at $23.50, down 24 cents or 1%.

In trading following the earnings conference call, shares dipped again, falling $1.56 or 6.4%. The bottom line: Expectations were already so high that the company would have had to issue truly stunning guidance to get an upside lift in its stock. "Expectations had been very high going into the earnings call and everybody was expecting an upside on topline or EPS or both, and they did that. Guidance was within the range expected, too," said Gerard Klauer Mattison's Ambrish Srivastava.

One positive takeaway from the call is the company's win with 3Com. "This is their own chip, without Intel. It's critical they were able to get a design win with a large player," he says.

Still, Srivastava thinks fundamentals could worsen. "Marvell is sitting at the sweetest possible spot right now," he says. "The Gigabit Ethernet transition is happening and Intel is not coming in for the next couple quarters. Marvell is ramping revenues in storage. But the thing is, the upside momentum for Marvell is going to slow down." Competition will be heating up before long in storage from rival Agere, as well as in the Ethernet market from Intel, he said.

Last month Intel announced it will begin making its own PHY chips, which it had previously bought from Marvell and combined with its own MAC silicon for sale into the Gigabit Ethernet market. Intel's products are expected to hit the market sometimes next year. Marvell's Yukon line will represent its alternative to Intel's roll-out.